Management of off-balance sheet activities Interest rate margin or spread management Credit risk management Liquidity management Management of noninterest expense Tax management (UNC Charlotte) FINN 3225 - Commercial Bank Management September 3rd, 2014 31 / 34
Maximizing Market Value (cont’d) Regulators use the CAMELS system to measure overall firm performance Capital adequacy signals institution’s ability to maintain enough capital relative to risks Asset quality reflects amount of credit risk associated with loan and investment portfolio and OBS activities Management quality is adequacy of board of directors and senior management systems Earnings is quantity and trend in earnings, along with factors impacting sustainability of earnings Liquidity is adequacy of institution’s currents and prospective sources of liquidity Sensitivity to market risk is degree to which changes in interest rates, foreign exchange rates, commodity prices, and equity prices can affect capital (UNC Charlotte) FINN 3225 - Commercial Bank Management September 3rd, 2014 32 / 34
Financial Statement Manipulation Bank managers are able to utilize several methods to adjust performance in the balance sheet and income statement Structured investment vehicles would issue debt and then buy assets, like loans or shares of stock, to SIV to get the proceeds from investors Banks will manipulate their total asset size to attract more customers Issuance of preferred stock in lieu of debt will overstate NIM, NI, ROE, and ROA (UNC Charlotte) FINN 3225 - Commercial Bank Management September 3rd, 2014 33 / 34
Financial Statement Manipulation (cont’d) Manipulation of nonperforming loans Allow an individual to make a partial payment so the bond is not nonperforming, or give the individual money to make a payment Misreporting of provisions for loan losses Overreporting of securities that are available-for-sale relative to held-to-maturity AFS are marked to market with unrealized gains or losses changing stockholder’s equity, not reported on the income statement like trading account securities DIs can sell a loan, real estate, subsidiary, lease assets, or hidden assets for a large earnings boost that is not repeatable (UNC Charlotte) FINN 3225 - Commercial Bank Management September 3rd, 2014 34 / 34
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