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1、Chapter 13The Effective Use of CapitalP 463504 P 463504 Contents Why Worry About Bank Capital?Why Worry About Bank Capital? (P464 - 465)(P464 - 465) Risk-based Capital StandardsRisk-based Capital Standards (P465 - 471)(P465 - 471) What Constitutes Bank Capital?What Constitutes Bank Capital? (P471 -
2、474)(P471 - 474) FDICIA and Bank Capital Standards FDICIA and Bank Capital Standards (P474 - 481)(P474 - 481) What is the Function of Bank Capital?What is the Function of Bank Capital? (P481 - 484)(P481 - 484) How Much Capital is Adequate? How Much Capital is Adequate? (P484 - 485)(P484 - 485) The E
3、ffect of Capital Requirements on Bank The Effect of Capital Requirements on Bank Operating Policies Operating Policies (P485 - 489)(P485 - 489) Characteristics of External Capital SourcesCharacteristics of External Capital Sources (P489 - 492)(P489 - 492) Capital Planning Capital Planning (P492 - 49
4、4)(P492 - 494) Federal Deposit Insurance Federal Deposit Insurance (P494 - 501)(P494 - 501)Chapter 13 Chapter 13 1 Why Worry About Bank Capital? High financial leverage, however, High financial leverage, however, increases the relative increases the relative riskinessriskiness of of operations by pr
5、oviding less protection to operations by providing less protection to creditors upon liquidation of the firm. creditors upon liquidation of the firm. Bankers also recognize that high leverage Bankers also recognize that high leverage increases potential profitabilityincreases potential profitability
6、, so they , so they attempt to minimize external equity attempt to minimize external equity financing. financing. Regulators, in contrast, want to Regulators, in contrast, want to increase bank equity financing and focus increase bank equity financing and focus on balancingon balancing solvency risk
7、s solvency risks with an with an individual banks profit potential.individual banks profit potential.P 464 P 464 Chapter 13 Chapter 13 Contents Why Worry About Bank Capital?Why Worry About Bank Capital? (P464 - 465)(P464 - 465) Risk-based Capital StandardsRisk-based Capital Standards (P465 - 471)(P4
8、65 - 471) What Constitutes Bank Capital?What Constitutes Bank Capital? (P471 - 474)(P471 - 474) FDICIA and Bank Capital Standards FDICIA and Bank Capital Standards (P474 - 481)(P474 - 481) What is the Function of Bank Capital?What is the Function of Bank Capital? (P481 - 484)(P481 - 484) How Much Ca
9、pital is Adequate? How Much Capital is Adequate? (P484 - 485)(P484 - 485) The Effect of Capital Requirements on Bank The Effect of Capital Requirements on Bank Operating Policies Operating Policies (P485 - 489)(P485 - 489) Characteristics of External Capital SourcesCharacteristics of External Capita
10、l Sources (P489 - 492)(P489 - 492) Capital Planning Capital Planning (P492 - 494)(P492 - 494) Federal Deposit Insurance Federal Deposit Insurance (P494 - 501)(P494 - 501)Chapter 13 Chapter 13 2 Risk-based Capital StandardsPrimary capitalPrimary capital consisted of common and consisted of common and
11、 perpetual preferred stock, surplus, undivided perpetual preferred stock, surplus, undivided profits, contingency and other capital profits, contingency and other capital reserves, mandatory convertible debt, and the reserves, mandatory convertible debt, and the allowance for loan and lease losses.a
12、llowance for loan and lease losses.Regulators recognized Regulators recognized secondary capitalsecondary capital to to include sheet items such as long-term include sheet items such as long-term subordinated debt and limited-life preferred subordinated debt and limited-life preferred stock.stock.Pr
13、imary plus secondary capital equaled Primary plus secondary capital equaled total total capitalcapital, with the minimum set at 6 percent of , with the minimum set at 6 percent of total bank assets. total bank assets. P 465 P 465 Chapter 13 Chapter 13 The Basel Agreement In 1986, U.S bank regulators
14、 In 1986, U.S bank regulators 12 industrial12 industrialnationsnations1992.1992.The Basel Agreement contained several The Basel Agreement contained several important elements. important elements. P 466P 466Chapter 13 Chapter 13 Risk-based elements of the plan1.Classify assets into one of four risk c
15、ategories, 1.Classify assets into one of four risk categories, appropriate to the obligor, collateral, or guarantor appropriate to the obligor, collateral, or guarantor of the asset.of the asset.2.Convert off-balance sheet commitments and 2.Convert off-balance sheet commitments and guarantees to the
16、ir on-balance sheet “credit guarantees to their on-balance sheet “credit equivalent” values and classify them in the equivalent” values and classify them in the appropriate risk categories.appropriate risk categories.3.Multipiy the dollar amount of assets in each risk 3.Multipiy the dollar amount of
17、 assets in each risk category by the appropriate risk weight, this category by the appropriate risk weight, this equals risk-weighed assets.equals risk-weighed assets.4.Multiply risk-weighted assets by the minimum 4.Multiply risk-weighted assets by the minimum capital percentages, either 4 percent f
18、or Tier 1 capital percentages, either 4 percent for Tier 1 capital or 8 percent for total capital for a U.S. bank capital or 8 percent for total capital for a U.S. bank to be adequately capitalized.to be adequately capitalized.P 466 P 466 Chapter 13 Chapter 13 Contents Why Worry About Bank Capital?W
19、hy Worry About Bank Capital? (P464 - 465)(P464 - 465) Risk-based Capital StandardsRisk-based Capital Standards (P465 - 471)(P465 - 471) What Constitutes Bank Capital?What Constitutes Bank Capital? (P471 - 474)(P471 - 474) FDICIA and Bank Capital Standards FDICIA and Bank Capital Standards (P474 - 48
20、1)(P474 - 481) What is the Function of Bank Capital?What is the Function of Bank Capital? (P481 - 484)(P481 - 484) How Much Capital is Adequate? How Much Capital is Adequate? (P484 - 485)(P484 - 485) The Effect of Capital Requirements on Bank The Effect of Capital Requirements on Bank Operating Poli
21、cies Operating Policies (P485 - 489)(P485 - 489) Characteristics of External Capital SourcesCharacteristics of External Capital Sources (P489 - 492)(P489 - 492) Capital Planning Capital Planning (P492 - 494)(P492 - 494) Federal Deposit Insurance Federal Deposit Insurance (P494 - 501)(P494 - 501)Chap
22、ter 13 Chapter 13 3 What Constitutes Bank Capital? According to the According to the accounting definitionaccounting definition, , capital or net worth equals the cumulative capital or net worth equals the cumulative value of assets minus the cumulative value of assets minus the cumulative value of
23、liabilities and represents value of liabilities and represents ownership interest in a firmownership interest in a firm. . . . In In bankingbanking, the regulatory concept of , the regulatory concept of bank capital differs substantially from bank capital differs substantially from accounting capita
24、laccounting capital . .P 471 P 471 Chapter 13 Chapter 13 Common stockCommon stockSurplusSurplusUndivided ProfitsUndivided ProfitsCapital reservesCapital reservesNet unrealized holding gains Net unrealized holding gains (losses)(losses)Preferred stockPreferred stockP 472 P 472 Chapter 13 Chapter 13 T
25、ier 1 or core capital Tier 1 or core capital Tier 2 or supplementary capitalTier 2 or supplementary capitalP 474P 474Chapter 13 Chapter 13 Tier 1Tier 1 or or core capitalcore capital consists of common consists of common stockholders equity, stockholders equity, noncumulativenoncumulative perpetual
26、perpetual preferred stock and any related surplus, and preferred stock and any related surplus, and minority interests in equity capital accounts of minority interests in equity capital accounts of consolidated subsidiaries, minus intangible consolidated subsidiaries, minus intangible assets like go
27、odwill and disallowed deferred tax assets like goodwill and disallowed deferred tax assets. assets. Tier 2Tier 2 oror supplementary capitalsupplementary capital is limited to 100 is limited to 100 percent of Tier 1 capital and consists of percent of Tier 1 capital and consists of cumulative perpetua
28、l preferred stock and any cumulative perpetual preferred stock and any related surplus, long-term preferred stock, limited related surplus, long-term preferred stock, limited amounts of term subordinated debt and amounts of term subordinated debt and intermediate-term preferred stock, and a limited
29、intermediate-term preferred stock, and a limited amount of the allowance for loan and lease amount of the allowance for loan and lease losses. losses. P 474P 474Chapter 13 Chapter 13 Contents Why Worry About Bank Capital?Why Worry About Bank Capital? (P464 - 465)(P464 - 465) Risk-based Capital Stand
30、ardsRisk-based Capital Standards (P465 - 471)(P465 - 471) What Constitutes Bank Capital?What Constitutes Bank Capital? (P471 - 474)(P471 - 474) FDICIA and Bank Capital StandardsFDICIA and Bank Capital Standards (P474 - 481)(P474 - 481) What is the Function of Bank Capital?What is the Function of Ban
31、k Capital? (P481 - 484)(P481 - 484) How Much Capital is Adequate? How Much Capital is Adequate? (P484 - 485)(P484 - 485) The Effect of Capital Requirements on Bank The Effect of Capital Requirements on Bank Operating Policies Operating Policies (P485 - 489)(P485 - 489) Characteristics of External Ca
32、pital SourcesCharacteristics of External Capital Sources (P489 - 492)(P489 - 492) Capital Planning Capital Planning (P492 - 494)(P492 - 494) Federal Deposit Insurance Federal Deposit Insurance (P494 - 501)(P494 - 501)Chapter 13 Chapter 13 Federal Deposit Insurance Improvement Federal Deposit Insuran
33、ce Improvement Act (1991)Act (1991) “ Prompt regulatory action ” “ Prompt regulatory action ”4 FDICIA and Bank Capital StandardsP 474P 474Chapter 13 Chapter 13 Well-capitalized banks Well-capitalized banks Adequately capitalized banksAdequately capitalized banksUndercapitalized banksUndercapitalized
34、 banksSignificantly undercapitalized banksSignificantly undercapitalized banksCritically undercapitalized banksCritically undercapitalized banksP 476P 476Chapter 13 Chapter 13 The new Basel Accord Operational riskOperational risk “the risk of loss resulting from “the risk of loss resulting from inad
35、equate or failed internal processes, inadequate or failed internal processes, people, and systems, or from external people, and systems, or from external events.”events.”P 480P 480Chapter 13 Chapter 13 Contents Why Worry About Bank Capital?Why Worry About Bank Capital? (P464 - 465)(P464 - 465) Risk-
36、based Capital StandardsRisk-based Capital Standards (P465 - 471)(P465 - 471) What Constitutes Bank Capital?What Constitutes Bank Capital? (P471 - 474)(P471 - 474) FDICIA and Bank Capital Standards FDICIA and Bank Capital Standards (P474 - 481)(P474 - 481) What is the Function of Bank Capital? What i
37、s the Function of Bank Capital? (P481 - 484)(P481 - 484) How Much Capital is Adequate? How Much Capital is Adequate? (P484 - 485)(P484 - 485) The Effect of Capital Requirements on Bank The Effect of Capital Requirements on Bank Operating Policies Operating Policies (P485 - 489)(P485 - 489) Character
38、istics of External Capital SourcesCharacteristics of External Capital Sources (P489 - 492)(P489 - 492) Capital Planning Capital Planning (P492 - 494)(P492 - 494) Federal Deposit Insurance Federal Deposit Insurance (P494 - 501)(P494 - 501)Chapter 13 Chapter 13 5 What is the Function of Bank Capital?I
39、t provides a cushion firms to absorb It provides a cushion firms to absorb losses and remain solvent.losses and remain solvent.It provides ready access to financial It provides ready access to financial markets and thus guards against liquidity markets and thus guards against liquidity problems caus
40、ed by deposit outflows.problems caused by deposit outflows.It constrains growth and limits risk taking.It constrains growth and limits risk taking. P 481P 481Chapter 13 Chapter 13 Contents Why Worry About Bank Capital?Why Worry About Bank Capital? (P464 - 465)(P464 - 465) Risk-based Capital Standard
41、sRisk-based Capital Standards (P465 - 471)(P465 - 471) What Constitutes Bank Capital?What Constitutes Bank Capital? (P471 - 474)(P471 - 474) FDICIA and Bank Capital Standards FDICIA and Bank Capital Standards (P474 - 481)(P474 - 481) What is the Function of Bank Capital?What is the Function of Bank
42、Capital? (P481 - 484)(P481 - 484) How Much Capital is Adequate? How Much Capital is Adequate? (P484 - 485)(P484 - 485) The Effect of Capital Requirements on Bank The Effect of Capital Requirements on Bank Operating PoliciesOperating Policies (P485 - 489)(P485 - 489) Characteristics of External Capit
43、al SourcesCharacteristics of External Capital Sources (P489 - 492)(P489 - 492) Capital Planning Capital Planning (P492 - 494)(P492 - 494) Federal Deposit Insurance Federal Deposit Insurance (P494 - 501)(P494 - 501)Chapter 13 Chapter 13 Limiting asset growthLimiting asset growthChanging the Capital M
44、ixChanging the Capital MixChanging Asset Composition Changing Asset Composition Pricing PoliciesPricing PoliciesShrinking the BankShrinking the Bank7 The Effect of Capital Requirements.P 485P 485Chapter 13 Chapter 13 P 487P 487 TA/TA1= TA/TA1= EQ/EQ1EQ/EQ1Chapter 13 Chapter 13 Contents Why Worry Abo
45、ut Bank Capital?Why Worry About Bank Capital? (P464 - 465)(P464 - 465) Risk-based Capital StandardsRisk-based Capital Standards (P465 - 471)(P465 - 471) What Constitutes Bank Capital?What Constitutes Bank Capital? (P471 - 474)(P471 - 474) FDICIA and Bank Capital Standards FDICIA and Bank Capital Sta
46、ndards (P474 - 481)(P474 - 481) What is the Function of Bank Capital?What is the Function of Bank Capital? (P481 - 484)(P481 - 484) How Much Capital is Adequate? How Much Capital is Adequate? (P484 - 485)(P484 - 485) The Effect of Capital Requirements on Bank The Effect of Capital Requirements on Ba
47、nk Operating Policies Operating Policies (P485 - 489)(P485 - 489) Characteristics of External Capital SourcesCharacteristics of External Capital Sources (P489 - 492)(P489 - 492) Capital Planning Capital Planning (P492 - 494)(P492 - 494) Federal Deposit Insurance Federal Deposit Insurance (P494 - 501
48、)(P494 - 501)Chapter 13 Chapter 13 Subordinated DebtSubordinated DebtCommon Stock Common Stock Preferred StockPreferred StockTrust Preferred StockTrust Preferred StockLeasing ArrangementsLeasing Arrangements88 Characteristics of External Capital Sources Characteristics of External Capital SourcesP 4
49、89P 489Chapter 13 Chapter 13 Subordinated Debtits relatively long maturitiesits relatively long maturitiesfunding permanencefunding permanencedebt holders claims debt holders claims original weighted average maturityoriginal weighted average maturityP 489P 489Chapter 13 Chapter 13 Common Stock Commo
50、n stock is preferred by Common stock is preferred by regulatorsregulators a source of external capital. a source of external capital. Common stock is not as attractive Common stock is not as attractive from the from the bankbanks perspective due to its s perspective due to its high high costcost. .P
51、 490P 490Chapter 13 Chapter 13 Preferred Stock Preferred stock is form of equity in Preferred stock is form of equity in which investors claims are senior to those which investors claims are senior to those of common stockholders.of common stockholders.P 491P 491Chapter 13 Chapter 13 Trust Preferred
52、 Stock pays dividends that are pays dividends that are tax deductible.tax deductible. bank or bank holding bank or bank holding company a trust company company a trust company sells preferred stock loans the sells preferred stock loans the proceeds proceeds P 491P 491Chapter 13 Chapter 13 Leasing Ar
53、rangements selling simultaneously selling simultaneously leasing it back maintain complete leasing it back maintain complete control receive large amounts of control receive large amounts of cash at low cost .cash at low cost .P 491P 491Chapter 13 Chapter 13 Contents Why Worry About Bank Capital?Why
54、 Worry About Bank Capital? (P464 - 465)(P464 - 465) Risk-based Capital StandardsRisk-based Capital Standards (P465 - 471)(P465 - 471) What Constitutes Bank Capital?What Constitutes Bank Capital? (P471 - 474)(P471 - 474) FDICIA and Bank Capital Standards FDICIA and Bank Capital Standards (P474 - 481)
55、(P474 - 481) What is the Function of Bank Capital?What is the Function of Bank Capital? (P481 - 484)(P481 - 484) How Much Capital is Adequate? How Much Capital is Adequate? (P484 - 485)(P484 - 485) The Effect of Capital Requirements on Bank The Effect of Capital Requirements on Bank Operating Polici
56、es Operating Policies (P485 - 489)(P485 - 489) Characteristics of External Capital SourcesCharacteristics of External Capital Sources (P489 - 492)(P489 - 492) Capital PlanningCapital Planning (P492 - 494)(P492 - 494) Federal Deposit Insurance Federal Deposit Insurance (P494 - 501)(P494 - 501)Chapter
57、 13 Chapter 13 The amount and type of capital The amount and type of capital required is determined simultaneously required is determined simultaneously with the expected composition of assets with the expected composition of assets and liabilities and forecasts of income and liabilities and forecas
58、ts of income and expenses. and expenses. The greater is assumed risk and The greater is assumed risk and asset growth, the greater is required asset growth, the greater is required capital.capital.9 Capital PlanningP 492P 492Chapter 13 Chapter 13 Planning processGenerate pro forma balance sheets and
59、 Generate pro forma balance sheets and income statements for the bank.income statements for the bank.Select a dividend payout.Select a dividend payout.Analyze the costs and benefits of Analyze the costs and benefits of alternative sources of external capital.alternative sources of external capital.P 492P 492 Exhibit 13.12 Exhibit 13.12Chapter 13 Chapter 13
