Assignment: Case Learnings

A report submitted to Prof. Saurabh Saraswat

In partial fulfillment of the requirements of the course

Managements of Bank

By

Abhinav Anand (Roll No. 2211006)

On 11-07-2023
 1. Citi Bank

• The cost of funding for Citi Bank was at T+5BPS, while the cost of funding for the
institutional investor was T+40BPS.
• Citibank Hong Kong proposed a credit default swap to a client (A-rated) with an AA
risk profile, allowing them to achieve a higher return on their equity compared to
holding the AA paper directly.
• Instead of directly holding the AA paper, the client would engage in a credit default
swap with Citibank. Under this arrangement, the client would receive an annual
payment of y basis points, provided that if the bond defaults, the client would assume
ownership of the bond and pay Citibank its full face value.
• Although, I had one doubt. Why is Citi Bank not holding the KDB Bond directly as it
be able to earn (T+60)-(T+5)= 55 BPS? It can increase its earnings by doing this.
• Other than building long-term relationships with institutional investors, I am not able
the think of any other reasons.

2. Bank One Corporation

• Banc One Corporation experienced a significant decline in its share price in 1993,
which negatively impacted its acquisitions, including the Liberty National Bancorp
acquisition. Investors were concerned about the transparency and accuracy of the bank's
financial statements, expecting them to reflect in the market.
• Shareholders had reservations about interest rate swaps, despite their effectiveness in
managing risk. The off-balance sheet nature of swaps raised concerns about the
potential underestimation of the bank's assets and overestimation of its net earnings.
Metrics such as true ROA, E/A ratio, and net interest margin were affected by the issues
surrounding interest rate swaps.
• Bank One along with its counterparties conceptualised synthetic investment called
AIRS (Amortised Interest Rate Swaps) due to following reason:
o Lower capital requirement
 o Higher Yield compared to mortgage backed securities
o Provides higher liquidity than conventional securities

3. Barclays Bank

• Barclays, in light of the new regulatory environment, needed to address compliance

with the CRD-IV rules and consider options such as issuing equity or contingent
convertibles as part of its tier 2 capital, with careful consideration of investor
attractiveness, offering size, pricing, and terms.
• In the UK, the Vickers Report recommended increased capital requirements for retail
banks and proposed the use of contingent capital instruments, known as CoCos, as part
of the primary loss-absorbing capital (PLAC).
• Contingent capital, besides strengthening equity in times of need, offers benefits from
a regulatory perspective by reducing the risk of abrupt and disorderly bankruptcy and
promoting effective risk governance through the threat of equity dilution.
• Previous issuances of contingent capital by European banks, such as Lloyds, UBS,
Credit Suisse, and Rabobank, saw significant demand and order volumes surpassing
traditional bond issuances. While the spread between contingent capital notes and Tier
2 debt increased over time, CoCo investing proved profitable, with notable returns for
funds specializing in contingent capital investments.