Banking is an activity that polls up surplus funds (savings) of the depositors (public lenders) and advances it to the borrowers or uses it in other investment avenues. Therefore bank is defined as “an entity taking deposits for the purpose of lending”. Whatever kind and form of deposits the Bank raises whether from individuals or Institutions and for whatever maturity, the Bank is actually creating its Liabilities. These liabilities can be categorized (but not limited to) as;
DEPOSIT ACCOUNTS
These are checking (cheque) accounts maintained with the bank by the client and claimable through writing negotiable instruments or orders. These can take different forms on the basis of maturities and returns payable as;
- Demand Deposit; This kind of deposit is generally called a "current" deposit but others may call it a Freedom account, Business account, etc. These are payable through checks.
- Savings Deposit (call accounts/ Notice deposits); These accounts are termed differently by banks and countries according to the provisions of local laws. In the Islamic world, these are called profit & loss-sharing account other call them interest-bearing deposit accounts. These are payable through checks with or without notice of withdrawal.
- Time deposits (fixed maturity); These represent long-term fixed-term deposits. Generally, receipts are issued for it. In some markets, these are negotiable whereas in others not. Some banks also accept these as pledges against loans as security. It is not a checking account rather another checking account is tagged with the fixed deposit account. Certificates of deposits (fixed deposits) are negotiable in some markets and traded on exchanges.
MONEY MARKET BORROWINGS
These are the deposit taken from other banks as funding/ cover.
ADVANCE RECEIVED (MARGINS, etc.)
These are the deposit taken from customers against facilities like Guarantees, Letters of Credit as margins.
PAYABLES
These are due to be paid as interest/ profit on deposit accounts, Payable of leased moveable and immovable properties taken from customers against facilities like Guarantees, and Letters of Credit as margins.
PAID UP CAPITAL
The amount of capital with which a banking company is registered is called an “Authorized/ Nominal Capital. The amount of Authorized Capital that has been issued for subscription is called “Issued Capital". The amount of issued Capital that has been subscribed by the public is called “Subscribed Capital”. The portion of issued Capital that has been paid by the public is called “Paid up Capital”. Only paid-up capital is accounted for in the balance sheet of a bank.
OTHER RESERVES
It is the accumulated and unappropriated profit of the bank. Reserves of a bank constitute a mandatory apportionment of profit before paying dividends to meet unforeseen exigencies. It may also include a premium received on the issue of shares at a price over and above the face value.
DEBT INSTRUMENTS
It represents the debt instrument issued by the bank like Bonds, Debenture, and Commercial Paper.
BANK'S CAPITAL ADEQUACY RATIO
Basel III has revised the Basel I and II accord rule for international Banking Reforms and introduced fresh bank regulations effective January 01, 2023.
Capital Adequacy 10.5% (8 % plus 2.5% buffer capital)
Tier I capital; should include only paid-up capital and disclosed reserves that appear on the balance sheet of the bank. It should be 6% of the risk-weighted assets (RWA). Tier I represent core capital and is more liquid and more secure than Tier II.
Tier II Capital; should include supplementary capital, undisclosed reserves, and unsecured subordinated debt instruments. It should be 2% of the risk-weighted assets (RWA).
Tier III capital; has been done away with. However, a fresh rule has been introduced as a Countercyclical Buffer Capital of 2.5% of the risk-weighted assets (RWA). Buffer capital should be based on Tier I capital.
