CONTENTS
PART ONE MEASUREMENT, ANALYSIS AND THEORY OF VALUE CREATION = 1
CHAPTER 1 The Changing Nature of Banking in the U.S. = 3
Role of Commercial Banking in the U.S. Economy = 3
Historical Background : Current Regulation and Structure = 6
Resulting Bank Regulation in the United States = 21
Resulting Banking Structure = 24
An Approach to Bank Management in This Challenging Environment = 31
Discussion Questions = 31
CHAPTER 2 Understanding a Bank's Financial Statements = 35
Understanding a Bank's Balance Sheet = 35
Understanding a Bank's Income Statement = 41
Supplementary Information = 44
Data for a Typical Bank? = 47
An Introduction to Loan Loss Accounting = 47
Off-Balance Sheet Information = 48
Nonfinancial Information = 51
Sources and Quality of Information = 51
End of Chapter Problems = 54
CHAPTER 3 Evaluating a Bank's Returns, Risk and Overall Performance = 78
Using Basic Ideas from Business Finance = 58
Key Return and Risk Measures for a Sample Bank = 73
Return-Risk Trade-Offs = 69
Analysis of Key Return-Risk Trade-Offs = 74
Comprehensive Ratio Analysis for Financial Firms = 77
The Components of Net Interest Margin = 87
Improving Risk Measurement and Management = 91
The Appropriate Trade-Off Between Risks and Return = 94
Uniform Bank Performance Reports = 96
End of Chapter Problems = 97
CHAPTER 4 Foundations of Value in Banking = 103
Banks Enter "Nominal Contracts" = 104
Time Value of Money and Interest Rate Sensitivity = 104
Balance Sheet Maturity Mismatching = 107
Measuring Interest Rate Sensitivity : Duration = 111
Arithmetic Calculation of Duration = 113
The Duration Gap = 115
Using Convexity to Modify Duration Analysis = 118
Yield to Maturity = 119
Summary and Conclusions = 121
End of Chapter Problems = 122
Appendix 4A : Combining Convexity and Duration Estimates of Price Change = 126
End of Appendix Problems = 128
CHAPTER 5 Asset and Liability Management and the Yield Curve = 129
Managing with Discount Rate Expectations = 130
Gap Management = 134
Gap Management and Basis Risk = 138
Simulation Systems = 138
Gap Strategies and Interest Rate Benchmarking = 141
Summary and Conclusions = 144
End of Chapter Problems = 145
Appendix 5A : Theories of the Term Structure of Interest Rates = 148
Interest Rate Expectations = 148
Liquidity Premium Theory = 150
Market Segmentation and Preferred Habitat Theories = 151
Appendix 5B : Risk Premiums and the Term Structure = 152
Bootstrapping = 153
Yield Curve Interpolation = 153
End of Appendix Problems = 156
Case 1 First National Bank = 157
Case 2 Lincoln National Bank = 173
Case 3 Quaker National Bank = 183
Case 4 Peralta National Bank = 191
Case 5 Norwest Corporation = 200
PART TWO Asset, Liability, and Capital Decisions = 207
CHAPTER 6 The Acquisition and Cost of Bank Funds = 209
Types and Changing Composition of Deposits = 209
Types and Composition of Borrowed Bank Funds = 214
The Funding Spread as a Source of Profitability = 216
Funding Availability and Strategy for Different Types of Banks = 217
Measuring and Using the Cost of Funds = 219
Using Cost-of-Funds Measures = 228
Risks Associated with Raising Funds = 230
Introduction to Basic Funding Strategies = 233
CHAPTER 7 Measuring and Providing Reserves and Liquidity = 242
Determining A Bank's Reserve Needs = 242
Meeting Required Reserves and Managing the Money Position = 246
Measuring a Bank's Liquidity Needs = 253
Filling a Bank's Liquidity Needs = 262
Matching Liquidity Sources to Liquidity Needs = 264
Meeting Contingency and Future Liquidity Needs = 268
End of Chapter Problems = 27O
CHAPTER 8 Managing the Security Portfolio = 274
Asset Priority Model = 274
Portfolio Objectives = 275
Debt Instruments = 277
Managing the Security Portfolio = 286
Total Return : Trading and Swapping Bonds = 293
Accounting Classification of Securities = 296
Portfolio Management and Business Cycles = 298
Evaluating Securities with Uncertain Cash Flows = 303
Implementing Investment Policies and Strategies = 303
Summary = 304
End of Chapter Problems = 305
Appendix 8A : Alternative Investment Instruments Used by Banks = 307
CHAPTER 9 Managing Bank Capital = 322
Determining Capital Adequacy = 322
Managing Capital and Lines of Business = 331
Sustainable Internal Growth = 339
Raising Capital Externally = 343
End of Chapter Problems = 354
Appendix 9A : A Process for Planning Financial Needs = 356
Case 6 Shawnee National Bank = 360
Case 7A Hillside Bancorp(A) = 368
Case 7B Hillside Bancorp(B) = 376
Case 8 Aspict Bankshares Corporation = 379
PART THREE MANAGING LOANS AND THE LOAN PORTFOLIO = 387
CHAPTER 10 The Bank Credit Organization = 389
Loan Risks and Losses = 390
Managing Credit Risk = 391
The Credit Organization = 394
Loan Committees and the Loan Approval Process = 395
Loan Policy and Procedures Formulation = 397
Controlling Loan Losses = 403
Pricing Policy = 409
Unethical Conduct and Conflicts of Interest = 409
Common Reasons for Loan Losses = 409
Legal and Regulatory Controls on Lending = 410
Summary = 414
End of Chapter Problems = 415
Appendix 10A : Are Bank Loans Competitive? = 416
CHAPTER 11 Credit Seleetion, Underwriting and Portfolio Diversification = 418
Selection Risk Analysis = 418
Covenants and Pricing = 423
Risk Rating and Monitoring = 429
Managing Portfolio Risk = 431
Types of Loans = 432
Loan Sales and Securitization = 446
Summary = 452
End of Chapter Problems = 453
Appendix 11A : Financial Ratio and Credit Selection Analysis = 455
Appendix 11B : Bases for Loan Pricing = 473
CHAPTER 12 Consumer Lending = 475
Commercial Bank Consumer Credit = 476
Automobile Lending = 477
Revolving Credit = 478
Home Equity Credit = 478
Mobile Home Financing = 479
Securitization of Consumer Loans = 479
Interest Charge Considerations = 480
Credit Analysis in Consumer Lending = 482
Credit Evaluation Systems = 486
Reporting the Credit Decision = 490
Banks and Credit Card Finance = 491
Real Estate Loans 494
Consumer Loan Losses and the Bankruptcy Code = 500
Bankruptcy Reform = 501
Criticism and Reform of the 1978 Bankruptcy Code = 502
Consumer Regulation and Compliance = 503
Summary = 506
End of Chapter Problems = 506
Case 9 Lobo Mill Products Company = 507
Case 10 Questor Inc. = 509
Case 11 Global Machinery arid Metals Company, Inc. = 513
Case 12 Bergner Construction Company = 517
Case 13 Calbank Leasing Corporation = 522
Case 14 Edward Edwards Company(A) = 529
PART FOUR HEDGING AND PRICING WITH DERIVATIVES AND INTERNATIONAL BANKING = 533
CHAPTER 13 Financial Futures and Forwards : Hedging and Pricing = 535
Overview of Derivatives = 535
The Basics and Forwards of Futures Contracts = 537
Forward Prices = 541
Microhedging = 544
Macrohedging = 550
Foreign Exchange Forwards and Futures = 555
Summary = 556
End of Chapter Problems = 557
CHAPTER = 14 Interest Rate Options : Hedging and Pricing = 559
Option Basics = 560
Exchange-Traded Interest Rate Options = 563
Hedging a Bond Portfolio = 565
Options Pricing Models = 566
Interest Rate Options = 568
Caps, Floors, and Collars = 513
Other Contingent Claims Products = 575
Summary = 582
End of Chapter Problems = 582
Appendix 14A : Black-Scholes Model and Put-Call Parity = 586
CHAPTER 15 Interest Rate Swaps : Hedging and Pricing = 588
The Basics of Interest Rate Swaps = 589
Basis Swaps = 592
Swaps, FRAs and Futures = 594
Swap Pricing = 597
Summary = 600
End of Chapter Problems = 601
Appendix 15A : Adjusting the Swap Rate for Convexity = 604
Appendix 15B : The Swap Curve = 606
CHAPTER 16 International Banking = 609
Bank Foreign Exchange (FX) Risk Management = 610
Foreign Exchange Rates = 611
Interest Rate Parity = 618
Structure of the Foreign Exchange Market = 620
The Eurocurrency Markets = 621
Bank Financial Management in a Foreign Environment = 622
International Loans = 624
International Lending by U.S. Banks = 628
Legal Forms of International Banking Organizations = 628
Summary = 630
End of Chapter Problems = 631
Case 15 Edward Edwards Company (B) = 633
Case 16 KeyCorp = 635
Case 17 Region Financial Corporation = 641
Case 18 City Federal Savings and Loan Association = 749
Case 19 Grantland Bank = 658
Index = 671
