Download e-book for kindle: Asset & Liability Management: A Guide to Value Creation and by Jean Dermine, Youssef F. Bissada

By Jean Dermine, Youssef F. Bissada

ISBN-10: 0273656562

ISBN-13: 9780273656562

ISBN-10: 1279431059

ISBN-13: 9781279431054

You might be drawn to the ebook provided that you're simply commencing to find out about a financial institution research and administration. Be careful!!!

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

Sample text

2%. ● Fixed interbank rate: 10% for the first year and 10% for the second year. ● Equity funding (economic capital): 6%. ● Interbank funding: 94%. ● Probability of default in Year One: 0%. ● Probability of default in Year Two: 3%. ● Recovery of 60 in case of default (or loss given default = 40). As we learned in Stage 7 (loan pricing), the break-even loan interest rate R is such that the discounted value of expected after-tax cash flows is equal to the initial equity investment (6).

S Tier 1 capital: . . . / . . . = . . . % Tier 2 capital: . . . / . . . = . . . % BIS capital ratio = Tier 1 + Tier 2 = . . . % + . . . % = . . . % 41 > 7 stage LOAN P R ICI NG (1): TH E ‘EQUITY’ SPREAD 3 2 1 4 5 6 7 43 ASSET AND LIABILITY MANAGEMENT In Stage 6 we discussed how the BIS capital adequacy regulation is forcing banks to fund loans with equity. This raises immediately a question about the interest margin on loans needed to satisfy shareholders. Your general manager has asked you to evaluate the impact of the 8% BIS ratio on loan pricing.

Net interest margin on loans Net interest margin on loans of 200 = ( . . . – . . . ) × . . . = . . . Net interest margin on loans of 300 = ( . . . – . . . ) × . . . = . . . 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.

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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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