[A] typical bank’s balance sheet presents, on the face of it, an alarmingly precarious situation: its liabilities are mostly short term, but most of its assets are realizable only in the long term, and it is highly geared or “leveraged.” Depositors and other creditors must be persuaded that the whole pack of cards will not come crashing down at a moment’s notice.
This book explores the creditworthiness of banks from several angles, many of them articulated around the balance sheet and, increasingly, around off-balance-sheet items. Bank financial statements are very complex. Readers may be familiar with general accounting rules, and this chapter will introduce them more specifically to the bank’s balance sheet—and its off-balance-sheet items. Inevitably, a number of concepts or definitions have to be discussed at this stage, while a more thorough analysis will be offered in later chapters, thereby introducing some degree of unavoidable duplication.
The balance sheet, also known as the statement of condition or statement of resources records assets on one side and liabilities and equity on the other. The two sides must balance, hence the term. Some analysts, however, prefer to separate the liability side into equity—which for a bank is usually just a small fraction of the total—and actual liabilities toward third parties, as can be schematically seen in Exhibit 5.1.
The balance sheet merely ...