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Bank Mgt, 5th Ed, Chapter 8 - Chapter 8 Managing the...

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Unformatted text preview: Chapter 8 Managing the Managing Security Portfolio Security Four Steps To Employ Funds s Meet the legal reserve requirement. s Make adequate provisions for bank’s Make liquidity needs. liquidity s Meet loan demands for the area served. s Invest remaining funds in the bank’s Invest security portfolio. security Managing Security Portfolio During 1970s and 1980s s Purchase very short-termed securities. s Large loan portfolios meant smaller bank Large security portfolios. security s Falling interest rates caused banks to sell Falling securities to take gains. securities s Prior securities sales now meant lower Prior income for similiar quality securities or take higher risk to maintain security income. higher Security Portfolio’s Contribution s Contribution to net income. s Provide collateral for public deposits. s Allowed borrowing from Fed. s Vehicle for repurchase agreements. s Dress-up the balance sheet. s Provide overall flexibility to manage bank’s Provide maturity and interest sensitivity position. maturity Distinguishing Characteristics of Debt Securities s Maturity x Numerous money market instruments (1 day to Numerous one year). one x Intermediate-term securites. x Long-term securities. s Taxation s Risks Four Risks of Debt Securities s Marketability risk s Interest rate risk s Credit risk s Purchasing power risk Short-Term Instruments Security Federal funds sold Treasury bills Agency notes Brief Description Excess funds sold to make money. Highly marketable, low risk. Obligation of federal agencies, high quality, low risk State & local notes State & local governmentsShort­term tax/bond anticipations of state & local governments; interest is usually tax­exempt for banks only. Commercial paper Business/finance companyHigh­quality promissory notes; sold on discount basis. Negotiable CDs Commercial banks & otherLarge interest­bearing deposits that financial institutions can be traded before maturity. Banker's acceptances Businesses backed by Paper used to finance international commercial bank trade, backed by bank's credit. Securities purchased Commercial banks or Temporary purchases of securities under agmt. to resell businesses in which seller agreed to repurchase securities at fixed price at set time; difference between sale & purchase price is received by holder. Broker call loans Securities brokers Loans created when securities dealers borrow from bank to finance securities position of their clients. Issuer Other commercial banks Federal government Government agencies Long-Term Debt Securities Security Issuer Treasury notes & bonds ederal government F Brief Description Longer­term interest­bearing notes & bonds that are obligations of govt. Agency bonds Government agencies Longer­term interest­bearing bonds of federal agencies. General obligations State & local governments Bonds backed by full faith, credit & taxing power of issuing unit; interest may be partially tax­exempt. Revenue bonds State & local governments Bonds backed by revenues from specific projects or tax source; interest on new issues is subject to 100% TEFRA. Corporate bonds Business Interest­bearing long­term business debt with varying degrees of quality and marketability. Mortgage­backed bonds Consumers (packaged) Interest­bearing long­term debt backed by grouping of mortgages & guarantee o government agency. New Bank Portfolio Instruments s Government National Mortgage Assn. Government (GNMA) mortgage-backed pass-throughs. (GNMA) s Federal Home Loan Mortgage Corp. Federal (FHLMC) mortgage participation certificates. (FHLMC) s Mortgage guarantee/insured by government. s CMOs/collateralized mortgage obligations. s STRIPS. s Floating-rate notes. s Adjustable rate preferred stocks. Steps In Managing The Security Portfolio s Establish general criteria and objectives. s Coordinate portfolio with expected external Coordinate environment. environment. s Inventory security management needs. s Formulate policies & strategies for Formulate managing security portfolio. managing s Delegate portfolio authority while keeping Delegate control. control. Valuing Portfolio Securities s FASB #115 requires three categories of FASB securities. securities. x Trading accounts of securities bank intends to Trading sell. (Marked-to-market) sell. x Value accounts of securities bank may sell with Value changes in value shown in equity reserve designated “available for sale”. (Marked-todesignated market) x Investment accounts of securities bank will Investment hold to maturity. (Historic cost) hold ...
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