Read e-book online Asset & Liability Management: A Guide to Value Creation and PDF

By Jean Dermine, Youssef F. Bissada

ISBN-10: 0273656562

ISBN-13: 9780273656562

ISBN-10: 1279431059

ISBN-13: 9781279431054

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Additional info for Asset & Liability Management: A Guide to Value Creation and Risk Control

Sample text

As the new CFO, you want to know which business units create value for shareholders, and which ones require intensive care. Your priority is to evaluate the performance of branches that collect deposits from the public and make loans. You ask the head of Accounting and Control to compute the profitability of deposits and loans. >Profitability of deposits and loans: the need for a relevant transfer price Let us consider the balance sheet introduced in Stage 1. Balance sheet (31 December 2000) Assets Reserves with central bank Consumer loans Corporate loans Interbank loans Government bonds Fixed assets Total 40 300 200 300 230 30 ––––– 1100 Liabilities and shareholders’ equity Demand deposits 500 Term deposits 300 Interbank deposits Equity Total 200 100 ––––– 1100 Deposits and loans are collected by various branches located in several towns.

Total net interest margin on loans = . . . + . . . = . . . =..... 33 > 6 stage T H E C A P I TA L A D E Q U A CY R E G U L AT I O N 3 2 1 4 5 6 35 A S S E T A N D L I A B I LT Y M A N A G E M E N T You found out in Stage 3 that one of the drivers of the return on equity was the leverage factor, that is the ratio debt/equity. As one could be tempted to increase leverage (that is reduce equity and increase debt) to boost the reported ROE, central banks have devised international capital adequacy regulations.

6 = 4 >Managerial rule A managerial rule follows from the choice of the transfer price: The main objective in collecting deposits and making loans is to increase the net interest margin. Each margin is calculated vis-à-vis the matched-maturity marginal value of fund. 1. It is as if the deposits collected by the branches were transferred to eBank’s treasury, the branches receiving as income the MMMVF. It is as if the loans granted by the branches were funded with money lent by the treasury at the MMMVF.

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Asset & Liability Management: A Guide to Value Creation and Risk Control by Jean Dermine, Youssef F. Bissada

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