The economics of money, banking, and financial markets

CHAPTER 9

Banking and the Management of Financial Institutions 

188

The Bank Balance Sheet ............................................................................................................188

Liabilities ............................................................................................................................ 188

Assets ................................................................................................................................. 191

Basic Banking................................................................................................................................192

General Principles of Bank Management .............................................................................195

Liquidity Management and the Role of Reserves ................................................................. 195

Asset Management .............................................................................................................. 198

Liability Management ......................................................................................................... 199

Capital Adequacy Management .......................................................................................... 200

APPLICATION

  Strategies for Managing Bank Capital ..............................................202

APPLICATION

  How a Capital Crunch Caused a Credit Crunch During the  

Global Financial Crisis .....................................................................................203

Managing Credit Risk .................................................................................................................203

Screening and Monitoring .................................................................................................. 204

Long-Term Customer Relationships .................................................................................... 205

Loan Commitments ............................................................................................................ 206

Collateral and Compensating Balances ............................................................................... 206

Credit Rationing ................................................................................................................. 206

Managing Interest-Rate Risk ....................................................................................................207

Gap and Duration Analysis ................................................................................................. 208

APPLICATION

  Strategies for Managing Interest-Rate Risk .......................................209

Off-Balance-Sheet Activities ....................................................................................................209

Loan Sales .......................................................................................................................... 210

Generation of Fee Income .................................................................................................. 210

Trading Activities and Risk Management Techniques .......................................................... 210

Global  Barings, Daiwa, Sumitomo, Société Générale, and JP Morgan Chase:  

Rogue Traders and the Principal–Agent Problem  211

Summary 212  •  Key Terms 213  •  Questions 213  •  Applied Problems 214  •   

Data Analysis Problems  215   •   Web Exercises  215   •   Web References  216