By Jean Dermine, Youssef F. Bissada
You will probably be drawn to the ebook provided that you're simply starting to know about a financial institution research and administration. Be careful!!!
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Extra resources for Asset & Liability Management: A Guide to Value Creation and Risk Control
Sample text
17 > 4 stage PROFIT CE NTR E MANAG E M E NT 3 2 4 1 19 A S S E T A N D L I A B I LT Y M A N A G E M E N T We have discussed the concept of value creation and the need for e-Bank to achieve a satisfactory return on equity. Value creation and ROE are useful tools to evaluate the overall performance of e-Bank. However, as the newly appointed CFO, you need to know which business units of e-Bank create value and which ones require intensive care. e-Bank is a complex organization that can be visualized as the sum of several business units.
The case of deposits We shall first compute the profitability on the term deposits of $300 million collected from the public. Straight accounting leads to: P R O F I T O N T E R M D E P O S I TS = R E V E N U E – E X P E N S E S ? We do not know in which asset the money collected is invested. In profitable consumer loans? In less profitable corporate loans? Can be calculated with interest paid on deposits, and employee/computer costs allocated to the collection of deposits To be able to compute the profitability of term deposits, we need to specify the relevant revenue that should be attributed to the term deposits.
S Tier 1 capital: . . . / . . . = . . . % Tier 2 capital: . . . / . . . = . . . % BIS capital ratio = Tier 1 + Tier 2 = . . . % + . . . % = . . . % 41 > 7 stage LOAN P R ICI NG (1): TH E ‘EQUITY’ SPREAD 3 2 1 4 5 6 7 43 ASSET AND LIABILITY MANAGEMENT In Stage 6 we discussed how the BIS capital adequacy regulation is forcing banks to fund loans with equity. This raises immediately a question about the interest margin on loans needed to satisfy shareholders. Your general manager has asked you to evaluate the impact of the 8% BIS ratio on loan pricing.