Loans are a major asset category on a commercial bank's balance sheet, since by definition, a bank is in the business of lending money and its primary money use is to issue loans to businesses and consumers. While a commercial business can have uncollectible accounts receivable, a bank may have bad loans at times. To preserve a bank's asset value, it must ensure the quality of its loans. Similar to writing down any impaired assets, writing off bad loans results in losses and reduces owners' equity.
As a financial institution itself, a commercial bank also invests in various financial securities to complement its loan portfolios. A right mix of investments helps control total asset risks and provide liquidity to meet any coming-due liabilities. A bank spends relatively less money on physical assets, and investments are another major asset category on a bank's balance sheet. A bank may invest in some securities for speculative trading purposes, some as held-to-maturity investments to earn higher yields, and others as available-for-sale holdings to provide needed liquidity.
A commercial bank has the unique advantage of accessing to customer deposits as a major money source. Both businesses and individuals place their funds with banks on a continuing basis. Customer deposits are either time deposit bearing interest or on-demand deposit bearing no interest, which has different implications on claims. With time deposits, or savings accounts, a bank can more easily manage the liquidity of the future claims but at certain costs. With on-demand deposits, or checking accounts, a bank obtains free funding but must maintain a certain level of asset liquidity.
Borrowings constitute another major claims on a bank's balance sheet. A commercial bank lends but also borrows. A bank may issue short-term bank notes and long-term bank bonds, as well as bank certificates of deposit, to raise money. Using borrowing, a bank can have more control over planning a fund-raising effort for specific investments and operations, compared to relying on deposits. However, borrowings increase financial risks if earnings fail to grow and must be maintained within a certain limit against the level of a banks' own equity.