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

Copyright © 2010 Pearson Education. All rights reserved The Bank Balance Sheet Liabilities –Checkable deposits （支票存款） –Nontransaction deposits ( 非交易存款 ) –Borrowings ( 借入款 ) –Bank capital ( 銀行資本 )

Copyright © 2010 Pearson Education. All rights reserved The Bank Balance Sheet Assets –Reserves ( 準備金 ) –Cash items in process of collection ( 託收中現金 ) –Deposits at other banks( 在他行存款 ) –Securities ( 證券投資 ) –Loans ( 放款 ) –Other assets

Copyright © 2010 Pearson Education. All rights reserved Table 1 Balance Sheet( 資產負債表 ) of All Commercial Banks (items as a percentage of the total, December 2008)

Copyright © 2010 Pearson Education. All rights reserved Table 1 Balance Sheet of All Commercial Banks (items as a percentage of the total, June 2011

Copyright © 2010 Pearson Education. All rights reserved 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 AssetsLiabilitiesAssetsLiabilities Vault Cash +$100Checkable deposits +$100Reserves+$100Checkable deposits +$100

Copyright © 2010 Pearson Education. All rights reserved Basic Banking: Check Deposit First National BankSecond National Bank AssetsLiabilitiesAssetsLiabilities Reserves+$100Checkable deposits +$100Reserves-$100Checkable deposits -$100 First National Bank AssetsLiabilities Cash items in process of collection +$100Checkable deposits +$100

Copyright © 2010 Pearson Education. All rights reserved Basic Banking: Making a Profit Asset transformation( 資產轉換 ): selling liabilities with one set of characteristics and using the proceeds to buy assets with a different set of characteristics( 賣出各種性質的負債 ( 存款）再將 本 金買進不同性質的資產 ( 放款 )) The bank borrows short and lends long （借短貸長） First National Bank AssetsLiabilitiesAssetsLiabilities Required reserves +$100Checkable deposits +$100Required reserves +$100Checkable deposits +$100 Excess reserves +$90Loans+$90

Copyright © 2010 Pearson Education. All rights reserved Bank Management Liquidity Management （流動性管理） Asset Management （資產管理） Liability Management （負債管理） Capital Adequacy Management （資本適足管 理） Credit Risk （信用風險） Interest-rate Risk （利率風險）

Copyright © 2010 Pearson Education. All rights reserved Liquidity Management: Ample Excess Reserves （足夠的超額準備） 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 （存款流失不需要改變資產負債表其 他部分） AssetsLiabilitiesAssetsLiabilities Reserves$20MDeposits$100MReserves$10MDeposits$90M Loans$80MBank Capital $10MLoans$80MBank Capital $10M Securities$10MSecurities$10M

Copyright © 2010 Pearson Education. All rights reserved Liquidity Management: Shortfall in Reserves （準備不足） Reserves are a legal requirement and the shortfall must be eliminated （準備金 ( 的作用 ) 是法定準備與 ( 使 用超額準備 ) 排除資金不足） Excess reserves are insurance against the costs associated with deposit outflows( 超額準備的作用是為 保障 ( 免於 ) 因存款流失所導致的成本 ) AssetsLiabilitiesAssetsLiabilities Reserves$10MDeposits$100MReserves$0Deposits$90M Loans$90MBank Capital $10MLoans$90MBank Capital $10M Securities$10MSecurities$10M

Copyright © 2010 Pearson Education. All rights reserved Liquidity Management: Borrowing Cost incurred is the interest rate paid on the borrowed funds (( 借入款 ) 成本來自於借入資金的利息支 付 ) AssetsLiabilities Reserves$9MDeposits$90M Loans$90MBorrowing$9M Securities$10MBank Capital$10M

Copyright © 2010 Pearson Education. All rights reserved Liquidity Management: Securities Sale The cost of selling securities is the brokerage and other transaction costs( 銷售證券的成本是經紀商手續費 與其他交易成本 AssetsLiabilities Reserves$9MDeposits$90M Loans$90MBank Capital$10M Securities$1M

Copyright © 2010 Pearson Education. All rights reserved Liquidity Management: Federal Reserve Borrowing from the Fed also incurs interest payments based on the discount rate( 向聯邦準備銀行 ( 央行）借入資金也會引發來自於貼現窗口利率之利息支付 ) AssetsLiabilities Reserves$9MDeposits$90M Loans$90MBorrow from Fed$9M Securities$10MBank Capital$10M

Copyright © 2010 Pearson Education. All rights reserved Liquidity Management: Reduce Loans Reduction of loans is the most costly way of acquiring reserves （以放款減少來籌措準備金所耗費的成本最高） Calling in loans antagonizes customers ( 收回放款會得罪客戶） Other banks may only agree to purchase loans at a substantial discount （其他銀行可能會同意在實質折扣下購買放款） AssetsLiabilities Reserves$9MDeposits$90M Loans$81MBank Capital$10M Securities$10M

Copyright © 2010 Pearson Education. All rights reserved Asset Management: Three Goals Seek the highest possible returns on loans and securities （尋找放款與證券之最高可能報酬） Reduce risk （降低風險） Have adequate liquidity （要有適度的流動性）

Copyright © 2010 Pearson Education. All rights reserved Asset Management: Four Tools Find borrowers who will pay high interest rates and have low possibility of defaulting （最高利率與最低違約可能） Purchase securities with high returns and low risk （最高報酬與最低風險） Lower risk by diversifying （越分散風險越低） Balance need for liquidity against increased returns from less liquid assets （越高報酬越 低流動性的資產越需要流動性以平衡之）

Copyright © 2010 Pearson Education. All rights reserved Liability Management( 負債管理 ) Recent phenomenon due to rise of money center banks （貨幣中心 ( 大型 ) 銀行） Expansion of overnight loan markets( 隔夜拆 款市場 ) and new financial instruments （新金 融工具） (such as negotiable CDs （可轉讓定期 存單） ) Checkable deposits have decreased in importance as source of bank funds

Copyright © 2010 Pearson Education. All rights reserved Capital Adequacy Management Bank capital helps prevent bank failure （銀 行資本有助於防止銀行失敗） The amount of capital affects return for the owners (equity holders) of the bank( 銀行業 主之報酬 ) Regulatory requirement ( 法定要求 )

Copyright © 2010 Pearson Education. All rights reserved Capital Adequacy Management: Preventing Bank Failure High Bank CapitalLow Bank Capital AssetsLiabilitiesAssetsLiabilities Reserves$10MDeposits$90MReserves$10MDeposits$96M Loans$90MBank Capital$10MLoans$90MBank Capital$4M High Bank CapitalLow Bank Capital AssetsLiabilitiesAssetsLiabilities Reserves$10MDeposits$90MReserves$10MDeposits$96M Loans$85MBank Capital$5MLoans$85MBank Capital-$1M

Copyright © 2010 Pearson Education. All rights reserved Capital Adequacy Management: Returns to Equity Holders

Copyright © 2010 Pearson Education. All rights reserved Capital Adequacy Management: Safety Benefits the owners of a bank by making their investment safe( 維護投資的安全是銀行股 東權益） Costly to owners of a bank because the higher the bank capital, the lower the return on equity （越多的資本導致股東的成本是越低的 資本報酬） Choice depends on the state of the economy and levels of confidence （根據經濟現況與信心 水準做出 ( 最適資本 ) 選擇）

Copyright © 2010 Pearson Education. All rights reserved Application: How a Capital Crunch Caused a Credit Crunch in 2008 Shortfalls of bank capital led to slower credit growth( 銀行資本不足會導致信用成長遲緩 ) –Huge losses for banks from their holdings of securities backed by residential mortgages( 不動 產抵押貸款所擔保發行的證券 ). –Losses reduced bank capital Banks could not raise much capital on a weak economy( 在經濟低迷時銀行很難籌措資本 ), and had to tighten their lending standards and reduce lending.

Copyright © 2010 Pearson Education. All rights reserved Credit Risk: Overcoming Adverse Selection and Moral Hazard Screening （篩選） and Monitoring( 監督 ) –Screening –Specialization in lending （貸款專門化） –Monitoring and enforcement of restrictive covenants( 強制性限制條款 )

Copyright © 2010 Pearson Education. All rights reserved Credit Risk: Overcoming Adverse Selection and Moral Hazard Long-term customer relationships （長 期的顧客關係） Loan commitments （放款承諾） Collateral and compensating balances （擔保品與補償存款 ） Credit rationing （信用分配）

Copyright © 2010 Pearson Education. All rights reserved Interest-Rate Risk If a bank has more rate-sensitive liabilities than assets （利率敏 感負債超過利率敏感資產）, a rise in interest rates will reduce bank profits and a decline in interest rates will raise bank profits First National Bank AssetsLiabilities Rate-sensitive assets$20MRate-sensitive liabilities$50M Variable-rate and short-term loansVariable-rate CDs Short-term securitiesMoney market deposit accounts Fixed-rate assets$80MFixed-rate liabilities$50M ReservesCheckable deposits Long-term loansSavings deposits Long-term securitiesLong-term CDs Equity capital

Copyright © 2010 Pearson Education. All rights reserved 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 –Measures the gap for several maturity subintervals. Standardized gap analysis –Accounts for different degrees of rate sensitivity.

Copyright © 2010 Pearson Education. All rights reserved Interest Rate Risk: Duration Analysis( 存續期間分析 ) %  in market value of security  - percentage point  in interest rate x duration in years. 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.

Copyright © 2010 Pearson Education. All rights reserved Off-Balance-Sheet Activities Loan sales (secondary loan participation)( 聯 貸 ) Generation of fee income( 手續費收入時代 ). Examples: –Servicing mortgage-backed securities. –Creating SIVs (structured investment vehicles( 結 構型投資工具 )) which can potentially expose banks to risk, as it happened in the subprime financial crisis of

Copyright © 2010 Pearson Education. All rights reserved Off-Balance-Sheet Activities Trading activities and risk management techniques –Financial futures ( 金融期貨 ), options for debt instruments ( 債務工具選擇權 ), interest rate swaps ( 利率交換 ), transactions in the foreign exchange ( 外匯買賣 ) market and speculation. –Speculation( 投機 ) –Principal-agent problem arises ( 主人 - 代理人問題 )

Copyright © 2010 Pearson Education. All rights reserved Off-Balance-Sheet Activities Internal controls to reduce the principal- agent problem –Separation of trading activities and bookkeeping –Limits on exposure （限制曝險額） –Value-at-risk( 風險值 ) –Stress testing( 壓力測試 )