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The Banking Firm

The Banking Firm. Mishkin, Chap 9. The Bank’s Capital Account: Mark each of the following as an asset or a liability Checkable deposits : Bank reserves Discount loans, Repo’s Bank capital The building/equipment. T-bonds, notes, bills Municipal bonds, Federal govt. agency bonds

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The Banking Firm

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  1. The Banking Firm Mishkin, Chap 9

  2. The Bank’s Capital Account: • Mark each of the following as an asset or a liability • Checkable deposits: • Bank reserves • Discount loans, • Repo’s • Bank capital • The building/equipment

  3. T-bonds, notes, bills Municipal bonds, Federal govt. agency bonds Non-transaction deposits: Federal funds Commercial loans Real estate loans Consumer loans

  4. II. Basic Banking: T-account analysis 1. You deposit $100 cash into your account with the First National Bank (FNB) (FNB) Assets (FNB) Liabilities _______________ ___________________ 2.You deposit a $100 check into your account with the FNB. The check is drawn on Second National Bank (SNB). FNB (Initial) Assets FNB (Initial) Liabilities ____________________ _____________________ FNB (Final) SNB (Final) Assets Liabilities Assets Liabilities Conclusion:

  5. III. Principles of bank management • Bank manager manages these four: • Liquidity – • Assets – • Liability – • 4. Capital –

  6. 1. Liquidity management The following bank maintains only the required amount of reserves at any point of time. Is it a wise decision?

  7. What can the bank do to acquire reserves at a short notice? Note the costs • Borrow from other banks (__________) /from corporations (_______) • Sell securities such as _______ • Borrowing from the FED (________ loans) • Calling in loans/selling of loans in secondary markets • Conclusion:

  8. 2. Asset management • basic principle of asset management: banks have high need of liquidity compared to other financial intermediaries; hence they are restricted in their choice of assets: • find borrowers with ________ • these risks are compounded by adverse selection and moral hazard problems. Usual strategies (managing credit risks) to safeguard against these are • find securities with ________

  9. (iii) diversify: besides default risk, the other most important type of risk that banks have to safeguard against is ________. Managing ___________risk Assets Liabilities Rate sensitive assets 20m Rate sensitive liabilities 50m i. variable-rate loans i. variable rate CDs ii short-term loans ii. money market accounts Iii short term securities Fixed rate assets 80m Fixed rate liabilities 50m i.reserves i.checkable deposits ii.long-term loans ii.savings deposits iii.long-term securities iii.long-term CDs Conclusion: If interest sensitive assets are less than interest sensitive liabilities banks can _________ if interest rates _________.

  10. 4. Capital management • Bank capital • is a cushion against __________ • (ii)determines the rate of return for owners • Net profit after tax / equity capital • = (___________/ _________) x (_________/ ___________) • (iii) required by law

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