IM_17 - Part 6 The Financial Institutions Industry Chapter...

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Part 6 The Financial Institutions Industry
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Chapter 17 The Banking Firm and Bank Management The Bank Balance Sheet Liabilities Assets Basics of Banking General Principles of Bank Management Liquidity Management and the Role of Reserves Asset Management Liability Management Capital Adequacy Management The Practicing Manager: Strategies for Managing Bank Capital Case: Did the Capital Crunch Cause a Credit Crunch in the Early 1990s? Off-Balance-Sheet Activities Loan Sales Generation of Fee Income Trading Activities and Risk Management Techniques Conflicts of Interest Box: Barings, Daiwa, and Sumitomo: Rogue Traders and the Principal- Agent Problem Measuring Bank Performance Bank’s Income Statement Measures of Bank Performance Recent Trends in Bank Performance Measures T Overview and Teaching Tips Although this chapter performs the conventional function of outlining what banks (depository institutions) do, and what their balance sheets and income statements look like, it also emphasizes an analytic way of thinking about how banks manage their assets and liabilities to make a profit. Two tools are used throughout this chapter and the rest of the book—T-accounts and the analysis of the determinants of asset demand, developed in Chapter 4. In teaching this material, it is worth emphasizing to the student that mastery of these two tools will pay high dividends in helping them to learn (and perform well on exams) in this course. Another point to emphasize is that the principles discussed here for bank management also apply to many other financial institutions as well. The first three sections of the chapter—“The Bank Balance Sheet,” “Basics of Banking” and “General Principles of Bank Management”—place particular emphasis on the question of why banks hold excess reserves, since banks’ decisions about the amount of excess reserves they hold play an important role in the money supply process.
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Chapter 17 The Banking Firm and Bank Management 127 The subsection, “Capital Adequacy Management,” and the following section, “Off-Balance-Sheet Activities,” discuss issues which have become increasingly important in recent years. Many instructors may therefore want to include this material in their course, yet none of this material is essential to understanding later chapters, so it can be skipped without any loss of continuity. The Practicing Manager application on strategies for managing bank capital illustrates how managers deal with an important managerial issue, while the case on the credit crunch of 1990–92 particularly piques the interest of students because it shows how changes in banks’ behavior can have major effects on the economy. T Answers to End-of-Chapter Questions 1. The rank from most to least liquid is (c), (b), (a), (d).
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