Hick Planet
magazine
tryna find the grownups table on a hick planet
an unperiodical:
on arts, endeavors, musings, sites, sights, & other senses
Thursday, 2019 November 28th
issue 1
Why Banks Are Special (and Highly Regulated)
a supplement to
by
Agent d’Amore
Banks and banking are special financial institutions that are highly regulated by the government in almost every country.
What makes them special?
The simple answer: they are allowed to use special accounting not available to other companies.
Most companies must account for the valuable things they possess (money, equipment, inventory, etc.) as
assets.
They must account for those things they owe others (promises to pay, rent, goods already purchased but not shipped, etc.) as
liabilities.
A balance sheet is a summary of all assets and liabilities of a company and, as the name implies, the assets and liabilities must balance each other.
Banks have balance sheets too.
The confusion for the average person is that how a bank views assets and liabilities seems to be a mirror image of a regular company.
What do banks own that they consider to be assets?
They own “promises to them that they will be paid with interest”, known as a promissory note or a debt security (a legal document ensuring that the debt is enforceable and legally collectable), and also own the investors’ capital that formed the bank.
What do they consider to be liabilities?
Their liabilities are any amount they owe to parties from whom the bank has borrowed.
As a “deposit-taking institution”, a bank is allowed to borrow money from individuals.
These borrowings are unsecured; the bank has pledged nothing more than its promise to return the deposits when requested.
As you can tell, a disreputable person could theoretically borrow and never pay it back, this is a reason for government oversight and regulation.
For a bank balance sheet, “deposits” are liabilities, and loan notes (promissory notes) are assets.
For a customer of the bank, “deposits” are an asset, and loan notes (promissory notes) are a liability.
An interesting accounting side effect of a bank balance sheet is that when the bank receives a fully completed and legally valid promissory note, they place it on their balance sheet as an asset and balance that entry with an equal liability.
From the customer perspective, this liability entry appears as if someone has deposited funds into their account.
Copyright 2019 The Cool Publication Company.
