Banking industry
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Banking Industry. Number of banks ~7 ,000 decreasing (result of consolidation, deregulation and failures) Number of branches ~ 90,000 increasing (result of relaxed geographical restrictions) About 4,000 are small banks (< $100 million in assets) Banks most commonly ranked by (1) assets.

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Banking Industry

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Banking industry

Banking Industry

  • Number of banks ~7,000 decreasing (result of consolidation, deregulation and failures)

  • Number of branches ~90,000 increasing (result of relaxed geographical restrictions)

  • About 4,000 are small banks (< $100 million in assets)

  • Banks most commonly ranked by (1) assets.

  • But sometimes ranked by (2) marketcap


Banks vs branches

Banks vs. Branches


Balance sheet for a commercial bank

Balance Sheet for a Commercial Bank

Uses of Funds Sources of Funds

(Assets) (Liabilities + Capital)

Cash Assets (8%)Deposit Liabilities (69%)

FF sold/Rev repos (4%)Borrowed Funds (16%)

Investments (19%) Other Liabilities (3%)

Loans & Leases (55%) Subordinated Notes & Deben (1%)

Premises (1%) Capital Accounts (11%)

Other (13%)

(See pp. 417 & 411)


First three items on left

First Three Items on Left

Cash Assets (8%):

  • Vault cash (physical currency and coin)

  • Reserves at the Fed

    Fed Funds Sold/Rev repos (4%):

  • Fed Funds sold

  • Reverse Repurchase Agreements

    Investments (19%): cushion in case need more liquidity

  • U.S. Treasury securities

  • Agency securities

  • Municipal bonds


Fourth item on left

Fourth Item on Left

Loans and Leases (55%)

Loans

  • commercial and industrial

  • real estate

  • agricultural

  • consumer

    Leases

  • fast-growing line of business for the big banks

  • fleet assets (aircraft, ships,..), rolling stock (railroad cars, trucks,..), equipment (cranes, generators,..)


First two items on right

First Two Items on Right

Deposit Liabilities (69%):

  • Transaction Deposits

  • Savings Deposits

  • Time Deposits (retail and negotiable CDs)

    Borrowed Funds (16%):

  • Fed Funds purchased

  • Repurchase Agreements

  • Eurodollars (dollars borrowed abroad)

  • Discount Window loans


Last two items on right

Last Two Items on Right

Subordinated Notes and Debentures (1%)

  • Subordinated to claims of depositors

    Capital Accounts (11%)

  • Paid-in capital (from sale of stock)

  • Retained earnings


Capital adequacy

Capital Adequacy

  • Capital adequacy ratio:

  • Numerator is subordinated notes & bonds + capital stock + retained earnings

  • Denominator is a weighted average of assets

    • Riskfree, weight of 0

    • Very risky assets like CDOs, weight of 1

    • Everything else, weight in between


Balance sheet for a commercial bank1

Balance Sheet for a Commercial Bank

Uses of Funds Sources of Funds

(Assets) (Liabilities + Capital)

Cash Assets (8%)Deposit Liabilities (69%)

FF sold/Rev repos (4%)Borrowed Funds (16%)

Investments (19%) Other Liabilities (3%)

Loans & Leases (55%) Subordinated Notes & Deben (1%)

Premises (1%) Capital Accounts (11%)

Other (13%)


Base rate pricing

Base Rate Pricing

  • Markups to base rate include adjustments for default risk, term-to-maturity, and competitive factors.

    rL = BR + DR + TM + CF

  • In this way, business loans can vary from customer to customer.

  • BR could be prime rate, Libor, or a T-bill rate.

  • Loan pricing is one of most important managerial decisions is banking.


Five c s of credit

Five ‘C’s of Credit

  • Five “C”s of Credit:

    • Character (willingness to pay)

    • Capacity (cash flow)

    • Capital (wealth or net worth)

    • Collateral (security for the loan)

    • Conditions (economic conditions)


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