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1/22
Dr. Rania Salem/Bank Management Spring 2012
Bank Management
Dr. Rania SalemDepartment of Finance
Spring 2012Lecture notes-1
Introduction to Banking Environment
8/2/2019 BM Lecture1
2/22
General Information
Lecturer: Dr. Rania Salem
Instructor Office Hours:Thursday 2nd and 3rd slots, B3.209
Teaching Assistants: Mrs. Samah Adel & Ms. Menna Hafez
Course Schedule:
Tuesday 8:3010:00, H3
Textbook: Selected References will be announced per topic
Bank Management & Financial Services by Rose & Hudgins, 8th ed.,McGraw-Hill, New York 2010.
Course Assessment:
Final Exam: 40%
Midterm Exam: 20%
Course Work (Quizzes and Assignments): 40%
Dr. Rania Salem/Bank Management Spring 2012/2
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Course Agenda
A. Basic Bank Management Techniques
1. Introduction
2. RoE based Profitability Management
3. Matched Funds Transfer Pricing Concept
B. Risk and Returnan Integrated Approach1. Principles of Risk/Return Management
2. Value Based Performance Management
C. Bank Specific Issues1. Credit Risk Management
2. Operational Risk Management
3. Introduction to Islamic BankingDr. Rania Salem/Bank Management Spring 2012/3
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Course Agenda
A. Basic Bank Management Techniques
1. Introduction
2. RoE based Profitability Management
3. Matched Funds Transfer Pricing Concept
B. Risk and Returnan Integrated Approach1. Principles of Risk/Return Management
2. Value Based Performance Management
C. Bank Specific Issues1. Credit Risk Management
2. Introduction to Islamic Banking
Dr. Rania Salem/Bank Management Spring 2012/4
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Banking Activities
Banks (as financial intermediaries) facilitate the flow of funds from surplusspending units (savers) to deficit spending units (borrowers)
Important functions
Risk transformation
Volume transformation
Maturity transformation
Some unique characteristics
Banks are usually under regulatory supervision
Their function isprimarily financial, thus most banks own few fixedassets
The liabilities are usually payable on demand or carry short termmaturities, therefore being highly dependent on interest rate changes
Banks usually operate with less equity than nonfinancial companies,leading to a high financial leverage andvolatility of earnings
Prof. Dr. C. Kalhoefer/Bank Management /5
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The Balance Sheet
As always:Assets = Liabilities + Equity Typical bank assets
Loans, usually the major asset
Investment securities
Noninterest cash and due from banks
Other assets
Typical bank liabilities
Transaction accounts
Savings and Time Deposits
Other Borrowings
Prof. Dr. C. Kalhoefer/Bank Management /6
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The four Building Blocks for an integrated
Management Control System in Banks
Profit OrientedBusiness
Philosophy
InstitutionalizedManagement ControlCycle
Market Orienteddual Organization ofStructures andProcesses
AdequateInformation
System
Prof. Dr. C. Kalhoefer/Bank Management /8
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Building Block 1:
Profit Oriented Business Philosophy
Profit oriented target system on all decision levels
(1) Primacy of Profitability
(2) Growth and risk policy as instruments to secure and increase
profitability
Profit oriented incentive scheme in consistence withdecision competence and responsibility
(1) Profit oriented design of the compensation system
(2) Synchronization of bank profitability targets and personal incomeand career targets
Profit oriented calculation systems to measure customerand market attractiveness
(1) Collection of customer related results (actual, budget, potential)
(2) Absolute condition for customer or segment specific decisions
Prof. Dr. C. Kalhoefer/Bank Management /9
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Building Block 2: Market Oriented dual
Organization of Structures and Processes
Consequent orientation towards a customer orientedprofitcenter organization
Cross sectional coordination of customer related divisions,using product and functional departments with decisionalauthority and structural profit responsibility
Organizational structure withprocesses (value chains) instead ofbureaucratic competency rules (decreasing of hierarchies in favorof activity based structures)
Prof. Dr. C. Kalhoefer/Bank Management /10
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Building Block 3: Institutionalized
Management Control Cycle
Organization of planning should follow top-down/bottom-up
process
Regular monitoring of the achievement of objectives andsystematic variance analysis, following the Management by
Exception principle
Ensure that problem awareness, competence, and responsibilityare present at the interface between bank and market, followingthe Self Controlling principle
Coordination of decisions and activities following the DualSteering Model; i.e. Integration among decision making and
the different individual departments
Prof. Dr. C. Kalhoefer/Bank Management /11
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Dual Steering Model
regulatory standards regarding the balance sheet overall structure of the credit portfolio strategic structure of business segments central investment decisions central product decisions cost of overhead maturity and currency transformation profit profit oriented growth minimum profitability
Centralized structural steering
related to business structure
business volume net marginscredit/debit margins marginal incomecommissions
Local market related steering
related to individual contracts or departments
Integration
Retail
actionsWholesale
actions
volume budgets cost budgets budget and/or minimum
margins
benchmarks limits bonus malus systems
interbank transactions securities trading foreign exchange trading
Additional instruments Own account tradingAgreement on objectives
Prof. Dr. C. Kalhoefer/Bank Management /12
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Building Block 4: Adequate Information
System
Decision-relevant profit information (conceptual foreach individual contract, target and actual values)
Complete transparency of the profit sources in
customer business (dice model) as well in centralinvestment, financing, and trading departments
Integrated risk performance and risk taking capacityinformation for counterparty, operational, and marketrisk
Prof. Dr. C. Kalhoefer/Bank Management /13
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Banking Regulations
The banking regulatory scheme in any country iscategorized into three levels:
1. Regulations that address the activities eligible bybanks
2. Regulations of accounting and disclosure
standards related to banking and investor protection
3. International regulations
Dr. Rania Salem/Bank Management Spring 2012/15
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International (Global) Banking System
Banks are globally interconnected through financialmarkets and inter-bank activities
Advantages of Global Banking: ??
Disadvantages of Global Banking: ??
The Bank for International Settlement (BIS) is thebank of central banks
Provides guidance to Central Banks Regulations
Worldwide Proposed the Basel Accord as an international regulation
Dr. Rania Salem/Bank Management Spring 2012/16
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Basel Accord: Role & History
The Basel Capital Accord was first introduced by the BIS in1988 to:
1. Ensure the efficiency of banks risk management
2. Support the confidence of market participants in the
banking system through proposing adequate principles andmethods of a best practiced risk management framework
Basel IIwas introduced in 2001 and implemented in 2004
Recently, Basel III has been introduced in the market, in
response to the subprime financial crisis
Dr. Rania Salem/Bank Management Spring 2012/17
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Basel II Pillars
Dr. Rania Salem/Bank Management Spring 2012/18
Pillar 1
Minimum CapitalRequirements
Pillar 2
SupervisoryProcess
Pillar 3
Market Discipline
Standardized Approach
Internal Rating-Based Approach:i. Foundation IRBii. Advanced IRB
Credit Risk
Standardized Approach
Internal Model ApproachMarket Risk
Standardized Approach
Basic Indicator Approach
Advanced Measurement Approach
OperationalRisk
Proposed
Assessment
Methods
under
Pillar 1
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Banking Sector Problems in Egypt
A majority of people face the problem oflimited access to
financial intermediation, which is a constraining factor foreconomic growth
Limited access to finance is not just a matter of ability to paythe interest but also connections and relationships with key
banking sector and finance ministry officials As of 2006 estimations, less than 10% of the population
have a bank account
Egypt has apublic sector dominated banking system.
The guaranteed income for the government-owned banksdenominated bygovernment securities with shortmaturity reduced the banks' incentives to develop capacityto serve small and medium private investors.
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Non Performing Loans
The Egyptian Banking sector has long suffered from the accumulation
ofnon performing loans (NPL) which reached its peak in the late1990s
The NPL problem can be summarized as follows:
Corruption in the lending activities, as loans were given based on
overvaluing assets to fit the collateral base of each bank anddisregarding future cash flows of the borrowing entities. Thisproblem is a clear result ofweak supervision by the CBE
Public banks were used to lend state-owned companies based on
government instructions; e.g. 26 billion EGP are owed by public
enterprises to the four state owned banks As a result, the bankingreform programwas set to tie up this
deteriorating situation of increasing NPLs, including both public
and non-public banks
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Banking Sector Reforms since 2003
Major Elements
Raising the minimum capital requirement for banks,this led to mergers and acquisitions
Administrative and financial restructuring of thepublic-sector banks
Privatizing the big public sector banks and divestingtheir stakes in joint ventures
Strengthening of regulatorysupervision by the CBE
As a first result, the number of banks declined from57 (September 2004) to 43 (June 2006)
The government aims to scale backthe number ofbanks to 22
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Egyptian Banks in Response to Crisis
?
Dr. Rania Salem/Bank Management Spring 2012/22
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