Assets vs Liabilities In Banking, A lesson

Boise’s SYRINGA BANK is in trouble and faces a merger or takeover from state and federal regulators because it’s capital level is less than 10% of its assets.

Terms used to describe banks are somewhat reverse of what we normally think. When we DEPOSIT funds in a bank–savings, checking, or CDs–the institution shows that as a LIABILITY because it is ultimately owed back to the customer.

LOANS to customers who ultimately owe payments to the banks are shown on the books as ASSETS. It is confusing to most folks because it seems logical that money in hand (deposits) would be assets and money loaned out would be a liability. The problem with banks loaning more than is being repaid draws down their cash reserves known as CAPITAL.

When regulators talk about “seizing assets,” it is normally about taking over loan contracts and either the money being repaid or the collateral–usually a house–that is security for the loan.

Comments & Discussion

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  1. BoiseAccountant
    May 3, 2012, 10:32 pm

    As an accountant, I’m a bit surprised at how inaccurate this ‘lesson’ is… Assets and liabilities in banking are exactly what they are to everyone else. The money in hand *is* an asset, and the money in hand is *not* a deposit or a liability. And I’m not sure I grasp the logic behind people expecting that money loaned out would be a liability. How does loaning someone money make me feel obligated to pay them more?

    Think of borrowing $5 from a my friend John… yes, the crisp new five dollar bill is the “money in hand” and absolutely is an asset. However, the obligation to repay John $5 at some point in the future is the liability associated with the ‘deposit’. If I in turn lend Sally that same $5, my expectation of getting the $5 back is the asset I now get to replace the $5 bill I gave up.

    If I have no more cash to my name, I have now effectively placed John’s likelihood of getting his $5 back based on Sally’s likelihood of paying me back. Unless I have access and permission from Sally to take her lollipop as collateral if she chooses not to repay me.

    One way the gov’t tries to protect people is by guaranteeing some deposits. John suddenly doesn’t have to care how careful I am with his $5 if he knows he can run to my daddy and get it back if I didn’t choose to wisely deal with what I borrowed from him.

    Another way is by requiring certain amounts of the capital you refer to, or in my example they would require that I keep some cash in my pocket. In order to lend Sally the $5, they want me to make sure I’ve got a couple bucks in my pocket. If I don’t, yes they come in and collect from Sally, or take the promised lollipop if she can’t repay, in order to give John back the $5, or as much as they can get for the lollipop.

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