Bank Management PDF

Bank balance sheet? Liabilities? → Lists sources of Bank funds (liability) and uses to which they are put (assets) banks Invest These liabilities (sources) into assets in order to create value for their capital providers total assets= total liability+ capital Checkable deposits = account that allow...

Bank balance sheet? Liabilities? → Lists sources of Bank funds (liability) and uses to which they are put (assets) banks Invest These liabilities (sources) into assets in order to create value for their capital providers total assets= total liability+ capital Checkable deposits = account that allow the owner (depositor) to write checks to third parties. It includes: non interest checking accounts interest earnings negotiable orders of withdrawal (NOW accounts) money market deposit accounts → low cost - safe - liquid BUT low interest → make up about 10% of bank Liab. Non transaction deposits = primary source of bank liabilities (50%) and are accounts form which the depositor can not write checks savings accounts time deposits (CD or deposit) → highest cost of finding BUT most stable Borrowings ? = funds from the federal Reserve system, other banks, and corporations. Different sources: Discount loans/advances (from Fed) fed funds ( from other banks) interbank offshore dollar deposits (from other banks) repurchase agreements Commercial paper and notes → more volatile than the liab. -> make up 19% of bad liab. Bank capital? Source of funds supplied by the bank owner (about 11% of assets ) Assets ? Reserves = Funds held in account with the Fed (vault cash as well) Required reserves = what is required by law under current required reserve Ratios → any reserves beyond this area = excess reserves Secondary Reserve = short debt treasury debt → high liquidity (= securities → make up about 20% of assets) Asset transformation? When a bank takes your swings deposits and uses the funds to make A mortgage loan for example → banks tend to "borrow short and lend long" Asset management? Attempt to earn the highest possible return an asset while minimizing risk → get borrowers with low default risk, paying high interest rates → buy securities with high returns , low risk → diversify → Manage liquidity Bank management Within Bank management Banks must also manage Credit Risk and Interest rate Risk. Credit Risk ? Managing the Source of funds from departs to CD's to other debt Liability management? important since 1960'S no longer Primarily depend on deposits Borrow or issue CD's to acquire funds when see loan opportunities → Manage both sides of the Balance sheet together most banks via asset-liability Management committee (ALM) → explained the increased Use of CD's and loans over checkable deposits in recent decades Capital adequacy management ? What happens if these banks make loans or invest in securities (say, subprime mortgage loans, for example) that end up losing money ? → higher bank capital = lower return on equity ROA = Net profits / Assets ROE = net profit / equity capital EM = Assets / equity capital ROE = ROA * EM → Capital increases -> EM falls , ROE falls → banks hold capital for safety and to meet Capital requirements Measuring bank performance requires a look at income statement: Bank performance and Income Statement ? operating income operating expenses Net operating income → diff. From a manufacturing firm income statement Use ROA, ROE, and Net Interest margin (NIM ) Off balance Sheet Activities ? Includes : → Loan sales (secondary Loan participation) → fee Income from Foreign exchange trades Servicing Mortgage- backed Security guarantees of debt back up lines of Credit → trading Activities and Risk Management tecchics Financial futures and options Foreign exchange trading Interest rate swaps They all involve Risk and potential conflits of Interest NIM = ( interest in come - interest expense) / assets Securitization ? , Transformation of liquid assets into marketable capital Market instrumente ( Involve a number of financial Institutions) → fondamental building block of the shadow Banking système → today almost any type of debt CAN be Securitized Search for profit (New Products and ideas) Financial innovation ? → growth of shadow Banking systems ( Bank Lending pas bien replaced by Lending via the Securities Market) 3 types of changes : → response to changes in demand conditions huge increase in interest risk starting in 1960'S → response : adjustable rate mortgages and creation of CBOT ( diff. Way to hedge ) → response to changes in supply conditions Major improvement in technology → response : lower the cost of processing financial trasacíons = profitable And made it easier for investors to acquire information → avoidance of existing regulations Money Market Mutual Funds (MMMFs) provide investors with liquidity similar to bank savings accounts but typically offer higher interest rates, particularly during the late 1970s. Sweep Accounts automatically transfer funds from checking accounts overnight for investment at higher overnight rates, avoiding reserve requirement taxes due to their non-checkable deposit status. STRIPS ? dev. in the early 1980'S avoid reinvestment risk associated with coupon bonds investment banks → profit from the Separation Of interest into "bonds" Shadow banking? Bank engaging in a securization process ( asset transformation): Loan origination → Servicing → bundling → distribution → at each step a fee is earned ATMs (Electronic Banking): Holding Companies: Automatic Teller Machines were the first innovation. Over 500,000 ATMs service the U.S Today. Automated Banking Machines combine ATMs provide « complete » service Fed oversees bank holding companies Allowed purchases of banks outside state BHCs allowed wider scope of activities by Fed BHCs dominant form of corporate structure for banks