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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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Chapter fifteen

Chapter Fifteen

THE BANKING FIRM AND BANK MANAGEMENT


The bank balance sheet

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


Bank operation

Bank Operation

  • T-account Analysis:

  • Deposit of $100 cash into First National Bank

  • Assets Liabilities

  • Vault Cash $100 Checkable Deposits + $100

  • (=Reserves)


Bank operation1

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


Principles of bank management

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


  • Principles of bank management1

    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


  • Liquidity management

    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


  • Liquidity management1

    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


  • Liquidity management2

    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


    Asset and liability management

    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


    Capital adequacy management

    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


    Off balance sheet activities

    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


    Banks income statement

    Banks' Income Statement

     Off balance sheet activities


    Measures of bank performance

    Measures of Bank Performance

    • ROA = Net Profits/ Assets

    • ROE = Net Profits/ Equity Capital

    • NIM = [Interest Income - Interest Expenses]/ Assets

    Bad loans

    Why?


    Financial innovation

    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


    3 avoidance of existing regulations

    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


    Avoidance of existing regulations

    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


    Profiting from treasury strips

    Profiting from Treasury Strips

    YTM=10%

    <10% why?

    Reinvestment risk


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