fin 537 t2
Asset utilization= ______ => _____ The greater the AU, the greater the bank's ability to generate _____ from the _____ it owns.
AU= total revenue/TA => AU= interest income/TA + noninterest income/TA + security gains (Losses)/TA income from the assets it owns
Productivity ratios: ______= Average Assets/Number of Full-time Employees ______= Personnel Expense/Number of Full-time Employees
Asset per employee- you want this to be high Average personnel expense- you want this to be low because personnel expense is salary, which its good to pay good people worth good money, but don't want to overpay
Expense ratio and asset utilization: ______: is a measure of the institution's ability to generate total revenue.
Asset utilization
______= Noninterest Expense - Noninterest Income
Burden (net overhead expense)
Dodd frank: Prohibited banks from engaging in _____ Dodd frank: repealed Re. Q which prohibited _____
Proprietary trading interest on demand deposits
Expense ratio (EXP) and asset utilization (AU) ROA=_____ => _______ => _____
ROA= NI/TA => ROA = T revenue/TA + Operating Expenses/TA + Taxes/TA => ROA= Asset Utilization - Expense ratio - tax ratio
Profitability analysis: ROE= ROE= ROA=
ROE= NI/TE ROE= ROA x EM (EM= TA/TE) ROA= NI/TA
Dodd frank: Requires certain hedge and private equity fund managers to register as _____ Dodd frank: Requires complex financial institutions to have _____ plans in place
SEC advisors "funeral"
Profitability Measures: ______: is a measure of the rate spread or funding differential on balance sheet items that earn or pay interest. formula
Spread Spread= interest income/total earning assets - interest expense/total interest bearing liabilities
Expense ratio and asset utilization: When asset utilization is high? When asset utilization is low?
The greater the AU and the lower the ER and TAX, the higher the ROA. The low the AU, the higher the ER and Tax, and in turn, the lower the ROA
The balance sheet: liabilities and equity What are defines the types of savings and time deposits?
Time deposits below insurance limit: are called small CDs (less than $250,000) and carry early withdrawal penalties. Time deposits above insurance limit: are called jumbo CDs (more than $250,000) and are negotiable. -bought and sold in secondary market -typically 1 million in size -maturities range from 1 month to 5 years
Dodd frank: Eliminated _____ bailouts Dodd frank: Mitigates systematic risk by requiring creation of rules for _____ Dodd frank: permanently extended maximum _____ to _____
Too-big-to-fail- although this was viewed as a failure Financial market utilities Deposit insurance to 250,000
the income statement: Total revenue= Total expense= Net income=
Total interest income, noninterest income and realized securities gains (losses) Total interest income, noninterest income and realized securities gains (losses) NI= net interest income -tax + security gains (losses) - burden -provisions for loan losses
profitability ratios _______: measure the amount of noninterest expense covered by fees, service charges, securities gains and other income as a fraction of total assets formula?
burden ratio burden ratio= (Non-Interest Expense - Non-Interest Income)/Total Assets
_____: refers to the potential decrease in the market value of assets below the market value of liabilities. A firm is _____ ______ when its net worth is negative.
capital risk formally insolvent
examples of interest income
cash securities real estate and commercial loans
efficient and compeitive financial system: effective regulation requires a balance between _____ and _____
competitiveness and safety and soundness concerns
examples of interest expense
demand deposits NOW and MMDA savings time deposits FHLB advances
_____: is the potential risk of loss associated with trading account portfolios. ______: is the risk to an institution from adverse movements in foreign exchange rates
equity and security price risk foreign exchange risk
commercial bank financial statements: Most depository institutions own few ______ and thus exhibit low _____ commercial bank financial statements: most banks operate with less _____ than nonfinancial companies which increases _____ and ____
fixed assets; operating leverage equity capital; leverage and volatility of earnings
The income statement: _____: is the sum of interest and fees earned on all assets. _____: is the sum of interest paid on all interest bearing liabilities _____: Gross interest income minus gross interest expense
interest income- sum of interest on deposits and interest on debt (tax shield) interest expense net interest income
_____: Risk that unenforceable contracts, lawsuits or adverse judgments could disrupt or negatively affect the operations, profitability, condition or solvency of the institution. ______: Risk that negative publicity, true or untrue, can adversely affect a bank's customer base or bring forth costly litigation that negatively affects profitability.
legal risk reputation risk
______: consist of unpledged, marketable short-term securities classified as available for sale plus federal funds sold and securities purchased under agreement to resell.
liquid assets
_______: Risk to earnings and equity from the bank's inability to timely meet payments or obligations.
liquidity risk
the balance sheet: bank assets: _____: are the major asset and generate the greatest amount of income before expenses and taxes. ______: are held to earn interest, help meet liquidity needs, speculate on interest rate movements, meet pledging requirements and serve as part of a bank's dealer function. _______: consists of vault cash, deposits held at Federal Reserve Banks and other institutions and cash items in the process of collection. other assets: are _____ assets of relatively small amounts.
loans investment securities noninterest cash and due from banks residual
Preperation for losses (credit risk) Ideally, loan ____ ____ should equal noncurrent loans Banks that lend in a narrow geographic area or to a certain industry risk ___________ if economic conditions adversely affect the area of concentration. Institutions in ________ areas may assume greater risk due to less rigorous loan procedures. ______: refers to risk of making international loans.
loss reserves concentration risk high loan growth country risk
_____: Risk to earnings and equity from adverse movements in market rates or prices. _____: the potential variability in an institution's net interest income and market value of equity due to changes in market interest rates.
market risk interest rate risk
Banks attempt to _______ cash holdings due to the ____ of holding. Liquid assets are costly to hold because they pay very ____
minimize; cost low rates of interest
_____= Burden/Average Total Assets
net noninterest margin
Expense ratio and asset utilization: ______: Measures of personnel, occupancy and other operating expenses as a percentage of total overhead indicate cost efficiencies or comparative disadvantages.
noninterest expense
Expense ratio and asset utilization: ______: composed of Fees, fiduciary activities, service charges, trading revenues and more
noninterest income
Larger banks focus more on ______ whereas smaller banks focus on ____ and their net interest margins
noninterest income (fees, brokerage advisory, gain/loss from sale of land etc.) lending
Off balance sheet risk: Refers to volatility in income and market value of equity from unanticipated losses due to _____ _____ capital requirements oblige a bank to covert off-balance sheet activities to ______ sheet equivalents and hold capital against them
off balance sheet liabilities Risked based; "on-balance"
Operational risk: Possibility that _______ might vary significantly from what was expected. What may cause operational risk?
operating expenses Business interruptions- ex: weather events such as tornado, power outages etc. Transaction processing Inadequate information systems Breaches in internal controls Client liability
______: sum of Personnel expense, Occupancy expense , Goodwill impairment, Other intangible amortization, and Other operating expense
overhead
Expected future losses (credit risk) ______: loans are still accruing interest. Nonperforming loans: are more than ___ days past due. ______: are not currently accruing interest. _____: have modified payments or interest. ______: have reserves for recognized losses.
past-due loans 90 nonacurral loans restructured loans classified loans
what are the three reasons interest income and interest expense differ between banks?
rate, composition and volume.
Small banks are more profitable from _____ and big banks are more profitable from _____
small banks- net income big banks- burden
The balance sheet: bank assets: _____: is held to meet customer withdrawals. ______: are demand balances used to meet legal reserve requirements, assist in check clearing and wire transfers or effect the purchase and sale of Treasury securities. Balances at other financial institutions are held primarily to _____ services. ______: are generally the ______ component of cash, representing checks that have been presented but not yet credited to accounts.
vault cash deposits held at the federal reserve purchase cash items in process of collection (CIPC); largest
financial manipulation (off-balance sheet activities):
window dressing: legally fixing something up to make it look good preferred stock Nonperforming loans: you can charge more off or less off to manipulate Allowance Securities gains and loss: about timing such as when you need a tax break Nonrecurring sale of assets: ex is a sale of land
The income statement: Examples of non interest expenses
Personnel, occupancy and other operating expenses Intangible amortizations and goodwill impairment
The balance sheet: bank assets: ______: is substantial for problem banks because it represents collateral on unpaid loans.
Other real estate owned (OREO)- listed as an asset on the balance sheet, but it is not a beneficial asset
CAMELS rated 1-5 with 1 as the best and 5 the worst C: A: M: E: L: S:
Capital Adequacy: Ability to maintain capital commensurate with the nature and extent of all types of risk and management ability to identify, measure, monitor and control those risks. Asset Quality: Reflects existing credit risk associated with the loan and investment portfolio and off-balance sheet activities Management Quality: Adequacy of the board of directors and management systems and procedures in managing risk. Earnings: Reflects the quality and trends in earnings and factors that may affect their sustainability. Liquidity: Reflects the adequacy of current and prospective sources of liquidity and funds-management practices. 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.
the balance sheet: liabilities and equity: _____: consist of demand deposits, NOW and ATS account, MMDAs, other savings and time deposits less than FDIC limits. -considered the most _____ and _____ source of institution's funding _____: are asset-quality sensitive borrowings and consist of jumbo CD's, deposits in foreign offices, federal funds purchased, repurchase agreements, FHLB borrowings and commercial paper. -Why are these more risky than other sources of funds?
Core deposits valuable and stable Volatile (noncore) liabilities These are less stable because when banks get in trouble, these deposits are more likely to be moved
Dodd frank: what are the 3 other agencies created in the legislation?
Created the Consumer Financial Protections Bureau to inform and protect consumers. Created the Office of National Insurance. Created the Office of Credit Rating Agencies
_____: Potential variation in net income from loan nonpayment or deferred payment. Net losses=
Credit risk Net losses= gross losses (charge-offs) - recoveries (dollar loans that were previously written off and collected).
The balance sheet: liabilites and equity: _____: pay no interest. ______ and ______: pay interest and are only available to noncommercial customers. ______: pay market rates but limit the number of checks and automatic transfers to no more than six each month. These accounts are listed as _____ accounts
Demand deposits- cheapest deposits to hold for a banks since they pay no interest Negotiable orders of withdrawl (NOW) and Automatic transfers from savings (ATS) Money market deposit accounts transaction accounts
Deregulation due to the _______ act encouraged _______ of products and charging for individual services rather than offering them for free.
Dodd frank "unbundling"
_____= Noninterest Expense/(Net Interest Income + Noninterest Income)
Efficiency ratio
profitability ratios _______: measures a bank's ability to control noninterest expense relative to total revenue net of interest expense. Formula?
Efficiency ratio Efficiency ratio= Non-Interest Expense/(Net Interest Income + Non-Interest Income)
What is the most expensive form of financing? Example: You have $300 in Net profit (earnings) and 100 shares of common stock. What is the EPS? -What happens to EPS and ownership if 100 new shares are issued if you originally owned 60 shares? What about price?
Equity EPS= NI/shrout => 300/100= 3 EPS= 300/200= 1.5 old ownership= 60/100= 60% new ownership= 60/200= 30% Issuing more equity increases supply, but it also decreases the price of the stock
Expense ratio and asset utilization Expense ratio=_____ => ______ =>
Expense ratio= Expense/TA => Expense ratio = interest expense/TA + noninterest expense/TA + provisions for loan losses/TA => Expense ratio= interest expense ratio + noninterest expense ratio + provisions for loan losses ratio
The income statement Examples of non interest income
Fiduciary activities Deposit service charges Trading, venture capital and securitization income Investment banking, advisory, brokerage and underwriting fees and commissions Insurance commission fees and income Net servicing fees Net gains (losses) on sales of loans Other net gains (losses)
Dodd frank: Created _____ and _____ which gives federal regulators the ability to take over and liquidate large bank holding companies and nonbank financial institutions if a threat to the country's financial stability.
Financial Stability Oversight Council and the Office of Financial Research.
The balance sheet: bank assets: ______: are recorded at amortized cost reflecting the objective to hold until maturity. ______: are actively bought and sold and are reported at current market value on the balance sheet. Unrealized gains and losses are reported on the _____. ______: are all other securities. They are recorded at market value on the balance sheet with a corresponding change to stockholders' equity as unrealized gains and losses.
Held-to-maturity securities trading account securities; income statement avaialble-for-sale securities
____ tend to have _____ (better) efficiency ratios because they generate more noninterest income
Larger banks; lower (better) bigger banks are more efficient, but low efficiency ratios dont always lead to higher ROEs
Profitability Measures: ______: is a summary measure of the net interest return on income-producing assets. formula?
Net interest Margin Net interest margin= net interest income/ total earning assets