Final answer:
A balance sheet displays a firm's financial condition, showing assets, liabilities, and net worth at a certain point in time. For banks, the balance sheet includes assets like cash reserves and loans, and liabilities such as customer deposits, which contribute to the bank's capital and risk management.
Step-by-step explanation:
A balance sheet reflects a firm's financial health at a specific point in time by listing its assets and liabilities. Assets represent valuable items owned by the firm and can be used to produce goods or services, such as cash or real estate. Liabilities are obligations that the firm owes, like loans or mortgages.
The difference between the total assets and total liabilities is known as the firm's net worth or bank capital.
Banks, as financial intermediaries, play a vital role by operating between savers who supply financial capital and borrowers who demand loans. They use balance sheets to manage and assess their financial stability.
The assets of a bank typically include the cash held in vaults, reserves at the Federal Reserve, loans made to customers, and bonds owned. Liabilities primarily consist of deposits made by customers. The bank's net worth needs to be positive, as a negative net worth indicates financial distress, potentially leading to the bank's failure.
Furthermore, a bank's balance sheet is crucial for understanding its risk exposure, such as the risk of loan defaults or interest rate fluctuations which may lead to an asset-liability time mismatch.