Question

analyse composition of assets and liabilities of the bank before financial crisis of 2007/2008

Answer 1

ANS : There had been a changes in the assets and liabilities in all the bank assets and liabilities prior to 2007 and 2008 presented by the detail chart below

Change in balance sheet items, all U.S. banks, 1998-2007
Percent
Item	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007	MEMO Dec. 2007 (billions of dollars)
Assets	8.21	5.47	8.78	5.13	7.23	7.25	10.80	7.79	12.36	10.81	11,077
Interest-earning assets	8.19	5.91	8.67	3.97	7.58	7.35	11.31	8.04	12.45	10.12	9,569
Loans and leases (net)	8.73	8.13	9.25	1.83	5.93	6.60	11.23	10.48	11.97	10.58	6,473
Commercial and industrial	12.96	7.90	8.55	-6.72	-7.39	-4.52	4.37	12.54	11.81	20.38	1,362
Real estate	8.03	12.28	10.76	7.95	14.49	9.78	15.44	13.81	14.94	7.03	3,634
Booked in domestic offices	8.01	12.42	11.04	8.03	14.90	9.69	15.11	13.93	15.05	6.77	3,565
One- to four-family residential	6.39	9.73	9.29	5.71	19.92	10.05	15.76	11.95	15.11	5.54	1,995
Other real estate	10.34	16.16	13.34	10.97	8.85	9.22	14.24	16.62	14.96	8.37	1,570
Booked in foreign offices	8.79	6.28	-1.62	3.97	-7.41	15.74	35.59	7.19	8.79	22.76	69
Consumer	.38	-1.47	8.05	4.17	6.60	9.77	10.17	2.80	6.19	11.67	948
Other loans and leases	13.50	7.19	7.01	-2.00	-.02	8.31	3.57	-.17	3.17	12.85	619
Loan-loss reserves and unearned income	3.10	2.40	8.00	13.17	5.82	-2.48	-4.18	-5.56	1.66	27.63	90
Securities	8.45	5.14	6.39	7.26	16.28	9.46	10.59	2.40	11.53	4.57	2,195
Investment account	12.11	6.71	2.89	8.92	13.60	8.73	6.17	1.19	6.94	-4.42	1,562
U.S. Treasury	-25.05	-1.87	-32.71	-40.23	41.93	14.14	-15.87	-17.59	-19.30	-26.90	29
U.S. government agency and corporation obligations	17.03	1.87	3.81	12.90	18.15	9.70	9.48	-1.82	4.71	-12.13	893
Other	27.02	20.93	13.41	12.19	2.81	6.04	3.03	10.12	13.78	10.72	639
Trading account	-13.32	-6.93	37.16	-3.72	36.32	14.01	36.81	7.96	31.32	36.13	633
Other	3.80	-8.35	10.33	13.04	-2.92	6.86	14.29	5.99	19.29	22.34	901
Non-interest-earning assets	8.39	2.66	9.46	12.79	5.14	6.65	7.61	6.21	11.80	15.36	1,509
Liabilities	8.09	5.61	8.60	4.47	7.17	7.31	9.57	7.80	12.10	10.79	9,941
Core deposits	7.08	.27	7.56	10.56	7.62	7.32	8.27	6.41	5.84	5.48	4,721
Transaction deposits	-1.38	-8.93	-1.28	10.22	-5.11	2.84	3.25	-1.19	-4.28	-1.21	695
Savings deposits (including MMDAs)	18.35	6.71	12.53	20.69	18.51	13.71	11.73	6.94	5.53	3.33	2,995
Small time deposits	.59	-.70	7.24	-7.21	-4.85	-6.67	1.61	12.90	16.97	18.00	1,031
Managed liabilities1	9.45	15.55	8.79	-2.71	5.38	7.09	12.07	12.26	19.45	16.58	4,550
Large time deposits	9.14	14.24	19.39	-3.64	5.18	1.84	21.89	23.00	15.95	1.92	1,024
Deposits booked in foreign offices	8.71	14.60	7.84	-10.92	4.49	12.63	16.84	6.32	29.67	25.86	1,502
Subordinated notes and debentures	17.00	5.07	13.98	9.56	-.59	5.08	10.49	11.42	22.60	16.83	174
Gross federal funds purchased and RPs	4.38	1.57	6.49	5.74	12.76	-8.70	8.40	15.62	9.47	7.06	744
Other managed liabilities	15.66	35.29	1.80	-.28	1.00	22.11	1.37	6.15	18.89	28.44	1,106
Revaluation losses held in trading accounts	3.44	-13.20	7.47	-17.06	33.44	14.02	-12.61	-17.86	6.89	42.20	205
Other	12.74	-1.25	20.63	14.92	5.24	5.30	17.19	-.82	22.34	3.35	465
Capital account	9.58	3.92	10.68	12.32	7.87	6.69	23.15	7.73	14.69	10.96	1,136
MEMO
Commercial real estate loans2	11.40	15.52	12.19	13.11	6.86	9.02	13.97	16.87	14.91	9.21	1,578
Mortgage-backed securities	22.14	-3.33	3.30	29.06	15.60	10.14	13.45	2.07	10.22	-1.24	960
Federal Home Loan Bank advances	n.a.	n.a.	n.a.	n.a.	17.30	3.71	3.74	10.00	29.80	30.62	455

Liabilities Side of Bank Balance sheet

Liabilities: On the liabilities side of the balance sheet, growth of core deposits remained moderate. The banks attracted small time deposits by maintaining relatively high rates, on average, on such deposits while other short-term yields were falling, but these inflows were partly offset by the continued sluggish growth of savings deposits (including money market deposit accounts). Given the relatively rapid growth in assets, banks turned to managed liabilities for funding. Moreover, in response to the pressures in funding markets, banks increased their reliance on FHLB advances and subordinated debt late in the year.Banks' capital expanded at about the same pace as assets. The rise in equity capital was supported by increased goodwill but was hampered by meager retained earnings. Regulatory capital, which excludes goodwill, grew somewhat more slowly than equity capital and assets, and regulatory capital ratios edged lower. A number of large institutions received sizable cash injections from their parent holding companies, which helped maintain capital ratios. As asset quality deteriorated late in the year, many banks significantly boosted loan-loss reserves.

1. Bank liabilities increased 10.8 percent in 2007, an advance matching that in bank assets. Core deposits grew only 3.2 percent, the slowest rate since 1999, and transaction deposits contracted for the third consecutive year.The rate of expansion of savings and money market deposit accounts slowed despite the decline in short-term market interest rates, which lowered the opportunity cost of holding liquid deposits, over the second half of the year . Small time deposits grew somewhat faster than savings accounts; aggressive bidding for them by banks held their yields steady even as other short-term rates declined in the fall. Core deposits are generally a more important funding source for smaller banks than for larger institutions, but core deposit growth was essentially zero for banks below the top 100 in 2007.
2. To compensate for the lackluster growth of core deposits, banks--especially the largest institutions--continued to ramp up their managed liabilities. Those funding sources accounted for 41 percent of the liabilities of all banks at year-end, up dramatically over the past decade. Given the deterioration in interbank markets late in the year, growth in managed liabilities was due primarily to the expansion of nonbank deposits booked in foreign offices (the largest component of managed liabilities) and to FHLB advances, which grew 42 percent at the 10 largest banks. Although growth in FHLB advances was lower at medium-sized banks, those banks now use advances to fund more than 5 percent of their assets. Large time deposits expanded 13 percent, primarily in the second half of the year.

Assets: On the Assets side of the banks the following heads had the following impact

1. Consumer Loan-Consumer loans Started declining as the rate of default grew in the market causing bad debt and poor retuns of the intrest income on the same.
2. Residential Real Estate Loans : Credit quality in the residential mortgage sector worsened sharply in 2007. The deterioration was partly rooted in the easing of underwriting standards around the middle of the decade--a shift in lending posture that was likely based to an extent on the assumption that house prices would continue to rise for some time to come. The easing of credit standards on mortgages reportedly was more pronounced at nonbank financial institutions than at commercial banks, in part because of different levels of regulation in those sectors. A historically large fraction of the loans originated in 2005 and 2006, particularly those to borrowers with weaker credit histories (subprime loans), had high loan-to-value ratios. Many subprime loans also had discounted introductory interest rates, which exposed borrowers to the potential for significantly higher mortgage payments after the initial rates on the loans reset, typically two to three years after origination.

           3)Securitized Loans :The credit quality of loans that were sold and securitized by                 banks that retained servicing rights or recourse or provided other credit enhancements to the securitization structure (hereafter referred to, for simplicity, as "securitized" loans) weakened in 2007, though not, in most cases, to the same extent as loans that were held on banks' balance sheets

4)Commercial Real Estate Loans :The rate of delinquency on CRE loans doubled in 2007, mostly because of a deterioration in the credit quality of construction and land development loans. In line with the problems in the housing sector, the delinquency rate on construction and land development loans that financed residential development nearly tripled between the first and fourth quarters of 2007, to 7.3 percent at year-end