1. Does a depository bank usually operate in the short or long run?

Depository banks are banking institutions that accept deposits from their customers of an agreed period and at a fixed rate. These banks operate either as short run or long run depending on the customer’s wish. Short term deposits 1-6months attract lower interest in long-term deposits where a customer deposits his money in a fixed account for a period exceeding one year(Fungáčová, Weill, & Zhou, 2017). Banks discourage withdraws of the deposits before maturity of the period agreed upon by setting strict regulations that may result in loss of the interest earned. These give the banks an opportunity to create a pool of funds to keep it in business.
2. ROE and ROA

Return on asset and return on equity are used to express internal returns. The return on equity is the net income gained by the company divided by its average shareholders’ equity. On the other hand, return on assets is the net income gained by the company in a given period divided by the company’s average assets over the same period. In a situation where the company has no liabilities, the value shareholders equity has the same value as assets (Rostami, Rostami, &Kohansal, 2016). Hence, since both returns on equity and return on assets are based on net income, and then the value of both ROA and ROE will be equal. In a situation involving a company with debt, it is more complex than the first case. The company assets will always exceed shareholders equity by the balance of the outstanding debt. That is, in the return computation divide by equity or assets, the return on equity will be higher than the return on the assets when the equity is smaller than assets.
3. Check Clearing

Check clearing is defined as the process whereby the funds move from one account to another settle a paycheck. The process involves the amount being credited to the bank account of deposit and later being debited from the bank which it is withdrawn (Mills, 2016). The process starts when a check is deposited to a bank or credit union. A request is then made by the bank to the check writer’s bank asking for the money. The next step involves the bank sending the money to the receiver bank from the check writer. The check is declared clear when it is received by the receiver’s bank from the check writer’s bank.

4. 4. Borrowing between banks

Banks borrow from one another. The market is referred to as the interbank lending market where banks borrow loans from other banks for a specified period. In most case, the loans do not exceed one week maturity period (Bräuning&Fecht, 2016). When the loan is supposed to be paid overnight, the interest rate gained is referred to as the overnight rate. The interest rate normally changes regarding the availability of money in the market, length of maturity period, and the specific terms of the contract. The main reason behind the interbank borrowing is when the bank cannot meet the liquidity requirements such as bank runs by the client. Banks are supposed to hold a sufficient amount of liquid assets especially cash to meet the unexpected situation.
5. Camels

The term camel is the acronym word that stands for the components of the bank’s condition. The components include capital adequacy, asset quality, management, earnings, and liquidity. In 1997, another component which is referred to as sensitivity of the bank was added hence the word Camels.  The components are then rated on a scale ranging from one to five and any factor that score less than three higher-than-satisfactory (Hasan, Ümit, &Serhat, 2016). Camels’ ratings are the summary of the private supervisory data that is collected in the on-site exams. The data is useful to both public monitoring and the supervisory of the commercial banks. The accessibility to supervisory information is improved by the market assessments of the bank’s condition since it compares favorably with the supervisory analysis.
6. Classification of securities

Security is defined as the tradable financial asset. Securities are categorized into various classes such as debt securities, derivatives, equity securities, and smart securities. Each category of securities has different types of securities such that debt securities have banknotes, debentures, and bonds, equity securities as common stocks, derivatives have futures, swaps, options, and forwards, and lastly smart securities have security tokens, digital security, and asset-backed token. An issuer is a name used to refer to the entity that issues the security. Each country has its regulatory structure which determines what qualifies as security. Security is represented by a certificate, dematerialized (electronic), or even book-entry only form.
7. Equity multiplier

Equity multiplier is defined as the ratio that is mainly used to assess a business’ debt and equity financing strategy. In the calculation, if the results show a higher ratio, it implies that more assets were financed by debt than by equity. In other words, it means that assets were funded more by the investors than by the creditors of the company (Abraham, Harris, &Auerbach, 2017). The firm is considered riskier for the creditors and investors when the assets of the firm are primarily financed by debt. This may also mean that the currentcreditors own more than the current investors. When the multiplier ratio is lower, it implies that the company is less independent of debt funding and the debt servicing costs are not high. Another application of multiplier ratio is in DuPont analysis where it is used to illustrate how the firm’s return on equity is affected by the leverage. In this case, according to DuPont analysis, higher returns on equity are delivered when the multiplier ratio is high.

8. Future loan losses

Banks are likely to experience future loan losses. It has been a common case since the banks came to existence. This situation has led to the need of the banks to set aside expense known as loan loss provision to act as an allowance for uncollected loans and loans payments(Jin, Kanagaretnam, &Lobo, 2018). The number of future loan losses that are covered by this provision in include customer defaults, bad loans, and renegotiated terms of the loan that has a lower value than the initial loan. Loan loss provision known as loan valuation allowances and it is an adjustment to loan reserves.
9. Liquidity of a bank

Bank liquidity is the term used to refer to the ability of the bank to meet its financial needs as they prevail. In other words, the liquidity of bank can be described as the degree at which the bank can convert its cash, cash equivalents, and other assets to meet unexpected financial risk. Liquidity is calculated finding the ratio of liquid assets and the liabilities of the financial institution. Examples of liquidity ratios current ratio which compares the current assets to current liabilities, cash ration that compares cash and readily convertible investments to current liabilities, and quick ratio are the same as the quick ratio but do not include inventory in its calculation.
10. Classification of deposits as to risk

Different deposit accounts are offered by financial institutions. The two most commonly known deposits account is checking and savings the account. Deposit account has classified in to two major categories which are time deposits and demand deposits.  The difference between the two categories is that in time deposits, the person is required after a particular period while the demand deposits can be withdrawn at any given time (Fungáčová, Weill, & Zhou, 2017). Demand deposits accounts include savings and checking accounts. Examples of time deposits accounts include IRA CDS and certificates of deposit (CDs). These two accounts offer higher interest rates that the demand deposits. The only disadvantage that time has compared to demand deposits accounts is that a lot of money may be lost in a case where the situation may lead the customer to withdraw the deposits before the maturity date.

References

Abraham, R., Harris, J., &Auerbach, J. (2017). Earnings yield as a predictor of return on assets, return on equity, economic value added and the equity multiplier. Modern Economy, 8(10).

Bräuning, F., &Fecht, F. (2016).Relationship lending in the interbank market and the price of liquidity. Review of Finance, 21(1), 33-75.

Fungáčová, Z., Weill, L., & Zhou, M. (2017). Bank capital, liquidity creation, and deposit insurance. Journal of Financial Services Research, 51(1), 97-123.

Hasan, D., Ümit, H., &Serhat, Y. (2016). Performance assessment of deposit banks with CAMELS analysis using fuzzy ANP-Moora approaches and an application on the Turkish banking sector. Asian Journal of Research in Business Economics and Management, 6(2), 32-56.

Jin, J., Kanagaretnam, K., & Lobo, G. J. (2018).Discretion in bank loan loss allowance, and earnings management. Accounting & Finance, 58(1), 171-193.

Mills, D. C., Wang, K., Malone, B., Ravi, A., Marquardt, J., Badev, A. I., …&Ellithorpe, M. (2016). Distributed ledger technology in payments, clearing, and settlement.

Rostami, S., Rostami, Z., &Kohansal, S. (2016). The effect of corporate governance components on return on assets and the stock return of companies listed in Tehran stock exchange. Procedia Economics and Finance, 36, 137-146.

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