Commercial Banking

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Bank Management and Financial

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What Banks do?

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Bank Management and Financial

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Then, Why Banking?

Particular expertise enabling them to do what others
cannot do, Monopoly attributes.
Others can also do, but they have comparative
advantage.

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Bank Management and Financial

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Why do banks exist?

Comparative advantages vs. Erosion of advantages

Information advantage
Imperfect and Incomplete market
Control theory
Insurance role
Regulatory subsidy
Payments advantage

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Bank Management and Financial

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Bank: The Financial Intermediary

The role of transaction cost
Role Asymmetric information
The Signaling Approach (Lemon Problem)
Good vs. Bad
Cost and credibility, and shareable

Delegated Monitoring

Cost of monitoring
Economies of scale
Diversification
Cost of delegation (cost by solving agencyincentive problem)

Participation cost

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Bank Management and Financial

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Making Money and Risk

Asset Transformation
Maturity spread
Credit spread
Liquidity spread
Variable rate deposits to fixed rate loans
Fee Business
Derivatives Business
Principal Investments Business
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Bank Management and Financial

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1-7

The Different Kinds of Financial Service Firms

Calling Themselves Banks

Commercial Banks
Savings Banks
Cooperative Banks
Mortgage Banks
Community Banks
Money Center Banks
Investment Banks
Merchant Banks
International Banks
Wholesale Banks
Retail Banks

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Bank Management and Financial

Limited Purpose Banks

Bankers Banks
Minority Banks
National Banks
State Banks
Insured Banks
Member Banks
Affiliated Banks
Virtual Banks
Fringe Banks
Universal Banks

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1-8

The Financial Service Competitors of Banks

Savings Associations
Credit Unions
Money Market Funds
Mutual Funds (Investment Companies)
Hedge Funds
Security Brokers and Dealers
Investment Banks
Finance Companies
Financial Holding Companies
Life and Property-Casualty Insurance Companies

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Bank Management and Financial

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Risk
Liquidity Risk
Mismatch Risk; Interest Rate Risk
Market Risk
Credit Risk
Operational Risk
Reputation Risk

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Bank Management and Financial

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Performance, Adequacy and

Valuation

Net Interest Margin

Efficiency,
Loan Loss Reserve as part of equity
Loan loss as part of loans
ROA
ROE

Capital Adequacy
Valuation
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Bank Management and Financial

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Bank Goals and Constraints

Amount of
cash flow

Maximize
shareholder
wealth

Timing of
cash flow
Risk of cash
flow

Constraints
Credit risk

Interest rate

Liquidity

Operational
Capital

Market
competition

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Bank Management and Financial

Social

Legal/regulatory

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1-12

Trends Affecting Banks and Other

Financial Service Firms Today
Service Proliferation
Rising Competition
Government Deregulation
Increased Interest Rate Sensitivity
Technological Change and Automation
Consolidation and Geographic Expansion
E-Banking and E-Commerce
Convergence
Globalization
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Bank Management and Financial

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McGraw-Hill/Irwin
Bank Management and Financial

2008 The McGraw-Hill Companies, Inc., All Rights

McGraw-Hill/Irwin
Bank Management and Financial

2008 The McGraw-Hill Companies, Inc., All Rights

McGraw-Hill/Irwin
Bank Management and Financial

2008 The McGraw-Hill Companies, Inc., All Rights

McGraw-Hill/Irwin
Bank Management and Financial

2008 The McGraw-Hill Companies, Inc., All Rights

McGraw-Hill/Irwin
Bank Management and Financial

2008 The McGraw-Hill Companies, Inc., All Rights

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Bank Management and Financial

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McGraw-Hill/Irwin
Bank Management and Financial

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1-20

Quick Quiz
Why do banks and other financial intermediaries
exist in modern society, according to the theory of
finance?
How have banking and the financial services market
changed in recent years?
What powerful forces are shaping financial markets
and institutions today? Which of these forces do you
think will continue into the future?
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Bank Management and Financial

2008 The McGraw-Hill Companies, Inc., All Rights