1 banking industry number of banks ~7,000 decreasing (result of consolidation, deregulation and...
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Banking Industry
• Number of banks ~7,000 decreasing (result of consolidation, deregulation and failures)
• Number of branches ~90,000 (result of relaxed geographical restrictions)
• About 4,000 are small banks (< $100 million in assets)
• The large banks in our economy have mostly gotten there by means of mergers and acquisitions.
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Banks vs. Branches (1920-2010)
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Balance Sheet for a Commercial Bank
Uses of Funds Sources of Funds (Assets) (Liabilities + Capital)
Cash Assets (8%) Deposit Liabilities (69%)
FF sold/Rev repos (4%) Borrowed Funds (16%)
Investments (19%) Other Liabilities (3%)
Loans & Leases (55%) Subordinated Notes & Deben (1%)
Premises (1%) Capital Accounts (11%)
Other (13%)
(See pp. 411 & 417)
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First Three Items on LeftCash Assets (8%):• Vault cash (physical currency and coin)• Reserves at the Fed
Fed Funds Sold/Rev repos (4%):
• Fed Funds sold
• Reverse Repurchase Agreements
Investments (19%): cushion in case need more liquidity
• U.S. Treasury securities
• Agency securities
• Municipal bonds
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Fourth Item on Left
Loans commercial and industrial real estate agricultural consumer
Leases fast-growing line of business for the big banks fleet assets (aircraft, ships,..), rolling stock
(railroad cars, trucks,..), equipment (cranes, generators,..)
Loans and Leases (55%)
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First Two Items on Right
Deposit Liabilities (69%):• Transaction Deposits• Savings Deposits • Time Deposits (retail and negotiable CDs)
Borrowed Funds (16%):
• Fed Funds purchased
• Repurchase Agreements
• Eurodollars (dollars borrowed abroad)
• Discount Window loans
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Last Two Items on Right
Subordinated Notes and Debentures (1%)• Subordinated to claims of depositors
Capital Accounts (11%)• Paid-in capital (from sale of stock)• Retained earnings
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Capital Adequacy
•Capital adequacy ratio:
•Numerator is subordinated notes & bonds + capital stock + retained earnings
•Denominator is a weighted average of assets •Riskfree, weight of 0.0 •Very risky assets like CDOs, weight of 1.0•Everything else, weight in between
Core Equity Capitala percentage like 6-10%
Risk-weighted Assets
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Five ‘C’s of Credit
• Five “C”s of Credit: Character (willingness to pay) Capacity (cash flow) Capital (wealth or net worth) Collateral (security for the loan) Conditions (economic conditions)
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Base Rate Pricing
• Markups to base rate include adjustments for default risk, term-to-maturity, and competitive factors.
rL = BR + DR + TM + CF
• In this way, business loans can vary from customer to customer.
• BR could be prime rate, Libor, or a T-bill rate.
• Loan pricing is one of most important managerial decisions is banking.
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Fixed Income Securities (a)
Fixed income securities – pay a return according to a fixed formula. Although payment amounts can vary, formula is known in advance.
Issued by governments and corporations that are designed to pay contractually a specified income over a specified time horizon.
Fixed income securities generally carry lower returns because of their guaranteed income characteristics.
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Different Balance Sheet Treatments
Assets Liabilities
Capital on issuer’s books in here
Generally used by people for income purposes rather than for capital appreciation (as in stock market).
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Things for FinalLast third of course.
5 Cs3 base rate adjustmentsWhat TIPS stands for6 types of MM instrumentsNames of 3 ratings agenciesLatest National Debt and Social Security Trust fund figures 2.7 trillion 13 + 5 trillion = 18 trillionOther numbers: 3.7 trillion 550 billion (approx) Know meaning of the word “notional” – principal or face value amountKnow about Commodity Futures Modernization Act
Questions end Dec 9 midnight.