CHAPTER 4

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The Economics of Banking and a Bank’s Balance Sheet and Income Statement

Before we embark on a bank valuation model, it is useful to review the main economic services provided by banks and present a representative balance sheet and income statement for a bank. Understanding these will greatly facilitate modeling.

THE ECONOMICS OF BANKING: FIVE MAIN FUNCTIONS

Through financial markets, economic units with surplus funds, such as some households and firms (and, more rarely, governments), can finance economic units with a shortage of funds, such as other firms, other households, or governments. On the financial markets, savers can buy bonds ...

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