Lecture 17 - Management of commercial banks

Lecture 17 - Management of commercial banks - Financial...

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Financial Markets and Institutions Commercial Banks Management (and all other depository institutions) Mishkin & Eakins 6 th ed. Chapter 17
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Preview In this lecture, we examine how banking is conducted to earn the highest profits possible. In the commercial banking setting, we look at loans, balance sheet management, and income determinants. Topics include: The Bank Balance Sheet Basics of Banking General Principles of Bank Management Off-Balance Sheet Activities Measuring Bank Performance 2
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The Bank Balance Sheet The Balance Sheet is a list of a bank’s assets and liabilities Total assets = total liabilities + capital A bank’s balance sheet lists sourcesof bank funds (liabilities) and uses to which they are put (assets) Banks invest these liabilities (sources) into assets (uses) in order to create value for their capital providers 3
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The Bank Balance Sheet 4
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The Bank Balance Sheet: Liabilities (a) Checkable Deposits: includes all accounts that allow the owner (depositor) to write checks to third parties. Examples: non-interest earning checking accounts (DDAs demand deposit accounts) interest earning negotiable orders of withdrawal (NOW) accounts money-market deposit accounts (MMDAs), typically most interest among checkable deposit accounts. Checkable deposits are a bank’s lowest cost funds because depositors want safety and liquidity and will accept a lesser interest return from the bank in order to achieve such attributes. They also make up about 6.5% of bank liabilities. 5
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The Bank Balance Sheet: Liabilities (b) Nontransaction Deposits: Overall primary source of bank liabilities (65%); Accounts from which the depositor cannot write checks; Examples: savings accounts and time deposits (also known as CDs or certificates of deposit). Generally a bank’s highest cost funds because banks want deposits which are more stable and predictable and will pay more to the depositors (funds suppliers) in order to achieve such attributes. 6
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The Bank Balance Sheet: Liabilities (c) Borrowings: Funds obtained by borrowing from The Federal Reserve System: discount loans/advances (Exceptional) Other banks: fed funds; interbank offshore dollar deposits; repurchase agreements ( “repos” ). Corporations and institutional investors: repos; commercial paper and notes. Certain borrowings can be more volatile than other liabilities, depending on market conditions. 7
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The Bank Balance Sheet: Liabilities (d) Bank Capital: Source of funds supplied by the bank owners, either directly through purchase of ownership shares or indirectly through retention of earnings (retained earnings being the portion of funds which are earned as profits but not paid out as ownership dividends). This is about 8% of assets.
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Lecture 17 - Management of commercial banks - Financial...

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