1. 貨幣銀行學 台大經濟系教授 許振明 93.3.17 93.3.24

2. ( 一 )General Principle of Bank Management 1.To earn lightest possible profit 2.Primary concerns: 3.Risk management: credit risk and interest-rate risk a)Liquidity management to meet deposit outflows b)Asset management to pursue acceptably low risk level c)Liability management to accrue funds at low cost d)Capital adequacy to maintain and acquire the needed capital

3. ( 二 )Liquidity Management: the Role of Reserves a)Ample reserves AssetsLiabilities Reserves $20 Loans $80 Securities $10 Deposits $ 100 Bank capital $10 AssetsLiabilities Reserves $10 Loans $80 Securities $10 Deposits $ 90 Bank capital $10

4. AssetsLiabilities Reserves $10 Loans $90 Securities $10 Deposits $ 100 Bank capital $10 b)Insufficient excess reserves AssetsLiabilities Reserves $0 Loans $90 Securities $10 Deposits $ 90 Bank capital $10

5.  To eliminate shortfall of reserves: 1)By borrowing from other banks or corporations (ex: selling NCDs) AssetsLiabilities Reserves $9 Loans $90 Securities $10 Deposits $ 90 Borrowings $9 Bank capital $10

6. 2)To sell some of its securities AssetsLiabilities Reserves $9 Loans $90 Securities $1 Deposits $ 90 Bank capital $10

7. AssetsLiabilities Reserves $9 Loans $90 Securities $10 Deposits $ 90 Discount loans $9 Bank capital $10 3):

8. 4)By reducing its loans  Excess reserves are insurance against to costs associated with deposit outflows. The higher the costs associated with deposit outflows, the more excess reserves banks will want to hold. AssetsLiabilities Reserves $9 Loans $81 Securities $10 Deposits $ 90 Bank capital $10

9. ( 三 ) asset management: three goals to maximize profits to maximize its profits, a bank must simultaneously seek the lightest returns possible on loans and securities, reduce risk and make adequate provisions for liquidity assets. a)To find borrowers paying high interest rates and unlikely defanting b)To purchase securities with high returns and low risk

10. c)Diversifying to low risk d)Liquidity or reserve management ( 四 )Liability management 1)Banks aggressively set target goals for their asset growth and tried to acquire funds (by issuing liabilities) as they were needed. 2)Manage both sides of the balance sheet together in a so-called asset-liability management (ALM) committee.

11. 3)NCDs and bank borrowing: 2% of bank liabilities in 1960 42% in 2002. 4)Loans proportion in asset: 46% (1960), 64% (2002).

12. ( 五 )Capital Adequacy Management 1)To prevent bank failure 2)The amount of capital affects returns for the equity holders of the bank 3)A minimum amount of bank capital (bank capital requirements) is required by regulatory authorities

13. AssetsLiabilities Reserves $10 Loans $90 Deposits $90 Bank capital $10 AssetsLiabilities Reserves $10 Loans $90 Deposits $96 Capital $4 AssetsLiabilities Reserves $10 Loans $85 Deposits $90 Bank capital $5 H bank L bank AssetsLiabilities Reserves $10 Loans $85 Deposits $96 Capital $-1

14. ROA= ROE=(net profit after taxes)/(equity capital) (net profit after taxes) assets

15.  The relationship between ROA and ROE: EM=equity multiplier = assets/equity capital ROA*EM=ROE  Low capital bank has higher EM, if total assets are the same.

16. ( 六 )Management Credit Risk 1)Screening and monitoring 2)Long-term customer relationships 3)Loan commitments: promotes a long- term relationship. 4)Collateral and compensating balances 5)Credit rationing

17. ( 七 )Management Interest-Rate Risk AssetsLiabilities Rate-sensitive assets $20 Fixed-rate assets $80 Rate-sensitive liabilities $ 50 Fixed-rate liabilities $50 Suppose that interest rate rise by 5% on average, form 10% to 15%. Income on assets rises by $1 (=5%*$20) Payments on liabilities rise by $2.5 (5%*50) Profit decline by $1.5 (=$1-$2.5)

18. 1)Gap analysis the gap= the amount of rate-sensitive liabilities (RSL) is subtracted from the amount of rate-sensitive assets (RSA). -$30=$20-$50 2)Duration analysis: F. Macaulay (1938) D=3 (the average duration of assets) D ’ =2 (the average duration of liabilities) assets=$100, liabilities=$90 5% increase in interest rates,

19. a)Percent change in market value of security ≈ (-5%)*D=-15%=fall in asset value b)Percent change in market value of liabilities = (-5%)*D’=-10% c)(-15%)*($100)=-$15 (-10%)*($90)=-$9 The net worth=(-$15)-(-$9)=-$6

20. ( 八 )Off-Balance-Sheet Activities  Trading financial instruments and generating income from fees and loan sales, activities that affect bank profits but do not appear on bank balance sheets. 1)A loan sale=a secondary loan participation a contract that sells all or part of the cash stream from a specific loan and thereby removes the loan from the bank ’ s balance sheet.

21. 2)The generation of income from fees a)Making foreign exchange trades on a customer ’ s behalf; b)Servicing a mortgage-backed security by collecting intest and principal payments and then paying them out; c)Guaranteeing debt securities (e.g. banker ’ s acceptances)

22. d)Providing bank up lines of credit (e.g. loan commitment; overdraft privileges; back up issues of commercial paper and other securities and underwriting Euronotes. Etc.) 3)Trading in financial futures, options for debt instrument and interest- rate swaps to manage interest-rate risk; transaction in foreign currency derivatives to reduce foreign-exchange risk.