5. Please write short answers for the following questions (27 points) a) Why do banks hold capital? b) Name 2 assets and 2 liabilities of banks? c) Why do banks have high liabilities? d) Define reserve requirement e) Define fed funds f) Differentiate between demand deposits and time deposits g) Name 2 revenues of a bank h) Name 2 expenses of a bank i) Define commercial loans consumer loans and mortgages.

a) Banks hold capital to absorb potential losses and ensure stability in the event of financial distress.<br /><br />b) Assets: Loans, Investments; Liabilities: Deposits, Borrowings.<br /><br />c) Banks have high liabilities due to the large amount of customer deposits they hold.<br /><br />d) Reserve requirement is the amount of funds that a bank must hold in reserve against specified deposit liabilities.<br /><br />e) Fed funds are overnight borrowings between banks to maintain their reserve requirements.<br /><br />f) Demand deposits can be withdrawn at any time, while time deposits have a fixed maturity date.<br /><br />g) Revenues: Interest on loans, Service fees.<br /><br />h) Expenses: Employee salaries, Loan loss provisions.<br /><br />i) Commercial loans are for businesses, consumer loans are for individuals, and mortgages are for real estate purchases.