This document discusses the various types of risks faced by banks, including credit risk, liquidity risk, market risk, operational risk, capital risk, and others. It provides definitions and considerations for evaluating each type of risk, such as key ratios to examine for credit risk, balance sheet items that influence liquidity risk, and how changes in interest rates and exchange rates can impact market risk. The CAMELS framework for regulatory bank ratings is also summarized. Overall, the document provides an overview of fundamental risks in bank financial intermediation and how they can be assessed.
This presentation provides a highlight of the key issues in the management of Market Risk. It touches briefly some of the elements of the Basel 2 Accord with respect to Market Risk
In collaboration with GMT Capital, Clement Ashley Consulting recently held a nation-wide capital market investors conference in ten cities. This is the slideshow of the presentation I made at the conference.
I have given this presentation at the Amsterdam Business School, University of Amsterdam. It is a practical introduction for Master students in Financial Markets about the importance of Risk Management and the tools thereof.
This presentation provides a highlight of the key issues in the management of Market Risk. It touches briefly some of the elements of the Basel 2 Accord with respect to Market Risk
In collaboration with GMT Capital, Clement Ashley Consulting recently held a nation-wide capital market investors conference in ten cities. This is the slideshow of the presentation I made at the conference.
I have given this presentation at the Amsterdam Business School, University of Amsterdam. It is a practical introduction for Master students in Financial Markets about the importance of Risk Management and the tools thereof.
MODULE 4:
Market Risk (includes asset liability management)
Yield Curve Risk Factor-Domestic and global contexts-handling multiple risk factor-principal component analysis- value at Risk (VAR) – implementation of a VAR system- Additional Risk in fixed income markets-Stress testing- Bank testing.
Coupling of Market Risk,Credit Risk, and Liquidity RiskGateway Partners
The main risks of any financial product are market risk, credit risk, and liquidity risk. When we reference credit risk, we are including both market-based credit risk, where widening of credit spreads is indicative of credit quality deterioration, as well as counterparty credit risk. This may be caused by the loss in the market value of the portfolio holdings or market illiquidity. Similarly, liquidity risk includes the funding liquidity as well as the market liquidity of different asset classes. In general, these risks are treated separately as if they are totally Independent of each other. That assumption is untrue as any loss in market value impacts both funding costs as well as credit quality loss. Similarly, any loss in liquidity can impact the credit performance risk as well as the market prices of an asset. If we measure the market, credit, and liquidity risk separately, this risk can be significantly understated as the coupling can be highly non-linear, thus increasing the losses several orders of magnitude.
The following presentation discusses this coupling of market, credit, and liquidity risk as well as the difficulties in measuring them in addition to possible solutions to hedge them.
A brief overview of financial risk management strategies which will be covered in a 2 day workshop on Emerging Markets Investment & Risk Management Strategies on Sept 15-16 2011 in Singapore.
Asset Liability Management and Risk Management over laps each other on many grounds, they are the two very important concepts of the study of Financial Systems.
Asset liability management (ALM) can be defined as the comprehensive and dynamic framework for measuring, monitoring and managing the financial risks associated with changing interest rates, foreign exchange rates and other factors that can affect the organisation’s liquidity.
In this presentation you will be introduced to the “Various Risk Factors in Banking”, which will help you understand the components and types of risk and it’s peril on the banking sector and risk terminologies used in the banking sector.
To know more about Welingkar School’s Distance Learning Program and courses offered, visit:
http://www.welingkaronline.org/distance-learning/online-mba.html
MODULE 4:
Market Risk (includes asset liability management)
Yield Curve Risk Factor-Domestic and global contexts-handling multiple risk factor-principal component analysis- value at Risk (VAR) – implementation of a VAR system- Additional Risk in fixed income markets-Stress testing- Bank testing.
Coupling of Market Risk,Credit Risk, and Liquidity RiskGateway Partners
The main risks of any financial product are market risk, credit risk, and liquidity risk. When we reference credit risk, we are including both market-based credit risk, where widening of credit spreads is indicative of credit quality deterioration, as well as counterparty credit risk. This may be caused by the loss in the market value of the portfolio holdings or market illiquidity. Similarly, liquidity risk includes the funding liquidity as well as the market liquidity of different asset classes. In general, these risks are treated separately as if they are totally Independent of each other. That assumption is untrue as any loss in market value impacts both funding costs as well as credit quality loss. Similarly, any loss in liquidity can impact the credit performance risk as well as the market prices of an asset. If we measure the market, credit, and liquidity risk separately, this risk can be significantly understated as the coupling can be highly non-linear, thus increasing the losses several orders of magnitude.
The following presentation discusses this coupling of market, credit, and liquidity risk as well as the difficulties in measuring them in addition to possible solutions to hedge them.
A brief overview of financial risk management strategies which will be covered in a 2 day workshop on Emerging Markets Investment & Risk Management Strategies on Sept 15-16 2011 in Singapore.
Asset Liability Management and Risk Management over laps each other on many grounds, they are the two very important concepts of the study of Financial Systems.
Asset liability management (ALM) can be defined as the comprehensive and dynamic framework for measuring, monitoring and managing the financial risks associated with changing interest rates, foreign exchange rates and other factors that can affect the organisation’s liquidity.
In this presentation you will be introduced to the “Various Risk Factors in Banking”, which will help you understand the components and types of risk and it’s peril on the banking sector and risk terminologies used in the banking sector.
To know more about Welingkar School’s Distance Learning Program and courses offered, visit:
http://www.welingkaronline.org/distance-learning/online-mba.html
Q120 years In the late 1990s the gold price reached its lowe.docxmakdul
Q1:
20 years: In the late 1990s the gold price reached its lowest level in real terms for two decades. The reasons why it was so weak during the so-called “Clinton boom” from 1995 to 2001 come surprisingly from MMT (modern monetary theory), a theory that in many points opposes gold, in particularly because its proponents are in love with fiat, “the lawful act to declare paper as money”. However, they do not like excessive private debt, which is an idea common to Austrian economists.
But much of the stage was set in 2008 for gold’s rise in 2009 – and for the next few years – when the global financial crisis was entering its darkest days. To recap what happened in the last quarter of 2008, the U.S. Treasury seized control of mortgage lenders Fannie Mae and Freddie Mac in September 2008 and said it offered a $200 billion cash injection for firms dealing with mortgage default losses. The most immediate reason for gold’s woes is the strong dollar. Gold is priced in dollars, so if the American currency goes up, investors mark down the yellow metal accordingly. An added factor is that the dollar is rising because of the revival of the American economy, which is bringing the prospect of higher interest rates.
6 menthes: In December, the price of gold was at the top level and that due to at the end of December the price of gold was decreased suddenly. The big news of course is that the Fed hiked rates another 25 basis points. So far, stock market speculators don’t seem to care. They should. The present value of all future earnings depends on the interest rate, and every upwards tick is a substantial downward revision of earnings in out years. However, the bull is so strongly entrenched that it may take a while for this to sink in. We also think of the companies who were borrowing to buy their own shares, and for that matter borrowing to pay dividends.
Q2:
a. Credit risk: is the type of risk of evasion on a debt that may emerge from a borrower failing to do needed payments. Firstly, the risk is that of the lender which includes lost principal and interest, interruption to cash flows, together with improved collection costs. This loss may be complete or partial. In an efficient market, higher points of credit risk will always be related with huge borrowing costs in an efficient market type. Following this measures of borrowing costs which includes yield spreads can be used to surmise credit risk levels grounded on assessments by current market participants. A good existing example is what happens in local retail shop where buyer in this case will lend money or take goods on credit suggesting to pay later but unfortunately fail to respect that deal.
There actually two kinds of risks associated with bonds that is interest risk and credit risk. They can have very dissimilar impacts on various assets within the bond market. As earlier learnt that interest is the vulnerability of a bond or fixed income asset class to movements in the prevailing rates
b. In ...
https://rb.gy/n89u77
Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. Discuss the general features,
yields, prices, ratings, popular types, and international issues of
corporate bonds. Review the legal aspects of bond financing and bond cost.
when will pi network coin be available on crypto exchange.DOT TECH
There is no set date for when Pi coins will enter the market.
However, the developers are working hard to get them released as soon as possible.
Once they are available, users will be able to exchange other cryptocurrencies for Pi coins on designated exchanges.
But for now the only way to sell your pi coins is through verified pi vendor.
Here is the telegram contact of my personal pi vendor
@Pi_vendor_247
Exploring Abhay Bhutada’s Views After Poonawalla Fincorp’s Collaboration With...beulahfernandes8
The financial landscape in India has witnessed a significant development with the recent collaboration between Poonawalla Fincorp and IndusInd Bank.
The launch of the co-branded credit card, the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card, marks a major milestone for both entities.
This strategic move aims to redefine and elevate the banking experience for customers.
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
how to sell pi coins in all Africa Countries.DOT TECH
Yes. You can sell your pi network for other cryptocurrencies like Bitcoin, usdt , Ethereum and other currencies And this is done easily with the help from a pi merchant.
What is a pi merchant ?
Since pi is not launched yet in any exchange. The only way you can sell right now is through merchants.
A verified Pi merchant is someone who buys pi network coins from miners and resell them to investors looking forward to hold massive quantities of pi coins before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
If you are looking for a pi coin investor. Then look no further because I have the right one he is a pi vendor (he buy and resell to whales in China). I met him on a crypto conference and ever since I and my friends have sold more than 10k pi coins to him And he bought all and still want more. I will drop his telegram handle below just send him a message.
@Pi_vendor_247
Currently pi network is not tradable on binance or any other exchange because we are still in the enclosed mainnet.
Right now the only way to sell pi coins is by trading with a verified merchant.
What is a pi merchant?
A pi merchant is someone verified by pi network team and allowed to barter pi coins for goods and services.
Since pi network is not doing any pre-sale The only way exchanges like binance/huobi or crypto whales can get pi is by buying from miners. And a merchant stands in between the exchanges and the miners.
I will leave the telegram contact of my personal pi merchant. I and my friends has traded more than 6000pi coins successfully
Tele-gram
@Pi_vendor_247
how to sell pi coins in South Korea profitably.DOT TECH
Yes. You can sell your pi network coins in South Korea or any other country, by finding a verified pi merchant
What is a verified pi merchant?
Since pi network is not launched yet on any exchange, the only way you can sell pi coins is by selling to a verified pi merchant, and this is because pi network is not launched yet on any exchange and no pre-sale or ico offerings Is done on pi.
Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
How can i find a pi vendor/merchant?
Well for those who haven't traded with a pi merchant or who don't already have one. I will leave the telegram id of my personal pi merchant who i trade pi with.
Tele gram: @Pi_vendor_247
#pi #sell #nigeria #pinetwork #picoins #sellpi #Nigerian #tradepi #pinetworkcoins #sellmypi
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
BYD SWOT Analysis and In-Depth Insights 2024.pptxmikemetalprod
Indepth analysis of the BYD 2024
BYD (Build Your Dreams) is a Chinese automaker and battery manufacturer that has snowballed over the past two decades to become a significant player in electric vehicles and global clean energy technology.
This SWOT analysis examines BYD's strengths, weaknesses, opportunities, and threats as it competes in the fast-changing automotive and energy storage industries.
Founded in 1995 and headquartered in Shenzhen, BYD started as a battery company before expanding into automobiles in the early 2000s.
Initially manufacturing gasoline-powered vehicles, BYD focused on plug-in hybrid and fully electric vehicles, leveraging its expertise in battery technology.
Today, BYD is the world’s largest electric vehicle manufacturer, delivering over 1.2 million electric cars globally. The company also produces electric buses, trucks, forklifts, and rail transit.
On the energy side, BYD is a major supplier of rechargeable batteries for cell phones, laptops, electric vehicles, and energy storage systems.
what is the best method to sell pi coins in 2024DOT TECH
The best way to sell your pi coins safely is trading with an exchange..but since pi is not launched in any exchange, and second option is through a VERIFIED pi merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and pioneers and resell them to Investors looking forward to hold massive amounts before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade pi coins with.
@Pi_vendor_247
how to sell pi coins at high rate quickly.DOT TECH
Where can I sell my pi coins at a high rate.
Pi is not launched yet on any exchange. But one can easily sell his or her pi coins to investors who want to hold pi till mainnet launch.
This means crypto whales want to hold pi. And you can get a good rate for selling pi to them. I will leave the telegram contact of my personal pi vendor below.
A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
Here is the telegram contact of my vendor:
@Pi_vendor_247
What website can I sell pi coins securely.DOT TECH
Currently there are no website or exchange that allow buying or selling of pi coins..
But you can still easily sell pi coins, by reselling it to exchanges/crypto whales interested in holding thousands of pi coins before the mainnet launch.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and resell to these crypto whales and holders of pi..
This is because pi network is not doing any pre-sale. The only way exchanges can get pi is by buying from miners and pi merchants stands in between the miners and the exchanges.
How can I sell my pi coins?
Selling pi coins is really easy, but first you need to migrate to mainnet wallet before you can do that. I will leave the telegram contact of my personal pi merchant to trade with.
Tele-gram.
@Pi_vendor_247
1. Bank Management
RISK IN FINANCIAL
INTERMEDIATION
Session 6
William Chittenden edited and updated the PowerPoint slides for this edition.
2. Fundamental risks :
Credit risk
Liquidity risk
Market risk
Operational risk
Capital or solvency risk
Off-Balance Sheet Activities
Foreign Exchange Risk
Sovereign Risk
Legal risk
Reputational risk
3. Credit risk
…the potential variation in net income and
market value of equity resulting from
nonpayment or delayed payment on loans
and securities
Three Question need to be addressed:
1. What has been the loss experience?
2. What amount of losses do we expect?
3. How prepared is the bank?
4. Credit ratios to consider
What has been the loss experience?
Net loss to average total LN&LS
Gross losses to average total LN&LS
Recoveries to avg. total LN&LS
Recoveries to prior period losses
Net losses by type of LN&LS
What amount of losses do we expect?
Non-current LN&LS to total loans
Total Past/Due LN&LS - including nonaccrual
Non-current & restruc LN&LS / Gross LN&LS
Current - Non-current & restruc/ Gr LN&LS
Past due loans by loan type
5. Credit ratios to consider (continued)
How prepared are we?
Provision for loan loss to: average
assets and average total LN&LS
LN&LS Allowance to: net losses and
total LN&LS
Earnings coverage of net loss
6. Liquidity risk
…the variation in net income and market value of
equity caused by a bank's difficulty in obtaining cash
at a reasonable cost from either the sale of assets or
new borrowings
Banks can acquire liquidity in two distinct
ways:
1. By liquidation of assets
Composition of loans & investments
Maturity of loans & investments
Percent of loans and investments pledged
as collateral
2. By borrowing
Core deposits
Volatile deposits
Asset quality & stockholders’ equity
7. Market risk
…the risk to a financial institution’s
condition resulting from adverse movements
in market rates or prices
Market risk arises from changes in:
Interest rates
Foreign exchange rates
Equity, commodity and security prices
8. Interest rate risk
…the potential variability in a bank's net
interest income and market value of equity
due to changes in the level of market
interest rates
Example: Rs.100,000 Car loan
4 year fixed-rate car loan at 8.5%
1 year FD at 4.5%
Spread 4.0%
But for How long?
Funding GAP
GAP = RSA - RSL,
where RSA = amount of assets expected to reprice in a
give period of time.
In this example:
GAP1yr = Rs. 0 – Rs.100,000 = - Rs.100,000
This is a negative GAP.
9. Foreign exchange risk
… the risk to a financial institution’s
condition resulting from adverse movements
in foreign exchange rates
Foreign exchange risk arises from changes
in foreign exchange rates that affect the
values of assets, liabilities, and off-balance
sheet activities denominated in currencies
different from the bank’s domestic (home)
currency.
This risk is also often found in off-balance
sheet loan commitments and guarantees
denominated in foreign currencies; foreign
currency translation risk
10. Foreign exchange risk
Foreign currency trading dominates direct portfolio
investments. Trading volume may look very large but overall
net exposure positions can be relatively small.
Net exposure i = (FX asset i - FX liabilities i) + (FX bought i -
FX sold i )
= Net foreign assets i + Net FX bought i
where
i = I th currency
11. Foreign exchange risk
An FI can match its foreign currency assets to its liabilities in a given
currency and match buys and sells in its trading book in that foreign
currency to avoid FX risk.
Or it can offset its imbalance in its foreign asset-liability portfolio by
an opposing imbalance in its trading book so that its net exposure
position in that currency would be zero.
12. Foreign exchange risk
A positive net exposure position implies a FI is net long in a currency
and faces the risk that foreign currency falls in value against the
domestic currency. Failure to maintain a fully balanced position in
any given currency exposes a FI to fluctuations in the FX rate of that
currency against the dollar.
The greater the FI's exposure in a foreign currency and greater that
currency's exchange rate volatility, greater the loss or gain potential
to an FI's earnings.
13. Foreign exchange risk
Spot market for FX: The market in which
foreign currency is traded for immediate
delivery.
Forward market for FX: The market in which
foreign currency is traded for future
delivery.
Net exposure: The degree to which a bank is
net long or net short in a given currency.
14. Foreign exchange risk
Net long in a currency: Holding more assets than liabilities in a
currency.
Open position: An unhedged position in a particular currency.
FX risks arise through mismatching foreign currency or foreign
asset-liability positions in individual currencies. These mismatches
can be profitable if FX forecasts prove to be correct.
Unexpected outcomes and volatility can impose significant losses on
an FI.
These risks can be minimised by hedging through matched foreign
asset-liability books, through forward contracts and hedging through
foreign asset and liability portfolio diversification.
15. Equity and security price risk
…change in market prices, interest rates and
foreign exchange rates affect the market values of
equities, fixed income securities, foreign currency
holdings, and associated derivative and other off-
balance sheet contracts.
Large banks must conduct value-at-
risk analysis to assess the risk of loss
with their trading account portfolios.
16. Operational risk
…measures the cost efficiency of the bank's
activities; i.e., expense control or productivity;
also measures whether the bank has the proper
procedures and systems in place .
Typical ratios focus on:
total assets per employee
total personnel expense per employee
Non-interest expense ratio
There is no meaningful way to estimate the
likelihood of fraud or other contingencies
from published data.
A bank’s operating risk is closely related to
its operating policies and processes and
whether it has adequate controls.
17. Operational & Technology Risk
OPERATING COST AND TECHNOLOGY RISK
Financial risk is only one part of the risk profile of a
modern FI. They also have regular operations that
result in additional costs and revenues. They also
have to use various factors of production like
labour, capital and other inputs optimally. Cost of
these production factors has a direct bearing on the
profitability and solvency of an FI.
18. Operational & Technology Risk
An efficient technological base for an FI can result
in:
1. Lower costs by combining labour and capital in a
more efficient mix
2. Increased revenues by allowing a broader array
of financial services to be produced or innovated
and sold to customers.
Technology has the potential to increase FI's net
interest margin i.e. the difference between interest
income and interest expense and other net income.
19. Operational & Technology Risk
Impact of technology on Banking:
* Faster reconciliation of accounts
* Electronic fund transfer
* Electronic initiation and transmission of letters of credit
* Portfolio insurance
* Faster clearance of cheques
* Note counting machines
* Automatic Teller Machines
* Home banking
* Treasury management software
* Payment of telephone and electricity bills
20. Operational & Technology Risk
Technological advances allow an FI to offer such products to
its customers which have potential to earn higher profits.
The investment in many of these products is risky.
Innovations may fail to attract sufficient business in relation
to initial cash outlay.
Innovations in financial sectors get imitated fast.
One benefit of technology is that it allows FI to cross-market
both new and existing products to customers.
Technology increases the rate of innovation of new products.
It improves the quality of service and lowers its cost. This is
possible due to economies of scale and economies of scope.
21. Operational & Technology Risk
Improvement in technology has contributed more risk to
financial system
Daylight Overdraft Risk: Bank's reserve account becomes
negative within the banking day. Risk of bank failure during
the transaction time is a major risk.
International Technology Transfer Risk: Between 1974 and
1994 there has been a dramatic change in the position of
American Banks. Not one American bank figured in top twenty
in 1994 while top 20 positions were occupied by American
banks in 1974 inspite of heavy investment in technology and
financial services innovations in U S.
22. OFF-BALANCE-SHEET
ACTIVITIES
Off-balance-sheet activities have both risk increasing and risk reducing
attributes.
They are an important source of fee income for many FIs.
They are less obvious and invisible to all but the very informed investor or
regulator.
In economic terms they are contingent assets and liabilities that affect the
future rather than current shape of an FI's balance sheet.
They have a direct impact on the future profitability and solvency
performance of the FI.
Their efficient management is central to controlling overall exposure in a
modern FI.
An activity is an off-balance-sheet asset if, when a contingent event occurs,
the off-balance-sheet item moves onto the asset side of the balance-sheet.
Similarly, when an item moves to liability side of balance-sheet on a
contingent event it is called an off-balance-sheet liability.
23. OFF-BALANCE-SHEET
ACTIVITIES
The major types of off-balance-sheet activities for
banks are:
* Loan Commitments
* Letter of Credits
* Bank Guarantees including DPGs
* Futures, Forward contracts, Swaps and Options
* Underwriting Commitments
Although off-balance-sheet activities can be risk
increasing, they can also be used to hedge on-
balance-sheet exposures resulting in lower risk as
well as generating fee income to the FI.
24. Sovereign Risk
Mexican crisis and Asian meltdown confirms the importance of
assessing the country or sovereign risk of a borrowing country in
making lending or other investment decision like buying foreign
bonds or equity.
If a borrower refuses or is unable to repay its loans the lender would
probably seek to reschedule the promised interest and principal
payments on the loan into the future. Continued inability to pay
would result in liquidation of the firm's assets.
Consider lending to a first class borrower in a foreign country.
25. Sovereign Risk
The corporation may be doing well and repaying its debt as
per repayment schedule.
However, the foreign exchange reserves of the country are
precarious and in order to conserve the foreign exchange
reserves, the government of that country refuses to allow any
further debt repayment in hard currency to outside creditors.
This puts the foreign borrower automatically into default even
though the company is a good credit risk.
These types of government action pose sovereign risk which
is independent of the credit standing of the individual loan to
the borrower.
26. Sovereign Risk
Unlike legal remedy in case of domestic bankrupcy courts,
there is no international bankruptcy court to which the lender
can take the foreign government. Lender's legal remedies to
offset a sovereign country's default or moratoria decisions are
very limited.
This means that making a lending decision to a party residing
in a foreign country is a two step decision.
First, lender must assess the underlying credit quality of the
borrower and set an appropriate credit risk premium.
Second, lenders must assess the sovereign risk quality of the
country in which the borrower resides. Even if the credit risk
is assessed as good but the sovereign risk is bad, the loan
should not be made.
27. Sovereign Risk
A sovereign's negative decisions to its debt
obligations or the obligations of its public and
private organisation may take two forms:
Repudiation: an outright cancellation of all current
and future debt obligations by a borrower. They
were very common before the second world war.
Rescheduling: A country declares a moratorium or
delay on its current and future debt obligations and
then seeks to ease credit terms by rescheduling
debt maturity and renegotiation of interest rates.
28. Capital risk
… closely tied to asset quality and a bank's
overall risk profile
The more risk taken, the greater is the
amount of capital required.
Appropriate risk measures include all the
risk measures discussed earlier as well as
ratios measuring the ratio of:
Tier 1 capital and total risk based capital to
risk weighted assets
Equity capital to total assets
Dividend payout, and growth rate in tier 1
capital
29. Definitions of capital
Tier 1 capital is:
Total common equity capital plus
noncumulative preferred stock, plus minority
interest in unconsolidated subsidiaries, less
ineligible intangibles.
Risk-weighted assets are:
The total of risk-adjusted assets where the
risk weights are based on four risk classes of
assets.
Importantly, a bank's dividend policy affects
its capital risk by influencing retained
earnings.
30. Legal risk
…the potential that unenforceable contracts,
lawsuits, or adverse judgments can disrupt or
otherwise negatively affect the operations or
condition of the banking organization
Legal risk includes:
Compliance risks
Strategic risks
General liability issues
31. Reputational risk
Reputational risk is the potential that
negative publicity regarding an
institution’s business practices,
whether true or not, will cause a
decline in the customer base, costly
litigation, or revenue reductions.
32. Strategies for Maximizing
Shareholder Wealth
Asset Management
Composition and Volume
Liability Management
Composition and Volume
Management of off-balance sheet activities
Net interest margin management
Credit risk management
Liquidity management
Management of non-interest expense
Securities gains/losses management
Tax management
33. CAMELS
Capital Adequacy
Measures bank’s ability to maintain
capital commensurate with the bank’s
risk
Asset Quality
Reflects the amount of credit risk with
the loan and investment portfolios
Management Quality
Reflects management’s ability to
identify, measure, monitor, and control
risks
34. CAMELS (continued)
Earnings
Reflects the quantity, trend, and quality
of earnings
Liquidity
Reflects the sources of liquidity and
funds management practices
Sensitivity to market risk
Reflects the degree to which changes
in market prices and rates adversely
affect earnings and capital
35. CAMELS Ratings
Regulators assign a rating of 1 (best)
to 5 (worst) in each of the six
categories and an overall composite
rating
1 or 2 indicates a fundamentally sound
bank
3 indicates that a bank shows some
underlying weakness that should be
corrected
4 or 5 indicates a problem bank
36. Performance Characteristics of Banks
by Business Concentration and Size
Wholesale Banks
Focus on loans for the largest
commercial customers and purchase
substantial funds from corporate and
government depositors
Retail Banks
Focus on consumer, small business,
mortgage, and agriculture loans and
obtain deposits form individuals and
small businesses
37. Financial Statement Manipulation
Off-balance sheet activities
Enron and “Special-Purpose Vehicles”
Window dressing
Eliminate Fed borrowing prior to
financial statement reporting date
Increase asset size prior to year-end
Preferred stock
Meets capital requirements but causes
NIM, NI, ROE, and ROA to be
overstated
38. Financial Statement Manipulation
(continued)
Non-performing loans
Banks may lend borrower funds to
make payments on past due loans,
understating non-performance status
Allowance for loan losses
Management discretion and IRS
regulations may be in conflict
39. Financial Statement Manipulation
(continued)
Securities gains and losses
Banks often classify all investment
securities as “available for sale,”
overstating any true “gains or losses”
Non-recurring sales of assets
This type of transaction is not part of
the bank’s daily activities and typically
cannot be repeated; thus it overstates
earnings