If assets of a bank are greater than liabilities, it will be recorded as:

Correct — A. A balance sheet must balance, and the identity is assets = liabilities + net worth.

Rearranged, net worth = assets - liabilities. So whatever remains after a bank's liabilities are met is the owners' claim on it, and that residual is recorded as net worth - also called capital or equity.

It sits on the liabilities side of the statement, because the bank owes it to its own shareholders rather than to outsiders.

Why the others are wrong

• (b)
  liabilities — Liabilities are what the bank owes to others - deposits and borrowings. The excess of assets over them is by definition the thing that is left after liabilities, not a liability item of that kind.
• (c)
  assets — Assets are what the bank owns or is owed - cash, loans and investments. They are one of the two quantities being compared, not the name of the difference.
• (d)
  reserves — Reserves is a narrower term - retained profits, or the cash a bank holds against deposits. They form part of a bank's own funds but do not equal the whole excess of assets over liabilities.

A bank's balance sheet inverts everyday intuition.

Deposits are liabilities, because the bank owes that money to depositors. Loans are assets, because borrowers owe the money to the bank.

The two sides are forced to match by the balancing item, net worth, which is the owners' stake. A bank whose liabilities grow past its assets has negative net worth and is insolvent, which is why regulators watch bank capital so closely.

Key facts

• The balance sheet identity is assets = liabilities + net worth, so net worth equals assets minus liabilities.
• For a bank, deposits are liabilities and loans advanced to borrowers are assets.
• A bank whose liabilities exceed its assets has negative net worth and is insolvent.

Common traps

• Calling the excess profit. Profit is a flow over a period, while net worth is a stock at a date.
• Treating deposits as a bank's assets because the bank is holding the money.

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