Depository Institutions Banks and Bank Management - Money and Banking - Lecture Slides, Slides of Economics

Download Depository Institutions Banks and Bank Management - Money and Banking - Lecture Slides and more Slides Economics in PDF only on Docsity! Chapter 12. Banks and Bank Mgmt. • Balance sheet • Bank Risks Docsity.com Bank Balance Sheet • Assets: Uses of funds – 2007: $10.5 trillion • Liabilities: Sources of funds – $9.4 trillion Docsity.com Liabilities • deposits ($6.4 trillion, 68%) – transaction deposits – Nontransaction deposits ($5.9 trillion) • Savings • CDs (large CDs, >$100,000 can be resold) Docsity.com • borrowed funds – discount loans (Federal Reserve) – federal funds (other banks) – repos – eurodollar loans – commercial paper Docsity.com Bank capital • or net worth = assets – liabilities = $1.1 trillion 10 to 1 leverage! • banks have capital requirement – cushion against bad loan losses Docsity.com Liquidity Risks • Risk of running short of cash – need cash to deal with deposit outflows – but holding cash drags down profits • Holding too little cash, bank incurs costs of raising additional funds Docsity.com Credit risk • Risk of unpaid loans • How to minimize? – Credit risk analysis • Credit history, scores – Monitoring, collateral – Diversification • Tradeoff with the gains of loan specialization Docsity.com Interest-rate risk • changes in interest rates affect BOTH assets and liabilities • assets – changes VALUE – changes the amount of interest income – depends on whether LT or ST Docsity.com Other Risks • Trading risk – Securities fluctuate in values – Traders do not personally corver losses – Solution: monitoring, limits Docsity.com • Foreign exchange risk – Currency fluctuations affect value of foreign assets – Use derivatives to manage • Sovereign risk – Governments interfere with currency transfers Docsity.com • Operational risk – Damage to physical/computer infrastructure – Backup systems, geographically dispersed Docsity.com