Overview
Loans (fixed income instruments ) that banks make to its customers represent a significant portion of the banks assets. They also comprise a significant portion of its risk as well.The following represent a listing of some of the types of loans that are commonly held by banks.
- Consumer Loans
- Credit Cards
- Auto Loans
- Mortgages
- Commercial Loans
- Construction
- Commercial Real Estate
Terms of a Loan Contract
The Terms of a Loan Contract refers to the contractual obligations of the parties of the loan and may include provisions such as- Length (term) - the maturity of the loan, that is the date by which the principal is contractually obligated to have been paid off.
- Recourse and Collateral - terms that specify the options available to a bank in the case that the obligor defaults, including whether the loan requires collateral to be posted and when.
- Pre-payment - terms that dictate if the obligor can prepay the loan and what the penalties are, if any, in such a case.
- Payment Structure - timing of interest and principal payments.
Accounting Treatment
The accounting for assets on the bank's balance sheet follows the principles of accounting for fixed income investments or securities. However, because investments and securities represent the primary business of a bank, they are subject to additional requirements.- Current Expected Credit Losses (CECL) - banks are required to subtract the expected losses from a loan at origination.
- Deferred Loan Fees