banking_part3 - BANKING MANAGEMENT AND THE MANAGEMENT OF...

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BANKING MANAGEMENT AND THE ANAGEMENT OF FINANCIAL INSTITUTIONS MANAGEMENT OF FINANCIAL INSTITUTIONS 1
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The Bank Balance Sheet 2
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ank Operation Bank Operation T-account Analysis: Deposit of $100 cash into First Bank Assets Liabilities Vault Cash + $100 Chequable Deposits + $100 (=Reserves) Deposit of $100 cheque into First Bank Assets Liabilities Cash items in process Chequable Deposits + $100 f collection + $100 of collection + $100 First Bank Second Bank Assets Liabilities Assets Liabilities Chequable Chequable Reserves Deposits Reserves Deposits + $100 + $100 – $100 – $100 3 Conclusion: When bank receives deposits, reserves by equal amount; when bank loses deposits, reserves by equal amount
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rinciples of Bank Management Principles of Bank Management Liquidity Management Asset Management Managing Credit Risk gg Managing Interest-rate Risk Liability Management Capital Adequacy Management 4
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rinciples of Bank Management Principles of Bank Management Liquidity Management Desired reserve ratio = 10%, Excess reserves = $10 million Assets Liabilities Reserves $20 million Deposits $100 million oans 80 million ank Capital 10 million Loans $80 million Bank Capital $ 10 million Securities $10 million Deposit outflow of $10 million Assets Liabilities Reserves $10 million Deposits $ 90 million Loans $80 million Bank Capital $ 10 million Securities $10 million 5 Conclusion: With 10% desired reserve ratio, bank still has excess reserves of $1 million: no changes needed in balance sheet.
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iquidity Management Liquidity Management No excess reserves ssets iabilities Assets Liabilities Reserves $10 million Deposits $100 million Loans $90 million Bank Capital $ 10 million Securities $10 million Deposit outflow of $ 10 million Assets Liabilities Reserves $ 0 million Deposits $ 90 million Loans $90 million Bank Capital $ 10 million Securities $10 million 6
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iquidity Management Liquidity Management orrow from other banks or corporations 1. Borrow from other banks or corporations Assets Liabilities Reserves $ 9 million Deposits $ 90 million Loans $90 million Borrowings $ 9 million ecurities 10 million ank Capital 10 million Securities $10 million Bank Capital $ 10 million 2. Sell Securities Assets Liabilities Reserves $ 9 million Deposits $ 90 million Loans $90 million Bank Capital $ 10 million Securities $ 1 million 7
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iquidity Management Liquidity Management 3. Borrow from Bank of Canada Assets Liabilities Securities $10 million Bank Capital $ 10 million Reserves $ 9 million Deposits $ 90 million Loans $90 million Advances $ 9 million 4. Call in or sell off loans Assets Liabilities Reserves $ 9 million Deposits $ 90 million Loans $81 million Bank Capital $ 10 million Securities $10 million 8 Conclusion: excess reserves are insurance against above 4 costs from deposit outflows
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sset and Liability Management Asset and Liability Management Asset Management Get borrowers with low default risk, paying high interest rates Buy securities with high return, low risk •D i v e r s i f y anage liquidity Manage liquidity Liability Management Important since 1960s Banks no longer primarily depend on deposits When see loan opportunities, borrow or issue CDs to acquire funds 9
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This note was uploaded on 05/30/2011 for the course ACC 101 taught by Professor Worfy during the Winter '08 term at Akademia Ekonomiczna w Poznaniu.

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banking_part3 - BANKING MANAGEMENT AND THE MANAGEMENT OF...

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