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1、Chapter 9,Banking and the Management of Financial Institutions,9.1 The Bank Balance Sheet,9.1.1 Liabilities,1. Checkable depositBank accounts that allow the owner to write checks to third parties.Includes :-Demand deposit-NOW accounts:-MMDAs: similar to money market mutual funds and not subject to r
2、eserve requirementsOnce are the most important source of bank funds, but the share has shrunk over time.Usually the lowest-cost source of bank fund.,2. Nontransaction DepositPrimary source of bank funds. Owners cannot write checks, but the interest rates are usually higher.Two types:-Savings account
3、s-Time deposit: have a fixed maturity length.3. BorrowingsMore and more important.,4. Bank CapitalThe difference between total assets and liabilities.(8%)Raised by selling new stock or from retained earnings.Is a cushion against a drop in the value of its assets.,9.1.2 Assets,1. ReservesReserves = V
4、ault cash + Deposits in an account at the central bank ( required reserves + excess reserves)No interest payment.Banks hold reserves for two reasons:1) Reserve requirement2) Reserves are the most liquid and can be used to meet its obligations when funds are withdrawn.中国的历次调整http:/,2. Cash items in p
5、rocess of collectionSuppose a check written on an account at another bank is deposited in your bank and the funds for this check have not yet been received from the other bank.3. Deposits at other banksMany small banks hold deposits in larger banks in exchange for a variety of services.All of the ab
6、ove three are referred to as cash items. Importance shrinking over time.,4.SecuritiesAn important income-earning asset.(23%)Made up entirely of debt instruments.5. LoanBanks make their profits primarily by issuing loans. (66%)Typically less liquid and have a higher probability of default than other
7、assets.5. Other assetsThe physical capital owned by the banks.,浦发银行2011年资产负债表,9.2 Basic Banking,Asset transformationSelling liabilities with one set of characteristics and using the proceeds to buy assets with a different set of characteristics.“Borrows short and lends long.”,T-account Analysis:Depo
8、sit of $100 cash into First National BankAssetsLiabilitiesVault Cash + $100Checkable Deposits + $100(=Reserves)Deposit of $100 check into First National BankAssetsLiabilitiesCash items in processCheckable Deposits + $100of collection + $100First National BankSecond National BankAssetsLiabilitiesAsse
9、tsLiabilitiesCheckableCheckableReservesDepositsReservesDeposits+ $100+ $100 $100 $100Conclusion: When bank receives deposits, reserves by equal amount; when bank loses deposits, reserves by equal amount,Basic Banking: Making a Profit,9.3 General Principles of Bank Management,1. Liquidity Management2
10、. Asset ManagementManaging Credit RiskManaging Interest-rate Risk3. Liability Management4. Capital Adequacy Management,9.3.1 Liquidity Management,Reserve requirement = 10%, Excess reserves = $10 millionAssets LiabilitiesReserves$20 millionDeposits$100 millionLoans$80 millionBank Capital$ 10 millionS
11、ecurities $10 millionDeposit outflow of $10 millionAssets LiabilitiesReserves$10 millionDeposits$ 90 millionLoans$80 millionBank Capital$ 10 millionSecurities $10 millionWith 10% reserve requirement, bank still has excess reserves of $1 million: no changes needed in balance sheet,Liquidity Managemen
12、t,No excess reservesAssets LiabilitiesReserves$10 millionDeposits$100 millionLoans$90 millionBank Capital$ 10 millionSecurities$10 millionDeposit outflow of $ 10 millionAssets LiabilitiesReserves$ 0 millionDeposits$ 90 millionLoans$90 millionBank Capital$ 10 millionSecurities$10 million,Liquidity Ma
13、nagement,1. Borrow from other banks or corporationsAssets LiabilitiesReserves$ 9 millionDeposits$ 90 millionLoans$90 millionBorrowings$ 9 millionSecurities$10 millionBank Capital$ 10 million2. Sell SecuritiesAssets LiabilitiesReserves$ 9 millionDeposits$ 90 millionLoans$90 millionBank Capital$ 10 mi
14、llionSecurities$ 1 million,Liquidity Management,3. Borrow from FedAssets LiabilitiesSecurities$10 millionBank Capital$ 10 millionReserves$ 9 millionDeposits$ 90 millionLoans$90 millionDiscount Loans$ 9 million4. Call in or sell off loansAssets LiabilitiesReserves$ 9 millionDeposits$ 90 millionLoans$
15、81 millionBank Capital$ 10 millionSecurities$10 millionConclusion: excess reserves are insurance against above 4 costs from deposit outflows,Bank Run of Northern Rock,Northern Rock was best known for becoming the first bank in 150 years to suffer a bank run after having had to approach the Bank of E
16、ngland for a loan facility, to replace money market funding, during the credit crisis in 2007. Having failed to find a commercial buyer for the business, it was taken into public ownership in 2008, and was then bought by Virgin Money in 2012.,9.3.2 Asset Management:,Three Goals1. Seek the highest po
17、ssible returns on loans and securities2. Reduce risk3. Have adequate liquidity,Asset Management: Four Tools,1.Find borrowers who will pay high interest rates and have low possibility of defaulting2. Purchase securities with high returns and low risk3. Lower risk by diversifying4. Balance need for li
18、quidity against increased returns from less liquid assets,9.3.3 Liability Management,1.Important since 1960s2.Banks no longer primarily depend on deposits3.When see loan opportunities, borrow or issue CDs to acquire funds,9.3.4 Capital Adequacy Management,1.Bank capital is a cushion that helps preve
19、nt bank failure.2.Higher is bank capital, lower is return on equityROA = Net Profits/AssetsROE = Net Profits/Equity CapitalEM = Assets/Equity CapitalROE = ROA EMCapital , EM , ROE 3.Tradeoff between safety (high capital) and ROE,4.Banks also hold capital to meet capital requirements5.Managing Capita
20、l:A. Issue or buy back stocksB. Change dividends to change retained earningsC. Change asset growth,Capital Adequacy Management: Preventing Bank Failure,9.4 Managing Credit Risk,Solving Asymmetric Information Problems9.4.1.Screening and MonitoringScreeningSpecialize in Lending Monitoring and Enforcem
21、ent of Restrictive Covenants9.4.2Establish Long-Term Customer Relationships,9.4.3Loan Commitment A banks commitment to provide a firm with loans up to a given amount at an interest rate that is tied to some market interest rate.9.4.4Collateral and Compensating BalancesCompensating Balances: A firm r
22、eceiving a loan must keep a required minimum amount of funds in a checking account at the bank. Help increase the likelihood that a loan will be paid off.,9.4.5Credit RationingRefusing to make loans even though borrowers are willing to pay the stated interest rate or even a higher rate.Two forms1. R
23、efuse to make a loan even if the borrower is willing to pay a higher interest rate.2. Make a loan but restricts the size to less than the borrower would like.,9.5 Managing Interest Rate Risk,If a bank has more rate-sensitive liabilities than assets , a rise in interest rate will reduce bank profits
24、and a decline in interest rates will raise bank profits.,Managing Interest-Rate Risk,Gap AnalysisGAP= rate-sensitive assets rate-sensitive liabilities= $20 $50 = $30 millionWhen i 5%:1.Income on assets = + $1 million(= 5% $20m)2.Costs of liabilities = +$2.5 million(= 5% $50m)3.Profits = $1m $2.5m =
25、$1.5m= 5% ($20m $50m) = 5% (GAP)Profits = i GAP,Duration Analysis% value (% pointi) (DUR)Example: i 5%, duration of bank assets = 3 years, duration of liabilities = 2 years; % assets = 5% 3 = 15% liabilities = 5% 2 = 10%If total assets = $100 million and total liabilities = $90 million, then assets
26、$15 million, liabilities$9 million, and banks net worth by $6 millionStrategies to Manage Interest-rate Risk1.Rearrange balance-sheet2.Interest-rate swap3.Hedge with financial futures,9.6 Off-Balance-Sheet Activities,OBS activities involve trading financial instruments and generating income from fee
27、s and loan sales, activities that affect bank profits but do not appear on bank balance sheets.Loan sales a contract that sells all or part of the cash stream from a specific loan and thereby removes the loan from the banks balance sheet.,2. Generation of Fee Income A. Foreign exchange trades for cu
28、stomersB. Servicing mortgage-backed securitiesC. Guarantees of debtD. Backup lines of credit3.Trading ActivitiesA. Financial futuresB. Financial optionsC. Foreign exchangeD. Swaps,Risk Management,Principal-Agent ProblemTraders have incentives to take big risksRisk Management Controls1. Separation of front and back rooms2. Value-at-risk modeling3. Stress testingRegulators encouraging banks to pay more attention to risk management,
