session 5 Flashcards
financial institutions management
main liabilities
checkable deposits
nontransaction deposits
borrowings
bank capital
main assets
reserves cash items in process of collection deposits at other banks securities loans other assets
3 goals of asset management
seek the highest possible returns on loans and securities
given a certain risk target
and maintaining adequate liquidity
4 tools asset management
find borrowers who will pay high interest rates and have low possibility of defaulting
purchase securities with hight returns, given target level of risk
lower risk by diversifying
balance need for liquidity against increased returns from less liquid assets
capital adequacy management
trade-off between risk and return: more capital reduces the default probability of the bank but also reduces the return to equity
managing credit risk
screening and monitoring
- specialization in ledning
- monitoring and enforcement of restrictive covenants
long-term customer relationships
loan commitments
credit rationing
what if bank has more rate-sensitive liabilities than assets?
a rise in interest rates will reduce bank profits and a decline in interest rates will raise bank profits
maturity bucked approach
measures the gap for several maturity subintervals
standardized gap analysis
accounts for different degrees of rate sensitivity
macaulay duration
consists of fixed cash flows, for example a bond is weighted average of the times until those fixed caash flows are received
modified duration
measures the price sensitiy to yield, i.e. the rate of change of price with respect to yield or the percentage change in price for a parallel shift in yields
off-balance sheet acitivities
loan sales
generation of fee income
example: creating SIV which can expose banks to risk
trading acitivities and risk management techniques
internal controls to reduce the principal-agent problem
