Chapter 3 - Bank Management
A
Asset quality - reflects the amount of existing credit risk associated with the loans and investment portfolio as well as off-balance sheet activities
Credit Risk
Potential variation in net income and market value of equity resulting from this non-payment or delayed payment - associated with the quality of individual assets and the likelihood of default. (will not repay the principal and interest on a timely basis)
S
Sensitivity to market risk - reflects the degree to which changes in interest rates, foreign exchange rates, commodity prices and equity prices can adversely affect earnings or economic capital
Nonperforming loans
are loans that are more than 90 days past due plus non accrual loans
Non accrual loans
are those not currently accruing interest- habitually past due
High Loan Growth
assumes greater risk because credit analysis and review procedures become less rigorous as loan officers have less time for each loan
C
capital adequacy - signals the institutions ability to maintain capital commensurate with the nature and extent of all types of risk, and the ability of management to identify, measure, monitor and control these risks.
Market Risk
current and potential risk to earnings and stockholders' equity resulting from adverse movements in market rates or prices
Liquidity Risk
current and potential risk to earnings and the market value of stockholder's equity that results from a bank's inability to meet payment or clearing obligations in a timely and cost effective manner
Concentration Risk
direct result of lack of diversification and dramatically affects a majority of the bank's portfolio if economic factors negatively affect the geographic/industry concentration
Net Losses- net charge offs
equals the difference between gross loan losses and recoveries
Gross Loan Losses - (charge offs)
equals the dollar value of loans written off as uncollectible during a period
Transaction Processing
from failed, late or incorrect settlements
Business Interruptions
from loss or damage to assets, facilities, systems or people
Classified loans
general category of loans in which management set aside reserves for clearly recognized losses
Cash Assets
held to satisfy customer withdrawal needs, meet legal reserve requirements or to purchase services from other financial institutions but do not pay interest - try not to hold a lot of these
Market Liquidity Risk
inability of the institution to easily unwind or offset specific exposures without significant losses from inadequate market debt/disturbances
E
Earnings - quantity and trend in earnings but also the factors that may affect the sustainability or quality of earnings
M
Management quality - reflects the adequacy of the BOD and senior management systems and procedures in the identification, measurement, monitoring and control of risks.
L
liquidity - reflects the adequacy of the institution's current and prospective sources of liquidity and funds-management practices
Restructured Loans
loans for which the lender has modified the required payments on principal or interest.
Reputation Risk
negative publicity either true or untrue can adversely affect a bank's customer base or bring forth costly litigation, hence negatively affecting profitability
Equity and security price risk
potential risk of loss associated with a bank's trading account portfolios
Interest Rate Risk
potential variability in a financial institution's net interest income and market value of equity due to changes in the level of market interest rates
Risk Management
process by which managers identify, assess, monitor and control risks associated with a financial institution's activities
Recoveries
refer to the dollar amount of loans that were previously charged off but were subsequently collected
Operational Risk
refers to the possibility that operating expenses might vary significantly from what is expected, producing a decline in net income and firm value - the risk of loss resulting from inadequate or failed internal processes, people and systems, or other external events
Capital Risk
refers to the potential decrease in the market value of assets below the market value of liabilities indicating that economic net worth is zero or less
Country Risk
refers to the potential loss of interest and principal on international loans due to borrowers in a country refusing to make timely payments per loan agreement
Off-Balance Sheet Risk
refers to the volatility in income and market value of bank equity that may arise from unanticipated losses due to these off balance sheet liabilities
Past Due Loans
represent loans for which contracted interest and principal payments have not been made but are still accruing interest (30-89 days past due and 90+days past due)
breaches of internal control
resulting in fraud, theft or unauthorized activities
Client liability
resulting in restitution payments or reputation losses
Legal Risk
risk that unenforceable contracts, lawsuits, or adverse judgements could disrupt or negatively affect the operations, profitability, condition or solvency of the institution - general liability issues and compliance risk
Inadequate Information Systems
security of data systems is compromised
Funding Liquidity Risk
the inability to liquidate assets or obtain adequate funding from new borrowing
Foreign Exchange risk
the risk to a financial institution's condition resulting from adverse movements in foreign exchange rates
Liquid assets
un-pledged, marketable and short term securities that are classified as available for sale, plus federal funds sold and securities purchased under agreement to resell