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stitution has issued, which bonds it has in its
portfolio and how many structured products it
offers.The value of the buildings is also stated in
it, as well as the goodwill. To put it simply, this
last item tries to put a figure on the value of less
material possessions like reputation, growth
potential or a brand. The balance sheet total is
the sum of all assets (as well as all liabilities).
To the right of the assets is the list of liabilities.
At the top, the equity appears – i.e. the debts
to the shareholders. In principle the equity is
money that a bank can dispose of immediately.
Under the equity appears the borrowed capital.
The savings (deposits) of the customers are part
of this, but also the money, for instance, that a
bank borrows from the central banks and on
the financial markets to fund its balance sheet.
The ratio between the equity and the balance
sheet total (in fact, therefore, the number of
times that a bank has lent its equity in the mar-
ket) is called the leverage.
The balance sheet total of a bank is not by
definition stable – not even if a bank does not
purchase or sells assets. The reason is that the
value of the assets is subject to change. A build-
ing may increase or decrease in value, the value
of a brand may increase or decrease. The inter-
national IFRS accounting rules provide that a
bank must take those fluctuations into account
for a specific part of its possessions.
Shifts on the assets side
Broadly speaking, on the assets side of the bank
balance sheet we find three categories of ‘finan-
cial’ possessions.
Long-term loans that will remain in the books
until the maturity date (e.g. mortgages for
thirty years) must, in accordance with the in-
ternational accounting rules ‘
hold to maturity
’.
That means that they will remain in the books
at purchase price until they are paid. If, for in-
stance, the house linked to the mortgage in-
creases or decreases in value, that value fluctua-
tion will not affect the balance sheet total of the
bank in any way.
The assets in the trading portfolio, however, are
meant to be resold as quickly as possible.
They appear in the books at day value. Usually
no sustainable long-term funding is required to
keep them in the books, because in principle
they will be sold on quickly.
In-between those two categories there are fi-
nancial possessions that are booked as ‘
avail-
able for sale
’.
These are assets that the bank may
maintain until maturity, but may also sell them
before that. A major part of the assets of Bel-
gian banks (for example. many government
bonds) has been placed in the last category so
that the financial institutions have their hands
free should a buyer make an interesting bid.
Frozen financial markets
The consequences of that choice have become
clear during the crisis. The market fluctuations
of, for example, government bonds became
(
and become) immediately visible in the books
of the bank because of the accounting rules. If
the market price of Spanish government bonds
collapses or if the banks decide to devaluate
their Greek sovereign debt to 30% of its nomi-
nal value, this creates a problem for the banks
>
Stable financial sector