AFIN8003 Workshop 2
Department of Applied Finance
2025-08-04
To begin with, a simple bank has just been established with shareholders’ contribution of $10,000.
import datetime
from brms.accounting.account import AccountBalances
from brms.accounting.report import Report
from brms.accounting.statement_viewer import HTMLStatementViewer
from brms.models.bank import Bank
bank = Bank()
balances = AccountBalances(
{
bank.chart_of_accounts.cash_account: 10_000,
bank.chart_of_accounts.equity_account: 10_000,
},
)
bank.initialize(balances)
viewer = HTMLStatementViewer(jupyter=True, hide_zero_balance_accounts=True)
today = datetime.date(2025, 7, 28)
report = Report(ledger=bank.ledger, viewer=viewer, date=today)
report.print_balance_sheet()Balance Sheet ──────────────────────────────────────────── Assets Cash and Cash Equivalents $10,000.00 Total assets $10,000.00 ──────────────────────────────────────────── Liabilities Total liabilities $0.00 ──────────────────────────────────────────── Net assets $10,000.00 ──────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Total shareholders' equity $10,000.00 ──────────────────────────────────────────── Date: 2025-07-28
Now some customers have made some deposits, for example:
Notably, customer deposits are the bank’s liability. We see an increase in both the bank’s total assets and total liabilities, while total shareholders’ equity remains unchanged.
from brms.instruments.factory import InstrumentFactory
from brms.models.transaction import TransactionFactory, TransactionType
customer_A_deposit = InstrumentFactory.create_deposit(value=60_000)
customer_B_deposit = InstrumentFactory.create_deposit(value=40_000)
customer_C_deposit = InstrumentFactory.create_deposit(value=20_000)
tx_deposit1 = TransactionFactory.create_transaction(
bank=bank,
transaction_type=TransactionType.DEPOSIT_RECEIVED,
instrument=customer_A_deposit,
transaction_date=today,
description="Customer A's Deposits",
)
tx_deposit2 = TransactionFactory.create_transaction(
bank=bank,
transaction_type=TransactionType.DEPOSIT_RECEIVED,
instrument=customer_B_deposit,
transaction_date=today,
description="Customer B's Deposits",
)
tx_deposit3 = TransactionFactory.create_transaction(
bank=bank,
transaction_type=TransactionType.DEPOSIT_RECEIVED,
instrument=customer_C_deposit,
transaction_date=today,
description="Customer C's Deposits",
)
bank.process_transaction(tx_deposit1)
bank.process_transaction(tx_deposit2)
bank.process_transaction(tx_deposit3)
report = Report(ledger=bank.ledger, viewer=viewer, date=today)
report.print_balance_sheet()Balance Sheet ──────────────────────────────────────────────────────── Assets Cash and Cash Equivalents $130,000.00 Total assets $130,000.00 ──────────────────────────────────────────────────────── Liabilities Deposits and Other Public Borrowings $120,000.00 Deposits $120,000.00 Total liabilities $120,000.00 ──────────────────────────────────────────────────────── Net assets $10,000.00 ──────────────────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Total shareholders' equity $10,000.00 ──────────────────────────────────────────────────────── Date: 2025-07-28
Depositors can also withdraw from the bank.
If Customer C has withdrawn all of their deposits ($20,000), we see a decrease of cash and deposits.
from brms.models.transaction import DepositWithdrawTransaction
tx_deposit_withdraw = TransactionFactory.create_transaction(
bank=bank,
transaction_type=TransactionType.DEPOSIT_WITHDRAWAL,
instrument=customer_C_deposit,
transaction_date=today,
description="Customer C withdraw",
)
bank.process_transaction(tx_deposit_withdraw)
report = Report(ledger=bank.ledger, viewer=viewer, date=today)
report.print_balance_sheet()Balance Sheet ──────────────────────────────────────────────────────── Assets Cash and Cash Equivalents $110,000.00 Total assets $110,000.00 ──────────────────────────────────────────────────────── Liabilities Deposits and Other Public Borrowings $100,000.00 Deposits $100,000.00 Total liabilities $100,000.00 ──────────────────────────────────────────────────────── Net assets $10,000.00 ──────────────────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Total shareholders' equity $10,000.00 ──────────────────────────────────────────────────────── Date: 2025-07-28
Of course, the typical business of a bank is to make loans. Let’s assume the bank has made an (interest-only) loan of $80,000 to some borrowers.
from brms.instruments.base import Instrument
from brms.instruments.mock import MockInstrument
from brms.models.transaction import LoanDisbursementTransaction
(loan := MockInstrument("A loan")).value = loan_amt
# fmt: off
tx_loan = TransactionFactory.create_transaction(
bank=bank,
transaction_type=TransactionType.LOAN_DISBURSEMENT,
instrument=loan,
transaction_date=today,
description="Loan made to a borrower",
)
# fmt: on
bank.process_transaction(tx_loan)
report = Report(ledger=bank.ledger, viewer=viewer, date=today)
report.print_balance_sheet()Balance Sheet ──────────────────────────────────────────────────────── Assets Cash and Cash Equivalents $30,000.00 Loans and Advances $80,000.00 Total assets $110,000.00 ──────────────────────────────────────────────────────── Liabilities Deposits and Other Public Borrowings $100,000.00 Deposits $100,000.00 Total liabilities $100,000.00 ──────────────────────────────────────────────────────── Net assets $10,000.00 ──────────────────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Total shareholders' equity $10,000.00 ──────────────────────────────────────────────────────── Date: 2025-07-28
After some time (e.g., a month), the bank may need to pay interest on customers’ deposits, e.g., $100.
Income Statement is included given that we’d like to know the profit and loss (P&L) of the bank over the period.
from brms.instruments.cash import Cash
from brms.models.transaction import InterestPaidOnDepositTransaction
today = today + datetime.timedelta(days=31)
tx_interest_paid = TransactionFactory.create_transaction(
bank=bank,
transaction_type=TransactionType.INTEREST_PAID_ON_DEPOSIT,
instrument=Cash(value=loan_interest_expense),
transaction_date=today,
description="Interest paid on deposits",
)
bank.process_transaction(tx_interest_paid)
report = Report(ledger=bank.ledger, viewer=viewer, date=today)
report.print_balance_sheet()
report.print_income_statement()Balance Sheet ──────────────────────────────────────────────────────── Assets Cash and Cash Equivalents $29,900.00 Loans and Advances $80,000.00 Total assets $109,900.00 ──────────────────────────────────────────────────────── Liabilities Deposits and Other Public Borrowings $100,000.00 Deposits $100,000.00 Total liabilities $100,000.00 ──────────────────────────────────────────────────────── Net assets $9,900.00 ──────────────────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Retained Earnings ($100.00) Total shareholders' equity $9,900.00 ──────────────────────────────────────────────────────── Date: 2025-08-28
Income Statement ────────────────────────────────── Income $0.00 ────────────────────────────────── Expense $100.00 Interest Expense $100.00 ────────────────────────────────── Profit ($100.00) ────────────────────────────────── Date: 2025-08-28
If the bank has only paid interest on deposits over this period, it surely has a net loss or negative profit as shown before.
However, it is more reasonable that the bank also has earned some profits during the same time, especially because it has made some loans.
Suppose that over the 1-month period, the bank has earned some interest income from the loans made earlier, e.g., for a total of $800.
Overall, the bank has a net profit of $700. We can observe that the bank’s Retained Earnings has increased by $700, too.
tx_interest_earned = TransactionFactory.create_transaction(
bank=bank,
transaction_type=TransactionType.LOAN_INTEREST_PAYMENT,
instrument=Cash(value=loan_interest_income),
transaction_date=today,
description="Interest earned from loans",
)
bank.process_transaction(tx_interest_earned)
report = Report(ledger=bank.ledger, viewer=viewer, date=today)
report.print_balance_sheet()
report.print_income_statement()Balance Sheet ──────────────────────────────────────────────────────── Assets Cash and Cash Equivalents $30,700.00 Loans and Advances $80,000.00 Total assets $110,700.00 ──────────────────────────────────────────────────────── Liabilities Deposits and Other Public Borrowings $100,000.00 Deposits $100,000.00 Total liabilities $100,000.00 ──────────────────────────────────────────────────────── Net assets $10,700.00 ──────────────────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Retained Earnings $700.00 Total shareholders' equity $10,700.00 ──────────────────────────────────────────────────────── Date: 2025-08-28
Income Statement ──────────────────────────────── Income $800.00 Interest Income $800.00 ──────────────────────────────── Expense $100.00 Interest Expense $100.00 ──────────────────────────────── Profit $700.00 ──────────────────────────────── Date: 2025-08-28
The transactions and non-transactions previous discussed all occur to the bank’s banking book.
However, a bank also has a trading book that holds securities for short-term trading P&L purposes.
These instruments are named Fair Value Through Profit and Loss (FVTPL).
Accounting for trading book securities is relatively easy. We consider:
Assume that the bank just purchased a FVTPL security for its trading book at its fair value of $10,000.
The fair value of the security is recorded on the balance sheet under the Assets at FVTPL account.
Balance Sheet ──────────────────────────────────────────────────────── Assets Cash and Cash Equivalents $30,700.00 Loans and Advances $80,000.00 Total assets $110,700.00 ──────────────────────────────────────────────────────── Liabilities Deposits and Other Public Borrowings $100,000.00 Deposits $100,000.00 Total liabilities $100,000.00 ──────────────────────────────────────────────────────── Net assets $10,700.00 ──────────────────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Retained Earnings $700.00 Total shareholders' equity $10,700.00 ──────────────────────────────────────────────────────── Date: 2025-08-28
from brms.models.base import BookType
fvtpl_security = MockInstrument("A FVTPL Security", BookType.TRADING_BOOK)
fvtpl_security.value = fvtpl_security_value
tx_fvtpl_purchase = TransactionFactory.create_transaction(
bank=bank,
transaction_type=TransactionType.SECURITY_PURCHASE_TRADING,
instrument=fvtpl_security,
transaction_date=today,
description="Purchase a FVTPL security",
)
bank.process_transaction(tx_fvtpl_purchase)
report2 = Report(ledger=bank.ledger, viewer=viewer, date=today)
report2.print_balance_sheet()Balance Sheet ──────────────────────────────────────────────────────── Assets Cash and Cash Equivalents $20,700.00 Loans and Advances $80,000.00 Assets at FVTPL $10,000.00 Total assets $110,700.00 ──────────────────────────────────────────────────────── Liabilities Deposits and Other Public Borrowings $100,000.00 Deposits $100,000.00 Total liabilities $100,000.00 ──────────────────────────────────────────────────────── Net assets $10,700.00 ──────────────────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Retained Earnings $700.00 Total shareholders' equity $10,700.00 ──────────────────────────────────────────────────────── Date: 2025-08-28
There are two possible cases:
These trading gains and losses are unrealized because the securities have not yet been sold.
If the market value of the security went down by 5% ($500.0) the next day, we need to recognize this unrealized trading loss in the Income Statement.
Income Statement ──────────────────────────────── Income $800.00 Interest Income $800.00 ──────────────────────────────── Expense $100.00 Interest Expense $100.00 ──────────────────────────────── Profit $700.00 ──────────────────────────────── Date: 2025-08-28
from brms.instruments.mock import MockValuationVisitor
today = today + datetime.timedelta(days=1)
# Assume that the market value of the FVTPL security went down by 5%
new_fvtpl_instrument_value = fvtpl_security.value * 0.95
valuation_visitor = MockValuationVisitor(new_value=new_fvtpl_instrument_value)
tx_fvtpl_marked_down = TransactionFactory.create_transaction(
bank=bank,
transaction_type=TransactionType.SECURITY_FVTPL_MARK_TO_MARKET,
instrument=fvtpl_security,
transaction_date=today,
valuation_visitor=valuation_visitor,
description="Mark to market a FVTPL security (down)",
)
bank.process_transaction(tx_fvtpl_marked_down)
report3 = Report(ledger=bank.ledger, viewer=viewer, date=today)
report3.print_income_statement()Income Statement ───────────────────────────────────────────── Income $300.00 Interest Income $800.00 Trading Income (FVTPL) ($500.00) Unrealized Trading Loss $500.00 ───────────────────────────────────────────── Expense $100.00 Interest Expense $100.00 ───────────────────────────────────────────── Profit $200.00 ───────────────────────────────────────────── Date: 2025-08-29
If we were to generate the balance sheet now, such net trading loss would reduce the bank’s retained earnings.
Balance Sheet ──────────────────────────────────────────────────────── Assets Cash and Cash Equivalents $20,700.00 Loans and Advances $80,000.00 Assets at FVTPL $10,000.00 Total assets $110,700.00 ──────────────────────────────────────────────────────── Liabilities Deposits and Other Public Borrowings $100,000.00 Deposits $100,000.00 Total liabilities $100,000.00 ──────────────────────────────────────────────────────── Net assets $10,700.00 ──────────────────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Retained Earnings $700.00 Total shareholders' equity $10,700.00 ──────────────────────────────────────────────────────── Date: 2025-08-28
Balance Sheet ──────────────────────────────────────────────────────── Assets Cash and Cash Equivalents $20,700.00 Loans and Advances $80,000.00 Assets at FVTPL $9,500.00 Total assets $110,200.00 ──────────────────────────────────────────────────────── Liabilities Deposits and Other Public Borrowings $100,000.00 Deposits $100,000.00 Total liabilities $100,000.00 ──────────────────────────────────────────────────────── Net assets $10,200.00 ──────────────────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Retained Earnings $200.00 Total shareholders' equity $10,200.00 ──────────────────────────────────────────────────────── Date: 2025-08-29
Usually, financial reports are generated at a period’s end, such as quarter’s end or year’s end. What’s shown here should be viewed as what if we close the bank’s accounting ledger at this time and generate the reports?
The day after, if the market value of the security went up by 10% ($950.0), we need to recognize this unrealized trading gain.
Income Statement ───────────────────────────────────────────── Income $300.00 Interest Income $800.00 Trading Income (FVTPL) ($500.00) Unrealized Trading Loss $500.00 ───────────────────────────────────────────── Expense $100.00 Interest Expense $100.00 ───────────────────────────────────────────── Profit $200.00 ───────────────────────────────────────────── Date: 2025-08-29
today = today + datetime.timedelta(days=1)
# Assume that the market value of the FVTPL security went up by 10%
new_fvtpl_instrument_value = fvtpl_security.value * (1 + day2_pct_change / 100)
valuation_visitor = MockValuationVisitor(new_value=new_fvtpl_instrument_value)
tx_fvtpl_marked_up = TransactionFactory.create_transaction(
bank=bank,
transaction_type=TransactionType.SECURITY_FVTPL_MARK_TO_MARKET,
instrument=fvtpl_security,
transaction_date=today,
valuation_visitor=valuation_visitor,
description="Mark to market a FVTPL security (up)",
)
bank.process_transaction(tx_fvtpl_marked_up)
report4 = Report(ledger=bank.ledger, viewer=viewer, date=today)
report4.print_income_statement()Income Statement ───────────────────────────────────────────── Income $1,250.00 Interest Income $800.00 Trading Income (FVTPL) $450.00 Unrealized Trading Gain $950.00 Unrealized Trading Loss $500.00 ───────────────────────────────────────────── Expense $100.00 Interest Expense $100.00 ───────────────────────────────────────────── Profit $1,150.00 ───────────────────────────────────────────── Date: 2025-08-30
Again, if we were to close the bank’s accounting ledger now and check its balance sheet, we will see changes of the bank’s retained earnings (increase by $950.0).
Balance Sheet ──────────────────────────────────────────────────────── Assets Cash and Cash Equivalents $20,700.00 Loans and Advances $80,000.00 Assets at FVTPL $9,500.00 Total assets $110,200.00 ──────────────────────────────────────────────────────── Liabilities Deposits and Other Public Borrowings $100,000.00 Deposits $100,000.00 Total liabilities $100,000.00 ──────────────────────────────────────────────────────── Net assets $10,200.00 ──────────────────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Retained Earnings $200.00 Total shareholders' equity $10,200.00 ──────────────────────────────────────────────────────── Date: 2025-08-29
Balance Sheet ──────────────────────────────────────────────────────── Assets Cash and Cash Equivalents $20,700.00 Loans and Advances $80,000.00 Assets at FVTPL $10,450.00 Total assets $111,150.00 ──────────────────────────────────────────────────────── Liabilities Deposits and Other Public Borrowings $100,000.00 Deposits $100,000.00 Total liabilities $100,000.00 ──────────────────────────────────────────────────────── Net assets $11,150.00 ──────────────────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Retained Earnings $1,150.00 Total shareholders' equity $11,150.00 ──────────────────────────────────────────────────────── Date: 2025-08-30
The next day, if the bank sold the security at the prevailing market price (assumed 2% up), we recognize realized trading gain.
Tracking the P&L of this particular FVTPL security,
The total P&L from this security is therefore a net gain of $659.0, which shows up in the Income Statement.
Because of the sale, the unrealized trading gain/loss associated with this security must be reclassified to realized gain/loss.
Income Statement ───────────────────────────────────────────── Income $1,250.00 Interest Income $800.00 Trading Income (FVTPL) $450.00 Unrealized Trading Gain $950.00 Unrealized Trading Loss $500.00 ───────────────────────────────────────────── Expense $100.00 Interest Expense $100.00 ───────────────────────────────────────────── Profit $1,150.00 ───────────────────────────────────────────── Date: 2025-08-30
today = today + datetime.timedelta(days=1)
# Assume that the market value of the FVTPL security went up by 2%
new_fvtpl_instrument_value = fvtpl_security.value * (1 + day3_pct_change / 100)
valuation_visitor = MockValuationVisitor(new_value=new_fvtpl_instrument_value)
tx_fvtpl_marked_up = TransactionFactory.create_transaction(
bank=bank,
transaction_type=TransactionType.SECURITY_FVTPL_MARK_TO_MARKET,
instrument=fvtpl_security,
transaction_date=today,
valuation_visitor=valuation_visitor,
description="Mark to market a FVTPL security (up)",
)
bank.process_transaction(tx_fvtpl_marked_up)
# Sale transaction should be created after the previous transaction has been processed
tx_fvtpl_sale = TransactionFactory.create_transaction(
bank=bank,
transaction_type=TransactionType.SECURITY_SALE_TRADING,
instrument=fvtpl_security,
transaction_date=today,
valuation_visitor=valuation_visitor,
description="Sale of FVTPL security (net gain)",
)
bank.process_transaction(tx_fvtpl_sale)
# fmt: on
report5 = Report(ledger=bank.ledger, viewer=viewer, date=today)
report5.print_income_statement()
# report.print_balance_sheet()Income Statement ─────────────────────────────────────────── Income $1,459.00 Interest Income $800.00 Trading Income (FVTPL) $659.00 Realized Trading Gain $1,159.00 Realized Trading Loss $500.00 ─────────────────────────────────────────── Expense $100.00 Interest Expense $100.00 ─────────────────────────────────────────── Profit $1,359.00 ─────────────────────────────────────────── Date: 2025-08-31
Now, if we were to close the bank’s accounting ledger and produce its balance sheet, we will have:
Balance Sheet ──────────────────────────────────────────────────────── Assets Cash and Cash Equivalents $20,700.00 Loans and Advances $80,000.00 Assets at FVTPL $10,450.00 Total assets $111,150.00 ──────────────────────────────────────────────────────── Liabilities Deposits and Other Public Borrowings $100,000.00 Deposits $100,000.00 Total liabilities $100,000.00 ──────────────────────────────────────────────────────── Net assets $11,150.00 ──────────────────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Retained Earnings $1,150.00 Total shareholders' equity $11,150.00 ──────────────────────────────────────────────────────── Date: 2025-08-30
Balance Sheet ──────────────────────────────────────────────────────── Assets Cash and Cash Equivalents $31,359.00 Loans and Advances $80,000.00 Total assets $111,359.00 ──────────────────────────────────────────────────────── Liabilities Deposits and Other Public Borrowings $100,000.00 Deposits $100,000.00 Total liabilities $100,000.00 ──────────────────────────────────────────────────────── Net assets $11,359.00 ──────────────────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Retained Earnings $1,359.00 Total shareholders' equity $11,359.00 ──────────────────────────────────────────────────────── Date: 2025-08-31
Compared to the balance sheet before the bank purchased this FVTPL security, the retained earnings increased by exactly $659.0.
Balance Sheet ──────────────────────────────────────────────────────── Assets Cash and Cash Equivalents $30,700.00 Loans and Advances $80,000.00 Total assets $110,700.00 ──────────────────────────────────────────────────────── Liabilities Deposits and Other Public Borrowings $100,000.00 Deposits $100,000.00 Total liabilities $100,000.00 ──────────────────────────────────────────────────────── Net assets $10,700.00 ──────────────────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Retained Earnings $700.00 Total shareholders' equity $10,700.00 ──────────────────────────────────────────────────────── Date: 2025-08-28
Balance Sheet ──────────────────────────────────────────────────────── Assets Cash and Cash Equivalents $31,359.00 Loans and Advances $80,000.00 Total assets $111,359.00 ──────────────────────────────────────────────────────── Liabilities Deposits and Other Public Borrowings $100,000.00 Deposits $100,000.00 Total liabilities $100,000.00 ──────────────────────────────────────────────────────── Net assets $11,359.00 ──────────────────────────────────────────────────────── Shareholders' equity Shareholders' Equity $10,000.00 Retained Earnings $1,359.00 Total shareholders' equity $11,359.00 ──────────────────────────────────────────────────────── Date: 2025-08-31
We’ll discuss more next week!
AFIN8003 Banking and Financial Intermediation