CHAPTER 16
THE MANAGEMENT OF A BANK'S EQUITY CAPITAL POSITION Goal of This Chapter: To discover how to evaluate the adequacy of a bank's equity (owners') capital position and to learn what sources of new capital a bank can u.
Key Terms Prented in This Chapter
Capital Subordinated Debentures
Operating Risk Minority Interest in
Exchange Risk Consolidated Subsidiaries
Crime Risk Equity Commitment Notes
Portfolio Diversification International Lending and
Geographic Diversification Supervision Act 1983
Common Stock Basle Agreement
Preferred Stock Tier 1 Capital
Surplus Tier 2 Capital
Undivided Profit Internal Capital Growth Rate
Equity Rerves Value at Risk (VAR) Models
Chapter Outline
I. Introduction: What Is Bank Capital?
II. The Many Tasks Performed by Bank Capital
A. Cushion Against Risk of Failure
B. Provides Funds Needed to Begin Banking Operations
C. Promotes Public Confidence
D. Provides Funds for Future Growth and New Services
E.The Regulation of Bank Growth
F.Capital Plays a Role in Bank Mergers
G.Limits How Much Risk Exposure the Bank Accepts
H.Protects the Government’s Deposit Insurance System
Ill. Bank Capital and Risk
A. Key Risks in Banking
1. Credit Risk
2. Liquidity Risk
3. Interest-Rate Risk
4. Operating Risk
5. Exchange Risk
6. Crime Risk
B. Bank Defens against Risk
1. Quality Management
2. Diversification2022新年
a. Portfolio
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b. Geographic
3. Deposit Insurance
4. The Protection Provided by Owners' Capital
IV. Types of Bank Capital
A. Common Stock
B. Preferred Stock
C. Surplus
D. Undivided Profits
E. Equity Rerves
F. Subordinated Notes and Debentures
G. Minority Interest in Consolidated Subsidiaries
H. Equity Commitment Notes
I. Relative Importance of Various Sources of Bank Capital
V. Measuring the Size of Bank Capital
A. GAAP Capital
B. RAP Capital
C. Market-Value Capital
VI. How Much Capital Does a Bank Need?
A. The Regulatory Approach to Evaluating a Bank's Capital Needs
1. Reasons Behind Capital Regulation
2. Rearch Evidence
3. Alternative Policy Strategies for Regulating Bank Capital
4. Judgment Approach
5. The Imposition of Minimum Capital Requirements
a. Primary Capital
b. Secondary Capital
c. The Leverage Ratio
B. The Basle Agreement on International Capital Standards
如何学好高中数学1. Tier One: Primary or Core Capital
2. Tier Two: Secondary or Supplemental Capital
3. Calculating Risk-Weighted Asts
4. Calculating the Capital-to Risk-Weighted Asts Ratio
5. Capital Requirements Attached to Derivatives
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6. Bank Capital Standards and Market Risk
7. Value at Risk (VAR) Models
C. New Capital Standards Propod to Follow Basle
VII. Current Pressure to Rai More Capital
A. FDIC Improvement Act
B. Prompt Corrective Action
1. Well Capitalized Banks
2. Adequately Capitalized Banks
3. Undercapitalized Banks
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4. Significantly Undercapitalized Banks
5. Critically Undercapitalized
VIII. Planning To Meet a Bank's Capital Needs
A. Raising Capital Internally to Fulfill the Bank's Plan
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1. Dividend Policy
2. How Fast Must Internally Generated Funds Grow?
B. Raising Capital Externally
1. Issuing Common Stock
2. Issuing Preferred Stock
3. Issuing Subordinated Notes and Debentures
4. Selling Asts and Leasing Facilities
5. Swapping Stock for Debt Securities
6. Choosing the Best Alternative for Raising Outside Capital
XI. Summary of the Chapter
Concept Checks
16-1. What does the term capital as it applies to banking really mean?
Funds contributed to a bank primarily by its owners, consisting mainly of stock, rerves, and retained earnings, plus any long-term debt issued by a bank that qualifies under regulations.
16-2. What crucial roles does capital play in the management and viability of a bank?
Capital in banking provides the long-term, permanent funding that banks need to construct their facilities and provide a ba for the future expansion of their asts. Capital also absorbs operating loss until management has a chance to correct the institution's problems. From a regulatory perspective capital limits the growth of risky asts.
16-3. What are the links between capital and risk exposure in banking?
Capital functions as a cushion to absorb loss until a bank's management can correct the problems generating tho loss. Banks face many different kinds of risk: (1) crime risk, (2) interest-rate risk, (3) credit risk, (4) solvency risk, and (5) business risk. Capital reprents the ultimate line of defen against the risks when all other defens fail.
16-4. What forms of bank capital are in u today?
The principal forms of bank capital include common and preferred stock, surplus, retained earnings, and capital rerves. Retained earnings are normally the most important source of bank capital along with surplus. Common and preferred stock, measured by par value, are usually among the smallest components of bank capital.
16-5. How is the size of a bank's capital measured?
There are veral different capital measures in u today: GAAP capital, RAP capital, and market value capital.
16-6. What is the difference between RAP and GAAP capital?
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GAAP capital is bank capital that is measured by book value (in accounting terminology, by generally accepted accounting principles). RAP capital is regulatory capital, and in addition to GAAP capital includes debt curities, stock holdings in subsidiary companies, and bad-debt rerves.
16-7 What is the rationale for having the government t capital standards for banks, as oppod to letting the private marketplace t tho standards?
The government's interest in bank capital stems from its efforts to stabilize the financial system and avoid drains on the federal insurance system. Capital requirements have long been subject to government regulation, though bankers frequently argue that the market, rather than regulators, should determine how much capital a bank should hold. The fear among regulators, however, is that
banks would hold too little capital to avoid excessive numbers of failures and that the private market cannot adequately asss a bank's need for capital.
16-8. What evidence does recent rearch provide on the role of the private marketplace in determining bank capital standards?
西裤怎么洗The results of recent studies are varied, but most find that the private marketplace is more important than government regulation in determining the amount and type of capital banks must hold. However, government regulation apparently was at least as important in the 1980s and early 1990s, with the tightening of capital regulations and the imposition of minimum capital requirements.
16-9. According to recent rearch, does capital prevent a bank from failing?
If capital is large enough to absorb a bank's operating loss it can prevent failure for a time, at least until the capital is all ud up. However, there is no solid, undisputed evidence of a significant relationship between the size of a bank's capital-to-ast ratio and the incidence of bank failure.
16-10. What are the most popular financial ratios regulators u to asss the adequacy of bank capital today?
The prime capital-adequacy ratios are total capital to asts, equity capital to asts, total capital to risk asts, and primary or core capital and supplementary or condary capital to total asts and to risk-adjusted asts.
16-11. What is the difference between core (or tier 1) capital and supplemental (or tier 2) capital?
Core capital is the permanent capital of a bank, consisting mainly of common stock, surplus, retained earnings, and equity rerves. Supplemental capital is condary forms of bank capital, such as debt curities and limited-life preferred stock.
16-12. A bank reports the following items on its latest balance sheet: Allowance for Loan and Lea Loss $42 million; Undivided Profits $81 million; Subordinated Debt Capital $3 million;
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Common Stock and Surplus $27 million; Equity Notes $2 million; Minority Interest in Subsidiaries $4 million; Mandatory Convertible Debt $5 million; Identifiable Intangible Asts $3 million; and Noncumulative Perpetual Preferred Stock $5 million. How much does the bank hold in Tier 1 capital? In Tier 2 capital?
The Tier 1 capital items include: The Tier 2 capital items include:
$42 mill. Common stock and surplus $27 mill. Allowance for Loan and
Lea Loss
Undivided Profits 81 Subordinated Debt Capital 3 Noncumulative Perpetual Mandatory Convertible Debt 5
Preferred Stock 5 Equity Notes 2 Minority interest in Identifiable Intangible Asts 3
Subsidiaries 4
Total Tier 1 Capital $117 mill. Total Tier 2 Capital $55 mill.
The bank does not have too much Tier 2 capital which can be up to 100 percent of the amount of Tier 1 capital and still count toward meeting capital requirements.
16-13. What changes in the regulation of bank capital were brought into being by the Basle Agreement?
U.S. banks, along with international banks from other industrialized nations, must hold a core or primary (permanent) capital ratio to risk-adjusted asts of 4 percent and an additional 4 percent in supplementary or condary capital, under the terms of the Basle Agreement on international capital standards.
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16-14. First National Bank reports the following items on its balance sheet: cash $200 million; U.S. government curities $150 million; residential real-estate loans $300 million; and corporate loans $350 million. Its off-balance-sheet items include: standby credit letters, $20 million and long-term credit commitments to corporations, $160 million. What are First National's total
risk-weighted asts?
We first convert the off-balance-sheet items to their credit-equivalent amounts:
Off-Balance-Sheet Items
Standby Credit Letters $20 mill. * 1.00 = $20 mill.
Long-Term Commitments to Corporations $160 mill. * 0.50 = 80 mill.
Then we risk-weight all asts:
灵芝食用方法Risk-Weighted Asts
Cash
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