Learning Objectives

At the end of the chapter, students must be able to:

• Know the importance of bank management

• Explain bank goals, strategy and governance
• Discuss and analyze the bank’s balance sheet in details
• Analyze how banks manage liquidity
• Describe how banks manage interest rate risk, credit
risk and market risk
• Awareness in managing risk of International
Operations
BANK MANAGEMENT
A.Bank Goals, Strategy and Governance
B.The Balance Sheet
C.Managing Liquidity
D.Managing Interest Rate Risk
E.Managing Credit Risk
F.Managing Market Risk
G.Managing Risk of International Operations
WHAT IS A BANK?
A bank is a financial institution that
accepts deposits from the public
and creates credit.

SAVER BORROWER
 BANK
BankMANAGEMENT
management governs various
concerns associated with bank in order to
maximize profits.
Planning Organizational
Organizing • liquidity management of
Staffing • asset management
Coordinating • liability management and
Motivating • capital management
Controlling
GOALS/ OBJECTIVES
OF BANK
Main Objectives
• maintain price stability conducive to a balanced
and sustainable economic growth
• promote and preserve monetary stability and
the convertibility of the national currency
 Creation of medium of exchange
 Collection of saving and formation of
capital 
 Supply of capital and increase of
investment  
 Help in home trades  
 Helps in foreign trades
 Industrial development
 Agricultural development
 Increases of gross production  
 Employment
 Increases of government revenue
 Handling of foreign exchange
 Improving standard of living
 ‘S
STRATEGIC PRIORITIES
1. Increasing BPI’s level of digitalization
2. Enhancing the bank’s deposit
franchise and delivery infrastructure
3. Accelerating the growth of SME and
retail loans
4. Continuing to grow the microfinance
business
CORPORATE GOVERNANCE
- set of rules and incentives through which the
management of a company is directed and
controlled.

- frames the distribution of rights and responsibilities

among management, the board of directors,
controlling shareholders, minority shareholders,
and other stakeholders and provides the structure
for setting, implementing, and monitoring company
objectives.
Corporate governance principles for banks
Principle 1: Board’s overall responsibilities
Principle 2: Board qualifications and composition
Principle 3: Board’s own structure and practices
Principle 4: Senior management
Principle 5: Governance of group structures
Principle 6: Risk management function
Principle 7: Risk identification, monitoring and controlling
Principle 8: Risk communication
Principle 9: Compliance
Principle 10: Internal audit
Principle 11: Disclosure and transparency
Principle 12: The role of supervisors
Principle 1: Board’s overall responsibilities

The board has overall responsibility for the bank,

including approving and overseeing management’s
implementation of the bank’s strategic objectives,
governance framework and corporate culture.
Principle 2: Board qualifications and
composition

Board members should

be and remain
qualified, individually
and collectively, for
their positions. They
should understand their
oversight and corporate
governance.
Principle 3: Board’s own structure and
practices

The board should define

appropriate governance
structures and practices for
its own work, and put in
place the means for such
practices to be followed
and periodically reviewed
for ongoing effectiveness.
Principle 4: Senior management
Under the direction and oversight of the board,
senior management should carry out and manage
the bank’s activities in a manner consistent with the
business strategy, risk appetite, remuneration and
other policies approved by the board.
Principle 5: Governance of group structures

In a group structure, the

board and senior
management should
know and understand
the bank group’s
organizational structure
and the risks that it
poses.
Principle 6: Risk management function

Banks should have an

effective independent risk
management function,
under the direction of a
chief risk officer (CRO),
with sufficient stature,
independence, resources
and access to the board.
Principle 7: Risk identification, monitoring
and controlling

Risks should be
identified, monitored
and controlled on an
ongoing bank-wide
and individual entity
basis.
Principle 8: Risk communication

An effective risk governance framework requires

robust communication within the bank about risk,
both across the organization and through reporting
to the board and senior management.

Governance
Principle 9: Compliance

The board should

establish a compliance
function and approve the
bank’s policies and
processes for identifying,
assessing, monitoring
and reporting and
advising on compliance
risk.
 Principle 10: Internal audit

The internal audit function

should provide independent
assurance to the board and
should support board and
senior management in
promoting an effective
governance process and the
long-term soundness of the
bank.
Principle 11: Disclosure and
transparency

The governance of the

bank should be adequately
transparent to its and
shareholders, depositors,
other relevant stakeholders
and market participants.
Principle 12: The role of supervisors

Supervisors should provide guidance for and

supervise corporate governance at banks,
including through comprehensive evaluations
and regular interaction with boards and senior
management.
BANK BALANCE
SHEET
•
Assets, Liabilities, and Bank Capital
A balance sheet (statement of financial position) is a
financial report that shows the value of a company's
assets, liabilities, and owner's equity on a specific date,
usually at the end of an accounting period, such as a
quarter or a year.
• Asset - is anything that can be sold for value.
• Liability - is an obligation that must eventually be paid,
and, hence, it is a claim on assets.
• Owner's equity - in a bank. is often referred to as bank
capital, which is what is left when all assets have been
sold and all liabilities have been paid.
Cash and Cash Equivalents
• One of the major services of a bank is to supply cash
on demand, whether it is a depositor withdrawing
money or writing a check, or a bank customer
drawing on a credit line.
• A bank also needs funds to pay bills, but while bills
are predictable in both amount and timing, cash
withdrawals by customers are not.
• Hence, a bank must maintain a certain level of cash
compared to its liabilities to maintain solvency. A
bank must hold some cash as reserves, which is the
amount of money held in a bank's account at the
Federal Reserve (Fed).
• The Federal Reserve determines the legal reserves,
which is the minimum amount of cash that banks
must hold in their accounts to ensure the safety of
banks and also allows the Fed to effect monetary
policy by adjusting the reserve level. Often, banks will
keep excess reserves for greater safety.

• To do business at its branches and automated teller

machines (ATMs), a bank also needs vault cash, which
includes not only cash in its vaults, but also cash
elsewhere on a bank's premises, such as in teller
drawers, and the cash in its ATM machines.
Securities

The primary securities that banks own are United States

Treasuries and municipal bonds. These bonds can be
sold quickly in the secondary market when a bank
needs more cash, so they are often referred to as
secondary reserves.
• The recent credit crisis has also underscored the fact
that banks held many asset-backed securities as well.
United States banks are not permitted to own stocks,
because of their risk, but, ironically, they can hold
much riskier securities called derivatives.
Loan
• Loans are the major asset for most banks. They
earn more interest than banks have to pay on
deposits, and, thus, are a major source of revenue
for a bank.

• Often banks will sell the loans, such as mortgages,

credit card and auto loan receivables, to be
securitized into asset-backed securities which can
be sold to investors. This allows banks to make
more loans while also earning origination fees
and/or servicing fees on the securitized loans.
Liabilities: Sources of Funds

• Liabilities are either the deposits of customers

or money that banks borrow from other
sources to use to fund assets that earn
revenue.
• Deposits are like debt in that it is money that
the banks owe to the customer but they differ
from debt in that the addition or withdrawal
of money is at the discretion of the depositor
rather than dictated by contract.
Checkable Deposits

Checkable deposits are deposits where

depositors can withdraw the money at will. These
include all checking accounts. Some checkable
deposits, such as NOW, super-NOW, and money
market accounts pay interest, but most checking
accounts pay very little or no interest. Instead,
depositors use checking accounts for payment
services, which, nowadays, also includes
electronic banking services.
Bank Capital

Banks can also get more funds either from the bank's
owners or, if it is a corporation, by issuing more stock.
For instance, 19 of the largest banks that received
federal bailout money during the 2007 - 2009 credit risis
raised $43 billion of new capital in 2009 by issuing stock
because their reserves were deemed inadequate in
response to stress testing by the United States Treasury.
The number of banks has continually declined since
1990, while the share of assets of the 100 largest banks
has exceeded 80%, with the 10 largest of those banks
holding about 60% of those assets.
MANAGING
LIQUIDITY
Liquidity means an
immediate capacity to meet
one’s financial commitments.
Banks can achieve liquidity in multiple
ways. Each of these methods ordinarily has
a cost, comprising of:

• Shorten asset maturities

• Improve the average liquidity of assets
• Lengthen Liability maturities
• Issue more equity
• Reduce contingent commitments
• Obtain liquidity protection
Principles of Liquidity Management
Banks should formally adopt and implement these
principles for use in overall liquidity management
process:

A. Banks must develop a structure for liquidity

management.

B. Banks must measure and monitor net funding

requirements.

C. Banks should Manage market access.

D. Banks should have contingency plans.

E. Banks should manage their foreign currency liabilities.

F. Each bank must have an adequate system for internal

controls over its liquidity risk management process.

G. Each bank should have in place a mechanism for ensuring

that there is an adequate level of disclosure of information
about the bank in order to manage public perception of the
organization and its soundness.
MANAGING
 INTEREST RATE

Interest rates are prices. They are the price

paid for the use of money for a period of time.
Two ways by which interest rates can
be defined:

from a lender’s from the point of

point of view view of a borrower

(lending rate) (borrowing rate)

- is the risk to income or capital
arising from fluctuating interest rates.
 Repricing
risk

Sources of
Option Basis
Interest Rate risk
risk
Risk
Yield
curve
risk
 Interest Rate Risk
Management Process

Identify Measure

Control Monitor
MANAGING INTEREST RATE RISK
Appropriate board Adequate risk
and senior management
management policies and
oversight procedures

Appropriate risk Comprehensive

measurement, internal controls
monitoring, and and independent
control functions audits
MANAGING
CREDIT RISK
 MANAGING CREDIT RISK
• A credit risk is the risk of default on a debt that
may arise from a borrower failing to make
required payments.

• The risk is that of the lender and includes lost

principal and interest, disruption to cash flows,
and increased collection costs.

• The loss may be complete or partial.

Credit risk can be of the following types:

• Credit default risk

• Concentration risk
• Country risk

Credit default risk – The risk of loss arising from a debtor

being unlikely to pay its loan obligations in full or the
debtor is more than 90 days past due on any material
credit obligation; default risk may impact all credit-
sensitive transactions, including loans, securities and
derivatives.
• Concentration risk – The risk associated with any single
exposure or group of exposures with the potential to
produce large enough losses to threaten a bank's core
operations. It may arise in the form of single-name
concentration or industry concentration.

• Country risk – The risk of loss arising from a sovereign

state freezing foreign currency payments
(transfer/conversion risk) or when it defaults on its
obligations (sovereign risk); this type of risk is
prominently associated with the country's
macroeconomic performance and its political stability.
 Mitigation of Credit Risk
There are multiple ways to mitigate the credit risk
which are as follows by :

A) Risk-Based Pricing
The lenders usually charge a higher rate of interest
to borrowers who are defaulters. This practice is
known as risk-based pricing. The lenders take into
consideration the factors such as on purpose credit
rating and loan to value ratio.
B). Credit insurance and credit derivatives.

Bondholders hedge the risk by purchasing credit

derivatives or credit insurances. These contacts
ensure the transference of the risk from the
gender to the server against a specific amount of
payment. Credit default swap is the most
common form of credit derivative used in the
market.
C). Covenants Stipulations may be written by lenders
to the borrowers which are called covenants.

These are usually written into loan agreements such

as a periodic report about the financial condition,
refrain from paying dividends or further borrowing of
amount or any other specific action that affect the
company’s financial position in a negative way or
repayment of the full loan at the request of the
gender in events such as borrower changes or
changes in debt to equity ratio or change in interest
coverage ratio.
D). Diversification

Lenders diversify their borrower

pools and reduce the risk.
MANAGING
MARKET
RISK
What Is Market Risk?
Market risk is the possibility of an investor experiencing
losses due to factors that affect the overall performance
of the financial markets in which he or she is involved.
Market risk, also called "systematic risk,” cannot be
eliminated through diversification, though it can be
hedged against in other ways.
TYPES OF MARKET RISK

1. Interest Rate Risk

2. Foreign Exchange Risk
3. Commodity Price Risk
4. Equity Price Risk
 TYPES OF MARKET RISK

1. Interest Rate Risk

Interest rate risk arises when the value of security might fall
because of the increase and a decrease in the prevailing and
long-term interest rates. It is a broader term and comprises
multiple components like basis risk, yield curve risk, options
risk, and repricing risk.
 TYPES OF MARKET RISK

2. Foreign Exchange Risk

Foreign exchange risk arises because of the fluctuations in the

exchange rates between the domestic currency and the foreign
currency. The most affected by this risk is the MNCs that operate
across geographies and have their payments coming in different
currencies.
 TYPES OF MARKET RISK

3. Commodity Price Risk

Like foreign exchange risk, commodity price risk arises because of

fluctuations in the prices of commodities like crude, gold, silver,
etc. However, unlike foreign exchange risk, commodity risks not
only affect the multinational companies but also the common
people like farmers, small business enterprises, commercial
traders, exporters, and governments.
 TYPES OF MARKET RISK

4. Equity Price Risk

The last component of market risk is the equity price risk

which refers to the change in the stock prices in the
financial products. As equity is most sensitive to any
change in the economy, equity price risk is one of the
biggest parts of the market risk.
MANAGING MARKET RISK

 HEDGE

 SPECULATION

 ARBITRAGE

 SWAPS
 HEDGE

Making an investment to reduce risk of

adverse price movements in an asset.
Normally, a hedge consists of taking an
offsetting position in a related security, such
as a features contract
 SPECULATION

o The process of selecting investment with

high risk in order to profit from an
anticipated price movement.

o Speculation should not be considered purely

a form of gambling, as speculators do make
an informed decision before choosing to
acquire the additional risks.
 ARBITRAGE

o It is a trade that profits by exploiting price

differences of identical or similar financial
instruments, on different markets or in
different forms.

o The opportunity to buy an asset at a low

price then immediately selling it on a
different market for a higher price.
 SWAPS

Traditionally, the exchange of one security or

another to change the maturity (bonds), quality
of issues (stocks or bonds), or because
investment objectives have changed. Recently,
swaps have grown to include swaps and interest
rate swap.
MANAGING RISK
OF
INTERNATIONAL
OPERATIONS
 International Business Risk

- It is the possibility of loss due to same

uncertain future occurrence. International
business risk may be defined as the
possibility of loss caused by some
unfavorable or undesirable event in
international business operations.
Different Types of Risks

- Political Risk
- Currency risk
- Cross-cultural Risk
- Operational Risk
 Political Risk
- Geopolitical risk, also known as political risk,
transpires when a country’s government
unexpectedly changes its policies, which now
negatively affect the foreign company. The
political actions and instability may make it
difficult for companies to operate efficiently in
these countries due to negative publicity and
impact created by individuals in the top
government.
Currency Risk
 Currency Risk
- is a form of risk that arises from the change
in price of one currency to another. Investors
or companies that have assets or business
operations across national borders are
exposed to currency risk that may create
unpredictable profits and losses.
Cross-cultural Risk
 Cross-cultural Risk

- Cross-cultural arises when we step into

different environment characterized by
unfamiliar languages and unique value
systems, beliefs and behaviors.
Operational Risk
 Operational Risk

- Is the risk or loss due to errors,

breaches, interruptions, or damages –
either intentional or accidental –
caused by people, internal processes,
system or external events.
How can we assess our risks? And
what are the best strategies to
minimize those risks?
- Identify hazards and risk factors that have
the potential to cause harm.

- Analyze and evaluate the risk associated

with that hazard.

- Determine appropriate ways to eliminate

the hazard, or control the risk when the
hazard cannot be eliminated.
How to reduce risk? Here are five things you can
do to reduce international business risk.

1. Take the time to get to know the other party

2. Start slow
3. Do your homework
4. Use secure payment methods
5. Establish a meaningful relationship