Chapter 6 The Banking Firm and

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Nov 18, 2013 (3 years and 4 months ago)

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Chapter 6 The Banking Firm and
The Management of Financial
Institutions

Requirement


1.grasp


(1)component of the balance sheet of
banks


(2)component of liability of banks


(3)compoent of asset of banks


(4) general principles of bank
management


(5)interst rate risk management


(6)Bank capital requirement in Basel
agreement



2.Main point


Duration analysis


Gap analysis


3.key words


Financial innovation


Financial engineering


Off
-
balance sheet activity


Asset management


Balance sheet


Capital adequacy management


Duration analysis


Excess reserve


Gap analysis


Required reserve ratio


Required reserves


Return on asset


Return on equity


The Bank Balance Sheet


Balance sheet



a list of a firm

s asset and
liability


Total asset= total liability
+capital


A bank

s balance sheet list the
source of funds(liability) and
how they use assets


1.Liability(source of funds)



2.Asset

畳攠潦⁦畮摳



(1)checkable deposits



(2)Nontransaction deposit



(3)borrowing



(4) Bank capital

2.Asset

use of funds)


Banks use funds which acquired
by issuing liabilities to make
profit, mainly through earning
interest payments


(1)Cash item



(2)Security



(3) Loan



(4) Other assets



general principles of bank
management


1. Liquidity manage


2.Asset management


3.Liability management: acquire
funds at low cost


4.Capital adequacy




Credit risk management


(1)Screening and monitor


(2)collateral and compensating
balance requirement


(3)Long
-
term customer
relationships


(4)Loan commitments


(5)Collateral and compensating
balances


(6)Credit rationing




manage interest rate risk


1.gap analysis


2. duration analysis




net worth=
﹣⊿

i
×

duration of
asset
×

asset


(
﹣⊿

i
×

duration
of liability
×

liability)

=
﹣⊿

i
×
(duration of asset
×

asset


duration of liability
×

liability)



Off
-
Balance Sheet Activity


Off
-
balance sheet activity: involve
trading financial instruments and
generating income from fees and
loan sales, activities that affect
bank profits but do not appear on
bank balance sheet.


1.Loan sales


2.generation of fee income


3.trading activities and risk
management techniques.



Financial Innovation


financial innovation: Financial
institution develop new products to
maximize profit and satisfy the
needs of customer.


Financial engineering: a process of
researching and developing new
products that would meet
customers need and prove
profitable.



1.Responses to Changes in Demand
conditions


2.Responses to Changes in Supply
Conditions


(1)Bank Debit and Credit Cards


(2)Electronic Banking Facilities


3. Avoidance of Existing
Regulations


(1)Avoid Reserve Requirement


Eurodollars


Commercial paper issue by bank

s
parent holding company


(2) Avoid Restrictions on The
Interest Rates


NOW account


Sweep account

Summary


1.balance sheet is a list of bank

s asset
and liabilities. A bank

s liability refer to
the source of funds, contains checkable
deposits, nontransaction deposits.
Assets of a bank refer to use of funds,
contain reserve, securities, cash item in
process of collection, deposit at other
banks, loans and other assets.


2.there are four general principles of bank
management: first, liquidity management,
namely keep enough cash on hand ;
second, asset management, namely
manage asset to accomplish goals of
highest return, low risk and enough
liquidity; third, liability management,
banks aggressively set target goals for
their asset growth and tried to acquire
funds as they needed; fourth, capital
adequacy management, banks decide the
amount of capital the bank should
maintain and then acquire the needed
capital.



3.In loan market, there are moral hazard
and adverse selection, financial
institutions must overcome them
through: Screening and monitor,
collateral and compensating balance
requirement, Long
-
term customer
relationships, Loan commitments,
Collateral and compensating balances,
Credit rationing.



4.the methods to manage interest rate
risk are gap and duration analysis.



5.in order to avoid restriction and
respond the change in demand and
supply condition, financial innovation
appeared.


Questions


1.What are the general principle of
bank management?


2.How to manage credit risk?


3.Please analyze the reason of
financial innovation.


4.How many kinds of off
-
balance
sheet activities are there?


5.key words:


Financial innovation


Financial engineering


Off
-
balance sheet activity


Asset management


Balance sheet


Capital adequacy management


Duration analysis



Excess reserve


Gap analysis


Required reserve ratio


Required reserves


Return on asset


Return on equity


Reference Book


1.Frederic S. Mishkin: The Economics of
Money, Banking, and Financial Markets,
Pearson, 2009


2.LIoyd Brewster Thomas: Money, Banking,
and Financial Markets, Thomsom Learning ,
Inc. 2006


3. Lawrence S. Ritter, 3.William L. Silber,
Gregory F. Udell: Principles of Money, Banking,
and Financial Markets,
东北财金大学出版社
,2008


4. Kent Matthews, John L. Thompson:
Economics of Banking, John Wiley & sons,
Ltd.2005


Please teach yourself about chapter 10
-
12


Please prepare text book about chapter
13 financial derivatives(P337
-
363)