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 1 3 - 1

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