Week 6: Bank Management

Question 1

What is a Balance Sheet?

Answer 1

Financial statement of the wealth of a firm on a given date. The BS reports the assets and liabilities of the bank the stock values or sources and uses of bank funds.

Question 2

What is an Income Statement?

Answer 2

Financial statement that reports a firms profitability over some time period by subtracting all costs from income.

Question 3

Where do bank funds come from ?

Answer 3

• Retail deposits
• Corporate deposits
• Other Banks, typically wholesale deposits >£1 million
• Debtholders
• Shareholders
• Retailed Earnings

Question 4

What do revenues generated by assets include ?

Answer 4

• Interest earned on loans and investments
• Fees and commissions

Question 5

What do costs generated by liabilities include?

Answer 5

• Interest paid on deposits and debts
• Provision for loan losses and taxes
• Dividends to shareholders
• Staffing and operating costs

Question 6

Formula for return on assets? And what does it show?

Answer 6

Net income / Total assets

Measures profitability generated relative to banks total assets.

Question 7

Formula for return on Equity? And what does it show

Answer 7

Net income/Total equity capital

Measures % return on each £ of equity

Question 8

Formula for equity multiplier? And what does it measure?

Answer 8

Total assets / Total equity capital

Proxy for leverage

Question 9

Formula for Net Interest Margin? And what does it measure ?

Answer 9

Net Interest income/ Earning assets

Measures net interest return on income producing assets.

Question 10

Formula for cost to income ratio? And what does it measure?

Answer 10

Non interest expenses/ (net interest income + non - interest income)

Test of efficiency

Question 11

What’s the liquidity ratio formula? What what does it measure ?

Answer 11

Core deposits/Total Assets

Measures reliance on non market based funding

Question 12

What’s the formula for asset quality? What does it measure ?

Answer 12

NPLs/Total Assets

Proxy for exposure to credit losses

Question 13

What is the aim of financial management?

Answer 13

To maximise profits and shareholder value ( increasing ROE, ROC and EVA= surplus created by a bank in a given period)

Question 14

What is Asset and Liability Management all about?

Answer 14

• The coordinated and simultaneous decisions on financing and investing.

Asset management:
- Maximise return on loans and securities
- Minimise risks
- Adequate liquidity

Liability Management:
- Maximise return in the interbank market
- Minimise cost of deposits

Also about:

• Planning and monitoring actives
  designed to move the bank in the direction of its long-run strategic objectives.
• Maintaining the flexibility to adapt and respond to short run shocks/changes.

Question 15

What’s liquidity?

Answer 15

Liquidity is a cash flow concept:

• Banks should be able to meet all short term liquidity requirements
• Banks should be able to cover predictable and unpredictable withdrawals of deposits or all operating expenditures.

Question 16

What’s solvency ?

Answer 16

Solvency is a stock concept:

• Banks should be able to repay all their depositors and debtors at any point in time.
• Banks should be able to cash in all its assets and repay its liability holders at any point in time.

Question 17

Why do banks need reserves?

Answer 17

• To meet its obligations to depositors
• To satisfy customer loan demand

Question 18

What should banks consider when keeping liquidity?

Answer 18

• Calculate the opportunity cost of the amount kept as they are usually low yielding assets.
• Consider costs associated with deposit outflows for which liquidity reserves can be an insurance.

Question 19

What is the OBS (off balance sheet) Business?

Answer 19

A wide range of bank activities, such as promises and commitments to undertake certain types of businesses in the future.

They generate fees as long as they are consistent and they aren’t reported on the balance sheet.

When the contingent event occurs its activities are then written on the balance sheet and will generate income.

The advantage of OBS activities is they allow banks to increase profitability without increase in asset growth and thus leverage.