DEFINITION_ OF COMMERCIAL BANK_
*“Banks and other deposit taking institutions are financial intermediaries whose assets consist overwhelmingly of loans to a wide variety of borrowers and whose liabilities consist overwhelmingly of deposits.” THE ECONOMICS OF MONEY BANKING AND FINANCE 3rd* Edition PETER HOWELLS & KEITH BAIN Pg 32 A sound system of banking is very important for any economy. Commercial banks are directly related to the payment system of the economy. Generally most commercial banks are controlled by the central bank of that particular country. The central bank can never allow the banking system to fail because if banks start to fail the payment system will fail. They may allow some banks to fail but the government will never allow big banks or the whole payment system to collapse. This is very evident from the recent where government have pumped in huge amount of money to save the so called “too big to fail” banks. Banks helps in the payment services through various kinds of deposits, debit cards and credit cards ANALYSIS OF COMMERCIAL BANK BALANCE SHEET
For my assignment I have picked up Lloyds TSB as my bank. Lloyds TSB is one of the four biggest bank in the UK. I have taken 2007 annual report as the group has published only the 2008 interim report. The second item which we see in Lloyds TSB balance sheet is loan and advances to banks. It reflects the interbank relationship. This figure has fallen for most of the commercial bank and also for Lloyds TSB there is an decrease of 16.50%. This is due to the financial crisis which has hit banking sector very badly and many banks have failed as a result. Llyods TSB gives loans to customer just like any other commercial bank and bank charge an interest for giving loans which is higher than the interest on deposit. But there is always a default risk attached with the loan which the bank gives. Commercial Banks gives different kinds of loans starting from mortgage, education loan, overdraft facility etc. In case of Lloyds TSB mortgage comes out to be 48.4% of loans to customer. And thing we should bear in mind is that mortgage are long term loan and it can be for 30 years as well. Customer Accounts got an increase of 11% and there is an increase of 11% from 2006 to 2007. LIABILITIES OF LLOYDS TSB
Lloyds TSB is also having some fixed deposit like Certificates of deposit. In these deposits customers cannot withdraw there money before a specified time and they also receive some interest as well. Second are the commercial papers which are unsecured promissory notes to meet short term obligations. Certificate of Deposit comes to around 14,995 million GBP and commercial paper is 17,388 million GBP for Lloyds TSB. Lloyds TSB is also having reserves after paying reserves. This reserve can be used in case of emergency or any unexpected risks The main risks that commercial banks face due to their exposure to different kinds of assets and liabilities are liquidity risks, market risk and credit risk. Lloyds TSB faces liquidity risk because of deposit in central bank. They have a deposit of 4330 million GBP. This means that they cannot give this amount as loans because it’s stuck with the central bank. This amount has increased considerably from 2006 to 2007. The bank faces liquidity risk because of their mismatch in assets and liabilities side. The group liquidity risk exposure is 33,185 million GBP. The main sources of liquidity risk for the bank are deposits from banks and customer accounts. As we seen above the assets of Lloyds TSB are long term whereas the liabilities are short term. The commercial bank is the main source of payment service in any economy. Whenever bank gives loan they are exposed to default risk. Default risk arises whenever a company or individual is unable to meets its obligation on interest or principle payment of the loan. The bank faces asymmetric information problem as well. Though the bank does...
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