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if you receive a loan from a bank, how does the cash flow of the bank look like? I found the following: https://fincomplete.com/ratgeber/artikel/wie-berechnet-die-bank-meine-kreditzinsen-2 (unfortunately in German)

There, you see a split of different compontents of the interest rate. However, these component do not occur over the whole credit period, do they?

My assumption is the following: The base interest rate occurs every year (same as the interest rate for the customer). What about the other components: risk costs equity capital costs operating costs overhead costs ?

Do they occur over the whole credit period or only in the first year?

I would like to see the cash flow of the bank (assuming that it may even be negative in the first year).

Thank you!

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  • $\begingroup$ Risk costs and equity capital costs I do not think are cash flows. $\endgroup$
    – dm63
    Aug 19, 2021 at 19:07
  • $\begingroup$ @gumpel: you may get more and better responses if you provide an English translation of the components that make up the interest rate calculation. $\endgroup$
    – BrsG
    Aug 20, 2021 at 10:22

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For a given loan the cash flow of the bank or lender is the complement or reverse of the cash flow of the borrower as shown in the image below taken from the link below.

http://www.eng.utoledo.edu/~nkissoff/lessons/Lesson2.html

enter image description here

The cash flows can be classified as principal and interest where the bank lends principal and receives back both principal and interest.

When the bank records interest payments it debits deposits due to the borrower for a decrease and credits interest income revenue account for an increase. This tends to increase owner's equity when the books are closed, and accounts reconciled, at the end of an accounting period.

When the bank records principal repayment it debits deposits due to the borrower for a decrease and credits financial asset loans due from the borrower for a decrease. This tends to decrease loans and deposits when the books are closed, and accounts reconciled, at the end of an accounting period.

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    $\begingroup$ I think the question is about what kind of cash flows are triggered by the individual components that make up the banks calculation of the interest charged to the customer. For example what kind of flow does the risk premium trigger, if any? $\endgroup$
    – BrsG
    Aug 20, 2021 at 10:20
  • $\begingroup$ Then for context see Evaluating the Economic Value of Loans and The Implications: ... boj.or.jp/en/research/brp/ron_2003/data/ron0304a.pdf. Footnote 9: Generally, returns after deduction of credit cost are referred to as the “risk adjusted return on assets” (RAROA). There are also attempts to use “risk adjusted return on capital” (RAROC) as a measure of the profitability of capital allocated according to a credit risk framework. Another measure employed is “economic value added” (return after capital costs are deducted). See Bank of Japan (2001a) for details. $\endgroup$ Aug 20, 2021 at 20:04

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