Copyright © 2010 Pearson Education. All rights reserved. Chapter 10 Banking and the Management of Financial Institutions

Copyright © 2010 Pearson Education. All rights reserved.

Chapter 10

Banking and the Management of Financial Institutions

Copyright © 2010 Pearson Education. All rights reserved.10-2

The Bank Balance Sheet

• Liabilities and Equity– Checkable deposits– Nontransaction deposits( 非交易性存款，定期和

儲蓄存款 )– Borrowings ( 借款，中央銀行、其他銀行、企業 )– Bank capital


The Bank Balance Sheet

• Assets– Reserves– Cash items in process of collection– Deposits at other banks– Securities– Loans – Other assets


Table 1 Balance Sheet of All Commercial Banks (items as a percentage of the total, December 2008)


Basic Banking: Cash Deposit

• Opening of a checking account leads to an increase in the bank’s reserves equal to the increase in checkable deposits

First National Bank First National Bank

Assets Liabilities Assets Liabilities

Vault Cash

+$100 Checkable deposits

+$100 Reserves +$100 Checkable deposits

+$100


Basic Banking: Check Deposit

When a bank receives

additional deposits, it

gains an equal amount of reserves;

when it loses deposits,

it loses an equal amount of reserves

First National Bank Second National Bank


Reserves +$100 Checkable deposits

+$100 Reserves -$100 Checkable deposits

-$100

First National Bank

Assets Liabilities

Cash items in process of collection

+$100 Checkabledeposits

+$100


Basic Banking: Making a Profit

• Asset transformation: selling liabilities with one set of characteristics and using the proceeds to buy assets with a different set of characteristics

• The bank borrows short and lends long

First National Bank First National Bank


Required reserves


+$100 Required reserves


+$100

Excess reserves

+$90 Loans +$90


Bank Management

• Liquidity Management• Asset Management• Liability Management• Capital Adequacy Management• Credit Risk• Interest-rate Risk


Liquidity Management: Ample Excess Reserves

• Suppose bank’s required reserves are 10%• If a bank has ample excess reserves, a deposit outflow does not necessitate changes in other parts of its balance sheet


Reserves $20M Deposits $100M Reserves $10M Deposits $90M

Loans $80M Bank Capital

$10M Loans $80M Bank Capital

$10M

Securities $10M Securities $10M


Liquidity Management: Shortfall in Reserves

• Reserves are a legal requirement and the shortfall must be eliminated

• Excess reserves are insurance against the costs associated with deposit outflows


Reserves $10M Deposits $100M Reserves $0 Deposits $90M

Loans $90M Bank Capital

$10M Loans $90M Bank Capital

$10M

Securities $10M Securities $10M


Liquidity Management: 1.Borrowing

• Cost incurred is the interest rate paid on the borrowed funds

Assets Liabilities

Reserves $9M Deposits $90M

Loans $90M Borrowing $9M

Securities $10M Bank Capital $10M


Liquidity Management: 2.Securities Sale

• The cost of selling securities is the brokerage and other transaction costs

Assets Liabilities


Loans $90M Bank Capital $10M

Securities $1M


Liquidity Management: 3.Borrow from Federal Reserve

• Borrowing from the Fed also incurs interest payments based on the discount rate

Assets Liabilities


Loans $90M Borrow from Fed $9M

Securities $10M Bank Capital $10M


Liquidity Management: 4.Reduce Loans

• Reduction of loans is the most costly way of acquiring reserves

• Calling in loans antagonizes customers

• Other banks may only agree to purchase loans at a substantial discount

Assets Liabilities


Loans $81M Bank Capital $10M

Securities $10M


Asset Management: Three Goals

• Seek the highest possible returns on loans and securities

• Reduce risk

• Have adequate liquidity

• 自償性理論 : 生產性放款• 移轉性理論 : 有價證券投資• 預期收入理論 : 消費性放款


Asset Management: Four Tools

• Find borrowers who will pay high interest rates and have low possibility

of defaulting

• Purchase securities with high returns and low risk

• Lower risk by diversifying

• Balance need for liquidity against increased returns from less liquid assets


Liability Management

• Recent phenomenon due to rise of money center banks

• Expansion of overnight loan markets and new financial instruments (such as negotiable CDs)

• Checkable deposits have decreased in importance as source of bank funds


Capital Adequacy Management

• Bank capital helps prevent bank failure

• The amount of capital affects return for the owners (equity holders) of the bank

• Regulatory requirement( 銀行資本適足性及資本等級管理辦法 )


銀行法第 44條 : 銀行自有資本與風險性資產之比率，不得低於一定比率 ( 合併資本適足率及銀行本行資本適足率均不得低於百分之八及最低資本適足率要求。 ) 。

自有資本與風險性資產之比率（以下簡稱資本適足率）：

指合格自有資本除以風險性資產總額。銀行經主管機關規定應編製合併報表時，其合併後之自有資本與風險性資產之比率，亦同


銀行依自有資本與風險性資產之比率，劃分下列資本等級：一、資本適足 ( 資本適足率為百分之八以上及符合最低資本適足率要求者 ) 。二、資本不足 ( 資本適足率為百分之六以上，未達百分之八或未符合最低資本適足率要求者 ) 。三、資本顯著不足 ( 資本適足率為百分之二以上，未達百分之六者 ) 。四、資本嚴重不足 ( 資本適足率低於百分之二者 ; 銀行淨值占資產總額比率低於百分之二者 ) 。


合格自有資本：指第一類資本、合格第二類資本、合格且使用第三類資本之合計數額。

風險性資產總額：指信用風險加權風險性資產總額，加計市場風險及作業風險應計提之資本乘以十二．五之合計數。但已自合格自有資本中減除者，不再計入風險性資產總額。

信用風險加權風險性資產：指衡量交易對手不履約，致銀行產生損失之風險。該風險之衡量以銀行資產負債表內表外交易項目乘以加權風險權數之合計數額表示。市場風險應計提之資本：指衡量市場價格（利率、匯率及股價等）波動，致銀行資產負債表內表外交易項目產生損失之風險，所需計提之資本。作業風險應計提之資本：指衡量銀行因內部作業、人員及系統之不當或失誤、或外部事件造成損失之風險，所需計提之資本。


Capital Adequacy Management: Preventing Bank Failure

High Bank Capital Low Bank Capital



Loans $90M Bank Capital $10M Loans $90M Bank Capital $4M

High Bank Capital Low Bank Capital



Loans $85M Bank Capital $5M Loans $85M Bank Capital -$1M


Capital Adequacy Management: Returns to Equity Holders

Return on Assets: net profit after taxes per dollar of assets

ROA = net profit after taxes

assetsReturn on Equity: net profit after taxes per dollar of equity capital

ROE = net profit after taxes

equity capital

Relationship between ROA and ROE is expressed by the

Equity Multiplier: the amount of assets per dollar of equity capital

EM =Assets

Equity Capital

net profit after taxes

equity capitalnet profit after taxes

assets assets

equity capital

ROE = ROA EM


Capital Adequacy Management: Safety

• Benefits the owners of a bank by making their investment safe

• Costly to owners of a bank because the higher the bank capital, the lower the return on equity

• Choice depends on the state of the economy and levels of confidence


Application: How a Capital Crunch Caused a Credit Crunch in 2008

• Shortfalls of bank capital led to slower credit growth– Huge losses for banks from their holdings of securities backed by residential mortgages.

– Losses reduced bank capital

• Banks could not raise much capital on a weak economy, and had to tighten their lending standards and reduce lending.


Credit Risk: Overcoming Adverse Selection and Moral Hazard

• Screening and Monitoring

– Screening

– Specialization in lending

– Monitoring and enforcement of restrictive covenants


Credit Risk: Overcoming Adverse Selection and Moral Hazard

• Long-term customer relationships

• Loan commitments

• Collateral and compensating balances

• Credit rationing


Interest-Rate Risk

• If a bank has more rate-sensitive liabilities than assets, a rise in interest rates will reduce bank profits and a decline in interest rates will raise bank profits

First National Bank

Assets Liabilities

Rate-sensitive assets $20M Rate-sensitive liabilities $50M

Variable-rate and short-term loans Variable-rate CDs

Short-term securities Money market deposit accounts

Fixed-rate assets $80M Fixed-rate liabilities $50M

Reserves Checkable deposits

Long-term loans Savings deposits

Long-term securities Long-term CDs

Equity capital


Interest Rate Risk: Gap Analysis(缺口分析 )

• Basic gap analysis:(rate sensitive assets - rate sensitive liabilities) x interest rates = in bank

profit

• Maturity bucked approach( 到期日分析法 )– Measures the gap for several maturity subintervals.

• Standardized gap analysis ( 缺口標準化分析法 )– Accounts for different degrees of rate sensitivity.


Interest Rate Risk: Duration Analysis(期間分析 )

• Uses the weighted average duration of a financial institution’s assets and of its liabilities to see how net worth responds to a change in interest rates.

• 使用 Macaulay 的期間概念，衡量銀行的資產市值與負債市值對利率變動的敏感性

• 市值變動的百分比 ≒ ━利率變動百分點 X 期間• 若一銀行的資產有 1 億，平均期間 3 年；負債 9000 萬，平

均期間 2 年。• 利率上升 5% ，則資產市值下跌 15 %(- 5% X 3) ；負債市

值下跌 10 % (- 5% X 2) ；淨值淨減少 600 萬


Off-Balance-Sheet Activities

• Loan sales (secondary loan participation)

• Generation of fee income. Examples:– Servicing mortgage-backed securities.

– Creating SIVs (structured investment vehicles) which can potentially expose banks to risk, as it happened in the subprime financial crisis of 2007-2008.



• Trading activities and risk management techniques – Financial futures, options for debt instruments, interest rate swaps, transactions in the foreign exchange market and speculation.

– Principal-agent problem arises

– 1995 霸菱 Nick Leeson

– Daiwa 大和、 Sumitomo 住友



• Internal controls to reduce the principal-agent problem– Separation of trading activities and bookkeeping

– Limits on exposure 交易員交易總額及機構承受風險暴露的限制

– Value-at-risk( 風險價值 ) 計算銀行投資組合在特定期間內可能產生的最大損失

– Stress testing ( 壓力測試 ): 最差情況下能承受的損失

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Copyright © 2010 Pearson Education. All rights reserved. Chapter 10 Banking and the Management of Financial Institutions