Beginner's guide: Banking Business & Balance Sheet Analysis

Explore how banks earn through deposits, loans, and fees while comparing central, retail, commercial, and investment banks and their roles in money creation and capital markets.

Explore universal, private, community, and digital banks and how they deliver retail, investment, and wealth management services across front, middle, and back office operations in a tech-driven, automated environment.

Explore how the income statement and balance sheet reveal a bank's performance and financial health at year-end, distinguishing period cash flow from point-in-time assets and liabilities.

Build and analyze a bank's balance sheet, showing assets and liabilities in balance, and explore asset types (physical, liquid, retail, commercial, mortgages) and funding (retail deposits, wholesale funding, loan-deposit ratio).

Learn how a bank's balance sheet stays balanced during customer transactions by matching liability and asset changes through cash, liquid assets, and central bank reserves using clearing systems.

Learn how high quality liquid assets, including cash and government bonds, enable banks to borrow from the central bank and help complete the balance sheet's assets and liabilities.

Explore how loan defaults shrink assets on the balance sheet, and how equity serves as capital compensation for losses, highlighting the impact on liabilities and deposits.

Equity acts as a capital buffer, absorbing losses to protect depositors. Regulators reference the Basle accords, Basle one through Basle four, to guide required equity against shocks.

Explore how net interest margin drives bank profitability and yields a return on equity, illustrating how earnings relative to shareholder equity determines the return on equity and investor risk.

Banks grew their balance sheets with risky mortgage backed loans and securitizations, aided by lax risk weightings and hybrids, fueling defaults, credit default swaps, and the 2008 financial crisis.

Explore how bank balance sheets use financial instruments, including equity and debt instruments, derivatives and cash instruments, from bonds and checks to forex instruments.

Analyze JPMorgan Chase's 2021 balance sheet from the bank's annual report, including the audited financial statements, notes, and the standard structure of letters to shareholders, income statement, and cash flows.

Identify cash and cash equivalents as liquid bank assets under IFRS and GAAP, maturing in three months or less, including marketable securities, government bonds, commercial paper, and treasury bills.

Examine amortized cost and fair value on the balance sheet, noting assets marked to market and available for sale securities carried at amortized cost, with straight-line amortization.

A repurchase agreement, or repo, is the sale of a financial instrument with a later repurchase. The repurchase price exceeds the initial sale to reflect the repo rate and collateral.

Explore reverse repurchase agreements, where jp morgan buys securities with a plan to resell, recording interest earnings in the balance sheet section. Note borrowed, loaned, and held to maturity.

Firms acquire trading assets to resell for profit, value them at fair value with unrealized gains or losses, and banks holding assets for others use market-to-market and notify FDIC.

Explore how banks measure loans with amortized cost and fair value, including arrangement fees and effective interest rate. Review loan classifications, accruals, nonaccrual status, and the allowance for credit losses.

Explore how deposits, including demand and time deposits and CDs, shape J.P. Morgan's liability profile and interest costs, with growth in consumer, wholesale, and client assets from 2008 to 2021.

Analyze JPMorgan's balance sheet liabilities, including short-term borrowings around 53 billion and long-term debt around 301 billion, and note currencies, fixed or variable rates, and equity-linked or junior subordinated debt.

Analyze trading liabilities, including derivative liabilities and short positions. Explore put options, option premiums, exercise prices, and how banks hedge against price drops on their balance sheets.

Explore accounts payable and other liabilities, including brokerage payables and unsettled security purchases, with accrued expenses like credit card rewards and income tax payables, disclosed by JPMorgan at fair value.

Explore beneficial interests issued by consolidated VIEs, including SPs used in securitization to isolate assets and distribute cash flows to investors, with examples like J.P. Morgan's 10 billion issuance.

Explore the equity section of a bank balance sheet, focusing on common stock and additional paid-in capital, par value, stock issuance effects, treasury stock, and employee stock options.

Learn how retained earnings drive the balance sheet's equity, growing from opening to closing balances via net income minus dividends, illustrated by $100B opening and $110B closing.

Explain preferred stock's liquidation priority and regulatory use, and define accumulated other comprehensive income as unrealized gains and losses excluded from net income and transferred to retained earnings.

Learn how liquidity, a rainy day fund of assets that can be sold quickly, strengthens bank resilience and withstands wholesale funding risks highlighted by Lehman and Northern Rock.

Explore how the liquidity coverage ratio, per Basel III, requires systemically important banks to hold high quality liquid assets equal to 100% of 30-day net cash outflows estimated supervisory rates.

Assess the liquidity coverage ratio under Basel Accords by evaluating high quality liquid assets, including level one and level two assets, and net outflows for 2020 and 2021.

Learn how high quality liquid assets enhance bank liquidity, distinguishing level 1 and level 2 assets, their risk weights, and applicable haircuts under Basel rules.

Financial leverage uses borrowed funds to boost returns on investments in financial markets when asset prices rise, but magnifies losses if they fall, as banks lend for productive assets.

Examine the amplifying effect of using leverage, showing how a down payment grows equity and net worth in real estate and how borrowed funds boost investment returns.