Banks
Banks
Commercial Banking
•Commercial banking is highly regulated
because of its importance in keeping the public confidence.
•Regulations mainly address the capital
which must be maintained, activities
Capital Requirements of A
Small Commercial Bank
Summary Balance Sheet for DLC at end of 2009 ($ millions)
Assets Liabilities and net worth
Cash 5 Deposits 90
Marketable Securities 10 Subordinated long-term debt 5
Loans 80 Equity capital 5
Fixed Assets 5
Capital Requirements of A
Small Commercial Bank
Summary Income Statement for DLC in 2009 ($ millions)
Capital Requirements of A
Small Commercial Bank
•Suppose there is a severe recession and as
a result the bank’s loan losses rise by 3.2% of assets to 4% next year. We assume that other items on income statement are
unaffected.
•The result will be a pretax net operating
Capital Requirements of A
Small Commercial Bank
•Assuming a tax rate of 30%, this would result
in an after-tax loss of about 1.8% of assets. •In balance sheet, equity capital is 5% of
assets, and so an after-tax loss equal to 1.8% of assets which can be absorbed.
Investment Banking: Example
• The bank can either offer the client a best efforts arrangement where it charges a fee of $0.30 per share sold so that, assuming all shares are sold, it obtains a total fee of 0.30 x 50 = 15 million
dollars.
• Alternatively, it can offer a firm commitment
