Professional Documents
Culture Documents
Banking and
the Management
of Financial
Institutions
9-2
+$100
Liabilities
Checkable
deposits
+$100
Assets
Reserves
Liabilities
+$100 Checkable
deposits
+$100
9-3
+$100
Checkable
deposits
+$100
additional deposits, it
Liabilities
Liabilities
+$100
Assets
Reserves
-$100
Liabilities
Checkable
deposits
-$100
9-4
Liabilities
+$100 Checkable
deposits
+$90
+$100
Assets
Required
reserves
Loans
Liabilities
+$100 Checkable
deposits
+$100
+$90
9-5
Bank Management
Liquidity Management
Asset Management
Liability Management
Capital Adequacy Management
Credit Risk
Interest-rate Risk
Copyright 2007 Pearson Addison-Wesley.
9-6
Liquidity Management:
Ample Excess Reserves
Assets
Liabilities
Reserves
$20M Deposits
Loans
$80M Bank
Capital
$10M
Securities
$100M
$10M
Assets
Liabilities
Reserves
$10M Deposits
$90M
Loans
$80M Bank
Capital
$10M
$10M
Securities
9-7
Liquidity Management:
Shortfall in Reserves
Assets
Liabilities
Reserves
$10M Deposits
Loans
$90M Bank
Capital
$10M
Securities
$100M
$10M
Assets
Reserves
Loans
Securities
Liabilities
$0 Deposits
$90M Bank
Capital
$10M
$90M
$10M
9-8
Liabilities
$9M Deposits
$90M
Loans
$90M Borrowing
$9M
Securities
$10M
9-9
Liquidity Management:
Securities Sale
Assets
Reserves
Loans
Securities
Liabilities
$9M Deposits
$90M Bank Capital
$90M
$10M
$1M
9-10
Liquidity Management:
Federal Reserve
Assets
Reserves
Liabilities
$9M Deposits
Loans
Securities
$90M
$9M
$10M
9-11
Assets
Reserves
Liabilities
$9M Deposits
Loans
Securities
$10M
$90M
$10M
9-12
9-13
9-14
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
Copyright 2007 Pearson Addison-Wesley.
9-15
9-16
Liabilities
Liabilities
Reserves
$10M Deposits
$90M Reserves
$10M Deposits
Loans
$10M Loans
Liabilities
Reserves
$10M Deposits
Loans
$96M
$4M
Liabilities
$10M Deposits
$96M
-$1M
9-17
equity capital
ROE =
9-18
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
Copyright 2007 Pearson Addison-Wesley.
9-19
9-20
Interest-Rate Risk
First National Bank
Assets
Rate-sensitive assets
Liabilities
$20M Rate-sensitive liabilities
$50M
Variable-rate CDs
Short-term securities
Fixed-rate assets
Reserves
Checkable deposits
Long-term loans
Savings deposits
Long-term securities
Long-term CDs
$50M
Equity capital
9-21
9-22
9-23
Off-Balance-Sheet Activities
Loan sales (secondary loan
participation)
Generation of fee income
Trading activities and risk management
techniques
Speculation
9-24
Principal-agent problem
Internal Controls
Separation of trading activities and bookkeeping
Limits on exposure
Value-at-risk
Stress testing
9-25