Final answer:
Asset and liability measurement is central to a bank's balance sheet, with assets holding potential economic benefits and liabilities reflecting owed debts. The bank's capital is its net worth, calculated as the difference between assets and liabilities. Valuation complexities arise from risks such as loan defaults and the timing differences between asset cash flows and liability obligations.
Step-by-step explanation:
The basis for measurement of many assets and liabilities can be understood through a bank's balance sheet. An asset is an item of value that a firm or an individual owns with the capacity to generate economic benefits, like cash or a house. On the other hand, a liability represents a debt or obligation that must be settled, as in the case of a mortgage. For a bank, assets typically include loans and reserves held at the Federal Reserve, while their liabilities could be customer deposits. The value of a bank's net worth is known as bank capital, which equates to the excess of assets over liabilities.
Measuring the value of a bank's assets isn't always straightforward due to factors like the asset-liability time mismatch and the risk of loan defaults. Asset valuation often depends on future estimates and risk assessments influenced by customer behavior, economic conditions, and even international agreements if the bank is involved in global lending.