Balance Sheet

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A balance sheet is a financial statement that provides a snapshot of what a company owns (assets) and owes (liabilities), as well as shareholders' investment in the company (shareholders' equity) at a specific point in time.

The fundamental accounting equation that a balance sheet follows is:

Assets = Liabilities + Shareholders' Equity

Balance Sheet Utility

The balance sheet helps stakeholders:

• Assess the company's financial health,
• Evaluate liquidity,
• Determine how the company finances its assets,
• Track the company's financial position over time.

Bank balance sheets differ significantly from traditional corporate balance sheets in several key ways:

Banks:

• Primarily financial assets (loans, securities)
• A very small proportion of physical assets
• Large cash/liquid asset holdings for regulatory requirements

Traditional Companies:

• Significant physical assets (equipment, inventory)
• A lower proportion of financial assets
• Less liquid assets overall

Banks:

• Deposits are the bank’s major liability
• Higher leverage ratios
• Complex financial instruments (derivatives)
• Subject to regulatory capital requirements

Traditional Companies:

• Accounts payable and term debt as main liabilities
• Lower leverage typically
• Simpler liability structure

Total Loans and Acceptances for Canada's domestic systematically important banks (D_SIBs) in $millions

Source: WOWA Data Labs

Banks:

• Much larger relative to equity
• More leveraged

Traditional Companies:

• Smaller relative to equity
• Lower leverage ratios

Banks:

• Credit risk from loans
• Interest rate risk
• Liquidity risk
• Subject to strict regulatory oversight

Traditional Companies:

• Operational risk
• Market risk
• Less regulatory oversight of balance sheet

Banks:

• Must maintain specific capital ratios
• Regulatory reserves required
• Stress testing requirements

Traditional Companies:

• No formal capital requirements
• Capital structure based on business needs

Total Deposits for Canada's domestic systematically important banks (D_SIBs) in $millions

Source: WOWA Data Labs

Balance Sheet Example:

Following is the balance sheet of the Royal Bank of Canada, the largest Canadian bank.

One should note that an indentation means a subcategory when reading a balance sheet. In the example above, we have “ASSETS” and “LIABILITIES AND EQUITY” at the leftmost position, meaning that they are the most general categories.

Total Assets for Canada's domestic systematically important banks (D_SIBs) in $millions

Beneath “Assets” and shifted to the right, we see various types of assets. These include Cash and due from banks, Interest-bearing deposits with banks, Securities, Assets purchased under reverse repurchase agreements, Loans, and Others.

"Cash and due from banks" primarily includes physical cash holdings (notes and coins), in-transit/clearing items, and nostro accounts for payment and settlement purposes. A nostro account is a bank account that a bank holds with another bank in a foreign country and in that foreign country's currency. Due from banks represents funds the bank has at other banks for operational purposes like payments clearing and settlements.

"Interest-bearing deposits with banks" represents funds placed with other financial institutions (including central banks) that earn interest. These are part of a bank's liquid asset management and include term deposits, money market deposits, and settlement balances with central banks that earn interest at the policy rate. While they earn interest, these deposits remain highly liquid and can be used for the bank's funding and liquidity management needs.

Beneath “securities”, there is an indentation, which means that we see the subcategories of this line beneath it. These subcategories are “trading” and “Investment, net of applicable allowance.” Securities on a bank's balance sheet represent financial instruments like government bonds, corporate bonds, equities, and other marketable securities.

The next line in RBC's balance sheet is “Assets purchased under reverse repurchase agreements”. These and securities borrowed are both forms of secured lending where the bank receives securities as collateral.

Reverse Repurchase Agreements

• Bank lends money to counterparties
• Receives securities as collateral
• Counterparty agrees to repurchase the securities at a slightly higher price later
• The difference in price represents interest earned
• Usually short-term transactions (often overnight)
• Used by banks for liquidity management and to earn interest income
• Very safe lending as backed by securities collateral

Securities Borrowed

• Bank borrows securities from counterparties
• Provides cash or other securities as collateral
• Pays a fee to borrow the securities
• Often used to cover short positions or facilitate client trades
• Also used to generate additional revenue through securities lending
• Similar to reverse repos but the focus is on obtaining specific securities rather than lending money

Both these instruments are important for:

• Bank's liquidity management
• Supporting trading operations
• Generating secured lending income
• Facilitating market-making activities

Loans are the largest category of assets for banks. They include retail and wholesale loans.

Retail Loans

• Made to individual consumers and small businesses
• Typically smaller loan amounts
• More standardized terms and approval processes
• Examples include: Mortgages, Personal loans, Credit cards, Small business loans and Auto loans

Wholesale Loans

• Made to larger businesses, corporations, and institutions
• Typically larger loan amounts
• More customized terms and structures
• Often require more complex documentation
• Examples include: Commercial real estate loans, Corporate credit facilities, Syndicated loans, Project financing, and Trade financing

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The bottom half of the balance sheet lists amounts of Liabilities and Equities. A bank's most important and largest category of liabilities is its deposits. In the example above, RBC’s balance sheet classifies deposits based on the depositor. Personal deposits, Business and government deposits, and bank deposits are all reported. Other important liabilities of the bank include repurchase agreements and securities loaned and also derivative liabilities.