Topic 9. Bank assets, their structure and quality. "Since the beginning of time, mankind has made three great discoveries: fire, the wheel and the banking system" Will Rogers

Questions: 5.1 Economic content of the bank's assets, their composition and structure. 5.2 Assessment of the quality of bank assets.

9.1 Economic content of the bank's assets, their composition and structure Active Operations commercial banks are to place their own and borrowed funds accumulated by banks in order to provide the necessary conditions for: 1) the functioning of a credit institution 2) receiving income.

Bank assets can be grouped into 4 groups: 1)Cash and cash equivalents; 2)Loans; 3)Investments (including in securities); 4)Other assets.

1- Monetary assets are traditional for banks, but their share, as a rule, is small and amounts to approximately1-3%. It should be borne in mind that a commercial bank at any time and at the first request of the client is obliged to pay him in full or in part the funds held on demand accounts. To do this, a commercial bank must have the necessary amount of cash on hand. ! The creation of a significant stock of such assets for commercial banks is impractical, since the bank's resources, "frozen" in the form of cash on hand, are not able to generate income.

2 - Credit investments constitute, as a rule, the main share in banking assets - up to 50-80%. They may include interbank loans (deposits), loans granted to clients - legal entities and individuals, individual entrepreneurs, Operations (of a credit nature) with promissory notes, provided financial leasing, factoring, bank guarantees not collected from customers. ! This group of assets provides commercial banks with the bulk of income, but it must be taken into account that this is also the most risky of all assets.

3- Investments in securities in commercial banks of the Republic of Belarus are presented mainly in the form of investments in various government securities. ! A distinctive feature of such assets is that they are able to bring stable income with minimal risks. Significantly greater risks are associated with investments in corporate securities.

4 - To other assets usually include the bank's costs for the acquisition of buildings, structures and other fixed assets, as well as participation in the economic activities of legal entities. The main characteristic of the assets included in this group is their low liquidity.

Under structure of bank assets is understood as the ratio of different in quality items of the bank's balance sheet asset to the balance sheet total. The composition and structure of the assets of individual commercial banks can vary significantly, since their formation is determined by the following factors: peculiarities of national legislation (it can restrict or stimulate certain types of banking activities); the financial position of the bank; the duration of the commercial bank's activity, which determines its ability to obtain various licensing powers to perform certain (including active) operations; the composition and structure of liabilities formed by the bank; type and specialization of a commercial bank, etc.

9.2 Assessment of the quality of bank assets. The quality of assets is their generalizing characteristic. Its definition is based on criteria: a) liquidity; b) riskiness; c) profitability; d) diversification.

For example: -cash in the cash desks of the bank and the funds on its correspondent accounts act as a kind of liquidity reserve; -fixed assets and intangible assets needed by the bank to ensure the conditions for the functioning of a credit institution; -credit investments and investments provide the bank with one of main sources of income.

Bank assets by degree of liquidity 1 - First class (highly liquid) liquid assets These include the bank's cash on hand or on a correspondent account, as well as government securities in the bank's portfolio, which it can sell in case of insufficient liquid funds to pay off obligations to creditors and depositors.

Bank assets by degree of liquidity 2 - Relatively liquid assets. This group consists of short-term loans to legal entities and individuals (for up to 30 days), short-term interbank loans and demand loans, factoring operations. In countries with a fairly developed secondary securities market, this group of assets also includes corporate commercial securities. Assets classified in this group require more time for their sale or conversion into cash.

Bank assets by degree of liquidity 3 - Least liquid assets. Such assets include long-term credit investments, including financial leases and various investments.

Bank assets by degree of liquidity 4 - Illiquid assets. This group of assets includes buildings, structures and other fixed assets, intangible assets, certain types of securities, overdue and doubtful loans.

To assess the quality of assets in terms of the ratio of assets with different degrees of liquidity, certain indicators can be used. At present, such an indicator for the Republic of Belarus is the standard for the minimum allowable value of the ratio of the bank's liquid and total assets. ! The share of liquid assets must be at least 20%.

An essential criterion for the quality of a bank's assets is their profitability. Non-income-generating assets traditionally include funds: 1)transferred to the mandatory reserve fund; 2)at the cash desks of the bank; 3)on correspondent accounts; 4)invested in fixed assets and intangible assets. Income generating assets are: 1)short-term and long-term loans to individuals and legal entities; 2)loans and deposits provided to other banks, 3)investments in securities; 4)factoring; leasing; 5) investments in statutory funds; 6)funds transferred to legal entities for participation in their economic activities.

diversification The degree of asset diversification can be assessed by the following indicators: the structure of the bank's assets by main areas of investment resources; the structure of the loan portfolio (including by objects and subjects of loan investments), the structure of the securities portfolio; the share of different currencies with which the bank carries out operations; composition of correspondent banks.

NB There is a direct relationship between the diversification of a bank's assets and its liquidity: the more bank assets are diversified, the higher the bank's liquidity.

Questions for self-control: 1) What is the essence of active bank operations? 2) What is the relationship between the active and passive operations of the bank? 3) What are the main groups of assets in the bank's balance sheet? 4) What factors influence the bank's asset structure? 5) What are the main criteria for assessing the quality of assets? 6) List 3 groups of bank assets according to the degree of liquidity.

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