Assets and Liabilities
Assets and liabilities represent what a bank owns and what it owes, forming the two main sides of its balance sheet.
Meaning in Practice
In practice, assets include loans, securities, and cash reserves that generate income for the bank. Liabilities primarily consist of customer deposits, wholesale funding, and issued debt. The difference between total assets and total liabilities equals the bank’s equity capital.
Why It Matters
The structure of assets and liabilities determines a bank’s profitability, liquidity, and risk profile. A mismatch in maturities or risk exposures can create vulnerabilities. Effective balance sheet management is essential for maintaining solvency and regulatory compliance.
Market Impact
Changes in asset quality or funding conditions can affect bank valuations and credit spreads. Rising non-performing loans may weaken capital positions, while stable deposit funding enhances resilience. Investors closely monitor balance sheet composition during periods of financial stress.
Example
A bank holds mortgage loans and government bonds as assets, while customer deposits and issued bonds appear as liabilities. The remaining difference represents shareholder equity.