Banks Balance Sheet

Balance Sheet of a Bank

The balance sheet of the bank is different from the balance sheet of the company and it is prepared only by the banks according to the mandate by the Bank’s Regulatory Authorities in order to reflect the tradeoff between the profit of the bank and its risk and its financial health.

Balance Sheet for banks is different from other sectors and companies. There are several characteristics of the bank’s financial statement that highlight how banks balance sheets and income statements are created. Sales are not measured by ratios like sales turnover and receivables turnover. Once investors are comfortable with the terminology and can grasp the statements, it becomes elementary for them to analyze the trends and understand the statements.

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Source: Banks Balance Sheet (

Banks Balance Sheet Example

Below is the example of Consolidated balance sheet of Goldman Sachs for the year 2017 and 2016 from their Annual 10K

Balance Sheet Assets

Bank Balance Sheet Assets

source: Goldman Sachs SEC Filings

Balance Sheet Liabilities

Bank Balance Sheet Liabilities -1

Components of Banks Balance Sheet

The main components of the above bank’s balance sheet are

#1 – CashCash and Cash Equivalents

#2 – Securities

#3 – Loans

Lending money and earning interest is the primary business of the bank. It can be termed as bread and butter of the bank.

Bank Balance Sheet Assets - loans

#4 – Deposits

  • Deposits fall under the liability portion of the banks’ balance sheet and are also mainly the most substantial liability for the bank. It includes money marketMoney MarketThe money market is a financial market wherein short-term assets and open-ended funds are traded between institutions and more, savings, and current account and has both interest and non-interest bearing accounts.
  • Deposits are considered liabilities, but they are also crucial in determining a bank’s ability to lend. If the bank does not have sufficient deposits, it will not be able to lend, and the loan growth will also be hampered. Banks may have to take on debt to meet the loan growth, which would cost them more than the rate they might receive on loans.
  • Also, this is not a sustainable way for banks to grow their loans. After a certain point, the debt amount will reach an extent where the bank will not get any credit, and if the bank fails to pay on its payments, it will lead to a crash.
  • Banks use these liabilities to generate more income, which earns them additional income. By using these deposits to finance loans for individuals etc. Banks will be able to leverage this additional capital to make the extra income that they might have otherwise earned through the capital.
  • Banks also have an allowance in the balance sheet for covering losses, and the changes in this amount are based on the economic conditions.

Accounting Rules for Valuing Assets in a Bank

Capital is determined by Total Assets, less total liabilities (also known as net worth). However, the recent changes have changed this definition and have made it complex to determine the true value of the bank’s net worthNet WorthThe company's net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company's share capital (both equity and preference) as well as reserves and more.

Post-2009 crisis, the government took specific initiatives to restore faith in the banking system. Financial Accounting Standards Board has allowed Banks to value their assets at a Fair Value. Banks are now also allowed to record income on the income statement if the market value of the debt decreases. This change is because the bank could buy its debt in the market and reduce the debt amount.

Important Indicators in Banks Balance Sheet Analysis

The word “Default” means failure to meet interest or payment obligations. Usually, banks use a Non-performance ratio, which is a percentage indicating the number of loans given on credit is expected to fail. This comparison helps us in understanding if the bank has sufficient funds to meet the future contingencies

Widely used ratios include –

  1. Non-performing loans / Customer loans
  2. Non performing loans / Customer loans + collateral
  3. Non-performing loans / Average total assets
  4. Own Resources / Average total assets

Non-performing assets or loans to loans ratio is used as a measure of the overall quality of the bank’s entire loan book. Not performing loans are the ones for which interest is overdue for more than 3 months

The third ratio is especially significant for institutions that are already in a bad place. When this ratio crosses a benchmark, it is considered as a strong sign of insolvencySign Of InsolvencyInsolvency is when the company fails to fulfill its financial obligations like debt repayment or inability to pay off the current liabilities. Such financial distress usually occurs when the entity runs into a loss or cannot generate sufficient cash more

The higher fourth the ratio indicates that the bank is highly leveraged and there is lower protection against defaults on the loans mentioned above on the asset side

This article has been a guide to Banks Balance Sheet. Here we discuss the main components of the banks’ balance sheet in detail and its analysis along with practical examples, important indicators, and the widely used Ratios. You may learn more about accounting from the following articles –

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