Financial Markets and Institutions: Chapter 19

Chapter 19 Bank Management: describe the underlying goal, strategy, and governance of banks, explain how banks manage liquidity, explain how banks manage interest rate risk, explain how banks manage credit risk, explain integrated bank management.
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Financial Markets and Institutions: Chapter 19 FinancialMarketsandInstitutions Abridged10thEdition by Jeff Madura © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.1 19 Bank Management ChapterObjectives ■ describetheunderlyinggoal,strategy,and governanceofbanks ■ explainhowbanksmanageliquidity ■ explainhowbanksmanageinterestraterisk ■ explainhowbanksmanagecreditrisk ■ explainintegratedbankmanagement © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.2 Bank Goals, Strategy, and Governance AligningManagerialCompensationwithBankGoals Banksmayimplementcompensationprogramsthatprovidebonusesto managersthatsatisfybankgoals. BankStrategy n Abank’sdecisionsonsourcesoffundswillheavilyinfluenceitsinterest expensesontheincomestatement. n Abank’sassetstructurewillstronglyinfluenceitsinterestrevenueonthe incomestatement. n HowFinancialMarketsFacilitatetheBank’sStrategyToimplement theirstrategy,commercialbanksrelyheavilyonfinancialmarkets.3 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Exhibit 19.1 Participation of Commercial Banks in Financial Markets4 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank Goals, Strategy, and Governance BankGovernancebytheBoardofDirectors Someofthemoreimportantfunctionsofbankdirectorsareto: n Determineacompensationsystemforthebank’sexecutives. n Ensureproperdisclosureofthebank’sfinancialconditionandperformanceto investors. n Overseegrowthstrategiessuchasacquisitions. n Overseepoliciesforchangingthecapitalstructure,includingdecisionstoraise capitalortoengageinstockrepurchases. n Assessthebank’sperformanceandensurethatcorrectiveactionistakenifthe performanceisweakbecauseofpoormanagement.5 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank Goals, Strategy, and Governance BankGovernancebytheBoardofDirectors n InsideversusOutsideDirectors n Boardmemberswhoarealsomanagersofthebank(i.e.insidedirectors)may sometimesfaceaconflictofinterestsbecausetheirdecisionsasboardmembers mayaffecttheirjobsasmanagers. n Outsidedirectors(directorswhoarenotmanagers)aregenerallyexpectedtobe moreeffectiveatoverseeingabank:theydonotfaceaconflictofinterestsin servingshareholders.6 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bank Goals, Strategy, and Governance OtherFormsofBankGovernance n Publiclytradedbanksaresubjecttopotentialshareholderactivism. n Themarketforcorporatecontrolservesasaformofgovernancebecause bankmanagersrecognizethattheycouldlosetheirjobsiftheirbankis acquired.7 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Managing Liquidity n Bankscanexperienceilliquiditywhencashoutflows(duetodeposit withdrawals,loans,etc.)exceedcashinflows(newdeposits,loan repayments,etc.). n Theycanresolvecashdeficienciesbycreatingadditionalliabilitiesorby sellingassets. n Someassetsaremoremarketablethanothers,soabank’sassetcomposition canaffectitsdegreeofliquidity.8 © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Managing Liquidity UseofSecuritizationtoBoostLiquidity n Theabilitytosecuritizeassetssuchasautomobileandmortgageloanscan enhanceabank’sliquidity. n Theprocessofsecuritizationinvolvesthesaleofassetsbythebanktoa trustee,whoissuessecuritiesthata ...