General Principles of Bank Management

Let’s look at how a bank manages its активами иобязательствами to earn the highest possible прибыль. The управляющий банка has four primary concerns. The first is to make sure that the bank has enough наличность ready to pay its вкладчики when there are deposit outflows – that is, when deposits are lost because depositors make списание средств and demand payment. To keep enough наличность в кассе, the bank must engage in управление ликвидностью, the acquisition of sufficiently ликвидные активы to meet the bank’s obligations to depositors. Second, the bank manager must pursue an acceptably low уровень риска by acquiring assets that have a низкая степень of default and by diversifying asset holdings (управление активами). The third concern is to приобретать средства at low cost (управление обязательствами). Finally, the manager must decide the сумма капитала the bank should поддерживать and then acquire the needed capital (capital adequacy management).

 

6.5.4 Text for discussion.

a. Look up the dictionary for the meaning and pronunciation of the following words and word-combinations and use them to discuss the problems outlined in the text.

Banks’ trading activities; management techniques; interest-rate risk; financial futures; options; swaps; foreign exchange markets; off-balance-sheet activities; to outguess the markets and engage in speculation; bank insolvencies; Barings bank; bets; financial derivatives; an incentive; excessive risks; internal controls; bookkeeping for trades; regulators; risk management.

b. Briefly scan the text and outline the list of major points.

c. Read the text more carefully and comment on the following items:

- the increased risk of off-balance-sheet activities of a bank;

- risk assessment procedures and internal controls to restrict employees from taking on too much risk;

- the importance of bank regulation;

- the dramatic failure of Barings, a British bank, in 1995.

 

Trading Activities and Risk Management Techniques

Banks’ attempts to manage interest-rate risk have led them to trading in financial futures, options for debt instruments, and interest-rate swaps. Banks engaged in international banking also conduct transactions in the foreign exchange market. All transactions in these markets are off-balance-sheet activities because they do not have a direct effect on the bank’s balance sheet. Although bank trading in these markets is often directed toward reducing risk or facilitating other bank business, banks may also try to outguess the markets and engage in speculation. This speculation can be very risky business and indeed has led to bank insolvencies, the most dramatic being the failure of Barings, a British bank, in 1995.

Trading activities, although often highly profitable, are dangerous because they make it easy for financial institutions and their employees to make huge bets quickly. Given the ability to place large bets, a trader, whether he or she trades in bond markets, in foreign exchange markets, or in financial derivatives, has an incentive to take on excessive risks: if his or her trading strategy leads to large profits, he or she is likely to receive a high salary and bonuses, but if he or she takes large losses, the financial institution will have to cover them.

To reduce this problem, managers of financial institutions must set up internal controls which among others include complete separation of the people in charge of trading activities from those in charge of the bookkeeping for trades.

U.S. regulators have become concerned about the increased risk that banks are facing from their off-balance-sheet activities, and are encouraging banks to pay increased attention to risk management.