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Chapter Fifteen

Chapter Fifteen. THE BANKING FIRM AND BANK MANAGEMENT. The Bank Balance Sheet. 有利息或不付息. 包括銀行持有之 currency 及存在央行的存款. Cash items. Secondary reserve. Negotiable CD 有次級市場 流動性高，安全性高 通常買者為大企業或其他銀行. Discount loan FF market RP agreement Loans from BHC Eurodollar

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Chapter Fifteen

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  1. Chapter Fifteen THE BANKING FIRM AND BANK MANAGEMENT

  2. The Bank Balance Sheet 有利息或不付息 包括銀行持有之currency及存在央行的存款 Cash items Secondary reserve Negotiable CD 有次級市場 流動性高，安全性高 通常買者為大企業或其他銀行 Discount loan FF market RP agreement Loans from BHC Eurodollar  Loan loss reserve 為 bank capital 之重要組成  FF market

  3. Bank Operation • T-account Analysis: • Deposit of $100 cash into First National Bank • Assets Liabilities • Vault Cash $100 Checkable Deposits + $100 • (=Reserves)

  4. Bank Operation • Deposit of $100 check • First National Bank • Assets Liabilities Cash items in + $100 Checkable Deposits + $100 • process of collection • First National Bank Second National Bank • Assets Liabilities Assets Liabilities • Reserves Deposits Reserves Deposits • + $100 + $100 - $100 - $100 • Conclusion: When bank receives deposits, reserves  by equal amount; when bank loses deposits, reserves  by equal amount First National 會將check轉存到它在Fed開的存款帳戶∴Fed會從Second National 收到現金 此時First National Bank應只會保留$10作required reserve，其餘$90作Loan出去，以賺取較高利潤

  5. Principles of Bank Management Deposit outflow 1. Liquidity management 2. Asset management A. Managing credit risk B. Managing interest-rate risk 3. Liability management 4. Managing capital adequacy • Liquidity Management • Reserve requirement = 10%, Excess reserves = $10 million • Assets Liabilities • Reserves $20 million Deposits $100 million • Loans $80 million Bank Capital $ 10 million • Securities $10 million

  6. Principles of Bank Management • Deposit outflow of $10 million • Assets Liabilities • Reserves $10 million Deposits $ 90 million • Loans $80 million Bank Capital $ 10 million • Securities $10 million • With 10% reserve requirement, bank still has excess reserves of $1 million: no changesneeded in balance sheet

  7. Liquidity Management • No excess reserves • Assets Liabilities • Reserves $10 million Deposits $100 million • Loans $90 million Bank Capital $ 10 million • Securities $10 million • Deposit outflow of $ 10 million • Assets Liabilities • Reserves $ 0 million Deposits $ 90 million • Loans $90 million Bank Capital $ 10 million • Securities $10 million • With 10% reserve requirement, bank has $9 million reserve shortfall

  8. Liquidity Management Federal Fund Market or issue negotiable CD, or Eurodollar Deposit or RP agreement • 1. Borrow from other banks or corporations • Assets Liabilities • Reserves $ 9 million Deposits $ 90 million • Loans $90 million Borrowings $ 9 million • Securities $10 million Bank Capital $ 10 million • 2. Sell securities • Assets Liabilities • Reserves $ 9 million Deposits $ 90 million • Loans $ 90 million Bank Capital $ 10 million • Securities $ 1 million

  9. Liquidity Management • 3. Borrow from Fed Assets Liabilities Reserves $ 9 million Deposits $90 million Loans $90 million Discount Loans $ 9 million Securities $10 million Bank Capital $10 million • 4. Call in or sell off loans Assets Liabilities Reserves $ 9 million Deposits $ 90 million Loans $81 million Bank Capital $ 10 million Securities $10 million • Conclusion: excess reserves are insurance against • above 4 costs from deposit outflows

  10. Asset and Liability Management • Asset Management 1. Get borrowers with low default risk, paying high interest rates 2. Buy securities with high return, low risk 3. Diversify 4. Manage liquidity to satisfy reserve requirement • Liability Management 1. Important since 1960s, 由 money center bank開始靈活的隨時找到資金 2. No longer primarily depend on deposits 3. When see loan opportunities, borrow or issue CDs to acquire funds

  11. Capital Adequacy Management 1. Bank capital is a cushion that prevents bank failure 2. Higher is bank capital, lower is return on equity ROA = Net Profits/Assets ROE = Net Profits/Equity Capital EM = Assets/Equity Capital ROE = ROA x EM Equity Capital , EM, ROE 3. Tradeoff between safety (high capital) and ROE 4. Banks also hold capital to meet capital requirements 5. Strategies for Managing Capital: A. Sell or retire stock B. Change dividends to change retained earnings C. Change asset growth 1980年代不動產不景氣，導致銀行承受大量之呆帳損失，∴equity capital又加上新的自有資本管制，強制銀行要提高自有資本比率。導致 “credit crunch” Make more (fewer) loans Buy (Sell) securities and increase (reduce) liabilities

  12. Off-Balance-Sheet Activities • 1. Fee income from A. Foreign exchange trades for customers B. Servicing mortgage-backed securities C. Guarantees of debt，如banker’s acceptance D. Backup lines of credit，如 loan commitment, depositor overdraft, privilege, NIF or RUF • 2. Financial futures and options • 3. Foreign exchange trading • 4. Interest rate swaps • 5. Loan sales將loan的cash stream賣給別人 • All these activities involve risk For hedging and speculation 如1995 Barings trader Leeson Agency problem Asymmetric informationmoral hazard Loss $1.3billion It’s not the only case!! 解決之道為monitoring, internal control, risk assessment 如VAR

  13. Banks' Income Statement  Off balance sheet activities

  14. Measures of Bank Performance • ROA = Net Profits/ Assets • ROE = Net Profits/ Equity Capital • NIM = [Interest Income - Interest Expenses]/ Assets Bad loans Why?

  15. Financial Innovation • Innovation is result of search for profits • 1.Response to Changes in Demand • Major change is huge increase in interest-rate risk starting in 1960s • Example: Adjustable-Rate Mortgages • 2.Response to Changes in Supply • Major change is improvement in computer technology 1. Increases ability to collect information 2. Lowers transactions costs • Examples: 1. Bank Credit Cards 2. Electronic Banking Facilities

  16. 3.Avoidance of Existing Regulations • Regulations Behind Financial Innovation • 1. Reserve requirements Tax on deposits = i x rD • 2. Deposit-rate ceilings (Reg Q) As i, loophole mine to escape reserve requirement tax and deposit-rate ceilings i為若將準備金loan出去所能賺的利率 rD為存款準備率 disintermediation

  17. Avoidance of Existing Regulations • Examples: • 1. Eurodollars • 2. Bank Commercial Paper • 3. NOW Accounts • 4. ATS Accounts • 5. Sweep Accounts and Overnight RPs • 6. Money Market Mutual Funds 1960年代inflationidisintermediation 為了規避deposit rate ceiling及reserve requirement BHC  by calling a check a “ negotiable order of withdrawal” 為了規避支票存款帳戶不得支付利息的規定

  18. Profiting from Treasury Strips YTM=10% <10% why? Reinvestment risk

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