Addis Ababa university

Department of management

MANAGEMENT OF FINANCIAL INSTITUTIONS

BANK MANAGEMENT
 Group Members

Mahlet Zerihun- BER/5067/11

Melat Tesfaye - BEE/3990/11

Mesay Negash -BEE/5231/11

Mintesenot Yadisew- BEE/3402/11

Redieat Sisay- BEE/7987/11

Tesfmariyam Endale- BEE/3213/11

Yalemselam Sewarga- BEE/1404/11

Yared Desalegn -BEE/6826/11

Yared G/kirtos - BEE/1306/11

 Objectives of this presentation

Define the Bank industry and its management

Explain the general principles of bank management
 Asset management
 Liquidity management
 Liability management
 Capital adequacy management
Explain the bank Balance sheet
State the strategies for managing the bank capital.
 What is Banking industry ?

It is service industry providing different service to the

customer such as loans and deposits.
Bank Management refers to the process of managing the
banks statutory activities.
 General principles of Bank management

The bank manager has four primary concerns.

1. Liquidity management
2. Asset management
3. Liability management
4. Capital Adequacy management
 The bank balance sheet

Is a list of the bank’s assets and liabilities. As the name implies,
this list balances; that is, it has the characteristic that
 Total assets = total liabilities + capital
 A bank’s balance sheet is also a list of its sources of bank
funds (liabilities) and Uses to which the funds are put (assets).
Banks obtain funds by borrowing and by issuing other
liabilities such as deposits. They then use these funds to
acquire assets such as securities and loans.
Banks make profits by charging an interest rate on their asset
holdings of securities and loans that is higher than the interest
and other expenses on their liabilities
 Components of the bank balance sheet

Assets Liabilities
1. Cash and balances Capital
2. Balance with banks and money at call Reserve and surplus
and short notices
3. Investments Deposits
4. Advances Borrowings
5. Fixed Assets Other liabilities and Provisions
6. Other Assets
 Liquidity management

Is sustaining the liquidity that the bank has enough ready
cash to pay its depositors when there are deposit outflows.
How to obtain liquid reserves:
1. Borrow from central bank
2. Borrow from other banks
3. Sell marketable securities
4. Sell( call in loans)
Lets take an example of a bank with this balance sheet.
And assume the bank reserve requirement is 5%

Asset Liabilities
Reserves 0 Deposit 90 million
Loan 90 million Bank capital 10 million
Securities 10 million
 Borrow from other banks

Asset Liabilities
Reserves 4,500,000 Deposit 90 million
Loan 90 million Borrowing 4,500,000
Securities 10 million Bank capital 10 million
 Sell securities

Asset Liabilities
Reserves 4,500,000 Deposit 90 million
Loan 90 million Bank capital 10 million
Securities 5,500,000 million
 Borrow from central Bank

Asset Liabilities
Reserves 4,500,000 Deposit 90 million
Loan 90 million Discount loans 4,500,000
Securities 10 million Bank capital 10 million
 Call in/sell loans

Asset Liabilities
Reserves 4,500,000 Deposit 90 million
Loan 85,500,000 Bank capital 10 million
Securities 10 million
 Asset Management

Is to pursue an acceptably low level of risk by acquiring

assets that have a low rate of default and by diversifying
asset holdings.
There are four Basic methods for asset management .
1. First, banks try to find borrowers who will pay high
interest rates and are unlikely to default on their loans.
Second, banks try to purchase securities with high returns
and low risk.
Third, in managing their assets, banks must attempt to
lower risk by diversifying.
Finally, the bank must manage the liquidity of its assets so
that it can satisfy its reserve requirements without bearing
huge costs.
 Liability management

Obtain source of relatively cheap funds in order to use

them in marketable securities or financing loans.
While negotiable Certificate of deposit and bank
borrowings have greatly increased in importance as a
source of bank funds in recent years (rising from 2% of
bank liabilities in 1960 to 24% by the end of 2009),
checkable deposits have decreased in importance (from
61% of bank liabilities in 1960 to 4% by the end of 2009).
 Capital Adequacy Management

To decide the amount of capital the bank should maintain

and then acquire the needed capital.
The trade off between safety (High capital) and net
profits/equity capital.
The higher the bank capital, lower is return on equity. But
also should hold on to capitals for the reasons stated on
the next slide.
Strategies for managing the bank capital
 Why is Capital need ?

First, bank capital helps prevent bank failure, a situation

in which the bank cannot satisfy its obligations to pay its
depositors and other creditors and so goes out of business.
Second, the amount of capital affects returns for the
owners (equity holders) of the bank.
Third, a minimum amount of bank capital (bank capital
requirements) is required by regulatory authorities.
To raise the amount of capital relative to assets, you now have the following choices:

1. You can raise capital for the bank by having it issue
equity (common stock)
2. Reducing the bank’s dividends to shareholders, thereby
increasing retained earnings that it can put into its capital
account
3. Keep capital at the same level but reduce the bank’s
assets by making fewer loans or by selling off securities
and then using the proceeds to reduce is liabilities
 To lower the amount of capital relative to assets and raise the equity multiplier, you can do any of three things:

1. You can reduce the amount of bank capital by buying

back some of the bank’s stock
2. You can reduce the bank’s capital by paying out higher
dividends to its stockholders; thereby reducing the bank’s
retained earnings
3. You can keep bank capital constant but increase the
bank’s assets by acquiring new funds and then seeking out
loan business or purchasing more securities with these
new funds
Thank You!