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Bank valuation with an application to the implicit duration of non-maturing deposits

Author: Dermine, Jean INSEAD Area: FinanceIn: International Journal of Banking, Accounting and Finance, vol. 2, no. 1, 2010 Language: EnglishDescription: p. 1-30.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: The purpose of the 'tutorial' paper is to present a model to value banks. First, three traditional models arc summarised briefly. Next, a 'fundamental' bank valuation model is introduced. Based on sound economics and finance principles, it allows to identify the various sources of value and to derive managerial implications, such as the measurement of interest rate risk on non-maturing deposits. A first contribution includes the breakdown of the value of equity into two parts: a liquidation value and a franchise value. A second contribution is to call the attention of the corporate bond market, instead of the equity market, to find adequate risk premium to value banks. The valuation model concerns on-balance sheet banking business, such as deposit taking and lending. Off-balance sheet business, such as advisory services, can be valued with standard corporate finance tools
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The purpose of the 'tutorial' paper is to present a model to value banks. First, three traditional models arc summarised briefly. Next, a 'fundamental' bank valuation model is introduced. Based on sound economics and finance principles, it allows to identify the various sources of value and to derive managerial implications, such as the measurement of interest rate risk on non-maturing deposits. A first contribution includes the breakdown of the value of equity into two parts: a liquidation value and a franchise value. A second contribution is to call the attention of the corporate bond market, instead of the equity market, to find adequate risk premium to value banks. The valuation model concerns on-balance sheet banking business, such as deposit taking and lending. Off-balance sheet business, such as advisory services, can be valued with standard corporate finance tools

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