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Management
Chapter Objectives
Describe the underlying goal of bank
management
Explain how banks manage liquidity
Explain how banks manage interest rate
risk
Explain how banks manage credit risk
Explain how banks manage capital
Financial Markets and
Value of
Bank
Interest Rate
Risk
Capital or
Insolvency
Risk
Market
Risk
Value
Related to
Cash Flows
and
Risk of
Cash Flows
Credit Risk
Managing Liquidity
Banks experience illiquidity when cash
outflows exceed cash inflows
Banks can resolve cash deficiencies by either
creating additional liabilities or selling assets
Borrowing: fed funds, discount window
Some assets are more liquid than others
Balancing liquidity vs. maintaining a
reasonable return
Managing Liquidity
Use of securitization to boost liquidity
Selling off loans to trustee
Mortgage and automobile loans
Trustee issues securities collateralized by the
assets
Loan payments pass through to holders of
securities
Securitization turns future cash flows into
immediate cash
Financial Markets and
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Operating Risk
Operating risk results from a banks
general business operations
Processing and sorting information
Executing transactions
Maintaining relationships with clients
Dealing with regulatory issues
Legal issues
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1. Market Risk
2. Credit Risk
3. Liquidity Risk
4. Settlement Risk
5. Operational Risk
6. Legal Risk
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Management Based on
Forecasts
Some banks position themselves to
benefit form expected changes in the
economy
If managers expect a strong economy they
may shift toward riskier loans and securities
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