Question

Why are loans such a high percentage of total assets at the typical bank? What four broad classes of loans do banks engage in? Most non-financial firms would never hold as much of their assets in safe liquid securities as banks do. Why do banks maintain such a high percentage of investment in securities?

Answer 1

Every banking institution works with the objective of providing banking solutions to the customers as well as enhance profitability. Major banks have loans as the highest percentage of total assets. This is primarily because loans are the highest earning assets for any bank. Various bank customers resort to bank for loan. This can be for purchasing home, car, funding education, etc. Hence loans are considered most lucrative product by bank.

The major types of loans, provided by banks are as follows:

· Mortgage loans

· Commercial as well as industrial loans

· Consumer loans

· Ubiquitous loans

Bank needs to have liquid reserves so as to meet the immediate capital needs of the customers. Hence they need to invest in a fund which is quite liquid and can be accessed quite easily. Securities are quite liquid instruments. Though the rate of interest associated with them is less, major banks maintain a high percentage of investment in securities, just to maintain liquidity and easy accessibility of funds.

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