Presentation on theme: "1 Banking Industry Number of banks ~7,000 decreasing (result of consolidation, deregulation and failures) Number of branches ~90,000 increasing (result."— Presentation transcript:
1 Banking Industry Number of banks ~7,000 decreasing (result of consolidation, deregulation and failures) Number of branches ~90,000 increasing (result of relaxed geographical restrictions) About 4,000 are small banks (< $100 million in assets) Banks most commonly ranked by total assets. The large banks in our economy have mostly gotten there by means of mergers and acquisitions.
3 Balance Sheet for a Commercial Bank Uses of Funds Sources of Funds (Assets) (Liabilities + Capital) Cash Assets (8%) Deposit Liabilities (69%) FF sold/Rev repos (4%) Borrowed Funds (16%) Investments (19%) Other Liabilities (3%) Loans & Leases (55%) Subordinated Notes & Deben (1%) Premises (1%) Capital Accounts (11%) Other (13%) (See pp. 417 & 411)
4 First Three Items on Left Cash Assets (8%): Vault cash (physical currency and coin) Reserves at the Fed Fed Funds Sold/Rev repos (4%): Fed Funds sold Reverse Repurchase Agreements Investments (19%): cushion in case need more liquidity U.S. Treasury securities Agency securities Municipal bonds
5 Fourth Item on Left Loans commercial and industrial real estate agricultural consumer Leases fast-growing line of business for the big banks fleet assets (aircraft, ships,..), rolling stock (railroad cars, trucks,..), equipment (cranes, generators,..) Loans and Leases (55%)
6 First Two Items on Right Deposit Liabilities (69%): Transaction Deposits Savings Deposits Time Deposits (retail and negotiable CDs) Borrowed Funds (16%): Fed Funds purchased Repurchase Agreements Eurodollars (dollars borrowed abroad) Discount Window loans
7 Last Two Items on Right Subordinated Notes and Debentures (1%) Subordinated to claims of depositors Capital Accounts (11%) Paid-in capital (from sale of stock) Retained earnings
8 Capital Adequacy Capital adequacy ratio: Numerator is subordinated notes & bonds + capital stock + retained earnings Denominator is a weighted average of assets Riskfree, weight of 0 Very risky assets like CDOs, weight of 1 Everything else, weight in between
9 Base Rate Pricing Markups to base rate include adjustments for default risk, term-to-maturity, and competitive factors. r L = BR + DR + TM + CF In this way, business loans can vary from customer to customer. BR could be prime rate, Libor, or a T-bill rate. Loan pricing is one of most important managerial decisions is banking.
10 Five ‘C’s of Credit Five “C”s of Credit: Character (willingness to pay) Capacity (cash flow) Capital (wealth or net worth) Collateral (security for the loan) Conditions (economic conditions)