Professional Documents
Culture Documents
CH 5 - Commercial Banks
CH 5 - Commercial Banks
Veronique Lafon-Vinais
Stock Banking
DCF Sell Side Buy Side
Valuation Regulation
Traditional
Basics of Commercial Monetary
Institutional
Interest Rates Banking Policy
Investors
Investment Alternative
Banking Investors
2
© Prof Veronique Lafon-Vinais – All Rights Reserved
Course map
Overview
Financial Institutions
5. Current Issues
$ $
Saver/ Bank Borrower
Lender
Deposit Loan
Account Contract
Asset transformation
Financial Intermediaries
Depository Institutions
Commercial Banks
Retail
Banking Corporate &
Investment
Bank
Consumer Retail/Consumer Wholesale
Finance Banking Banking
Trading,
Treasury &
Credit
Private Banking/ Markets
Cards
Asset Management
What are Commercial Banks?
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Commercial Banking
loans wholesale)
Video
https://www.youtube.com/watch?v=cP7IjoeMcZw
Article
https://www.bloomberg.com/news/articles/2024-01-31/hong-kong-
underwater-mortgage-levels-surge-to-two-decade-high?embedded-
checkout=true
Veronique Lafon-Vinais
© Prof Veronique Lafon-Vinais – All Rights Reserved 7
Forces shaping International Banking
Changes in the
New entrants
structure of banking
Globalization Reduction
in profit Disintermediation
margins
Technological
changes
Ongoing product
Increased & process
Innovation innovation
competition
Regulation/ Transformation
Deregulation of regulatory
framework
What are Commercial Banks?
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Commercial Banks
Borrower
Liquidity
Lender
Providers
Payment Credit
Banks
Channel Enhancement
Conduit for
Custody Agents
Monetary Policy
Trustees
The bank
The bank deposits the
makes a loan money from
to the the loan into a
business deposit
account for
the business
Video
https://youtu.be/tS52UzgzicA?si=Epb1y65xEQW5JIXq
Article
https://vnextglobal.com/category/blog/digital-banking-in-hong-kong
Video
https://www.youtube.com/watch?v=_PFezEM_Mgg
Article
https://www.scmp.com/economy/china-economy/article/3237317/whats-
state-chinas-digital-yuan-2023
Competitors
Money creation
Financial Institutions
5. Current Issues
Bank Management
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Class discussion
Bank Management
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Liquidity Management
Scenario 1
Bank Management
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Liquidity Management
Scenario 2
Bank Management
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Liquidity Management
4 Possible actions for Bank B
2. Sell securities
Assets Liabilities
Reserves $9 mil Deposits $90 mil
Loans $90 mil Capital $10 mil
Securities $1 mil
Source: Mishkin/Eakins
Bank Management
© Prof Veronique Lafon-Vinais – All Rights Reserved 25
Liquidity Management
4 Possible actions for Bank B (Cont)
Source: Mishkin/Eakins
Bank Management
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ALM: Asset and Liability Management
Asset Management
– Get borrowers with low default risk, paying high interest rates
– Diversify portfolio
Liability Management
– No longer primarily depend on deposits
Bank Management
© Prof Veronique Lafon-Vinais – All Rights Reserved 27
Off-Balance-Sheet Activities
Fee income from:
– Foreign exchange trades for customers Off-balance sheet
– Servicing mortgage-backed securities activities involve trading
financial instruments and
– Guarantees of debt Contingent generating income from
– Backup lines of credit liabilities fees and loan sales,
activities that affect bank
Trading in and of: profits but do not appear
on bank balance sheets
– Financial futures and options (source: Mishkin)
– Foreign exchange
– Interest rate swaps
Loan sales
All these activities involve RISK
Bank Management
© Prof Veronique Lafon-Vinais – All Rights Reserved 28
Global Banking Revenues 2014-2021
Source: Mishkin/Eakins
Bank Management
© Prof Veronique Lafon-Vinais – All Rights Reserved 32
Test Your Understanding
Financial Institutions
5. Current Issues
Types of Risk in Banking
© Prof Veronique Lafon-Vinais – All Rights Reserved 35
Risk Management Basics
Identify
1) Eliminate
2) Keep
Quantify 3) Mitigate
4) Increase
Manage
1) Probability
2) Severity
Verify
Risk Management
© Prof Veronique Lafon-Vinais – All Rights Reserved 36
Types of Risk in Banking
Credit
Liquidity
Market
Operational
Types Mitigation
Consumer Netting
Ratings
Video
https://www.bloomberg.com/news/videos/2020-02-27/buying-non-
performing-loans-in-southeast-asia-arena-management-says-video
Article
https://www.rba.gov.au/publications/fsr/2014/mar/box-a.html
Veronique Lafon-Vinais
© Prof Veronique Lafon-Vinais – All Rights Reserved 40
Market risk
Types Mitigation
FX risk Hedging
Types Mitigation
Conservative ratios
Types Mitigation
Fraud “West LB’s equity trading loss soars; trading investigation launched”
FT 31 August 07
Video link
https://www.bloomberg.com/news/videos/2020-04-29/china-banks-face-
asset-quality-profitability-pressures-fitch-ratings-video
Article
https://www.seafarerfunds.com/prevailing-winds/has-covid-19-led-to-
financial-instability-in-china/
Veronique Lafon-Vinais
© Prof Veronique Lafon-Vinais – All Rights Reserved 44
Legal & Reputational Risks
Types Mitigation
Video
https://www.youtube.com/watch?v=uTQV-ZETnRE
Article
https://www.theguardian.com/world/2018/oct/25/1mdb-scandal-
explained-a-tale-of-malaysias-missing-billions
Veronique Lafon-Vinais
© Prof Veronique Lafon-Vinais – All Rights Reserved 46
Test Your Understanding
– KYC policy
– Credit policy
Summary
© Prof Veronique Lafon-Vinais – All Rights Reserved 48
Course map
Overview
Financial Institutions
5. Current Issues
Measuring Bank Performance
© Prof Veronique Lafon-Vinais – All Rights Reserved 49
Measuring Bank Performance
Income statement
Operating Income: the income that comes from a bank’s ongoing operations =
– Interest income = interest on the bank’s assets
– Non-interest income = service charges and fees, plus revenues from off-balance
sheet activities
Rating Agencies
Regulators Suppliers
Management
Shareholders Creditors
Employees
Competitors Customers
Matrix management
Shifting strategies
MM
DCM
ECM
Derivatives
M&A
LOB
Video
https://www.youtube.com/watch?v=2GGvd6SlcZk
Article
https://www.cmegroup.com/openmarkets/interest-
rates/2022/Derivatives-Trading-Growing-in-Asia.html
Veronique Lafon-Vinais
© Prof Veronique Lafon-Vinais – All Rights Reserved 55
SUMMARY (KLOs)
Summary
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Course map
Overview
Financial Institutions
5. Current Issues
Current Issues
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Current issues in banking
Regulatory pressure
ESG/Sustainability
Technology/FinTech
Shadow banking
New entrants
…..
Current Issues
© Prof Veronique Lafon-Vinais – All Rights Reserved 58
Wholesale banking growth will slow over the
next few years