After studying chapter 12, you should be able to: Define “capital budgeting” and identify the steps involved in the capital budgeting process, explain the procedure used to generate longterm project proposals within the firm, justify why cash, not income, flows are the most relevant to capital budgeting decisions,. | 8- McGraw-Hill/Irwin Chapter Eleven Commercial Banks: Industry Overview 11- McGraw-Hill/Irwin Commercial Banks Commercial banks are the largest group of financial institutions in terms of total assets Major assets are loans Major liabilities are deposits—thus, they are considered depository institutions Perform services essential to . financial markets play a key role in the transmission of monetary policy provide payment services provide maturity intermediation Banks are regulated to protect against disruptions to the services they perform 11- McGraw-Hill/Irwin Commercial Bank Assets Loans generate revenue for banks commercial and industrial loans are declining because of nonbank substitutes such as commercial paper mortgages are increasing in importance Investment securities generate revenue and provide banks with liquidity Cash assets are held to meet reserve requirements and to provide liquidity Other assets include premises and equipment, other real estate owned, etc. 11- McGraw-Hill/Irwin Commercial Bank Assets Commercial banks face unique risks because of their asset structure credit (default) risk is the risk that loans are not repaid liquidity risk is the risk that depositors will demand more cash than banks can immediately provide interest rate risk is the risk that interest rate changes erode net worth credit, liquidity, and interest rate risk all contribute to a commercial bank’s level of insolvency risk 11- McGraw-Hill/Irwin Commercial Bank Liabilities Transaction accounts are the sum of noninterest-bearing demand deposits and interest-bearing checking accounts interest bearing deposit accounts are called negotiable order of withdrawal (NOW) accounts Household (retail) savings and time deposits have been declining in recent years because of MMMFs passbook savings accounts retail time deposits Large time deposits negotiable CDs are fixed-maturity interest-bearing deposits with face values of $100,000 or more that . | 8- McGraw-Hill/Irwin Chapter Eleven Commercial Banks: Industry Overview 11- McGraw-Hill/Irwin Commercial Banks Commercial banks are the largest group of financial institutions in terms of total assets Major assets are loans Major liabilities are deposits—thus, they are considered depository institutions Perform services essential to . financial markets play a key role in the transmission of monetary policy provide payment services provide maturity intermediation Banks are regulated to protect against disruptions to the services they perform 11- McGraw-Hill/Irwin Commercial Bank Assets Loans generate revenue for banks commercial and industrial loans are declining because of nonbank substitutes such as commercial paper mortgages are increasing in importance Investment securities generate revenue and provide banks with liquidity Cash assets are held to meet reserve requirements and to provide liquidity Other assets include premises and equipment, other real estate
