Balance Sheet and Regulatory Features

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Balance sheet

The balance sheet of financial intermediary has the following features.

Cash & balances with reserve bank xx
Due from other banks xx
Investments xx
Loans and advances xx
Investment in associates xx
Net Property, Plant & Equipment xx
Other Assets xx
Total Assets xx
Due to banks and other financial institutions xx
Customers deposits xx
Debt securities in issue xx
Borrowings xx
Other liabilities xx
Share capital xx
Statutory reserve xx
Other reserves xx
Retained earnings xx
Proposed earnings xx
Total liabilities and shareholders equity xx

While the balance sheet of depository institutions has different features such as investment for customers, assets, cash/bank and many other features which are not related with the financial institutions. The balance sheet for these organizations is completely different because their transactions are different from those transactions that are carried out by financial intermediaries (McLaney, 2003).

Financial intermediaries and financial statements are regulated by a different body while the operations of depository institutions are regulated by the Central Bank as well as security exchange commission. In the United States of America the federal exchange regulates the banks or financial institutions.

Banks publish their reports in the newspaper for the general public and they report their financial position to various stakeholders such as the Federal Reserve, federal deposits insurance, shareholders and controller of currency.

Some of the reasons for using depository might suggest that a depository arrangement is a sham transaction without economic substance. The depository, however, is liable for claims costs if the intermediary institution goes under and becomes insolvent. Consequently, the depository has an incentive to monitor the solvency of the financial institution prior to engaging in a business transaction. And the fee charged by the depository will reflect the insolvency risk of the financial institution.


Financial institutions usually deal with customer’s money while depository institutions deal with securities of stock exchange. In effect, they both have different risks in their operations. The main sources of revenue for finance institutions such as banks are interest incomes, service charges and earnings on investment while depository earn their money through commissions (Brealey, Myres and Marcus, 2001).

Financial institution main activity is to carry out business as a payment agent and also borrow and lend out money. However, with time the banks have expanded their operations and now they are engaged in a wide range of activities. For instance banks are key players in the financial markets and provide financial services. According to the English law, a banker or a bank is an identity or a person who undertakes banking business which are outlined as (Teweles, R & Bradley, 2005);

  • Carrying out current accounts for the bank’s client
  • Paying checks which are drawn to the bank
  • Collecting checks on behalf of the clients

In banks loans to customer are investment because of the fact that it is the banks money given to customer. In comparing with a trading company it can be considered as receivables of the bank.

However, I should note that they are both affected by the same economic factors. Therefore they are grouped in the same category of financial institutions. The main reason why the government sometimes makes depository business regulated is to reduce the likelihood that firms will be unable to fulfill their legal obligations to individuals or other firms. Depository firms are obligated to hold people investments and securities. To ensure that firms are financially capable of holding the funds, firms must either deposit some of the assets with Federal Reserve.

The decision to finance losses using internal funds as opposed to using insurance also influences financial accounting income statements and balance sheets. It is important at the outset to distinguish financial reporting from tax accounting. The Financial Accounting Standards Board promulgates rules that firms should follow in reporting information to investors. These rules can and often do differ from tax accounting tax accounting rules. This section is concerned with financial reporting rather than taxes.

Generally, reported accounting numbers, in and of them, do not influence firm valuation. Value depends on expected cash flows, the timing of these cash flows, and the risk of the cash flows. To the extent that reported accounting numbers provide information about cash flows, then they will appear to influence valuation. However, the valuation effect arises not from the accounting numbers per se but from the expectation of higher cash flows (Shaw, 2007).

These institutions offer a safe and insured place for people to put their money at. However, there are risks which both the banks and mutual funds face, these risks includes bad debts, high inflations and changing market trends and other factors which can lead to these financial institutions collapsing. Over the last year, financial institutions have witnessed a rough time that has made the government to intervene.

Many financial institutions were put in financial positions which left them struggling to manage their interest rates effectively. This was brought about due to high reduced rates of interest the financial institutions were receiving. Another factor was high competition in the industry, general market transformation, changing industry trends, economic fluctuations and worse of all credit crunches. The past year was a big challenger for financial institutions particularly the banks to efficiently set their growth and expansion plans in an economic environment that continues to be witnessed (Campbell, Mandavilli, Greaves, Hodges, Harrison, Spencer, Walker, Izdebska, Gray and Aspinall, 2005).

Money laundry and the institutions

Conventional ways for laundering funds include the use of shell corporations, offshore financial havens and cash-only businesses, and the abuse of certain financial services offered by banks and other deposit-taking institutions. Promising markets such as formal securities, insurance and money-changing sectors promote for large-scale money laundering. Money laundering is also an outcome from terrorist activity or other serious crimes. If it is done effectively, it allows the criminals to maintain control over their proceeds and eventually to provide a legal protection for their source of income. Money laundering is effectual technique to facilitate the organized criminal, the insider dealer, the tax evader who needs to shun attention from the authorities that unexpected assets bring from illegal activities. Money laundering has three steps that can occur concurrently.

Technological advancement such as electronic money transaction and global systems of electronic payments formed an analogous banking system. Swindlers are more involved in money laundering because they find this media is a superb way of quickly shaped infrastructure. Money laundering by traditional methods is already a severe problem. But emergence of e-money technologies give opportunity to make money laundering much more widespread, as well as complicating efforts to fight it. Criminals are exploiting the advanced computer technology to enhance their own illegal activities. Unfortunately, police department is not competent to deal effectively with these criminals. Money laundering is quite prevalent among drug trafficking and terrorist activities and there are innumerable organizations trying to handle the problem. It is very important to develop adequate procedures for law enforcement that address the computer crime. Investigators must be knowledgeable to search the materials and seize the electronic evidence to recover, and the chain of custody to maintain. Law enforcement must be well prepared to deal with the computer-related crimes (Stessens, 2000).

Reference List

Brealey, R., Myres, S., & Marcus, A. (2001). Fundamentals of corporate Finance. Boston: Irwin/ McGraw – Hill.

Campbell, P, Mandavilli, A, Greaves, S, Hodges, M, Harrison, M, Spencer, N, Walker, J, Izdebska, B, Gray, S, & Aspinall, C. (2005). India: Nature outlook. 436, 477.

McLaney, E. (2003). Business Finance Theory and Practice. London: Prentice Hall,

Shaw, J. (2007). Declining U.S. Treasury Yields May Sink Mortgage Securities. Wall Street Journal (online edition)

Stessens, G. (2000). Money Laundering: Pinochet, the Junta, and a New International Law Enforcement Model. Cambridge: Cambridge University Press, Pg: 3.

Teweles, R & Bradley, S. (2005). The Stock Market: 7th Edition. New York: John Wiley & Sons,

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