Analysis of Commercial Bank Balance Sheet

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CONTENTS INTRODUCTION DEFINITION_ OF COMMERCIAL BANK_ *“Banks and other deposit taking institutions are financial intermediaries whose assets consist overwhelmingly of loans to a wide variety of borrowers and whose liabilities consist overwhelmingly of deposits.” THE ECONOMICS OF MONEY BANKING AND FINANCE 3rd* Edition PETER HOWELLS & KEITH BAIN Pg 32 A sound system of banking is very important for any economy. Commercial banks are directly related to the payment system of the economy. Generally most commercial banks are controlled by the central bank of that particular country. The central bank can never allow the banking system to fail because if banks start to fail the payment system will fail. They may allow some banks to fail…show more content…
Due to asymmetric information we have adverse selection and moral hazard problem. Adverse selection problem comes to picture before entering into the transaction. In short the bank has to filter the good borrowers and the bad borrowers. Sometimes the bank may give loan to the bad borrowers and may suffer of this. Though banks have put checks like credit history before making out the loan but adverse selection problem cannot be neglected completely. The other problem which is created because of asymmetric information is moral hazard problem. The moral hazard problem starts after the bank has sanctioned the loan. Borrowers may get into undesirable activities. The main objective for which the loan was sanctioned may never get fulfilled. The other side of moral hazard problem is the conflict of interest between the borrower and the bank. Borrowers may try to act on their interest rather than the interest of the bank. Banks like Lloyds TSB can overcome the problems of adverse selection and moral hazards if they have proper check and control on their customers but rarely any bank achieves 100% success in these problems. These are two most important risks which any financial intermediary faces in order to serve their most important duty i.e. payment services to the economy. Just like any other financial institution the group also faces credit risk. {text:bookmark-start} “Credit risk {text:bookmark-end} is risk due to uncertainty in a counterparty's (also

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