GuyHargreavesACF-104

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Recapofyesterday! UnderstandvariouscomponentsofanAustraliancommercialbankingbusiness

! Reviewofimportantfunctionsofacommercialbankincludingliquidity,capital,margins,revenues,strategybystudyingANZ

!  FormasoundunderstandingbetweenthetheoryofbankingandpracticebystudyingANZbankcase

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Goalsoftoday! Understandcommercialbankbalancesheetsandgeneralprinciplesofbankbalancesheetmanagement

! Compareoffandonbalancesheetproductsandstructures

! Understandkeyconsiderationsforthepracticeofgoodbanking

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Commercialbankmanagement

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!  Strategy:global,regional,local,products,retail/wholesale,technology

! Riskmanagement:credit,market,legal/reputational,operational,country,liquidity–>diversification

!  Financial:NIM,NPAT,ROE,RAROC,RoRWA,NIM! Regulatory:CET1,RoRWA,LCR,NSFR! Customers:productmix,KYC,X-sell! Operations:technology,costs,riskmanagement

Recall:commercialbankunits!  BoardofDirectors! ManagementOffice!  FinancialControl!  RiskManagement!  LegalandCompliance!  Operations!  HumanResources!  InformationTechnology!  FinancialMarkets! WholesaleBanking!  RetailBanking

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Goodcommercialbanking! Goodcommercialbankingrequiressoundmanagementpractices

!  Setlongtermincentives,removeshorttermincentives

!  Encouragelongertermbehaviourbystaff,management!  Leadstobetterdecisions=stablebank=strongsharepriceandhighliquidity/accesstocapital

! Goodbanking=healthybankingsystem=healthyfinancialsystemabletowithstandcrises/shocks

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Toavoidfinancialcrises! Therearemanytypesoffinancialcrises,including:

!  Bankingcrises!  Currencycrises!  Speculativeassetpricebubbles!  Economiccrises

!  2007-9GFCwasmostlyabankingcrisisbutitcamefromaspeculativeassetbubble

! EconomiccrisesareusuallydeeprecessionsordepressionswhereGDPfallssharply

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Inpar=cularbankingcrises!  Lossofconfidenceinabankornumberofbanksleadingtobankrunwheredepositorswithdrawfundsrapidly

! Oftenassociatedwithperiodsofpoorlendingdecisionsleadingtohighloanportfoliolossprovisions

! Highleverageinthebankingsystemmeansconfidenceisfragile

!  Smallloanlossescanquicklyturnintoabankingcrisis

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Balancesheetprinciples! Assets–Liabilities=Capital!  Liabilities:

!  Definedmaturitydate!  Definedcoupon(interestrate)!  Mustberepaidordefaultoccurs

! Capital:!  Nomaturitydate(perpetual)!  Nodefinedcoupon(dividendmayormaynotbepaid)!  Norequirementforrepayment-permanent

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UScommercialbankbalancesheet

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Onoroffbalancesheet?!  Iftheitemappearsinthebalancesheetfinancialstatementthenitis“onbalancesheet”

! Risksthatdonotappearinthebalancesheetfinancialstatementare“offbalancesheet”eg

!  LettersofCredit(LCs)!  Guarantees!  Counterpartycreditriskonderivatives

! BanksneedtoholdregulatorycapitalagainstonandoffbalancesheetsexposuresunderBISIIandBISII

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