Financial institutions management (6th edition) part 2
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Financial institutions management (6th edition) part 2
Find more at http^wvvw.downloadslide comChapter ThirteenOff-Balance-Sheet RiskINTRODUCTIONcontingent assets and liabilities Assets and liabilities off Financial institutions management (6th edition) part 2 f the balance sheet that potentially can produce positive or negative future cash flows for an Fl.One of the most important choices facing an II manager is the relative scale of an FIS on- and off-balance-sheet (OBS) activities. Most of US are aware of on-balance-sheet activities because they appear Financial institutions management (6th edition) part 2 on an ITs published asset and liability balance sheets. For example, an FI's deposits and holdings of bonds and loans are on-balance-sheet activitiesFinancial institutions management (6th edition) part 2
. By comparison, off-balance-sheet activities are less obvious and often are invisible to all but the best-informed investor or regulator. In accountiFind more at http^wvvw.downloadslide comChapter ThirteenOff-Balance-Sheet RiskINTRODUCTIONcontingent assets and liabilities Assets and liabilities off Financial institutions management (6th edition) part 2 owever, off-balance-sheet items are contingent assets and liabilities that affect the future, rather than the current, shape of an I l's balance sheet. As such, they have a direct impact on the FI's future profitability and performance. Consequently, efficient management of these OBS items is centra Financial institutions management (6th edition) part 2 l to controlling overall risk exposure in a modern FI.From a valuation perspective, OBS assets and liabilities have the potential to produce positiveFinancial institutions management (6th edition) part 2
or negative future cash flows, l ees from OBS activities provide a key source of noninterest income for many FIs, especially the largest and most credFind more at http^wvvw.downloadslide comChapter ThirteenOff-Balance-Sheet RiskINTRODUCTIONcontingent assets and liabilities Assets and liabilities off Financial institutions management (6th edition) part 2 up 1,795 percent from $3.9 billion in the first six months of 1996. Further, FIs use some OBS activities (especially forwards, futures, options, and swaps) to reduce or manage their interest rale risk (see Chapters 8 and 9), foreign exchange risk (see Chapter 14), and credit risk (see Chapters 11 an Financial institutions management (6th edition) part 2 d 12) exposures in a manner superior to what would exist without these activities. However, OBS activities can involve risks that add to an Fl's overaFinancial institutions management (6th edition) part 2
ll risk exposure. As a result, the true value of an FI's capital or net worth is not simply lhe difference between lhe market value of assets and liabFind more at http^wvvw.downloadslide comChapter ThirteenOff-Balance-Sheet RiskINTRODUCTIONcontingent assets and liabilities Assets and liabilities off Financial institutions management (6th edition) part 2 d liabilities.1 This fee income can have both direct (e.g.. a fee from the sale of a letter of credit) and indirect (through improved customer relationships) effects that have a positive income impact in other produơ areas In cases where customers feel aggrieved with respect to derivatives purchased Financial institutions management (6th edition) part 2 from a dealer Fl, off-balance-sheet aơrvities can have important negative reputational effects that have an adverse impact on the future flow of feesFinancial institutions management (6th edition) part 2
and other income372Find more at http://www.downloadslide.com374 Part Two Measuring RiskTABLE 13-1Major Types ofOff-Balance-SheetActivitiesoff-balanceFind more at http^wvvw.downloadslide comChapter ThirteenOff-Balance-Sheet RiskINTRODUCTIONcontingent assets and liabilities Assets and liabilities off Financial institutions management (6th edition) part 2 ange in the value of an option for a unit change in the price of the underlying security.Schedule L Activities*Loan commitment Contractual commitment to make a loan up to a stated amount at a given interest rate in the future.Letters of credit Contingent guarantees sold by an Fl to underwrite the pe Financial institutions management (6th edition) part 2 rformance of the buyer of the guaranty.Derivative contract Agreement between two parties to exchange a standard quantity of an asset at a predetermineFinancial institutions management (6th edition) part 2
d price at a specified date in the future.When-issued trading leading in securities prior to their actual issue.Loans sold Loans originated by an Fl aFind more at http^wvvw.downloadslide comChapter ThirteenOff-Balance-Sheet RiskINTRODUCTIONcontingent assets and liabilities Assets and liabilities off Financial institutions management (6th edition) part 2 eteriorates.Non-Schedule L Activities*Settlement risk Intraday credit risk, such as that associated with CHIPS wire ưansíer activities.Affiliate risk Risk imposed on one holding company affiliate as a result of the potential failure of the other holding company affiliates.’AsFinancial institutions management (6th edition) part 2
KÌule I anlvtllM ar<> ihn<4> not sutyvi lo ihK rpqnlretnMM.liability (its guaranty) becomes an actual liability and it moves onto the liability side oFind more at http^wvvw.downloadslide comChapter ThirteenOff-Balance-Sheet RiskINTRODUCTIONcontingent assets and liabilities Assets and liabilities off Financial institutions management (6th edition) part 2 FI's value. While some part of QBS risk is related to interest rale risk, credit risk, and other risks, those items also introduce unique risks that must bo managed by FIs. Indeed, the failure of the U.K. investment bank Barings, the legal problems of Bankers Trust (relating to swap deals involving Financial institutions management (6th edition) part 2 Procter &. Cambio and Gibson Greeting Cards), the $2.6 billion loss incurred by Sumitomo Corp, (of Japan) from commodity futures trading, and the $1.Financial institutions management (6th edition) part 2
5 billion in losses and eventual bankruptcy of Orange County in California have all been linked to FI off-balance-sheet activities in derivatives. ForFind more at http^wvvw.downloadslide comChapter ThirteenOff-Balance-Sheet RiskINTRODUCTIONcontingent assets and liabilities Assets and liabilities off Financial institutions management (6th edition) part 2 or that county's investments in risky securities and derivatives transactions. Twenty other banks and securities firms have been similarly sued. The Ethical Dilemmas box discusses how, more recently, questionable off-balance-sheet transactions between Citigroup, J. p. Morgan Chase, and Enron (in add Financial institutions management (6th edition) part 2 ition to other questionable accounting practices by many other firms) resulted in regulatory changes in 2002 regarding how off-balance-sheet activitieFinancial institutions management (6th edition) part 2
s are recorded by all public companies. Table 13-2 lists some other big losses for FIs from trading in derivatives. (Derivative securities I futures, Find more at http^wvvw.downloadslide comChapter ThirteenOff-Balance-Sheet RiskINTRODUCTIONcontingent assets and liabilities Assets and liabilities off Financial institutions management (6th edition) part 2 t assets and liabilities and move onto the balance sheet with a probability less than 1, their valuation is difficult and often highly complex. Because many off-balance-sheet items involve option features, the most common methodology has been to apply contingent claims/option pricing theory models o Financial institutions management (6th edition) part 2 f finance. For example, one relatively simple way to estimate the value of an OBS position in options is by calculating the delta of an option—theFindFinancial institutions management (6th edition) part 2
more at http7/wvvw downloadslide.comChapter 13 Off-Bilince Sheer Risk 375TABLE 13-2 Some Big Losses on DerivativesSounxM Osin Atkinson, "UBS fk-dgwi Find more at http^wvvw.downloadslide comChapter ThirteenOff-Balance-Sheet RiskINTRODUCTIONcontingent assets and liabilities Assets and liabilities off Financial institutions management (6th edition) part 2 ter & Gamble over derivative losses which amounted to $21 million for Gibson and d $200 million settlement for Procter & Gamble.•February 1995: Barings. Britain’s oldest investment bank, announces a loss which ultimately totals $ 1.38 billion, related to derivatives trading in Singapore by trader Ni Financial institutions management (6th edition) part 2 cholas Leeson.Find more at http^wvvw.downloadslide comChapter ThirteenOff-Balance-Sheet RiskINTRODUCTIONcontingent assets and liabilities Assets and liabilities offFind more at http^wvvw.downloadslide comChapter ThirteenOff-Balance-Sheet RiskINTRODUCTIONcontingent assets and liabilities Assets and liabilities offGọi ngay
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