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- 1. Bank Financial Analysis: attributes of financial structure unique to banks and, in particular, their sources of revenue, ROE, ROA, and equity multiplier.
- 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.
- a. BASEL I, II, III – in particular, pay attention to capital requirements and components and meaning of both Tier 1 and Tier II Capital
- 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.
- 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
- d. The CAMELS System –
- 3. Bank Risks: regarding the test, only these will be relevant:
- a. Interest Rate Risk
- b. Liquidity Risk
- c. Solvency Risk
- d. Credit Risk
- e. OBS Risk
- f. Be familiar with the above and understand how they affect bank performance or even bank survival
- 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-)
- 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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