Commercial Banks and Their Roles

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Commercial Banks and Their Roles

• The are the dominant depository institutions in
  any economy.
• They operate unit banking or branch banking
  system.
• They constitute an important source of external
  funds to finance businesses.
• They are otherwise known as retail bankers
• Roles
• Acceptance of deposits
• Credit creation
• Safe-keeping of valuables
• Portfolio management
• Foreign exchange transaction

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Goals of bank management

• The objective of banks is to maximize profit -
  albeit other objectives such as
• - maximization of shareholders returns
• - cost (loss) minimization
• - customer satisfaction
• Banking goals are driven by two basic principles
  - liquidity and profitability principles
• Banking goals can be achieved through prudent
  bank management.
• Bank management goals
• Liquidity management - to guard against
  illiquidity through
• - sales of assets or creation of additional
  liabilities
• - the use of securitization

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• Interest rate risk management management of net
  interest margin
• interest revenue interest expenses
• Net interest margin (NIM) Asset
• - NIM depends on interest rate fluctuation and
  composition of bank balance sheet - affects
  spreads

i
i
Interest on loans securities
Interest on loans securities
spread
Cost of funds
spread
Cost of funds
Time
Time
Decreasing i
Increasing i
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• - interest rate risk hedging depends on
  sensitivity of liabilities and assets to
  interest rate.
• Credit risk management there is always a
  .trade-off between credit risk and expected
  returns
• - credit assessment of loan applicants
• - determination of collateral
• - determination of loan interest
• Market risk management
• - changes value of securities as a result of
  changes in financial market conditions.
• - market risk is partially dependent on
  interest rate risk.
• Operating risk management
• - risks related to information transmission
  (sorting, processing, transmitting through
  technology), legal issues, regulatory issues
  etc.

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• Mobilisation of Funds and Capital management
• Deals with sources and uses of funds

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