discussion of Basel III, various Capital Standards, Repricing Gap and Risk, and Duration Gap; Math-based problems (actually, arithmetic)

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Subject Details:

  1. 1. Bank Financial Analysis: attributes of financial structure unique to banks and, in particular, their sources of revenue, ROE, ROA, and equity multiplier.
  2. 2. Regulations affecting banks: be cognizant of laws which have deregulated bank regimes including branching and business limitations. Review slide 9 from set COMMERCIAL BANKS.
    1. a. BASEL I, II, III – in particular, pay attention to capital requirements and components and meaning of both Tier 1 and Tier II Capital
    2. b. NSFR, LCR and CAR – there WILL BE calculated answers regarding these important ratios. In particular, understand the difference between ASF and RSF, and understand risk weightings for assets and liabilities.
    3. c. Repricing Gap/Duration Gap – understand what these men and do. Duration Gap equation: LADG = DA – DL × K, where DA is the duration of the assets, DL is the duration of the liabilities, and K = Liabs/Assets
    4. d. The CAMELS System
    5. 3. Bank Risks: regarding the test, only these will be relevant:
    6. a. Interest Rate Risk
    7. b. Liquidity Risk
    8. c. Solvency Risk
    9. d. Credit Risk
    10. e. OBS Risk
    11. f. Be familiar with the above and understand how they affect bank performance or even bank survival
    12. g. About interest rate spreads: this is the arithmetic difference between a liability (source of borrowed funds) and an asset (loans issued by the bank). Warning: it also can refer to the difference between the market rates of two different terms (i.e., 30-day and 5-year rates), or even between debt with the same maturity horizon but different credit quality (i.e., AAA and BBB-)
      1. 4. By now you should also be familiar with basic terminology, such as basis points, interest rate spreads, capital drainage, loan commitments, commercial paper, rate-sensitive assets and liabilities, and liquidity index.

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