Professional Documents
Culture Documents
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19
Bank Management
Chapter Objectives
describe the underlying goal, strategy, and governance
of banks
explain how banks manage liquidity
explain how banks manage interest rate risk
explain how banks manage credit risk
explain integrated bank management
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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Bank Strategy
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Managing Liquidity
Banks can experience illiquidity when cash outflows (due
to deposit withdrawals, loans, etc.) exceed cash inflows
(new deposits, loan repayments, etc.).
They can resolve cash deficiencies by creating additional
liabilities or by selling assets.
Some assets are more marketable than others, so a
banks asset composition can affect its degree of
liquidity.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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Managing Liquidity
Use of Securitization to Boost Liquidity
The ability to securitize assets such as automobile and
mortgage loans can enhance a banks liquidity.
The process of securitization involves the sale of assets
by the bank to a trustee, who issues securities that are
collateralized by the assets.
Collateralized Loan Obligations
Commercial banks can obtain funds by packaging their
commercial loans with those of other financial institutions.
Liquidity Problems
Typically preceded by other financial problems such as
major defaults on their loans.
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
11
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Gap analysis
Duration analysis
Regression analysis
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
DUR
t1
n
Ct(t)
t
k)
(1
C
(1
t1
k)
where:
C
representsthe interest
t thetime
or principal
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
DURAS AS
AS
DURLIAB LIAB
AS
DURAS- DURLIAB
AS
LIAB
where
DURASweightedaverage duration of the bank's assets
DURLIABweightedaverage duration of thebank'sliabilities
AS market valueof the bank'sassets
LIABmarket value of thebank'sliabilities
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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20
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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21
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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22
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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23
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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(c
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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25
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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26
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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(C
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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28
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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29
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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30
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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31
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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32
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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33
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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34
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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Bank Revisions of Market Risk Measurements Banks continually revise their estimate of market risk in
response to changes in their investment and credit
positions and to changes in market conditions.
Relationship between a Banks Market Risk and
Interest Rate Risk - Partially dependent on its exposure
to interest rate risk.
35
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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37
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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ROE
Equity
Assets
Equity
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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40
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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41
2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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Settlement Risk
International banks that engage in large currency
transactions are exposed not only to exchange rate risk
as a result of their different currency positions but also to
settlement risk, or the risk of a loss due to settling their
transactions.
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SUMMARY
The underlying goal of bank management is to maximize
the wealth of the banks shareholders, which implies
maximizing the price of the banks stock (if the bank is
publicly traded). A banks board of directors needs to
monitor bank managers to ensure that managerial
decisions are intended to serve shareholders.
Banks manage liquidity by maintaining some liquid assets
such as short-term securities and ensuring easy access to
funds (through the federal funds market).
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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SUMMARY (Cont.)
Banks measure their sensitivity to interest rate
movements so that they can assess their exposure to
interest rate risk. Common methods of measuring interest
rate risk include gap analysis, duration analysis, and
measuring the sensitivity of earnings (or stock returns) to
interest rate movements.
Banks can reduce their interest rate risk by matching the
maturities of their assets and liabilities or by using
floating-rate loans to create more rate sensitivity in their
assets. Alternatively, they could sell financial futures
contracts or engage in a swap of fixed-rate payments for
floating-rate payments.
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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SUMMARY (Cont.)
Banks manage credit risk by carefully assessing the
borrowers who apply for loans and by limiting the amount
of funds they allocate toward risky loans (such as credit
card loans). They also diversify their loans across
borrowers of different regions and industries so that the
loan portfolio is not overly susceptible to financial
problems in any single region or industry.
An evaluation of a bank includes assessment of its
exposure to interest rate movements and to credit risk.
This assessment can be used along with a forecast of
interest rates and economic conditions to forecast the
banks future performance.
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2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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