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