Ch19_Managing Commercial Bank Risk

Ch19_Managing Commercial Bank Risk - Chapter19...

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Financial Markets and Institutions Chapter 19 Managing Commercial Bank Risk
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Financial Markets and Institutions Bank Management The goal of a bank is to maximize the  wealth of the bank’s shareholders Managers may be tempted to make  decisions that are in their own best  interests Banks can incur agency costs
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Financial Markets and Institutions Bank Management (cont’d) Board of directors The board of directors oversees operations of  the banks  outside members  Functions of bank directors
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Financial Markets and Institutions Managing Liquidity Banks can experience illiquidity when cash  outflows exceed cash inflows Banks should maintain the level of liquid  assets Use of securitization to boost liquidity
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Financial Markets and Institutions Managing Interest Rate Risk Bank performance is influenced by the interest  payments earned relative to the interest paid: During a period of rising interest rates, a bank’s net interest  margin will likely decrease if its liabilities are more rate  sensitive than its assets (see next slide) During a period of decreasing interest rates, a bank’s net  interest margin will likely increase if its liabilities are more  rate sensitive than its assets (see next slide) Assets expenses Interest - revenues Interest margin interest Net =
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Financial Markets and Institutions Managing Interest Rate Risk (cont’d) % % Time Time Rate on Loans Cost of Funds Spread Increasing Interest Rates Decreasing Interest Rates Cost of Funds Rate on Loans
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Financial Markets and Institutions Managing Interest Rate Risk (cont’d) To measure interest rate risk, a bank  measures the risk and then uses its  assessment of future interest rates to decide  whether and how to hedge the risk Methods used to assess interest rate risk: Gap analysis Duration analysis Regression analysis
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Financial Markets and Institutions Managing Interest Rate Risk (cont’d) Methods used to assess interest rate risk  (cont’d) Gap analysis Gap  is defined as: The  gap ratio  is the volume of rate-sensitive assets  divided by rate-sensitive liabilities s liabilitie sensitive Rate - assets sensitive Rate Gap =
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Financial Markets and Institutions Computing A Bank’s Gap and Gap Ratio  Philly Bank generated interest revenues of $100 million last year and  $45 million in interest expenses. Philly bank has $2 billion in  assets, of which $800 million are rate-sensitive. Philly also has  $700 million in rate-sensitive liabilities. What are Philly Bank‘s gap ?and gap ratio % 29 . 114 000 , 000 , 700 $ 00 $800,000,0 ratio Gap 000 , 000 , 100 $ 000 , 000 , 700 $ 000 , 000 , 800 $ s liabilitie sensitive Rate - assets sensitive Rate Gap = = = - = =
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Ch19_Managing Commercial Bank Risk - Chapter19...

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