Beruflich Dokumente
Kultur Dokumente
10.18.11
Repo
Repurchase agreement (repo): sale of a
security with a promise to buy it back at a
to a bank
o Net Worth: The final item on the right side of the balance
banks.
Loans are less liquid than securities: it is hard to turn
goods or services.
o Standby letter of credit guarantees payments on a security.
Asset Management: wealth individuals hire banks to manage
assets, an activity called private banking.
III.
How Banks Make Profits?
Melvin Opens a Bank
The Income Statement
o Income statement: financial statement summarizing
IV.
The Evolving Pursuit of Profits
Changes in Commercial Banking: Causes and Effects
o Competition from Securities Markets
Growth of mutual funds banks lose deposits
Development of junk bonds and commercial paper
fewer C&I loans
o Deregulation
Elimination of interest rate caps banks compete
banking services
o Financial Innovation
Credit scoring and securitization more real estate
loans
Development of derivatives opportunities for
speculation
Sources of Funds
deposits)
Purchased funds: banks expensive sources of
Seeking Income
o Commercial and Industrial (C&I) Loans
o Real Estate Loans
o Consumer Loans
o Off-Balance-Sheet Activities
All major types of lending
V.
Managing Risk
Liquidity Risk
o Liquidity risk: the risk that withdrawals from a bank will
exceed its liquid assets
o The LiquidityProfit Trade-Off: there is a simple way
to reduce liquidity risk: hold more liquid assets. The more
a bank holds, the less likely it will be to run out when
more stable.
Floating Rates: interest rate on a long-term loan that
VI. Insolvency
Insolvency: liabilities exceed assets, producing negative net
worth
o An insolvent bank cannot stay in business
o Insolvency hurts a banks stockholders, whose becomes
worthless, because the bank will have no future earnings.
o The Equity Ratio
Equity ratio (ER): ratio of a banks capital to its
assets;
ER = capital/assets
The Equity Ratio and the Return on Equity