Tài chính doanh nghiệp - Chapter 13: Commercial bank operations

Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson UniversityAndLanny R. Martindale, Texas A&M University 1Copyright© 2006 John Wiley & Sons, Inc.CHAPTER 13 COMMERCIAL BANK OPERATIONS2Copyright© 2005 John Wiley & Sons, IncOverview of the Banking IndustryFewer banks, more branchesMany small banks, a few very large banksHolding companies predominate3Copyright© 2006 John Wiley & Sons, Inc.Fewer banks, more branches Less than 8,000 banks: Number of banks has declined significantly as industry has consolidated. Nearly 75,000 banking offices: Number of branches has increased as geographical restrictions on banking have relaxed.4Copyright© 2006 John Wiley & Sons, Inc.5Copyright© 2006 John Wiley & Sons, Inc.6Copyright© 2006 John Wiley & Sons, Inc.Many small banks, a few very large banks 82% of U.S. banks hold only 8% of total banking industry assets.The largest 83 banks (about 1% of U.S. banks) control 73% of total assets.7Copyright© 2006 John Wiley & Sons, Inc.Holding companies predominate A “bank holding company” is a company owning an interest in at least 1 bank.As of 2003, some 5,152 holding companies controlled 6,298 banks with about 96% of U.S. commercial bank assets.8Copyright© 2006 John Wiley & Sons, Inc.The Balance Sheet for a Commercial Bank Uses Sourcesof = ofFunds Funds(Assets) (Liabilities + Capital) Cash Assets Deposit LiabilitesInvestments Non-deposit liabilitiesLoans & Leases Capital AccountsOther Assets9Copyright© 2006 John Wiley & Sons, Inc.Sources of Funds: Liabilities + Capital Deposit Liabilities: Transaction Deposits; Savings Deposits; Time DepositsNon-deposit Liabilities: Fed Funds Purchased; Repurchase Agreements; OtherCapital Accounts: Capital stock; Undivided Profits; Special Reserve Accounts10Copyright© 2006 John Wiley & Sons, Inc.Deposit Liabilities:Transaction Deposits: Demand Deposits; NOW AccountsDemand Deposits, also known as checking accounts.NOW (Negotiable Order of Withdrawal) Accounts—pay interest; are just for individuals, governments, and nonprofitsSavings Deposits: Savings Accounts; MMDAsSavings Accounts comprise about 15% of all deposits MMDAs (Money Market Deposit Accounts)comprise about 39% of all deposits; available to any customer; interest plus limited transactional featuresTime Deposits: Certificates of Deposit; Negotiable Certificates of DepositCertificates of Depositusually under $100,000; non-transferable; terms of 30 days to 5 yearsNegotiable (or “Jumbo”) CDs$100,000 or more; transferable or negotiable in secondary market;terms rarely exceed 90 days11Copyright© 2006 John Wiley & Sons, Inc.Non-deposit Liabilities: Fed Funds Purchased: Most important non-deposit source of fundsRecall purpose of Fed Funds Market from Chapters 2 and 3Banks buy and sell Fed Funds to adjust liquidity--minimum usually $1 million; usual maturity 24 hours (“overnight”)Repurchase Agreements: Another liquidity adjustment mechanismBank sells securities but agrees to repurchase themEssentially a self-securing loan; usually “overnight” but can last longerT-Bills are a common form of collateralOther Borrowings—Eurodollars (See Chapter 12). Bankers’ Acceptances (see Chapters 7 and 12).Discount Window Loans (see Chapters 2 and 3).Capital Notes or Bondsusually subordinate to depositors’ claimsmay count as “capital” for some regulatory purposes12Copyright© 2006 John Wiley & Sons, Inc.Capital Accounts:Capital Stock: Direct investments of common or preferred equityUndivided Profits: Accumulated earnings not paid out in dividendsSpecial Reserve Accounts: Against losses on loans or securities13Copyright© 2006 John Wiley & Sons, Inc.Uses of Funds: Assets Cash AssetsInvestmentsLoans & LeasesOther Assets14Copyright© 2006 John Wiley & Sons, Inc.Cash AssetsVault cash (physical currency and coin) Counts against reserve requirementsReserves at the Fed (see Chapters 2 and 3)Required reserves per Reg D Excess reserves for settling transactions with Fed, check-clearing, Fed Funds transactionsBalances at other banksCash Items in Process of Collection (see Chapter 2)Fed Funds Sold (see Chapters 2 and 3)Reverse Repurchase Agreements 15Copyright© 2006 John Wiley & Sons, Inc.Investments: Risk discouraged in favor of liquidityU.S. Treasury securities (see Chapters 7 and 8)Agency securities (see Chapters 7, 8, and 9)Municipal securities (see Chapter 8)Probably the riskiest securities banks are allowed to ownInterest is exempt from federal income tax. 16Copyright© 2006 John Wiley & Sons, Inc.Loans and Leases: Major categories of bank loans:Commercial and Industrial Loans Loans to Depository InstitutionsReal Estate LoansAgricultural LoansConsumer Loans17Copyright© 2006 John Wiley & Sons, Inc.Lease FinancingFast-growing line of business for large banksCommon financing technique for— “fleet assets” (aircraft, ships, etc.) “rolling stock” (trucks, rail cars, etc) other capital equipment (cranes, generators, etc.) 18Copyright© 2006 John Wiley & Sons, Inc.Other AssetsTrading account assets—securities held for resale.Fixed assets—land, buildings, equipment, etc.Intangibles—goodwill, pre-paids, etc.19Copyright© 2006 John Wiley & Sons, Inc.Loan Pricing: One of the most important management decisions in banking3 key considerationsThe “Prime Rate”Base rate pricingNon-price adjustmentsMatched-funding loan pricing20Copyright© 2006 John Wiley & Sons, Inc.Key considerations in loan pricing Earn a high enough interest rate to cover the cost of loanable fundsRecover administrative costs of originating and monitoring the loan Provide adequate compensation for risk—Credit (or default) riskLiquidity riskInterest rate risk21Copyright© 2006 John Wiley & Sons, Inc.The “Prime Rate”Historically a benchmark rateThe lowest loan rate posted by commercial banks The rate banks charged their most creditworthy customersOther borrowers were typically charged some spread above primeRecently, the role of the prime rate has changedOver the last 20 years, fewer loans have been priced using “prime” Now, lenders choose among several other benchmark rates:LIBOR—“London Interbank Offered Rate”Treasury ratesFed Funds ratePopular media still use Prime Rate as barometerBanks sometimes lend below primeSome large, financially sophisticated customers also have access to the commercial paper or Eurocurrency market.Most below-prime loans are made by large money-center banks 22Copyright© 2006 John Wiley & Sons, Inc.Base rate pricing: marking up from a minimum offered the least risky borrowers Possible base rates: Prime, LIBOR, Treasury, Fed FundsMarkups include three adjustments: For increased default risk For term-to-maturity For competitive factors—a customer’s access to alternativesrL = BR + DR + TM + CF where: rL = individual customer loan rate BR = the base rate DR = adjustment for default risk above base-rate customers TM = adjustment for term-to-maturity CF = competitive factor23Copyright© 2006 John Wiley & Sons, Inc.Non-price adjustments alter the effective return under a given nominal rate Compensating balances--Bank requires borrower to carry minimum balance in non-interest-bearing deposit account; effective return increases because net loan amount is lowerOther nonprice adjustments— Risk reclassification Additional collateral or specified collateral Shorter maturities24Copyright© 2006 John Wiley & Sons, Inc.Matched-funding loan pricing Fixed-rate loans are funded with deposits or borrowed funds of the same maturity. 25Copyright© 2006 John Wiley & Sons, Inc.26Copyright© 2006 John Wiley & Sons, Inc.Analyzing, managing, and pricing credit riskFive “C”s of Credit: 1. Character (willingness to pay) 2. Capacity (cash flow) 3. Capital (wealth or net worth) 4. Collateral (security for the loan) 5. Conditions (economic conditions)Credit scoring based on the information in the borrower’s credit report: 1. Payment history 2. Amount owed 3. Length of credit history 4. Extent of new debt 5. Type of credit in useDefault risk premiums for identified risk categories 27Copyright© 2006 John Wiley & Sons, Inc.Pricing deposits, the bank’s main source of loanable funds Must offer depositors high enough rates to attract and retain a stable deposit baseMust not pay so much on deposits that profitability is compromisedCompetition puts pressure on the “spread” from both sides bank may have to charge lower rates on loans bank may have to pay higher rates on deposits28Copyright© 2006 John Wiley & Sons, Inc.Fee-based services Correspondent banking: sale of bank services to other financial institutionsTrust services: management of client wealthNon-banking financial services: Investments and insurance29Copyright© 2006 John Wiley & Sons, Inc.Correspondent banking: sale of bank services to other financial institutionsCommon correspondent services—check clearing and collectionsecuritiesforeign exchangeparticipation in large loansdata processingNot a recent development, but unique to the U.S.Many small banks need “large bank” servicesLarge banks provide these services30Copyright© 2006 John Wiley & Sons, Inc.Trust services: management of client wealthAs fiduciary, bank holds and manages assets for beneficiaryTrust function is strictly segregated from other bank functionsCommon trust services—administration of estatesmanagement of pension assetsregistration and transfer of securitiesadministration of bond indentures31Copyright© 2006 John Wiley & Sons, Inc.Nonbanking financial services: Investments and insuranceDeregulation allows these services, provided clients clearly understand they are not covered by deposit insuranceBanks can compete directly with mutual funds and securities firmsInsurance powers of banks are more limited32Copyright© 2006 John Wiley & Sons, Inc.Off-balance-sheet banking Loan commitments: unfunded promises to make loans in the futureLetters of credit:Written promises to pay third party on client’s behalfLoan brokerage: Sale of loans after originationSecuritization: Assignment of cash flows from assets (usually loans) via securities to investorsDerivatives: forwards, futures, options, swaps (see Chapter 11)33Copyright© 2006 John Wiley & Sons, Inc.Loan commitments: unfunded promises to make loans in the future.Lines of credit allow total advances up to a limitTerm loanscertain dollar amount longer than 1 yearRevolving credit lines of credit allowing payment and re-borrowing within limit34Copyright© 2006 John Wiley & Sons, Inc.Letters of credit: Written promises to pay third party on client’s behalfCommercial letters of credit—client buys goods and servicesbank promises to pay seller on behalf of clientseller presents bank with draft Standby letters of credit—bank guarantees client’s financial performance of some contractclient’s counterparty relies on bank’s creditworthiness, not borrower’sbeneficiary presents draft to bank if client does not performCommon uses of SLCs—securities offeringscredit enhancement of other debtscompletion of projects35Copyright© 2006 John Wiley & Sons, Inc.Loan brokerage: Sale of loans after originationRestores liquidity but earns feesAvoids regulatory burden of loans on books36Copyright© 2006 John Wiley & Sons, Inc.SecuritizationAssignment of cash flows from assets (usually loans) via securities to investors—bank transfers assets to trust; sells ownership units in trustSimilar rationale to loan brokerageBanks can underwrite securitizations themselves after deregulation37Copyright© 2006 John Wiley & Sons, Inc.Bank and Financial Holding Companies: The most common way of organizing U.S. banks De facto branchingMultibank holding companies circumvent branching restrictionsRecent deregulation makes branching easierDiversification into nonbank services Fed allows certain nonbank subsidiaries within a holding company BHCs with acceptable Community Reinvestment Act ratings (see Chapter16) can qualify as “financial holding companies”—can have subsidiaries related to almost any financial serviceTax avoidance Interest paid on debt is tax-deductibleMost dividends received from subsidiaries are tax-exemptNonbank subsidiaries can be structured to avoid local taxes 38Copyright© 2006 John Wiley & Sons, Inc.39Copyright© 2006 John Wiley & Sons, Inc.