THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 347

CHAPTER 13 Banking and the Management of Financial Institutions 315 A bank s balance sheet is also a list of its sources of bank funds (liabilities) and uses to which the funds are put (assets) Banks obtain funds by borrowing and by issuing other liabilities such as deposits They then use these funds to acquire assets such as securities and loans Banks make profits by earning an interest rate on their holdings of securities and loans that is higher than the expenses on their liabilities The balance sheet of all banks in Canada, as of January 31, 2009, appears in Table 13-1 Liabilities A bank acquires funds by issuing (selling) liabilities such as deposits, which are the sources of funds the bank uses The funds obtained from issuing liabilities are used to purchase income-earning assets Banks have three main sources of funds: deposits, borrowings, and equity Table 13-1 shows that deposits make about 64% of bank liabilities, borrowings 31%, and equity 5% Demand deposits are payable on demand; that is, if a depositor shows up at the bank and requests payment by making a withdrawal, the bank must pay the depositor immediately Similarly, if a person who receives a cheque written on an account from a bank presents that cheque at the bank, the bank must pay the funds out immediately (or credit them to that person s account) Notice deposits are more important as a source of funds for the banks than are demand deposits Although notice deposits have a notice requirement in the contractual agreement with the client, the banks rarely enforce this clause, and so in fact most notice deposits are really just like demand deposits in this sense Demand deposits and notice deposits are bank accounts that allow the owner to write cheques to third parties Table 13-1 shows that this category of chequable deposits is an important low-cost source of bank funds, making up close to 26% of bank liabilities Once, chequable deposits were the most important source of bank funds, but with the appearance of new, more attractive financial instruments, the share of chequable deposits in total bank liabilities has shrunk over time A chequable deposit is an asset for the depositor because it is part of his or her wealth Conversely, because the depositor can withdraw from an account funds that the bank is obligated to pay, chequable deposits are a liability for the bank DEMAND AND NOTICE DEPOSITS TA B L E - Balance Sheet of All Banks in Canada (items as a percentage of the total, January 31, 2009) Assets (Uses of Funds)* Reserves and cash items Securities Liabilities (Sources of Funds) 4.56 23.16 Loans Demand and notice deposits 25.67 Fixed-term deposits 38.02 Advances from the Bank of Canada 0.01 Non-mortgage loans 33.07 Borrowings 31.39 Mortgages 17.87 Bank capital 4.91 Other assets Total *In order of decreasing liquidity Source: OSFI website, www.osfi-bsif.gc.ca 21.34 100.00 Total 100.00