MoneyandBankingLecture.pptVIP

Money and BankingChapter 9Lecture 12 Selcuk Caner Bilkent University How to make profits? Asset transformation Balance Sheet Management Liquidity Management Asset Management Liability Management Capital Adequacy Management Have enough currency for deposit outflows RESERVES Not enough? Borrow from other banks or corporations (federal funds rate/interest rate) Sell securities (brokerage and/or transaction costs) Borrow from the Fed (discount rate) Reduce loans (loss of business; finding someone to take the loans) Asset Management Seek high interest-rate, low-default rate loans Purchase securities with high returns, low-risk Lower risk through diversification Keep liquidity in mind Liability Management When see a profitable investment opportunity Borrow from banks Negociable CD trading No longer as dependent on checkable deposits * * Financial Economics Mishkin, Chapter 9 The Business of Banking How and why make loans How they acquire funds How they manage their assets and liabilities How they earn income Basic Banking—Cash Deposit Opening of a checking account leads to an increase in the bank’s reserves equal to the increase in checkable deposits +$100 Checkable deposits +$100 Reserves +$100 Checkable deposits +$100 Vault Cash Liabilities Assets Liabilities Assets First National Bank First National Bank Basic Banking—Check Deposit -$100 Checkable deposits -$100 Reserves +$100 Checkable deposits +$100 Reserves Liabilities Assets Liabilities Assets Second National Bank First National Bank +$100 Checkable deposits +$100 Cash items in process of collection Liabilities Assets First National Bank Basic Banking—Making a Profit Asset transformation-selling liabilities with one set of characteristics and using the proceeds to buy assets with a different set of characteristics The bank borrows short and lends long +$90 Loans +$90 Excess reserves +$100 Checkable deposits +$100 Required reserves +$100 Checkable deposits +$100 Required reserves Liabilities Asset