UA FI 301 - Chapter 19 Bank Management (4 pages)

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Chapter 19 Bank Management

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Chapter 19 Bank Management


bank management

Lecture number:
Lecture Note
University of Alabama
Fi 301 - Intro Financl Instit Mkt

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FI 301 1st Edition Lecture 18 I Background on Commercial Banks II Bank Sources of Funds III Uses of Funds by banks IV Off Balance Sheet Activities Outline of Current Lecture I Banks Goals Strategies and governance II managing liquidity III managing interest rate risk IV Gap analysis V managing credit risk VI managing market risk VII Managing risk of international operation Current Lecture VIII Banks Goals Strategies and governance 1 What is the underlying goal of bank s management Maximize shareholder wealth make as many loans as you can and make good investments banks have ton of risk Aligning Managerial Compensation with Bank Goals How can a bank align compensation with bank s goals If bank fails people with savings lose their stocks go to 0 and people lose their jobs Bank Strategy What is a bank s strategy with regards to making money and mitigating risk They pay people with either commission or salary Bank officers no commission Mortgage officers commission cause they sell off the loans Way they pay salaries To implement their strategy commercial banks rely heavily on financial markets Outside to help guide them on making smart decisions they arent the ones getting paid Inside is conflict of interest because they can give themselves raises or bonuses IX managing liquidity 1 How can a bank have illiquidity issues Whether they have enough cash or not banks can become illiquid Bank run too many withdrawal at one time Failed investments loose all of the money Loan all of their money out loan more than they have sitting in the bank banks have liabilities too such as savings and money markets Use of Securitization to Boost Liquidity What is securitization and how does the bank make money from securitization Solve it Securitization where you sell your mortgages they loan a bunch of loans and they are becoming illiquid pull them together and sell to freddie mac or fannie mae Buy treasuries these help because treasuries are liquid sell them and get plenty of cash to put

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