Guy Hargreaves
ACF-104
Wechat: Guyhargreaves
Recap of yesterday
 Understand various components of an Australian
commercial banking business
 Review of important functions of a commercial bank
including liquidity, capital, margins, revenues, strategy
by studying ANZ
 Form a sound understanding between the theory of
banking and practice by studying ANZ bank case
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Goals of today
 Understand commercial bank balance sheets and
general principles of bank balance sheet management
 Compare off and on balance sheet products and
structures
 Understand key considerations for the practice of good
banking
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Commercial bank management
 Strategy: global, regional, local, products, retail /
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wholesale, technology
Risk management: credit, market, legal / reputational,
operational, country, liquidity –> diversification
Financial: NIM, NPAT, ROE, RAROC, RoRWA, NIM
Regulatory: CET1, RoRWA, LCR, NSFR
Customers: product mix, KYC, X-sell
Operations: technology, costs, risk management
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Recall: commercial bank units
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Board of Directors
Management Office
Financial Control
Risk Management
Legal and Compliance
Operations
Human Resources
Information Technology
Financial Markets
Wholesale Banking
Retail Banking
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Good commercial banking
 Good commercial banking requires sound
management practices
 Set long term incentives, remove short term incentives
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Encourage longer term behaviour by staff, management
Leads to better decisions = stable bank = strong share price
and high liquidity / access to capital
 Good banking = healthy banking system = healthy
financial system able to withstand crises/shocks
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To avoid financial crises
 There are many types of financial crises, including:
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Banking crises
Currency crises
Speculative asset price bubbles
Economic crises
 2007-9 GFC was mostly a banking crisis but it came
from a speculative asset bubble
 Economic crises are usually deep recessions or
depressions where GDP falls sharply
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In particular banking crises
 Loss of confidence in a bank or number of banks
leading to bank run where depositors withdraw funds
rapidly
 Often associated with periods of poor lending
decisions leading to high loan portfolio loss provisions
 High leverage in the banking system means
confidence is fragile
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Small loan losses can quickly turn into a banking crisis
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Balance sheet principles
 Assets – Liabilities = Capital
 Liabilities:
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Defined maturity date
Defined coupon (interest rate)
Must be repaid or default occurs
 Capital:
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No maturity date (perpetual)
No defined coupon (dividend may or may not be paid)
No requirement for repayment - permanent
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US commercial bank balance sheet
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On or off balance sheet?
 If the item appears in the balance sheet financial
statement then it is “on balance sheet”
 Risks that do not appear in the balance sheet financial
statement are “off balance sheet” eg
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Letters of Credit (LCs)
Guarantees
Counterparty credit risk on derivatives
 Banks need to hold regulatory capital against on and
off balance sheets exposures under BIS II and BIS II
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