Fundamentals of Banking
- 1. Fundamentals of Banking Yoshi
- 2. Agenda Money Supply (Banks’ Role in Economy) Asset Liability Management
- 3. Money Creation (Seigniorage) Lending Account Transfer Asset Liability Account A Account C Account B Bank Deposit This is also Money!!
- 4. Money Supply increases by Banks Money Creation (Multiple Effect) Bank 1 Bank 2 Account A Account C Account B Account A Account C Account B
- 5. Money Creation (Regulatory Cost) Account A Account C Account B Account A Account C Account B Multiple Effect does NOT Continue permanently Account A Account C Account B Reserve Reserve Central Bank 100% 80% 64% 20% 16% Bank 1 Bank 2
- 6. Asset Nostro 2 Monetary Base (called ‘M0’ ) High Powered Money Central Bank Nostro X Bank 1 Bank 2 Bank X Nostro 1 Google in future?
- 7. Money Supply M0 = Monetary Base by Central Bank M1 = M0 + Current Account M2 = M1 + Saving Account + Money Market Account M3 = M2 + Others (inc. Repo) *These classification may vary across countries
- 8. Singapore (as of Feb 2010) ( Unit S$ MILLION) M0 = 21,468.1 (Currency In Active Circulation) M1 = 96,894.7 (M0 + Demand Deposit) M2 = 373,689.0 (M1 + Quasi - Money) M3 = 380,817.5 (M2 + Net Deposit of Financial Companies) Source : http://www.mas.gov.sg/resource/data_room/msb/March%202010%20Vol%2031%20No%203.pdf
- 9. Banking / Shadow Banking Low (So far …. ) High Regulation Trading (Leverage) Lending Money Creation Hedge Funds Investment Banks Commercial Banks Who Shadow Banking Banking
- 10. When a Bank goes into Bankrupt? Cash Flow Problem Capital Adequacy Requirement (Basel/BIS, Regulatory Authorities) From Remedial to Preventive Measures! US Statistics (FDIC) 2009 140 1933 4000 (Commercial Banks) 1700 (S &L ) Source : http://www.fdic.gov/bank/individual/failed/banklist.html http://www.fdic.gov/about/learn/learning/when/1930s.html
- 11. Balance Sheet Equity Debt Long Term Asset Short Term Asset Lending Investment Asset Liability
- 12. Asset Liability Management Active : WACC, Portfolio Theory, etc Passive : Duration (Basis Point Value), Maturity Ladder, VaR, etc
- 13. Maturity Ladder In 5 Years Asset Liability Deposit Loan A/C Lending Present Future Customer In 10 Years Mismatch ! Bank In 5 Years Pay In 10 Years Receive
- 14. Basis Point Value Interest Up/ No Change on Value Asset Liability Bond Bond Present Future Price Sensitivity to Interest (Duration) Mismatch ! Bank Liability Interest Up/ Value Dropped Liability High Asset Low Liability
- 15. Value At Risk (VaR) Value Stable Asset Liability Portfolio Portfolio Present Future Historical Data Indicates Max Loss of the Portfolio can be High (= Risk!) Bank Liability Value Unstable
- 16. ALM Continued…. Reputation Risk Credit Risk Legal Risk
- 17. Key Questions Q1. Why Monetary Base has to be supplied by Central Bank? Q2. Does Central Bank have a control over Money Supply? Q3. Is Money Supply stable in this way? Q4. What else to run a bank besides maintaining a sound Balance Sheet ?