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银行负债管理
Chapter 3
Bank ManagementBank Management, 5th edition.5th edition.Timothy W. Koch and S. Scott MacDonaldTimothy W. Koch and S. Scott MacDonaldCopyright © 2003 by South-Western, a division of Thomson Learning
The composition of bank liabilities
There are many different types of liabilities. Some offer transaction capabilities with
relatively low or not interest. Others offer limited check writing
capabilities but pay higher interest rates. Liabilities with long-term fixed maturities
generally pay the highest rates. Customers who hold each instrument
respond differently to interest rate changes.
The percentage
contribution of various sources of
bank funds: a
comparison of large
versus small banks:
1992 and 2001
(% of total assets)
General decline in core deposits
Transaction accounts have decline in favor of interest bearing MMDA on small time deposits (less than $100,000).
Bank reliance on liabilities other than core deposits Banks use the term volatile liabilities to describe
purchased funds from rate-sensitive investors The types of instruments include federal funds
purchased, RPs, jumbo CDs, Eurodollar time deposits, foreign deposits, and any other large-denomination purchased liability.
Investors in these instruments will move their funds if other institutions pay higher rates or if it is rumored that the issuing bank has financial difficulties.
Average annual cost of liabilities: a comparison of large versus small banks: 2001
Banks with Assets from
$3 to $10 Billion
Banks with Assets from $10 to $25
Million Liabilities 2001 2001 Transaction accounts 1.71% 1.63% MMDAS and other savings deposits 2.15 2.79 Large CDs 4.94 5.40 All other time deposits 5.06 5.53 Foreign office deposits 0.56 NA Total interest-bearing deposits 3.60% 4.29% Federal funds & RPs 3.57 1.27 Other borrowed funds 5.16 1.37 Subordinated notes and bonds 1.93 NA All interest-bearing funds 3.86 4.31 SOURCE: Uniform Bank Performance Report.
Increased competition for bank funds
Perhaps the most difficult problem facing bank management is how to develop strategies to compete for funding sources. First, bank customers have become much
more rate conscious. Second, many customers have
demonstrated a strong preference for shorter-term deposits.
Characteristics of small denomination liabilities
Instruments under $100,000 are normally held by individual investors
Instruments are not actively traded in the secondary market.
Accounts with transactions privileges
Most banks offer three different accounts with transactions privileges:
1. demand deposits (DDAs), 2. negotiable orders of withdrawal (NOWs) and
automatic transfers from savings (ATS), and3. money market deposit accounts (MMDAs).
Demand deposit accounts …DDAs are non-interest-bearing checking accounts held by individuals, businesses, and governmental units
NOW account’s are DDA’s that pay interest. Only individuals and nonprofit organizations
can hold NOWs. This is expected to change very soon.
Money market deposit accounts MMDAs…similar to interest bearing checking accounts but have limited transactions.
Provide banks an instrument competitive with money market mutual funds offered by large brokerages.
Limited to six transactions per month, of which only three can be checks.
Attractive to the bank because required reserves are zero while required reserves on DDAs and NOWs are 10 percent. The bank can invest 100 percent of the funds
obtained from MMDA but only 90 percent from checking and NOW.
It is estimated that cash accounted for 82.3% of the total volume of payments in 2000
Checks were the second largest in terms of volume at 10.3%
Electronic payments (ATM, credit cards and debit cards) accounted for 7.4% of all payments.
In terms of the value of transactions, however cash accounted for only 0.3% of the total value of
transactions checks were 10.9% and electronic payments (AMT, credit cards and debit
cards) accounted for 2.9%. The vast majority of large transactions were
wholesale wire transfers such as CHIPS and Fed Wire transactions.
Although cash dominates the “small” payment end of transactions, it represents a very small fraction of the total value of payments.
Electronic funds transfer (EFT)…an electronic movement of financial data, designed to eliminate the paper instruments normally associated with such fund movement.
There are many types of EFTs including: ACH, POS, ATM, direct deposit, telephone bill paying, automated merchant authorization systems,
and pre-authorized payments.
Functional cost analysis
The Federal Reserve System conducts a survey called the Functional Cost Analysis Program to collect cost and income data on commercial bank operations.
According to functional cost analysis data, demand deposits are the least expensive source of funds.
Small time deposits
Small time deposits have denominations under $100,000, specified maturities ranging from seven days to any longer negotiated term.
Banks can control the flow of deposits by offering only products with specific maturities and minimum balances and varying the relative rates paid according to these terms.
Service charges
For many years, banks priced check handling services below cost.
While competition may have forced this procedure, it was acceptable because banks paid below-market rates on most deposits.
Because banks now pay market rates on deposits, they want all customers to pay at least what the services cost.
For most customers, service charges and fees for banking services have increased substantially in the 1990s.
Interest cost and net cost of transaction accounts
The average historical cost of funds is a measure of average unit borrowing costs for existing funds. Average interest cost for the total portfolio is
calculated by dividing total interest expense by the average dollar amount of liabilities outstanding.
Average historical interest costs for a single source of funds can be calculated as the ratio of interest expense by source to the average outstanding debt for that source during the period.
Interest costs alone, however, dramatically understate the effective cost of transaction accounts.
1. First, transaction accounts are subject to legal reserve requirements of up to 10 percent of the outstanding balances, invested in non-earning assets (federal reserve deposits or vault cash). This effectively increases the cost of transactional
accounts because a reduced portion of the balances can be invested.
Non transactional accounts have no reserve requirements and hence are cheaper, ceteris paribus, because 100 percent of the funds can be invested.
2. Second, transaction accounts are subject to processing costs.
3. Third, certain fees are charged on some accounts to offset noninterest expenses and this reduces the cost of these funds to the bank.
Calculating the net cost of transaction accounts
Annual historical net cost of bank liabilities is historical interest expense plus noninterest expense (net of noninterest income) divided by the investable amount of funds:
A regular check account that does not pay interest, has $20.69 in transaction costs charges $7.75 in fees, an average balance of $5,515, 5% float would have a net cost of:
ratio) reserve required - (1x float of net Balance Average
Income tNoninteres - Expense tNoninteres Expense Interest
sLiabilitieBank of Cost Net
4.66%x120.90x 0.95 x. $5,515
$7.75-$20.69$0checking regular of cost net %
Required reserves on transactions account are 10%.
Characteristics of large denomination liabilities
In addition to small denomination deposits, banks purchase funds in the money markets.
Money center and large regional banks effect most transactions over the telephone, either directly with trading partners or through brokers.
Smaller banks generally deal directly with customers and have limited access to national and international markets.
Because customers move their investments on the basis of small rate differentials, these funds are labeled ‘hot money’ or volatile liabilities.
Jumbo CDs …large, negotiable certificates of $100,000 or more are referred to as jumbo CDs.
Jumbo CDs are: issued primarily by the largest banks. purchased by businesses and governmental
units. CDs have grown to be the one of the most
popular hot-money, large-source financing used by banks. have a minimum maturity of 7 days. interest rates are quoted on a 360-day year. Insured up to $100,000 per investor per
institution. Banks issue jumbo CDs directly or indirectly
through dealers and brokers (brokered deposits).
Immediately available funds
Two types of balances are immediately available:
1. deposit liabilities held at Federal Reserve Banks and
2. certain ‘collected’ liabilities of commercial banks that may be transferred or withdrawn during a business day on order of the account holder.
Federal Funds purchased
The term federal funds is often used to refer to excess reserve balances traded between banks.
This is grossly inaccurate, given reserves averaging as a method of computing reserves, different nonbank players in the market, and the motivation behind many trades.
Most transactions are overnight loans, although maturities are negotiated and can extend up to several weeks.
Interest rates are negotiated between trading partners and are quoted on a 360-day basis.
Security repurchase agreements …(RPs or Repos) are short-term loans secured by government securities that are settled in immediately available funds
Technically, the loans embody a sale of securities with a simultaneous agreement to buy them back later at a fixed price plus accrued interest.
In most cases, the market value of the collateral is set above the loan amount when the contract is negotiated. This difference is labeled the margin.
Individual retirement accounts …savings plans for wage earners and their spouses
The primary attraction of IRAs is their tax benefits.
Each wage earner can invest up to $2,000 of earned income annually in an IRA. Prior to 1987, the principal contribution was tax-
deductible, and any accumulated earnings in the account were tax-deferred until withdrawn.
The Tax Reform Act of 1986 removed the tax-deductibility of contributions for individuals already covered by qualified pension plans if they earned enough income.
Federal Home Loan Bank Advances
The FHLB system is a government-sponsored enterprise created to assist in home buying.
The FHLB system is one of the largest U.S. financial institutions, rated AAA (Aaa) because of the government sponsorship.
Any bank can become a member of the FHLB system by buying FHLB stock.
If it has the available collateral, primarily real estate related loans, it can borrow from the FHLB. The Gramm-Leach-Bliley (GLB) Act of 1999 made is much easier
for smaller banks to borrow and these borrows could be used for non-real estate related loans.
GLB allows Banks with less than $500 million in assets to use long-term advances for loans to small businesses, small farms and small agri-businesses.
The act also established a new permanent capital structure for the Federal Home Loan Banks with two classes of stock authorized, redeemable on 6-months and 5-years notice.
FHLB borrowings, or advances, have maturities as short as 1 day or as long as 10 years.
Greater competition for funds and the authorization of new uses for FHLB advances has resulted in rapid growth in the number of banks with FHLB borrowing and the dollar amount of these borrowings.
Commercial Banks With FHLB Advances
0
50
100
150
200
250
Dec-
91
Dec-
92
Dec-
93
Dec-
94
Dec-
95
Dec-
96
Dec-
97
Dec-
98
Dec-
99
Dec-
00
Dec-
01$ B
illi
on
s o
f F
HL
B A
dv
an
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s O
uts
tan
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g
0
750
1500
2250
3000
3750
4500
Nu
mb
er o
f C
B w
ith
FH
LB
Ad
van
ces$ Billions of FHLB Advances Outstanding
Number of Commercial Banks with FHLB Advances
A recent trend has seen banks use longer-term FHLB advances as a more permanent source of funding. The interest cost compares favorably with the
cost of jumbo CDs and other purchases liabilities. The range of potential maturities allows banks
to better manage their interest rate risk. The interesting issue is whether these
advances are truly a permanent source of funds and thus comparable to core deposits, or whether they are hot money.
Average historical net cost …many banks incorrectly use the average historical costs in their pricing decisions
They simply add historical interest expense with noninterest expense (net of noninterest income) and divide by the investable amount of funds to determine the minimum return required on earning assets. Any profit is represented as a markup
The primary problem with historical costs is that they provide no information as to whether future interest costs will rise or fall.
Pricing decisions should be based on marginal costs compared with marginal revenues.
Marginal cost of bank funds
Marginal cost of debt…a measure of the borrowing cost paid to acquire one additional unit of investable funds
Marginal cost of equity capital…a measure of the minimum acceptable rate of return required by shareholders.
Together, the marginal costs of debt and equity constitute the marginal cost of funds, which can be viewed as independent sources or as a pool of funds.
Costs of independent sources of funds
Unfortunately, it is difficult to measure
marginal costs precisely. Management must include both the interest
and noninterest costs it expects to pay and
identify which portion of the acquired funds
can be invested in earning assets. Conceptually, marginal costs may be defined
as :
assets nonearning in funds of % - 1
Insurance + costs on Acquisiti+ costs Servicing + Rate Interst
Cost Marginal
Example:Marginal costs of a hypothetical NOW account
Assume: market interest rate = 2.5% servicing costs = 4.1% acquisition costs = 1.0% of balances deposit insurance costs = 0.25% of balances percentage in nonearning assets = 15.0%
(10% required reserves and 5% float.) The estimated marginal cost is 9.24%:
0.09240.85
0.00250.010.0410.025cost marginal
Cost of debt… the cost of long-term nondeposit debt equals the effective cost of borrowing from each source, including interest expense and transactions costs.
Traditional analysis suggests that this cost is
the discount rate, which equates the present
value of expected interest and principal
payments with the net proceeds to the bank
from the issue.
Assume the bank will issue: $10 million in par value subordinated notes paying $700,000 in annual interest and carrying a 7-year maturity. It must pay $100,000 in flotation costs to an
underwriter. The effective cost of borrowing (kd), where t
equals the time period for each cash flow, is 7.19%:
7.19% k or
)k(10$10,000,00
)k(1$700,000
$9,900,000
d
7d
7
1tt
d
Example:Cost of subordinated notes
Cost of equity… conceptually, the marginal cost of equity equals the required return to shareholders
It is not directly measurable because dividend payments are not mandatory.
Still, several methods are commonly used to approximate this required return:
1. Dividend valuation model2. Capital asset pricing model (CAPM)3. Targeted return on equity model
Dividend valuation model…this model discounts the expected cash flows from owning stock in determining a reasonable return to shareholders.
The cost of equity equals the discount rate (required return) used to convert future cash flows to their present value equivalent:
If dividends are expected to grow at a constant rate:
1tt
e
t
)k(1
DP
where Dt = the dollar value of the
expected dividend in period t ke = cost of equity, and t = time period
gP
g)(1Dk 0e
Do = the expected % dividend yieldg = the expected growth in earnings, dividend payments, and stock price appreciation.
Example:Cost of Bank Stock
A bank’s stock currently trades at: $24 per share and pays a $1 annual dividend. analysts’ forecasts the bank’s annual
dividends will increase by an average 10 percent annually.
The estimated equity cost is 14.58%:
14.58%
0.10$24
$1.10ke
Capital asset pricing model (CAPM)… this model relates market risk, measured by Beta (), to shareholders’ required returns.
Formally, the required return to shareholders (ke') equals the riskless rate of return (rf) plus a risk premium (r) on common stock reflecting nondiversifiable market risk:
The risk premium equals the product of a security’s Beta and the difference between the expected return on the market portfolio (km) and the expected riskless rate of return (rf).
Beta measures a stock’s historical price volatility relative to the price volatility of the market portfolio as:
ρrk fe
return) arketVariance(m
return] market return, )security(i l[individuaCovariancei β
Estimate the required return to shareholders for individual securities
Banks can use historical estimates and a projection of the market premium (km' - rf) to estimate the required return
to shareholders for individual securities:
)r-(kβrk fmifi e,
Example:…CAPM estimate for the bank’s cost of equity
Assume: a bank’s estimate equals 1.42 assume the differential between the market
return (km) and risk-free return (rf) is expected to
average 5 percent, with the Treasury bill rate expected to equal 6 percent
The CAPM estimate for the bank’s cost of equity is:
ke = 0.06 + 1.42 (0.05) = 13.1%
This cost of equity should be converted to a pretax equivalent, 19.85,% assuming a 34% marginal tax rate.
Targeted return on equity model …investors require higher pretax returns on common stock than on debt issues because of the greater assumed credit risk.
Many banks use a targeted return on equity guideline based on the cost of debt plus a premium to evaluate the cost of equity.
This return is then converted to a pretax equivalent yield.
It assumes that the market value of bank equity equals the book value of equity.
Equity rsStockholde
income net TargetedROE Targeted
Equity rsStockholde
taxes before income Targetedreturn required Pretax
Cost of preferred stock:
Preferred stock has characteristics of debt and common equity.
It represents ownership with investors’ claims superior to those of common stockholders but subordinated to those of debtholders.
Like common stock, preferred stock pays dividends that may be deferred when management determines that earnings are too low.
The marginal cost of preferred stock (kp) can be approximated in the same manner as the return on common equity; however, dividend growth is zero:
pPp
p
Dk
whereDp = contractual dividend payment,Pp = net price of preferred stock,
Trust preferred stock …a hybrid form of equity capital at banks
Trust preferred stock is recent innovation in capital financing.
Attractive because it effectively pays dividends that are tax deductible.
To issue the securities, a bank or bank holding company establishes a trust company. The trust company sells preferred stock to investors
and loans the proceeds of the issue to the bank. Interest on the loan equals dividends paid on the
preferred stock. This loan interest is tax deductible such that the bank
effectively gets to deduct dividend payments as the preferred stock.
The after tax cost of trust preferred stock would be:
ktp = tp
tp
P
t)(1D where Dtp = contractual dividend payment on
trust preferred, Ptp = net price of trust preferred stock,
Weighted marginal cost of total funds: …the best cost measure for asset-pricing purposes is a weighted marginal cost of funds (WMC)
This measure recognizes both explicit and implicit costs associated with any single source of funds.
It assumes that all assets are financed from a pool of funds and that specific sources of funds are not tied directly to specific uses of funds.
WMC is computed in three stages.
1. First, management must forecast the desired dollar amount of financing to be obtained from each individual debt source and equity.
2. Second, management must estimate the marginal cost of each independent source of funds.
3. Finally, management should combine the individual estimates to project the weighted cost, which equals the sum of the weighted component costs across all sources.
Each source’s weight (wj) equals the expected dollar amount of financing from that source divided by the dollar amount of total liabilities and equity and kj equals the single-source j component cost of financing:
m
1jjjkwWMC
Forecast of the weighted marginal cost of funds…projected figures for community state bank
Liabilities and Equity
(a) Average Amount
(b) Percent of Total
(c) Interest
Cost
(d) Processing
and Acquisition
Costs
(e) Nonearning Percentage
(f) Component
Marginal Costs
(g) Weighted Marginal Cost of Funds (b) x (f)
Demand deposits $ 28,210 31.0% 8.0% 18.0% 9.76% 0.0302 Interest checking $ 5,551 6.1% 2.5% 6.5% 15.0% 10.59% 0.0065 Money market demand accounts $ 13,832 15.2% 3.5% 3.0% 3.0% 6.70% 0.0102 Other savings accounts $ 3,640 4.0% 4.5% 1.2% 1.5% 5.79% 0.0023 Time deposits < $100,000 $ 18,382 20.2% 4.9% 1.4% 1.0% 6.36% 0.0129 Time deposits > $100,000 $ 9,055 10.0% 5.0% 0.3% 0.5% 5.34% 0.0053
Total deposits $ 78,670 86.5% Federal funds purchased $ 182 0.2% 5.0% 0.0% 0.0% 5.00% 0.0001 Other liabilities $ 4,550 5.0% 0.0% 40.0% 0.00%
Total liabilities $ 83,402 91.7%
Stockholders' equity $ 7,599 8.4% 18.9%* 4.0% 19.69% 0.0164
Total liabilities and equity $ 91,001 100.0%
Weighted marginal cost of capital ———————————————————————————-> 8.39%
Revised forecast of the weighted cost of funds
Liabilities and Equity
Average Amount
Percent of Total
Interest
Cost
Component
Marginal Costs
Weighted Marginal Cost of Funds
Demand deposits $ 25,890 28.5% 9.8% 0.0278 Interest checking $ 6,461 7.1% 4.0% 12.4% 0.0088 Money market demand accounts $ 12,831 14.1% 4.8% 8.0% 0.0113 Other savings accounts $ 3,640 4.0% 5.8% 7.1% 0.0028 Time deposits < $100,000 $ 19,383 21.3% 6.3% 7.8% 0.0166 Time deposits > $100,000 $ 10,465 11.5% 6.5% 6.8% 0.0079
Total deposits $ 78,670 86.5% Federal funds purchased $ 182 0.2% 6.5% 6.5% 0.0001 Other liabilities $ 4,550 5.0% 0.0% 0.0000
Total liabilities $ 83,402 91.7%
Stockholders' equity $ 7,599 8.4% 18.9%* 19.7% 0.0164
Total liabilities and equity $ 91,001 100.0%
Weighted marginal cost of capital ————————————————————-> 9.16%
Banks face two fundamental problems in managing liabilities:
1. Uncertainty over what rates they must pay to
retain and attract funds and
2. Uncertainty over the likelihood that
customers will withdraw their money
regardless of rates.
Funding sources and interest rate risk:
During the 1980’s, most banks experienced a shift in composition of liabilities away from demand deposits into interest-bearing time deposits and other borrowed funds.
This shift reflects three phenomena1. the removal of Regulation Q interest rate
ceilings, 2. a volatile interest rate environment and 3. the development of new deposit and money
market products. The cumulative effect was to increase the
interest sensitivity of funding operations.
Reducing interest rate risk… one widely recognized strategy to reduce interest rate risk and the long-term cost of bank funds is to aggressively compete for retail core deposits.
Individuals are generally not as rate sensitive as corporate depositors.
Once a bank attracts deposit business, many individuals will maintain their balances through rate cycles as long as the bank provides good service and pays attention to them.
Such deposits are thus more stable than money market liabilities.
Funding sources and liquidity risk
The liquidity risk associated with all liabilities has risen in recent years.
Depositors often simply compare rates and move their funds between investment vehicles to earn the highest yields.
The liquidity risk facing any one bank depends on the competitive environment.
Again, it is important to note the liquidity advantage that stable core deposits provide an acquiring bank.
Funding sources and credit risk
Changes in the composition and cost of bank funds can indirectly affect a bank’s credit risk by forcing it to reduce asset quality. Example, banks that have substituted
purchased funds for lost demand deposits have seen their cost of funds rise.
Rather than let their interest margins deteriorate, many banks make riskier loans at higher promised yields. While they might maintain their margins in the
near-term, later loan losses typically rise with the decline in asset quality.
Funding sources and bank safety
Changes in the composition and cost of bank funds have clearly lowered traditional earnings. This decrease slows capital growth and
increases leverage ratios. Borrowing costs will ultimately increase
unless noninterest income offsets this decline or banks obtain new external capital. Bank safety has thus declined in the
aggregate.
Risk characteristics…when a bank is perceived to have asset quality problems, uninsured customers move their deposits.
Bank’s with asset quality problems must pay substantial premiums to attract funds or rely on regulatory agencies to extend emergency credit.
Liquidity risk associated with a bank’s deposit base is a function of many factors, including:
1. the number of depositors, 2. average size of accounts, 3. location of the depositor, and 4. specific maturity and rate characteristics of each
account. Equally important is the interest elasticity of
customer demand for each funding source.
Borrowing from the Federal Reserve.
Federal Reserve Banks are authorized to make loans to depository institutions to help them meet reserve requirements.
DIDMCA opened borrowing to any depository institution that offers transactions accounts subject to reserve requirements.
The borrowing facility is called the discount window. Discount window loans directly increase a
member bank’s reserve assets.
Federal Reserve policies distinguish among three types of loans.
1. Short-term adjustment loans…made to banks experiencing unexpected deposit outflow or overdrafts caused by computer problems
2. Seasonal borrowing privilege…small banks are permitted to borrow if they can demonstrate that they experience systematic and predictable deposit withdrawals or new loan demand
3. Extended credit…loans granted to banks experiencing more permanent deposit outflows, typically associated with a run on the bank
Federal Deposit Insurance
The Banking Act of 1933 established the FDIC and authorized federal insurance for bank deposits up to $2,500, today the amount has been set at $100,000.
The Financial Institution Reform, Recovery, and Enforcement Act of 1989 (FIRREA) authorized the issuance of bonds to finance the bailout of the FSLIC and resources to close problem thrifts. The Act also created two new insurance funds:
1. Savings Association Insurance Fund (SAIF)
2. Bank Insurance Fund (BIF). It further created the Resolution Trust
Corporation to handle failed thrifts.
Federal Deposit Insurance (continued)
The Federal Deposit Insurance Corp. Improvement Act (FDICIA) authorized: Risk-based deposit insurance premiums
ranging from $0.0 to $0.27 per $100, depending on a bank’s capital position.
At the end 2001, the FDIC insurance fund exceeded the minimum 1.25% of insured deposits, which meant that “well capitalized” banks paid no insurance premium. At the end of 2001, over 92% of all banks were
considered well capitalized. Most expect that the economic problems of
the early 2000’s will mean that bank’s are again assessed insurance premiums.
When an insured bank fails, the FDIC has five basic options…
1. Purchase and Assumption Bid’s are accepted by healthy banks for the
failed bank’s good loans and other assets2. Open bank assistance
An acquiring bank is provided financial assistance by the FDIC in acquiring a failing bank
3. Insured deposit assumption or transfer Insured deposits are transferred to a health
bank4. Bridge Bank
The FDIC will operate the bank for a short period of time until it can find the appropriate buyer
5. Payout option The FDIC immediately (one week) pays
depositors the full amount of their insured funds