Question

I have searched the percentage of each question, but I want to know why there are differences?

a. What's the percentage of loans out of total assets for Bank of America and Central Bank? What explains such a significant difference?

BOA:40.2%, Central Bank:67%.

b. What's the percentage of total deposits out of total liabilities (including capital) for Bank of America and Central Bank? Again, why do you think there is a significant difference?

BOA:66.1%, Central Bank:89%.

Answer 1

a) The percentage loans to out of total assets indicates Loans-to-assets ratio. This is a measure of loans outstanding expressed as a percentage of total assets the bank has . Following measure is used to find out the ratio.

Loans to assets =(Loans / Total assets)

Now, let's come to the point. Reasons for the difference between these percentages are as follows

* The amount of funds loaned by these banks are different.

* Liquidity is different for these two banks.

*Higher the loans to asset ratio, the more risky a bank may to higher defaults.

In our case, central bank's loans out of total assets is a way higher than that of Bank of America.This indicatest central bank has loaned up more funds than bank of America and it's liquidity is low compared to Bank of America. If borrowers with higher loan amounts default, central bank will be more exposed to risks .

b) The percentage of total deposits out of total liabilities represents the deposits to liabilities ratio.

The ratio is calculated using the following formula

Deposits to liabilities= Total deposits/ Total liabilities.

The differences between the percentages arises because of the following reasons

* First of all, if all banks had same ratio of deposits to total liabilities and Capital, the results of loan/deposit ratios would be equivalent to those of the loan/asst ratio and the loan/ deposit ratios wouldn't be needed.

* These differences reflects the extent to which these banks are part of the banking industry.

* The areas these banks operate are different . Banking habits of the people also differ along with their preferences . Therefore liabilities as well as deposits secured the banks are different.

In our case, central bank has a higher percentage of deposits to total liabilities which means that, central bank has succeeded in more deposits than Bank of America. However,let's not forget that, for a bank , deposit is a liability. Therefore, central bank will be more vulnerable to a changes in global economic scenario and has more chances of a financial break down.