The firm's operator pays for assets by either borrowing (liabilities) or paying for it from the shareholders' stake.
The name said of property, which can sell at street prices to pay off debt, is an asset. When this same property is put to production in pursuit of profit, the name said of property is capital.
Always, property is the right of ownership in something and not the actual thing itself. In the reality of commerce, all anyone ever does with another is buy and sell the right of ownership in something for the right of ownership in something else.
All too often, mistakenly, most believe they are buying milk when they buy milk from a supermarket. Rather they are buying property in some milk while at the same time taking possession of some milk in which they have the exclusive right of ownership.
Every firm can have a balance sheet. If we look at all commercial banks as one entity, we can look at the balance sheet for commercial bankers. Conveniently, statisticians at the Federal Reserve do that for us.
Far too many believe that bankers are a risky lot, driven by never-a-care greed. However, because most don't know one whit about commercial banking, they don't how banking works at all.
Bankers structure their assets so they can make good on liabilities they have undertaken in doing business. Most of these liabilities are known as demand liabilities, which are payable in cash on demand. A typical demand liability is a checking account.
By keeping as low as likely the sum of cash on hand, bankers can engage in profit-seeking activities. So what bankers do is acquire assets with known maturities. Bankers stagger these maturities in such a way that liabilities can get met when such come due.
In short, rather than holding cash in vaults, investment assets of bankers become their primary reserve. Traditionally in banking, especially in the days of money — coined metal by weight and fineness, most often gold — the liquidating reserve assets were commercial paper.
In SEVEN YEARS LATER, WHO IS TO BLAME FOR THE CREDIT CRISIS CAUSED BY THE RESIDENTIAL REALTY BUBBLE? THE U.S. CONGRESS, I revealed how through the years, successive U.S. Congresses created Government Sponsored Enterprises (GSEs) — Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal Agricultural Mortgage Corporation (Farmer Mac) — which bundle up mortgages into securities known as mortgage-backed securities (MBS) and hire investment bankers to broker those securities.
These Congress-authorized securities have ended up constituting an ever greater portion of bankers' primary reserve assets.
Between Q4 1972 and Q3 2014, Bankers' Full Risk grew at a yearly rate of less than one percent (0.4%). During the same period, Bankers' Reduced-Risk grew at a yearly rate of 3% and Bankers' Risk-Free grew at the yearly rate of 1.6%.
As you can see in the chart below, today, bankers' assets consist almost equally in thirds of Full Risk, Reduced Risk and Risk Free assets.
Since the 1970s, bankers have become far less risky precisely because U.S. Congresses have been subsidizing bankers' risk through a twisted process.
Bankers lend to individuals who buy houses on credit. Congress, through its agencies, buy those mortgages. These agencies create mortgage backed securities and hire investment bankers to sell those MBS.
Bankers then buy those MBS from the U.S. Congress, effectively buying back the mortgages they made. Now though, the sum of those mortgage payments become an income stream guaranteed by Congress.
In short, successive U.S. Congresses have so distorted the economy, spurring on excessive house building through buying mortgages from bankers and then backstopping bankers that two-thirds of bankers' assets more or less lack significant risk. A third of those assets have a direct U.S. Congress guarantee.
The members of successive U.S. Congresses could not get away with what they do without the current, flawed design, wrecked by the 71st Congress. For more on that, you can check out HATERS OF TEAM ELEPHANTS FOOLISHLY BLAME THE RICH FOR THE LOSS BY TEAM DONKEYS. OTHERS BLAME OBAMA. NONE HAVE IT RIGHT. HERE IS WHY.
The wrong story of what happened in the Banking Crisis of 2008 that led to the Long, Slow Collapse of 2009 to 2014 blames bankers for taking on too much risk precisely because of the. Even the members of the Financial Crisis Inquiry Commission claimed the banking crisis arose from "widespread failures in financial regulation and supervision."
Risk-Free assets consist of fully-guaranteed U.S. Treasury and U.S. Agency securities, cash and interbank loans fully-guaranteed by the Federal Reserve.
Reduced-Risk assets consist of realty loans and other collateral of physical assets.
Risk assets consist of other securities, trading assets, commercial and industrial loans, consumer loans and all other loans and leases.