Chapter02.ppt

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1、BanksChapter21NatureofBankingCommercialbankingTakingdeposits,makingloans:(Interestchargedontheloans‒Interestpaidondeposits)coversadministrativecostsandloanlossesWholesalevs.retailMoneycenterbanks:Heavilydependingonwholesalebankingandfinancialmarketsforth

2、eirfundingInvestmentbankingRaisingdebtandequityforcompanies;adviceonmergersandacquisitions,restructurings,securitiestrading,etc.2StructureofBankingintheUSDualbankingsystemNationally-charteredbanksState-charteredbanksLargeinternationalbanks(smallnumber):M

3、oneycenterbanks(e.g.,Citigroup,J.P.MorganChase,…)Regionalbanks(severalhundred)Smallcommunitybanks(severalthousand)3BankRegulationAmongtheissuesaddressedbyregulationtohaveconfidenceinthebankingsystemthecapitalthatbanksmustkeeptheactivitiesbanksareallowedt

4、oengageindepositinsurancetheextenttowhichmergersandforeignownershipareallowed4ExampleofSimpleBankBalanceSheet:End2009(Table2.2,page22)5AssetsCash5MarketableSecurities10Loans80FixedAssets5Total100Liabilities&networthDeposits90Subord.L-TDebt5EquityCapital5

5、(Capital+R/E)Total100($million)IncomeStatement:2009(Table2.3,page23)NetInterestIncome3.00→int.rateriskProvisionforLoanLosses(0.80)→creditriskNon-InterestIncome0.90Non-InterestExpense(2.50)→operationalriskPre-TaxOperatingIncome0.60KeeptheNIIconstantregard

6、lessofinterestratechanges6($million)Year2010Whathappensinyear2010ifitisthesameasyear2009exceptthatprovisionforloanlossesis4.0insteadof0.8?NetInterestIncome3.00ProvisionforLoanLosses(4.00)Non-InterestIncome0.90Non-InterestExpense(2.50)Pre-TaxOperatingInco

7、me(2.60)→Assumethatataxrate=30%⇒after-taxloss=-1.82→Thelosscanbeabsorbedbythecapital7WhatifBalanceSheetHadBeenMoreAggressive?8AssetsCash5MarketableSecurities10Loans80FixedAssets5Total100Liabilities&networthDeposits94Subord.L-TDebt5EquityCapital1Total100→

8、Now,thelosscan’tbeabsorbedbythecapital⇒ImportanceofthebankcapitalandthecapitalregulationofbanksCapitalRegulationforCapitalAdequacyRegulatorssetminimumlevelsforthecapitalabankisrequiredtokeepEquityisanexampleofTier1capitalS