Management of off balance sheet activities interest

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