Which of the following forms an asset for a bank?

I. Reserves

II. Loans

The correct answer is Both I and II.

Key Points

• An asset is something of value that can be owned by an individual or an organization and can be used to produce something profitable.
• For a bank, these are the resources that generate income and profit.
• A bank has assets such as cash held in its vaults and moneys that the bank holds at the Federal Reserve bank (called “reserves”), loans that are made to customers.
• Other assets for a bank can include investments, such as stocks and bonds, and physical assets, such as buildings and equipment.

Additional Information

• Reserves, which are the funds held by the bank to meet its obligations and cover any potential losses, are considered an asset for the bank.
  • This is because the reserves can be used to make loans or investments that generate income for the bank.
  • These are important for a bank because they act as a buffer against unexpected losses.
    • Banks are required by regulatory authorities (like the Reserve Bank of India (RBI) in India) to hold a certain amount of reserves to ensure financial stability. e.g., CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio).
• Loans are also considered an asset for the bank.
  • When a bank makes a loan, it expects to receive interest payments from the borrower over time. This interest income is a source of revenue for the bank and is considered an asset.
• Reserves are typically low-risk and low-return, while loans are higher-risk and higher-return.