BK8 - MANA130107 Bank Management 1 Lecture Eight Reserve...

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Unformatted text preview: MANA130107 Bank Management 1 Lecture Eight Reserve and Capital Management (chap 15 ) Topics in Commercial Bank Management MANA130107 Bank Management 2 Reserve and Capital Management ¡ Topics covered in this lecture ¢ Reserve Management ¢ Capital Tasks and Risk Exposures ¢ Type of Capital and Regulation ¢ The Basel Agreements ¢ Capital Planning MANA130107 Bank Management 3 Legal Reserves ¡ Money position manager ¢ Ensures the bank maintains adequate legal reserves ¢ Keep legal reserves at the required level with no excess reserves and no reserve deficit leading to a penalty ¡ Legal reserves ¢ Assets that a central bank requires banks to hold as a reserve behind their deposits or other liabilities ¢ In the US, legal reserve requirements apply to all qualified depository institutions ¢ Two types of reserves are cash in vault and deposit in reserve account at the Fed MANA130107 Bank Management 4 Calculating Legal Reserve ¡ Reserve Computation ¢ Lagged reserve accounting (LRA) ¢ Daily average amount of legal reserve requirement computed based on information over the reserve computation period ¢ A 2-week window stretching from Tue to Mon 14-day later ¡ Reserve Maintenance ¢ Once determined, a bank maintains required legal reserves on deposit with the Fed over the reserve maintenance period ¢ A 2-week window from Thu to Wed 14 days later ¢ Reserve maintenance period begins 30 days later after the beginning of reserve computation period ¢ There is a 16 day lag between the computation period and the maintenance period, allowing mangers to plan. MANA130107 Bank Management 5 Calculating Legal Reserve ¡ Reserve requirements ¢ Depends on the volume and mix of a bank ’ s deposit and the time ¢ Each reservable liability item is multiplied by the stipulated reserve requirement percentage to derive the total legal reserve requirements ¡ The money position manager ¢ Determine the required legal reserves ¢ Compares to actual daily average holdings of legal reserve assets (cash and reserve deposit) ¢ For excess reserves, invest to earn interest ¢ For reserve deficit, raise additional reserves to cover ¢ A 4% deficit from required daily average reserve position is allowed, and penalty applied to deficit above 4% MANA130107 Bank Management 6 Clearing Balances ¡ Clearing Account ¢ Account held at the central bank for its check-clearing services ¢ A bank maintains a clearing balance with the Fed to cover checks and debit drawn against it ¢ The minimum size of clearing balance is set between the Fed and the bank based on estimated check-clearing needs and recent overdrafts ¢ When clearing balance falls by 2% below the minimum level, the bank is required to add more fund to the promised level ¢ Excess amount in clearing account can be used to cover deficit in the legal reserve account ¢ Clearing account earns interest that can be used to cover the cost of clearing services MANA130107 Bank Management 7 Factors Affecting Money Position...
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This note was uploaded on 10/17/2011 for the course FINANCE CFA 201 taught by Professor Leo during the Spring '09 term at Fudan University.

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BK8 - MANA130107 Bank Management 1 Lecture Eight Reserve...

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