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Lecture Principles of money, banking, and financial markets (12th edition): Chapter 12 - Ritter, Silber, Udell

Chapter 12 - Depository financial institutions. In this chapter you will learn to evaluate the traditional uses and sources of bank funds, understand bank profitability and the risks inherent in banking, describe the recent consolidation in the banking industry and the expansion of banks into nontraditional banking markets, put international banking into perspective, understand and analyze the subprime mortgage crisis. | Chapter 12 Depository Financial Institutions Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Learning Objectives • Evaluate the traditional uses and sources of bank funds • Understand bank profitability and the risks inherent in banking • Describe the recent consolidation in the banking industry and the expansion of banks into nontraditional banking markets • Put international banking into perspective • Understand and analyze the subprime mortgage crisis Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-2 The Fundamentals of Bank Management • Banks are business firms that buy (borrow) and sell (lend) money to make a profit • Money is the raw material for banks— Repackagers of money • Financial claims on both sides of balance sheet – Liabilities—Sources of funds – Assets—Uses of funds Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-3 1 The Fundamentals of Bank Management (Cont.) • Uses of Funds (Assets) (Table 12.1 and 12.2) – Total loans increased from 54% of total assets in 1980 to 59% in 2007—most increase coming from mortgages – Decline in cash and investments in state and local government securities – Holdings of federal government securities is fairly constant— highly marketable and liquid • Counter-cyclical—increase during recessions and decrease during expansions • Banks treat federal securities as a residual use of funds Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-4 TABLE 12.1 Assets of Insured Commercial Banks, 1980–2007 (billions of dollars) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-5 TABLE 12.2 Assets of Insured Commercial Banks, 1980–2007 (percentage distribution) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-6 2 The Fundamentals of Bank Management (Cont.) • Uses of Funds (Assets) (Table 12.1 and 12.2) (Cont.) – Banks are barred by law from owning stocks—too risky – However, banks do buy stocks for trusts they manage—not .