The balance sheets of the retail banks

An alternative perspective on the operations of retail banks can be obtained from an examination of the aggregate 'balance sheet' for the group. The summary totals for the retail banks as at 30 April 2002 are given in Table 1.l.

Assets

(i) Sterling assets

Sterling assets represent over 70% of total assets, and hence it is clear that they dominate the business of the retail banks. The components of those sterling assets are as follows.

Table 1. UK retail banks: summary balance sheet as at 30 April 2000
Assets	£bn	£bn
Sterling
Cash & balances with Bank of England		4.7
Market loans		95.6
Secured money with discount houses	6.4
Rest of UK banking sector	62.8
Certificates of deposit held	17.0
UK local authorities	0.3
Overseas	9.2
Bills		18.9
Treasury bills	7.9
Eligible bank bills	10.6
Other	0.4
Claims under sale and repurchase agreements		9.3
Advances		307.6
UK private sector	303.6
Others	4.0
Investments		48.0
Foreign currency
Market loans and advances		99.3
UK	38.4
Overseas	60.9
Bills		2.9
Investments		50.9
Claims under sale and repurchase agreements		8.1
Miscellaneous assets (in sterling and foreign currency)		32.6
Total assets		677.9
Liabilities	£bn	£bn
Sterling
Notes issued		2.4
Sterling deposits (of which £203bn are sight deposits)	426.8
UK banking sector	51.8
UK private sector	306.0
UK public sector	5.1
Overseas residents	26.5
Certificates of deposit issued, etc.	37.4
Liabilities under sale and repurchase agreements		7.9
Foreign currency
Foreign currency deposits		146.6
UK	41.1
Overseas residents	83.0
Certificates of deposit issued, etc.	22.5
Liabilities under sale and repurchase agreements		6.0
Miscellaneous liabilities (in sterling and foreign currency)	88.2
Total liabilities		677.9

Cash and balances with the Bank of England. Despite being the most vital asset for the day-to-day operations of the retail banks, the latter manage to keep the total very small. They do so because cash and balances at the Bank of England bring them no income. The balances with the Bank of England are partly operational balances used to meet commitments arising from payments-clearing operations, though they also include the cash ratio balances that all banks are required to hold with the Bank of England as part of the authori­ties' regulatory provisions. Only the operational balances are liquid assets.

Market loans. At £95.6bn, these represent about 14% of total assets and about 20% of sterling assets, and consequently represent a significant pro­portion of the retail banks' assets and activities. The 'market' aspect of these loans refers to the fact that they are wholesale loans that are usually made at market-related rates of interest and usually to other banking institutions. The majority of market loans are very liquid, i.e. they have only a short period to maturity, and hence represent an important means of holding inter­est-bearing assets that are also very liquid as an alternative to holding cash. They form the greater part, of the banks' liquid assets.

Bills. Bills total only £18.9bn, representing 2 % of total assets and 3.9% of sterling assets. As such, they now constitute only a fairly minor element of the retail banks' business, though their importance has been higher in the past. The largest element of these bills is 'eligible bank bills', so called because they are commercial bills that have been accep ted (underwritten) by banks which have eligibility status with the Bank of England. To achieve eligibility status, banks have to meet certain criteria set by the Bank of England, relat­ing to the quality of their acceptance business. The significance of eligible bank bills lies in the tact that they are eligible for re-discounting at the Bank of England. A bill that has been accepted by a bank which does not have eligibility status is a normal, non-eligible bank bill and will be included in this category of bills, along with Treasury bills and local authority bills. With a liquid secondary market in bills, these also represent liquid assets that yield an investment return.

Claims under sale and repurchase agreements. These are a new type of asset, introduced in the discount market on a formal basis to market members in 1993. In 1996, an 'open' repo (as these facilities are known) was introduced to the gilt-edged market. Banking statistics now show repo claims as a sepa­rate asset, with repo liabilities also being shown separately. These claims arise where the banks have bought assets (bills or gilts) in sterling from other parties, who must later complete the transactions by buying the assets from the banks with cash. The figures show claims at £9.3 billion and liabilities at £7.9 billion, so that the retail banks have net claims of £1.4 billion, which is small compared to the figure for wholesale banks.

Advances. At £307.6bn, representing 45% of total assets and over 63% of sterling assets, sterling advances clearly represent the most important ele­ment of retail banks' assets. Advances constitute the lending made predominantly to the UK private sector, either in the form of overdrafts or loans for fixed periods of lime. If the lending is for a fixed period of time, the original maturity may range from a few months to 10 years or more; in the case of mortgage loans, the original maturity is normally for 25 years. The arrangements for the interest rate charged on advances will be either floating (changing with the bank's base rate or the sterling London inter-bank offered rate - LIBOR), or fixed over the duration of the loan, or a hybrid of the two with rates fixed for a certain period of time. In addition, the interest rate charged will vary with the size of the sum borrowed, the creditworthiness of the borrower, the maturity of the loan, the arrangements for repayment, and so on.

Advances represent the least liquid element of the retail banks' financial assets but also represent the most important source of profit to a retail bank since, subject to competitive forces, the interest margin is greatest on these assets. In order for advances to be profitable, however, the banks need to control the costs of originating and administering the advances and to mini­mise losses through defaults. Given the lack of liquidity associated with advances, the importance of a substantial proportion of liquid assets - that is, cash, operational balances with the Bank of England, market loans and bills within the total sterling asset portfolio can be appreciated.

Investments. At £50.9bn. these represent only 7.5% of total assets and just over 10% of sterling assets. The bulk of these investments is accounted for by securities issued by, or guaranteed by, the British government. An important aspect of British government securities is that they are highly marketable and hence the underlying investment can be realised quickly. Their value changes, however, in the opposite direction to changes in interest rates.

(ii) Foreign currency assets

Table 1.1 shows (hat foreign currency assets constituted £16lbn and therefore about 24% of the total assets of the retail banks. The significance of these figures is that the retail banks are not just dealing in sterling at a retail level, but that almost 25% of their business involves foreign currencies.

The components of the foreign currency assets are very similar to those for sterling assets. A notable figure is the £99.3bn for market loans and advances to the overseas sector, demonstrating the point that not only is a substantial element of the business of the retail banks expressed in foreign currency, but furthermore a significant element of that is non-domestic in nature. In practice, around 75% of the 'market loans and advances' elements constitutes market loans, and therefore only 25% constitutes advances. Sale and pur­chase agreements are available in foreign currencies, so there is an entry for claims of £8.1bn.

(iii) Miscellaneous assets

This figure on the asset side of the balance sheet consists of items such as the retail banks' own branch premises and equipment and the value of cheques that have been credited to customers' accounts but which have not been presented for payment to other banks. Since it includes assets in both sterling and other currencies, it has been excluded from the calculation of the per­centages above.

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