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Sem 5 Prep
← Money & BankingSources and uses of bank funds

Formulas for this chapter

CASA ratio

CASA ratio = (Current account deposits + Savings account deposits) / Total deposits

Any question on the cost or the stability of a bank's funding. Only current and savings go on top; fixed, recurring and term deposits are in the denominator only.

Current accounts
Demand deposits paying 0% interest
Savings accounts
Demand deposits paying usually 2% to 4%

Weighted average cost of deposits

Cost = (SUM of each bucket x its rate) / total deposits Saving from a mix shift = amount shifted x (old rate - new rate)

When a deposit mix and its rates are given. Divide by total deposits, not by the interest-bearing ones, or the zero-cost current accounts will vanish from the answer.

bucket
Current, savings or term deposits, each with its own rate

Net interest income from a balance sheet

Interest earned = advances x lending rate + SLR securities x their yield + 0 x CRR cash Interest paid = CASA x CASA rate + term deposits x term rate NII = interest earned - interest paid

When a question builds a bank from its deposit mix and reserve requirements. The CRR balance is non-earning, so it appears on the asset side with a yield of zero and still has to be funded.

advances
Deposits times (1 - CRR% - SLR%), when the bank lends to its limit
Step 4 of 26
The real wordsTheory

Owned funds, and what they are for

Share capital: equity and preference.

Reserves and surplus: statutory reserve, capital reserve, retained earnings.

And the slide's own statement of their role, which is the exam answer: risk absorption and regulatory capital, the latter meaning the CRAR under Basel III.

So owned funds are not there to be lent. They are there to absorb losses so that depositors do not have to, which is exactly what a capital adequacy ratio measures.

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