Foundations of Financial Risk: An Overview of Financial Risk and Risk-based Financial Regulation, 2nd Edition

CHAPTER 2 Managing Banks

Chapter 2 builds on the first chapter and introduces bank management topics that are particularly relevant to risk management and regulation. This chapter examines bank corporate governance, the financial statements banks use to communicate their activities, the function of asset and liability management in banking, and how banks manage loan losses.

Chapter Outline

• 2.1 Balance Sheet and Income Statement
• 2.2 Loan Losses
• 2.3 Asset and Liability Management
• 2.4 Corporate Governance

Key Learning Points

• Banks report their assets, liabilities, and the effects of their various busi­ness transactions in financial statements. Financial statements provide a comprehensive view of performance for shareholders, depositors, stake­holders, and regulators.
• Banks treat performing and nonperforming loans differently; banks build up reserves in their financial statements to reduce the potential negative effects of nonperforming loans.
• Banks manage their assets and liabilities with the overall objective of reducing risks while maximizing returns to shareholders.
• Bank corporate governance refers to the framework banks use to manage their operations and deal with the often conflicting interests of bank stakeholders.

MANAGING BANKS

2.1 Balance Sheet and Income Statement

One responsibility that a bank's board and senior management team must fulfill is to record correctly and account for all the bank's transactions. Trans­actions include the bank's loans, investments, ...