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Learn about assets and liabilities in banking. Study examples of the types of bank liabilities and assets, and discover how to calculate assets and liabilities.Updated: 11/21/2023
Table of Contents
- What Are Liabilities and Assets in Banking?
- Types of Bank Assets and Liabilities
- Examples of Bank Liabilities and Assets
- Determining Bank Assets and Liabilities
- Lesson Summary
Frequently Asked Questions
What are the types of bank liabilities?
Banks may have different types of liabilities depending on the type of bank and services offered. Some examples include interest payments to other banks, mortgage payments for building, savings account interest due to customers, stock distributions, and any other debts the bank owes.
What are examples of other liabilities?
Other liabilities in general include anything owed by a business. Liabilities may include utility payments, interest from loans borrowed, and other debts owed.
Is a bank account an asset or liability?
A bank account may be an asset or a liability to the bank. For example, if the account incurs fees paid to the bank, it would be an asset, but if it is a savings account that accrues interest, then it would be a liability since the bank would owe this interest.
Table of Contents
- What Are Liabilities and Assets in Banking?
- Types of Bank Assets and Liabilities
- Examples of Bank Liabilities and Assets
- Determining Bank Assets and Liabilities
- Lesson Summary
Assets and liabilities are terms commonly used to describe property and items that are either owned or owed. This can be from a personal or a business standpoint. Assets are the things that a business or a person owns that are valuable. Personal assets may include cars and houses, while business assets would include equipment and land. Liabilities are the things that a business or an individual owes to another business or individual, such as debt and bills. Assets and liabilities are usually calculated together to determine the overall worth or value.
So then, what are bank assets and liabilities? Bank assets refer to the things owned by a bank that help to bring value. Bank assets different from personal and business assets as they generally include money-related assets. These assets cover a range of different categories, from investments to physical assets to loans. Bank liabilities refer to a debt or financial obligation. Bank liabilities are the things owed by the bank, such as interest owed to other banks and other debts owed.
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Assets and liabilities can be classified depending on their length and other factors. Current assets are the types of assets that are expected to bring value within the current period, which is typically a one-year period. A bank might have current assets, such as cash reserves and consumer loans. A bank that lends a consumer loan, such as an automobile loan, expects these payments within the specified terms of the loan. The payments expected in the current period are current assets. In the same way, current liabilities are the liabilities that need to be paid out within the current period. For example, utility bills or rent for the bank's building would be considered current liabilities.
Noncurrent assets are assets that won't be liquidated within the current period, meaning they bring value but can't be cashed out within the same period. Land and equipment that can't be sold quickly would be considered noncurrent assets. Noncurrent liabilities, or long-term liabilities, are the things owed but don't need to be paid right away. For example, if the bank borrows funds from another bank, the interest on this loan may not need to be paid right away.
Contingent assets and contingent liabilities are valued based on potential circ*mstances and factors. Contingent assets are things that might bring value, just as contingent liabilities are things that might be owed, based on factors such as the economy.
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Bank assets are the things that essentially bring value to the bank. The assets of a bank will depend on the type of bank and the types of accounts and services offered. Some common examples include:
- General assets: Cash reserves, interest, and general fees.
- Physical assets: Building, land, and equipment.
- Loans: Interest from consumer loans, such as auto loans, home loans, and personal loans.
- Investments: Securities and other investment-related assets.
Bank liabilities are the things the bank owes to individuals or other businesses. The liabilities of a business may depend on the types of accounts and services offered. The common list of liabilities of a bank include:
- Interest payments to other banks.
- Mortgage payments for building.
- Savings account interest due to customers.
- Stock distributions.
- Any other debts the bank owes.
Rate-Sensitive Assets and Liabilities
Rate-sensitive assets are assets that may fluctuate depending on the changes in interest rates. For example, if the federal funds rate were to increase, then assets from consumer loans may decrease if they opt to keep the bank rates the same. In the same way, rate-sensitive liabilities are the liabilities that fluctuate with changes in interest. For example, if the tax rate increases on the land property of the bank, then its liabilities will also increase. Rate-sensitive amounts can impact loans, bonds, and other types of assets and liabilities. Other adjustable rates include the prime rate and the T-bill rate.
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Assets and liabilities are reported on a company's balance sheet. The balance separates the two, with the assets on the left side and the liabilities on the right. The purpose of the balance sheet is to ensure all assets balance out with all liabilities (plus shareholder's equity). This shows the business can cover all its expenses with its assets.
Bank assets and liabilities can determine the amount of capital, which is represented in the shareholder's equity section. The bank's capital can be calculated by subtracting the total liabilities from its total assets as in the equation:
Capital = Assets - Liabilities.
If the bank's assets are equal to $500,000 but has $400,000 in liabilities, then it would essentially have $100,000 in capital. The equation would use these numbers as:
$100,000 = $500,000 - $400,000.
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Assets and liabilities are both terms used for business and personal matter. Assets are the things that a business or an individual owns which are valuable, such as property. Liabilities are the things a business or an individual owes to another business or individual, such as debt and bills. Bank assets refer to the things owned by a bank that help to bring value, which are generally more specific to money-related assets and interest. Bank assets can range from investments to physical assets to loans. Bank liabilities refer to a debt or financial obligation of the bank, such as interest owed to other banks and other debts owed.
Assets and liabilities may be classified as either current or noncurrent. Current assets are expected to bring value within the current period. A bank's asset may be cash reserves or consumer loans, such as automobile loans. Current liabilities need to be paid out within the current period, such as utility bills or rent for the building. Noncurrent assets won't be liquidated or bring in cash within the current period. Noncurrent liabilities, or long-term liabilities, don't need to be paid right away. Contingent assets and contingent liabilities are based on potential circ*mstances and factors, such as the economy. Assets and liabilities are included on the balance sheet. A bank's capital can be determined by subtracting liabilities from its assets. Assets and liabilities can be rate-sensitive with changes in interest rates such as the federal funds rate, prime rate, and T-bill rate.
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Video Transcript
What Are Assets & Liabilities?
All businesses have assets and liabilities. Even you, as an individual, have your own assets and liabilities. Individual assets are anything you may own outright, such as a car, a house, or cash in a bank account. Individual liabilities are considered to be anything that you make payments on, such as rent, a mortgage, a car payment, or utilities.
Business assets and liabilities are somewhat the same as individual assets and liabilities. Business assets are considered anything that the business owns, whereas business liabilities are anything that the business owes to someone else. So, assets are any property that is owned by a person or a business. Liabilities are a debt or financial obligation owed to another person or business.
Bank Assets
Banks have general assets and liabilities just like individuals. There are asset accounts that make money for the bank. For example, cash, government securities, and interest-earning loan accounts are all a part of a bank's assets.
A bank can have different types of assets, including physical assets, such as equipment and land; loans, including interest from consumer and business loans; reserves, or holdings of deposits of the central bank and vault cash; and investments, or securities.
Physical assets include the building and land (if the bank owns it), furniture, and equipment. Loans, such as mortgages, are an important asset for banks because they generate revenue from the interest that the customer pays on the loan. Examples of interest loans include consumer loans, such as home loans, personal loans, automobile loans, and credit card loans, and examples of business loans include real estate development loans and capital investment loans.
Bank Liabilities
Examples of liabilities for a bank include mortgage payments for the building, distribution payments to customers from stock, and interest paid to customers for savings and certificates of deposit. When considering the bank's capital, loan-loss reserves and any other debts owed by the bank are a part of its liabilities.
If a bank owns the building it operates in, the building is considered an asset because it can be sold for cash value. If the bank doesn't own the building it operates in, it's considered a liability because the bank must make payments to a creditor.
Banks can utilize their assets and liabilities to determine their capital. A bank's capital is all of the bank's assets minus the all of the bank's liabilities. When a bank has a positive working capital, it enables the bank to use that capital to establish credit accounts with other businesses.
Rate-Sensitive Assets & Liabilities
Because banks deal in loans or savings that may have adjustable rates that are dependent on the prime rate or T-Bill rate, their assets and liabilities can both be rate-sensitive. Rate-sensitive assets are considered short-term and include variable rate loans and securities. Rate-sensitive liabilities are also considered to be short-term and include variable rate savings deposits and certificates of deposit. Rate-sensitivity is based on how much the price of a fixed asset will fluctuate if the interest rate changes. Depending on the timing of an interest rate change, what a bank may pay on its liabilities may exceed the value of its assets or vice versa.
Lesson Summary
Let's review. Banks have both assets and liabilities. A bank's assets and liabilities depend in part on the numerous products they provide. Many of these products are sensitive to interest rate changes. The types of products a bank offers can be considered assets, such as a mortgage loan because it brings in an interest payment, or liabilities, such as a saving's account because the bank pays out interest. Bank assets can also include the property they own, such as a building, equipment, and investments. Bank liabilities may include mortgage payments on the building or distribution of stock payments.
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