Managing Risks and Returns Risk Management Market Risk Equity and Security Price Risk Foreign Exchange Risk Foreign Currency Translation Risk Commitments and Guarantees denominated in a foreign currency 68
Managing Risks and Returns Risk Management Operational Risk Business Interruptions Transaction Processing Inadequate Information Systems Breaches in Internal Controls Client Liability Legal Risk Reputation Risk 69
Managing Risks and Returns Risk Management Capital or Solvency Risk Risk of becoming insolvent Liabilities > Assets Off-Balance Sheet Risk Tier 1 Capital Common Equity + Non-cumulative Preferred Stock Risk-Weighted Assets 70
Evaluating Bank Performance: An Application Profitability Analysis for PNC in 2007 71
Maximizing the Market Value of Bank Equity Effective Management of: Assets Liabilities Off-Balance Sheet Activities Interest Rate Margin Credit risk Liquidity Non-Interest Expense Taxes 77
Maximizing the Market Value of Bank Equity CAMELS Ratings Capital Adequacy Asset Quality Management Quality Earnings Liquidity Sensitivity to Market Risk 78
Maximizing the Market Value of Bank Equity CAMELS Ratings Ratings from 1 (best) to 5 (worst) 1 & 2 Sound banks 3 Some underlying problems 4 & 5 Problem banks 79
Maximizing the Market Value of Bank Equity Performance Characteristics of Banks by Size Large Banks versus Small Banks Higher ROE Lower NIM Higher Charge-offs Lower Capital 81
Financial Statement Manipulation Off-Balance Sheet Activities Window Dressing Preferred Stock Non-Performing Loans Allowance for Loan Losses Securities Gains and Losses Non-Recurring Extraordinary Items 83
Analyzing Bank Performance 84
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