lec6

1,146 views

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
1,146
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
49
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

lec6

  1. 1. Chapter 9, goals <ul><li>Understand the 4 different goals of bank management </li></ul><ul><ul><li>Liquidity management </li></ul></ul><ul><ul><li>Asset management </li></ul></ul><ul><ul><li>Liability management </li></ul></ul><ul><ul><li>Capital adequacy management </li></ul></ul>
  2. 3. Basic Banking—Cash Deposit <ul><li>Opening of a checking account leads to an increase in the bank’s reserves equal to the increase in checkable deposits </li></ul>+$100 Checkable deposits +$100 Reserves +$100 Checkable deposits +$100 Vault Cash Liabilities Assets Liabilities Assets First National Bank First National Bank
  3. 4. Basic Banking—Check Deposit -$100 Checkable deposits -$100 Reserves +$100 Checkable deposits +$100 Reserves Liabilities Assets Liabilities Assets Second National Bank First National Bank +$100 Checkable deposits +$100 Cash items in process of collection Liabilities Assets First National Bank
  4. 5. Basic Banking—Making a Profit <ul><li>Asset transformation-selling liabilities with one set of characteristics and using the proceeds to buy assets with a different set of characteristics </li></ul><ul><li>The bank borrows short and lends long </li></ul>+$90 Loans +$90 Excess reserves +$100 Checkable deposits +$100 Required reserves +$100 Checkable deposits +$100 Required reserves Liabilities Assets Liabilities Assets Second National Bank First National Bank
  5. 6. Bank Management <ul><li>Liquidity Management </li></ul><ul><li>Asset Management </li></ul><ul><ul><li>Credit Risk </li></ul></ul><ul><li>Liability Management </li></ul><ul><li>Capital Adequacy Management </li></ul><ul><li>Interest-rate Risk </li></ul>
  6. 7. Liquidity Management: Ample Excess Reserves, rrr=10% <ul><li>Enough reserves and liquid assets to meet reserve requirements and net deposit outflows </li></ul><ul><ul><li>If a bank has ample excess reserves, a deposit outflow does not necessitate changes in other parts of its balance sheet </li></ul></ul>$90M $10M $100M $20M Liabilities Liabilities $10M Securities $10M Securities $10M Bank Capital $80M Loans $10M Bank Capital $80M Loans Deposits Reserves Deposits Reserves Assets Assets
  7. 8. Liquidity Management: Shortfall in Reserves <ul><li>Reserves are a legal requirement and the shortfall must be eliminated </li></ul><ul><li>Excess reserves are insurance against the costs associated with deposit outflows </li></ul>$90M $0 $100M $10M Liabilities Liabilities $10M Securities $10M Securities $10M Bank Capital $90M Loans $10M Bank Capital $90M Loans Deposits Reserves Deposits Reserves Assets Assets
  8. 9. Liquidity Management: Borrowing , federal funds for example <ul><li>Cost incurred is the interest rate paid on the borrowed funds </li></ul>Liabilities Assets $90M Deposits $9M Reserves $10M Bank Capital $10M Securities $9M Borrowing $90M Loans
  9. 10. Liquidity Management: Securities Sale <ul><li>The cost of selling securities is the brokerage and other transaction costs </li></ul>Liabilities Assets $90M Deposits $9M Reserves $1M Securities $10M Bank Capital $90M Loans
  10. 11. Liquidity Management: Federal Reserve , discount window <ul><li>Borrowing from the Fed also incurs interest payments based on the discount rate </li></ul>Liabilities Assets $90M Deposits $9M Reserves $10M Bank Capital $10M Securities $9M Borrow from Fed $90M Loans
  11. 12. Asset Management: Three Goals <ul><li>Seek the highest possible returns on loans and securities </li></ul><ul><li>Reduce risk </li></ul><ul><li>Have adequate liquidity </li></ul>
  12. 13. Asset Management: Four Tools <ul><li>Find borrowers who will pay high interest rates and have low possibility of defaulting </li></ul><ul><li>Purchase securities with high returns and low risk </li></ul><ul><li>Lower risk by diversifying </li></ul><ul><li>Balance need for liquidity against increased returns from less liquid assets </li></ul>
  13. 14. Liability Management <ul><li>Recent phenomenon due to rise of money center banks </li></ul><ul><li>Expansion of overnight loan markets and new financial instruments (such as negotiable CDs) </li></ul><ul><li>Checkable deposits have decreased in importance as source of bank funds </li></ul>
  14. 15. Capital Adequacy Management <ul><li>Bank capital helps prevent bank failure </li></ul><ul><li>The amount of capital affects return for the owners (equity holders) of the bank </li></ul><ul><li>Regulatory requirement </li></ul>
  15. 16. Capital Adequacy Management: Preventing Bank Failure When Assets Decline >calculate the change in net worth for the 2 banks Low Bank Capital High Bank Capital Liabilities Assets Liabilities Assets Decrease in Loans outstandin $96M Deposits $10M Reserves $90M Deposits $10M Reserves -$1M Bank Capital $85M Loans $5M Bank Capital $85M Loans $96M Deposits $10M Reserves $90M Deposits $10M Reserves $4M Bank Capital $90M Loans $10M Bank Capital $90M Loans Liabilities Assets Liabilities Assets Low Bank Capital High Bank Capital
  16. 17. Capital Adequacy Management: Returns to Equity Holders >measure the EM for the 2 different banks before the decline in assets
  17. 18. Capital Adequacy Management: Safety <ul><li>Benefits the owners of a bank by making their investment safe </li></ul><ul><li>Costly to owners of a bank because the higher the bank capital, the lower the return on equity </li></ul><ul><li>Choice depends on the state of the economy and levels of confidence </li></ul>
  18. 19. Credit Risk : Overcoming Adverse Selection and Moral Hazard <ul><li>Screening and information collection </li></ul><ul><li>Specialization in lending </li></ul><ul><li>Monitoring and enforcement of restrictive covenants </li></ul><ul><li>Long-term customer relationships </li></ul><ul><li>Loan commitments </li></ul><ul><li>Collateral and compensating balances </li></ul><ul><li>Credit rationing </li></ul>
  19. 20. Interest-Rate Risk <ul><li>If a bank has more rate-sensitive liabilities than assets, a rise in interest rates will reduce bank profits and a decline in interest rates will raise bank profits </li></ul>First National Bank <ul><ul><li>Checkable deposits </li></ul></ul><ul><ul><li>Reserves </li></ul></ul><ul><ul><li>Savings deposits </li></ul></ul><ul><ul><li>Long-term loans </li></ul></ul>$50M Fixed-rate liabilities $80M Fixed-rate assets <ul><ul><li>Long-term CDs </li></ul></ul><ul><ul><li>Long-term securities </li></ul></ul><ul><ul><li>Equity capital </li></ul></ul><ul><ul><li>Variable-rate CDs </li></ul></ul><ul><ul><li>Variable-rate and short-term loans </li></ul></ul><ul><ul><li>Money market deposit accounts </li></ul></ul><ul><ul><li>Short-term securities </li></ul></ul>$50M Rate-sensitive liabilities $20M Rate-sensitive assets Liabilities Assets
  20. 21. Interest Rate Risk: Gap Analysis > If interest sensitive liabilities are 30million more than interest sensitive assets, calculate the change in profits resulting from a 2% change in interest rates
  21. 22. Interest Rate Risk: Duration Analysis > If a bank has $100million in assets with an average 3 year duration and 96million in liabilities with an average 2 year duration, calculate the change in net worth resulting from a 2% change in interest rates
  22. 23. Chapter 10&11 <ul><li>Understanding the regulation of banking in the US </li></ul><ul><ul><li>Banks motivations </li></ul></ul><ul><ul><li>Regulators role </li></ul></ul><ul><li>Asymmetric information </li></ul><ul><ul><li>Changes in laws </li></ul></ul><ul><ul><li>Bank responses </li></ul></ul>
  23. 25. Evolution of the Banking Industry <ul><li>Financial innovation is driven by the desire to earn profits </li></ul><ul><li>A change in the financial environment will stimulate a search by financial institutions for innovations that are likely to be profitable </li></ul><ul><ul><li>Responses to change in demand conditions </li></ul></ul><ul><ul><li>Responses to changes in supply conditions </li></ul></ul><ul><ul><li>Avoidance of regulations </li></ul></ul>

×