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Why are loans such a high percentage of total assets at the typical bank? What four...

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?

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Answer #1

Loans are such a high percentage of total assets at the typical bank because loans are the highest earning asset on the bank's balance sheet. The four broad classes of loans do banks engage in are: commercial and industrial loans, mortgage loans, consumer loans and the ubiquitous "other" category.

Banks maintain a high percentage of investment in securities because a major portion of bank funds is raised through short-term deposits that people can choose to withdraw at short notice. Consequently, banks must plan for withdrawals and keep a significant portion of their assets in cash or near cash investments. So even though much of the investment portfolio earns only low rates of interest, banks must maintain liquid reserves to meet loan demand and deposit withdrawals.

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