Normal view MARC view

Managing financial institutions: an asset/liability approach

Author: Gardner, Mona J. ; Mills, Dixie L.Publisher: Dryden Press, 1988.Language: EnglishDescription: 795 p. : Graphs ; 24 cm.ISBN: 0030054796Type of document: BookBibliography/Index: Includes bibliographical references and index
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Item type Current location Collection Call number Status Date due Barcode Item holds
Book Europe Campus
Main Collection
Print HG1615.25 .G37 1988
(Browse shelf)
Available 001193097
Total holds: 0

Includes bibliographical references and index


Managing Financial Institutions An Asset/Liability Approach Contents Part I THE ENVIRONMENT OF ASSET/LIABILITY MANAGEMENT Chapter 1 1 ASSET/LIABILITY MANAGEMENT: WHAT AND WHY? Changing Times for Financial Institutions 3 Financial versus Real Assets 4 Financial Institutions versus Nonfinancial Firms 5 Financial Institutions: What Are They? 5 Financial Institutions and the Transfer of Funds 7 Benefits of Intermediation and Brokerage 10 Asset/Liability Management: What Is It? 11 Asset/Liability Management: Who Sets Objectives? 12 Summary 15 Plan of the Book 15 2 Chapter 2 REGULATION, TECHNOLOGY, AND FINANCIAL INNOVATION A Conceptual Framework for Regulation, Innovation, and Reform 21 Depository Institutions 25 Finance Companies 27 Insurance Companies 31 Pension Funds 32 Investment Companies 33 Securities Firms 34 Origins of Financial Innovation and Regulatory Reform in the 1980s 34 DIDMCA 36 After DIDMCA: Continuing Need for Reform 39 The Garn--St Germain Depository Institutions Act of 1982 40 The Years since 1982: The Dialectic Continues 42 20 xi xii Contents Continuing Regulatory Concerns 42 International Influences 44 Summary 45 Appendix 2A: Provisions of the Competitive Equality Banking Act of 1987 49 Chapter 3 THE IMPACT OF ORGANIZATIONAL STRUCTURE Equity versus Net Worth 51 The Role of Net Worth in Asset/Liability Management 52 Stockholder-Owned Institutions 53 Mutually Owned Institutions 63 Not-for-Profit Institutions 67 Comparative Taxation of Financial Institutions 68 Summary 71 Appendix 3A: Effect of Leverage on Return on Net Worth 75 50 Chapter 4 FINANCIAL MARKET INSTRUMENTS AND YIELDS Issues Affecting the Calculation of Money Market Yields 79 Calculating Annual Yields 80 Discount Securities and Their Yields 80 Short-Term Interest-Bearing Securities 90 Capital Market Instruments and Yields: Debt Securities 92 Capital Market Instruments and Yields: Equity Securities 99 What Determines Yields? 103 Summary 104 Appendix 4A: The Mathematics of Compound and Present Value 109 Part II 78 INTEREST RATE THEORIES AND INTEREST RATE RISK Chapter 5 113 THE LEVEL OF INTEREST RATES: THEORIES AND FORECASTING 114 Why Theories Are Important to Managers 115 A Historical Look at Interest Rates 115 The General Level of Interest Rates 116 Loanable Funds Theory 117 Loanable Funds Theory and Interest Rate Forecasting 121 Inflation and the Level of Interest Rates 123 Evaluation of the Fisher Theory 126 Accuracy of Interest Rate Forecasting 132 Summary 134 Contents xiii Chapter 6 THE TERM STRUCTURE OF INTEREST RATES 138 The Term Structure Defined: A Closer Look 139 Unbiased (Pure) Expectations Theory 146 Modifications of the Unbiased Expectations Theory 149 Empirical Tests of the Term Structure Theories 154 Application of Term Structure Theories to Financial Institutions Management 157 Summary 161 Chapter 7 INTEREST RATE RISK Interest Rate Risk Defined 169 The Price/Yield Connection 169 The Price/Yield Relationship Illustrated 172 The Two Sides of Interest Rate Risk 174 Effect of Interest Rate Changes on Debt Securities 175 Effect of Interest Rate Changes on Common Stock 180 Summary 181 Chapter 8 168 INTEREST RATE RISK MANAGEMENT: DURATION 184 Duration: An Idea Ahead of Its Time 185 Some General Properties of Duration 189 Measuring Interest Rate Risk: The Relationship between Duration and Price Changes 190 Applications of Duration to Asset/Liability Management 195 Summary 200 Chapter 9 INTEREST RATE RISK MANAGEMENT: INTEREST RATE FUTURES 204 Financial Institutions and Financial Futures 205 Futures Contracts 205 Interest Rate Futures 207 Risk and the Financial Futures Markets 211 Foreign Currency Futures 219 Summary 223 Chapter 10 INTEREST RATE RISK MANAGEMENT: INDEX FUTURES AND OPTIONS Stock Index Futures 229 Financial Institutions and Stock Index Futures 231 228 xiv Contents Other Index Futures 237 Options on Financial Assets 237 Options and Financial Institutions 239 Options and Futures Hedging: A Comparison 242 Summary 244 Part III MANAGING ASSETS AND LIABILITIES IN DEPOSITORY INSTITUTIONS 249 Chapter 11 DEPOSITORY INSTITUTIONS: OVERVIEW AND COMPARISON Commercial Banks: Industry Structure 251 Assets of Commercial Banks 251 Liabilities of Commercial Banks 254 Income and Expenses of Commercial Banks 257 Savings Institutions: Industry Structure 260 The Balance Sheet of Savings Institutions 262 Income and Expenses of Savings Institutions 267 Credit Unions: Industry Structure 267 The Balance Sheet of Credit Unions 271 Income, Expenses, and Earnings of Credit Unions 273 Financial Structure and Performance of Depositories: A Comparison 274 Depository Institutions: Mergers and Failures 278 Depository Institutions: Different, Yet Alike 282 Summary 284 Chapter 12 250 ASSET MANAGEMENT: LIQUIDITY RESERVES AND THE SECURITIES PORTFOLIO Importance of Liquidity in Depository Institutions 289 Estimating Liquidity Needs: Federal Reserve Board Requirements 290 Reserve Requirements of Other Regulators 297 Estimating Nonreserve Liquidity Needs 298 Managing the Liquidity Position 301 Impact of Regulation on Portfolio Management 304 Portfolio Management Strategies 307 Summary 309 Appendix 12A: Reducing Portfolio Risk through Diversification 315 Chapter 13 288 ASSET MANAGEMENT: COMMERCIAL, AGRICULTURAL, AND INTERNATIONAL LENDING Loan Portfolios of Depository Institutions 321 Institutional Policies and Objectives 322 320 Contents xv Establishing Loan Terms 324 Additional Policy Areas 327 Recent Trends in Commercial Lending 329 Commercial Loan Credit Analysis 332 Interest Rates on Commercial Loans 335 Commercial Lending: Noninterest Terms and Conditions 339 Management of Agricultural Loans 343 Management of International Loans 346 Summary 349 Chapter 14 ASSET MANAGEMENT: CONSUMER AND MORTGAGE LENDING 354 Consumer Credit: An Overview 355 Regulation of Consumer Credit 357 Consumer Credit Analysis 361 Terms on Consumer Installment Loans 363 Consumer Credit through Credit Cards 367 Mortgage Lending: An Overview 370 Credit Risk and Mortgage Lending 372 Adjustable-Rate Mortgage Terms 374 Mortgages without Adjustable Rates 378 Other Terms of Mortgage Loans 380 Secondary Market Purchases and Sales 382 Summary 383 Chapter 15 DEPOSIT AND LIABILITY MANAGEMENT Interest Rate Restrictions: A History 389 Liability Management 396 Changing Sources of Funds: A Summary 406 Noninterest Competition among Depositories 406 Acquisition of Funds in a Deregulated Environment 410 Deregulation and Federal Deposit Insurance 415 Summary 421 388 Chapter 16 THE ROLE OF CAPITAL Why Capital? 427 Components of Capital 429 How Is Capital Measured? 434 Capital Compared to What? 439 How Much Capital Is Enough? 443 Management of Capital: Growth 449 426 xvi Contents Management of Capital: Cost of Capital 453 Management of Capital: Dividend Policy 457 Summary 459 Part IV ASSET/LIABILITY MANAGEMENT IN DEPOSITORY INSTITUTIONS Chapter 17 465 466 ASSET/LIABILITY MANAGEMENT : GAP ANALYSIS The Need for an Integrated Policy 467 Alternatives for Asset/Liability Management 468 Monitoring the Balance Sheet: GAP Analysis 468 Impact of the GAP on RONW 474 Managing the GAP in Response to Interest Rate Forecasts 475 Principles of GAP Management 478 Limitations of GAP Management 481 Summary 483 Appendix 17A: Measuring the GAP over Several Planning Horizons 489 Chapter 18 ASSET/LIABILITY MANAGEMENT: BEYOND GAP ANALYSIS Why GAP Management Is Insufficient 491 Duration as an Asset/Liability Management Tool 493 Financial Futures as an Asset/Liability Tool 499 Interest Rate Swaps 503 The Secondary Mortgage Market as an Asset/Liability Tool 509 Securitization: Development of Other Secondary Loan Markets 514 Summary 515 490 Chapter 19 LONG­TERM ASSET/LIABILITY MANAGEMENT DECISIONS Short-Run versus Long-Run Decisions 521 The Model for Long-Term Investment Decisions 521 Electronic Funds Transfer Systems 523 Application of NPV Analysis to EFT 529 Merger Analysis: Another Use of NPV 531 Estimating Value in a Merger 534 Other Estimates of Acquisition Value 537 Dilution: Is NPV Best in the Short Run? 538 Regulation of Depository Institutions Mergers 539 Summary 544 520 Contents xvii Chapter 20 FEE­BASED SERVICES The Role of Fee-Based Services 551 Traditional Fee-Based Services 551 Trust Department Operations 552 Correspondent Banking 553 Emerging Fee-Based Services 557 Securities Activities: BHCs and Member Banks 557 Securities Activities of Other Depository Institutions 561 Financial Implications of Brokerage Activities 562 Insurance Activities as Sources of Fee-Based Income 564 Financial Implications of Insurance Activities 567 Other Emerging Fee-Based Services 568 Summary 569 Chapter 21 550 PERFORMANCE EVALUATION General Guidelines 575 Liquidity and Portfolio Management 580 The Loan Portfolio 584 Management of Liabilities and Capital 585 Efficiency and Productivity 586 Profitability 588 Trend Analysis 591 Determinants of Exceptional Performance in Depositories 592 Off-Balance Sheet Activities and Performance Evaluation 596 Performance Rating Services 598 Summary 598 Appendix 21A: Alternative Ratios for Evaluating Performance 612 Appendix 21B: Supplementary Financial Information for First National Corporation 613 574 Part V ASSET/LIABILITY MANAGEMENT IN NONDEPOSITORY INSTITUTIONS 617 Chapter 22 FINANCE COMPANIES Nondepository Institutions: What Are They? 619 Finance Companies: What Are They? 619 Assets and Liabilities of Finance Companies 621 Income, Expenses, and Profitability of Finance Companies 624 Asset Management 625 618 xviii Contents Liability and Capital Management 631 Use of Overall Asset/Liability Techniques 632 Performance Measurement in Finance Companies 633 Summary 636 Chapter 23 INSURANCE COMPANIES An Industry Founded on Probabilities 643 Ownership Structure of the Insurance Industry 644 Assets of Life Insurers 645 Obligations of Life Insurers 647 Income and Expenses of Life Insurers 648 The NIM Modified 649 Types of Life Insurance Policies 650 Comparison of Policy Cash Flows 651 The Evolving Life Insurance Product Mix: Causes and Results 654 Life Insurers: Asset Management 657 Life Insurers: Techniques for Integrated Asset/Liability Management 659 Balance Sheet of Property and Casualty Insurers 660 Income and Expenses of PandC Insurers 663 Changes in the PandC Industry: Causes and Results 665 PandC Insurers: Techniques for Integrated Asset/Liability Management 668 Performance Evaluation of Insurance Companies 668 Summary 670 Appendix 23A: Calculation of the Premium on a Whole Life Policy 676 642 Chapter 24 PENSION FUNDS, INVESTMENT COMPANIES, AND SECURITIES FIRMS Types and Growth of Pension Funds 681 Influence of ERISA 682 Pension Funds: Descriptive Data 683 Managing Pension Fund Assets 685 Integrated Management Strategies 688 Performance Evaluation of Pension Funds 690 Investment Companies: An Overview 691 Investment Companies: Regulatory Influences 693 Growth of Investment Companies since 1970 694 Investment Companies: Descriptive Data 695 Managing Mutual Fund Assets 698 Managing REIT Assets 699 Performance Evaluation of Investment Companies 700 Securities Firms: An Overview 701 680 Contents xix Securities Firms: Regulatory Influences 703 Securities Firms: Descriptive Data 706 Securities Firms: Managing Assets and Liabilities 706 Performance Evaluation of Securities Firms 709 Summary 709 Chapter 25 DIVERSIFIED FINANCIAL SERVICES FIRMS Financial Services Firms: What Are They? 715 Development of Financial Services Firms: When and Why 715 Profiles of Major Diversified Financial Services Firms 717 Merrill Lynch and Company 719 Prudential Insurance Company of America 721 American Express 723 Sears, Roebuck and Company 725 Citicorp 729 Managerial Implications of Diversified Financial Services Firms 732 Summary 734 Appendix A CASES Case 1 First National Corporation 737 Case 2 Heart of America State Bank 753 Case 3 Construction Equipment Credit Union 762 Case 4 Turner Federal Savings and Loan 768 Appendix B MATHEMATICAL TABLES AUTHOR INDEX SUBJECT INDEX 714 737 773 781 786

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