Question

1)state and explain what constitutes assets and liabilities in commercial banks and how profitability is measured.( 8 marks)

2)explain the following term, clearly stating the impact they have on the provision of financial services. information asymmetry,adverse selection,moral hazard.

3) comment on the characteristics following the type of financial intermediaries and how there services may defer from other financial intermediaries. investment banks,insurance companies,pension funds,credit unions.

Answer 1

Q:1: State and explain what constitutes assets and liabilities in commercial banks and how profitability is measured.( 8 marks)

Ans:-

Assets for commercial Banks:-

Cash and cash equivalents which includes cash in hand and reserves with thier Central Banks.

Money at call which includes money given to other banks and financial institutions.

Investments which includes short term or long term investment made by bank i.e govt securities and other planned and national saving certificates.

Loans and advances , Bill discounted and bill purchased which means banks gives advances and loans to other instituions and customers in return they give interest to banks.Bill discounting and bills purchasec are the asset for the banks banks receives interest on it.

Cash credit, Demand loans, Term Loans,Overdraft on which banks charges its services.so these are some of its assets.

Liabilities for Banks:-

Capital reserves;- Which inlcudes paid up and authorised capitals for banks, Sharholders' contributionsetc.

Deposits:- Deposits made by customers and others fiancia; or companies .

Borrowings;- Banks borrowing from other financial institutions.

Bills payables etc

How banks profitability is measured?

Banks profitability is measured by following ways;-

1 Return on Assets 2, Interest income, 3,Return on owners' equity.

Generally banks Earns profit from its services provided to customers, for that its charges some fees.

Return on Asset is determined by :-

Net interest income + free income - Operating costs / Average total assets

Net interest margin shows how good banks earns interest on its assets.

Net interest margin= Net interest Income / Average total Assets

Return on asset is determined by ;- Net income / Average total assets.