Class 17 Bank Management Discussion Outline

Class 17 Bank Management Discussion Outline - to risk or...

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Class 17 Bank Management Discussion outline We will cover a limited issue in this chapter so that the root of the Current Crisis will come into focus. In preparation. Be familiar with Table 12.1 in the text. Understand sources and used of funds on the Balance sheet. 1) Bank Assets are Uses of Funds. Main categories are: a. Cash Reserves b. Securities: Mainly Gov’t issued c. Loans c.i. Commercial and industrial c.ii. Mortgages c.iii. Consumer c.iv. Inter Bank c.v. Real property 2) Bank Liabilities are Sources of funds: a. Checkable Deposits b. Non Transaction deposits b.i. Saving and small CDs (< $100,000) b.ii. Large CDs (> $100,000) c. Borrowings c.i. From banks: FED (discount loans) & FED Funds (interbank reserve lending) c.ii. From non-banks (repos) 3) Bank capital and profitability a. ROA = b. ROE = c. Define the ratio . ( ability of the Bank to create assets from capital) d. Note then (b) can be written as ROE = . Also note that “productivity” goes by the common name of leverage! In a real sense, bank productivity is proportional
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Unformatted text preview: to risk or leverage! This is a two edged sword. More assets mean more profit possibility. It also means great risk of insolvency if default rates on loans increase. This is the pivot point of the current financial crisis. In this light carefully examine Figure 12.2 & table 12.4 in the text. 4) Off Balance Sheet Activities a. Loan origination and sale: construct an example b. Letter of Credit c. Line of Credit 5) Bank Risk See table 12.4 in the text a. Liquidity risk: inability to cover day-to-day withdrawls a.i. Reserves are held for this purpose b. Default Risk: Loans become non performing b.i. CDSs can be purchased c. Interest Rate Risk: Lend long and borrow short: collapse of rate spread. c.i. Interest rate swaps c.ii. Other hedging strategies with options d. Trading risk d.i. Banks trade assets from their own account. 6) The “too-big-to-fail” issue. a. What is the issue of TBTF? b. What are some proposed solutions to TBTF?...
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This note was uploaded on 02/22/2012 for the course MANEC 453 taught by Professor Jerrynelson during the Winter '10 term at BYU.

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Class 17 Bank Management Discussion Outline - to risk or...

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