Do Banks Have Working Capital?

The concept of working capital does not apply to banks since financial institutions do not have typical current assets and liabilities such as inventories and accounts payable. Also, it is very hard to determine current liabilities for banks, because banks typically rely on deposits as a source for their capital, and it is not certain when a customer will demand his deposit back.

Working capital is calculated as the difference between a company's current assets and current liabilities. Working capital is used to finance a company's current operations, such as purchasing inventories, collecting accounts receivable from customers, obtaining credit from vendors, and producing and shipping products.

Banks do not produce physical goods; instead, they borrow and lend funds. A bank's income comes primarily from the spread between the cost of capital and interest income it earns by lending out money to the public. Also, banks do not have fixed assets, and they heavily rely on borrowing as their primary source of capital. This is especially evident from looking at a typical commercial bank's balance sheet. It has a small number of fixed assets, which primarily consist of various fixtures and buildings. Given the nature of a bank's business, its balance sheet does not contain inventories, typical accounts payable and accounts inventories, making calculating working capital an impractical endeavor.

Another issue with calculating working capital for banks is a lack of classification of assets and liabilities by their due dates. Banks do not organize their balance sheets by current and noncurrent assets and liabilities, as it is impossible to do so. For instance, a typical bank's liabilities consist of deposits, which can be withdrawn on demand. Because it is impossible to determine with certainty when a particular deposit will be demanded, banks have no means to classify deposits as either current or noncurrent. All this makes the classification of assets and liabilities by their due dates impractical.