Chapter 1
Bank Business and Capital
Banking has a long and honourable history. Today it encompasses a wide range of activities of varying degrees of complexity. Whatever the precise business, the common denominators of all banking activities are those of risk, return and the bringing together of the providers of capital. Return on capital is the focus of all banking activity. The co-ordination of all banking activity could be said to be the focus of asset–liability management (ALM), although some practitioners will give ALM a narrower focus. Either way, we need to be familiar with the wide-ranging nature of banking business and the importance of bank capital. This then acts as a guide for what follows.
In this introductory chapter we place ALM in context by describing the financial markets and the concept of bank capital. We begin with a look at the business of banking. We then consider the different types of revenue generated by a bank, the concept of the banking book and the trading book, financial statements and the concept of provisions.
BANKING BUSINESS
Banking operations encompass a wide range of activities, all of which contribute to the asset and liability profile of a bank. Table 1.1 shows selected banking activities and the type of risk exposure they represent. The terms used in the table, such as ‘market risk’, are explained elsewhere in this book. In another chapter we discuss the elementary aspects of financial analysis – using key financial ratios – that are used ...
