Ch. 10 Banking and Management of Financial Institutions
Ch. 10 Banking and Management of Financial Institutions ECON 3303
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This 5 page Class Notes was uploaded by Ashlie Meckley on Sunday November 1, 2015. The Class Notes belongs to ECON 3303 at University of Texas at Arlington taught by Chi-Young Choi in Summer 2015. Since its upload, it has received 50 views.
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Date Created: 11/01/15
Ch 10 Banking and Management of Financial Institutions Lecture Date October 20th 29th 0 wwepositoryinstitutions 0 Part of financial intermediaries 0 Take money from depositors and make loans to barrowers 0 Types I Commercial common banks I Saving amp loans I Mutal Savings banks I Credit unions 0 Bold 3 are thrift institutions 0 Why Banking Matters 0 Important source of firms financing 0 Supply more than 10 trillion in credit annually 0 Major employer of the economy 0 Provide services of checking and savings accounts 0 Bank Risks 0 Liquidity 0 Credit 0 Interest Rate I Sensitive liability or assets 1 Change with interest rate I Fixed rate I Gap Analysis measure of sensitivity of bank profits to changes in inters rate I L amount of rate sensitive liabilities amount of rate sensitive assets I Bank profits Gap X interest rate 0 Trading 0 Other risk 0 4 Primary Concerns o Assets management 39 G0as 1 Seek highest returns possible on loans and securities 2 Reduce risks 3 Adequate provisions for liquidity by holding liquid assets I Achieved by 1 Barrowers who pay high returns M unlikely to default 2 Purchasing securities with high returns and low risk 3 Lowering risk by diversifying 4 Managing the liquidity of assets to satisfy reserve requirements 0 Liabilities management I Optimal mix between deposits and barrowing I Before 1960 no need for liquidity management I Now 1 Money center to increase flexibility in liquidity NY Chicago San Fran 0 Develop overnight loan markets and ne financial instruments 0 Aggressive in acquiring funds 2 Banks increase proportion of their assets held in loans to earn higher income 0 Liquidity management 0 Capital management I Purpose 1 Helps prevent bank failure 2 Affects returns for the owners 3 Required by regulations I Banks maintain banks capital to lessen chance of insolvency 1 At 0 is okay below 0 is insolvent I Increase Capital 1 Issue new stocks 2 Reduce banks dividends 3 Trouble Asset Relief Program 0 Federal gov purchases assets and equity from troubled banks Insolvency Problem 0 FDIC takes over bank o Sells assets or gives to another stable bank License 0 National Banks 13 I Get license from OCC Office of Currency and Control 0 State Banks 23 I Get license from State government Indirect Financing 0 Depositoryinstitutions 0 Commercial savings institutions 0 Investment intermediaries SiSystemically Important Financial Intermediaries o Metlife o AIG o Prudential financial 0 GE capital Thrift Institutions 0 Savings amp loans association SampL 0 Mutual Savings Banks 0 Credit Union 0 Commercial Banks o Firm that is licensed by the Office of Comptroller of the Currency in the US Treasury I Can accept deposits and make loans Less than 5500 Commercial Banks still a lot compared to other countries 14000 Commercial Banks in 1980 s RLle I dominant role in monetary system I channeling funds from lenders households AKA us to borrowers Firms and Government 0 M maximize profit I Positive spread Banks charge higher interest rates which they borrowed from depositors I Source of Funds deposits amp borrowings I Use of Funds 1 Loans 2 Government Securities 3 Keep some cash in vault for JIC reserves 0 Cash in vault o FED 0 Balance Sheet I Total Assets Total Liabilities Capital net worth I Net Worth 0 Value of the owners equity on the bank residual claim 0 Cushion against a drop in the value of its assets I Assets lt Liabilities 0 Net Worth lt 0 0 Banks become insolvent I Liabilities source of funds 0 Deposits 1 Transaction Deposits CD I Demand Deposits I Other checkable deposits NOW MMDA s 2 Nontransaction Deposit primary source 55 I Saving deposits I Time deposits 0 Ex CD Certificate of Deposits o Borrowings 1 Discount Loans the FED 2 Federal Funds Market other banks 3 From Parent Companies I Assets use of funds 0 Reserves 0 Vault cash 0 Deposits from FED 0 Required vs Excess Reserve I Reguired held by banks required by FED regulation I Reserve Ratio required reserve Depo t o Mreserves that exceed those need to meet the required ratio 0 Total reserve required reserve 0 Securities 0 No stocks debt instruments only 0 US gov t securities as second reserve m 0 Primary source of banks profits 0 Less liquid and higher risks 0 Other physical building computer ect assets Comerica Incorporated largest bank in DFW State Bank Assets Liabilities Loans Deposits Securities Barrowing Reserve Capital Equity ASSETS MUST LIABLITIES 0 Liquidity Problem 1 Federal Funds Market 2 Sell Securities 3 Borrow from FED 4 Call in Loans 0 ROAreturn on asset 0 Net profit after tax Assets 0 Smaller for larger banks better risk management 0 heturn on equity 0 Net profit after tax Equhy 0 Higher for larger banks economy of scale 0 Mequity multiplier m Equhy 0 Higher in large banks 0 Stock holders want high 0 ROE ROA X EM 0 Capital Adequacy Management Safety 0 Good for owners of bank I Money is safe 0 Costly to owners I Higher bank capital lower return on equity 0 Trade off I Depends on economy and levels of confidence 0 Off balance sheet activities 0 Affect bank profit but not on 35 0 Financial Derivatives I Financial instruments value depends on the value of some other financial instruments I Original purpose to transfer risks 0 Trading