1. Banks versus other companies

- Before the companies, business schools and specialists thought that banks and companies are the same in terms of drivers.

- A company gives loans to their clients because the clients wouldn’t buy otherwise the goods. You don’t like the liabilities, but you need it.

- A manager seeks to get the highest return on equity. Reduce the inventories, cost of production, balance sheet, investments.

- The bank is completely opposite from a normal company. What is a bank selling? Loans, deposits. If a bank gives a loan, the balance sheet is going up. A bank is increasing the balance sheet. The bigger, the better. As for a small company, a balance sheet should be as low as possible.

- Banks do not pay VAT because nobody knows what is the value added for a bank. They pay other taxes, but not VAT. If you pay something to the bank, you pay the interest rate, not the VAT. The big driver of a bank is the interest rate revenue from the balance sheet. Interest revenue – Interest expense = the major driver for a normal company, named net interest margin. It is not comparable with any other company

- A risk of a bank – if you have 7% bad bank loans, you will go bankrupt and the loss will exceed the equity. You need to correctly manage the loans distribution. What is the risk for not getting what I expect to get?

- A bank should manage the risks in a way not to collapse its activity- The first risk – something goes wrong with the loans. How much credit risk should I take? - A rating institute will give a rating with the probability of default (AAA AA+ and so on). Very

low = AAA. A country like Belgium will have AA. It is a small probability, but still can happen.A = a risky, like Italy. BBB onwards = high risk. CCC onwards extremely high risk and D = the danger is gone.

- Credit spread = risk premium- Vezi slide 23 din Chapter IV for a graph with the impact of credit risk on profitability. - Banking risks and risk management: credit and liquidity risk. How to avoid a low liquidity?

Hold a cash reserve.

Slide 118 – exercise:

For interest rate 7%

+ 3,5; 88 => total 91,5

-13,5; 16; 40, 239 => 91,5

For interest rate 10%

+5; 88 = 93

-13,5;16;40;23,5

Daca fac cu Assets si liabilities:

A: 50; 100; 960 => total 1110 (it will be higher with 20% than 800). Also a gat between 7% market interest rate and 11% loans rate

L: 156; 210; 428; 336 => total 1110

For 10%

A: 50;100;840 => 990

L: 147; 180; 400; 263=> 990

Equity capital = bold = A calculat ca si diferenta intre ce ramane la liabilities si assets.