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Commercial banks create balance sheets that list their assets, including cash, securities, and loans. Cash is the most liquid asset and often invested in market securities. Loans represent long-term assets, with toxic assets being those that no longer earn interest payments. The health of a commercial bank is often determined by its balance sheet.
The assets of commercial banks, like the assets of other companies, are elements that add value to the bank. Every commercial bank creates a monthly, quarterly, or yearly balance sheet that lists in detail the assets it owns. Major asset categories include cash, securities, and loans, with various subcategories or other classes possible in the larger groups. In summary, the assets of commercial banks represent the elements that make up the economic wealth of the institution, with net economic wealth being total bank assets minus total bank liabilities. The health of a commercial bank is often determined from the institution’s balance sheet.
Cash is typically the number one asset on a commercial bank’s balance sheet, primarily because it is the most liquid asset for the institution. For a commercial bank, cash represents money generated from interest-bearing accounts or money placed in financial investments. In some cases, the assets of commercial banks listing sources of cash may also include cash held at other financial institutions. Commercial banks often leave cash at these other institutions to earn interest or other financial returns. Disclosures or separate line items for cash at other banks are required on the commercial bank’s balance sheet.
Many banks invest their cash in market securities, which may include bonds and securities issued by other companies or organizations. These items represent assets, although they are not cash and may or may not be highly liquid. Therefore, different lines on the balance sheet are needed to properly define the assets of commercial banks. In most cases, the bank lists these assets in order of liquidity, with the most liquid first and the least liquid last. Other designations for investments and securities may be necessary to fully inform interested parties about these assets.
Long-term assets often fall into the category of loans and other funds made to individuals and businesses. Common subgroups in a commercial bank’s loan portfolio include mortgages, auto loans, business loans, and other types of loans made for a specific purpose. The principal balance of the loan is usually the principal portion of these business bank assets. The interest generated by the loans corresponds to the income accounts of the income statement, which are completely separated from the assets listed on the balance sheet. Toxic assets represent loans that no longer earn interest payments; Banks may need to reduce the yield on these loans, and in some cases write them off as they are no longer valuable.
Smart Asset.
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