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Chapter2:BanksSemester2,2013-14Wu,Wei-ShaoNatureofBanking•Commercialbanking–Takingdeposits,makingloans.–Wholesalevs.retail.•Investmentbanking–Raisingdebtandequityforcompanies;adviceonmergersandacquisitions,restructurings,etc.2ExampleofSimpleBankBalanceSheet:End20123AssetsCash5MarketableSecurities10Loans80FixedAssets5Total100LiabilitiesDeposits90SubordL.T.Debt5EquityCapital5Total100IncomeStatement:2012NetInterestIncome3.00ProvisionforLoanLosses(0.80)Non-InterestIncome0.90Non-InterestExpense(2.50)Pre-TaxOperatingIncome0.604Year2013•Whathappensinyear2013ifitisthesameasyear2012exceptthatprovisionforloanlossesis4.0insteadof0.8?–Pre-taxnetoperatingloss:0.6-3.2=2.6–After-tax(30%)loss:2.6*0.7=1.8–Equitycapitalis5%ofassets–After-taxlossis1.8%ofassets5WhatifBalanceSheetHadBeenMoreAggressive?6AssetsCash5MarketableSecurities10Loans80FixedAssets5Total100LiabilitiesDeposits94SubordL.T.Debt5EquityCapital1Total100Year2013•Whathappensinyear2013ifitisthesameasyear2012exceptthatprovisionforloanlossesis4.0insteadof0.8?–Pre-taxnetoperatingloss:0.6-3.2=2.6–After-tax(30%)loss:2.6*0.7=1.8–Equitycapitalis1%ofassets–After-taxlossis1.8%ofassets–It’saissueofCapitalAdequacyRegulation•Regulatorssetminimumlevelsforthecapitalabankisrequiredtokeep.•EquityisanexampleofTier1capital.•SubordinatedlongtermdebtisanexampleofTier2capital.8DepositInsurance•Mostcountrieshavedepositinsuranceprogramsthatinsuredepositorsagainstlossesuptoacertainlevel.•IntheUStheFDIC(FederalDepositInsuranceCorporation)hasprovidedprotectionfordepositorssince1933.•Theamountinsuredwas$2,500(maximumlevel)in1933.•Ithasbeenincreasedseveraltimes.Followingthecreditcrisisitwasincreasedfrom$100,000to$250,000inOctober2008.•Whymightdepositinsuranceencourageabanktotakerisks?(moralhazard)9InvestmentBanking•Methodsofraisingdebtorequity–Publicoffering.–Privateplacement.–Bestefforts.–Firmcommitment.10BestEffortsvs.FirmCommitment•50millionsharesaretobeissuedandtargetpriceis$30pershare.•Besteffortswouldleadtoafeeof30centspershare;firmcommitmentleadstobankbuyingat$30pershare11BesteffortsFirmCommitmentCansellat$29+$15million−$50millionCansellat$32+$15million+$100millionInitialPublicOffering(IPO)•Usuallyonabesteffortsbasis.•Bankwillsetofferingpricesufficientlylowthatsharesarealmostcertaintobesold.•OftenpricerisesimmediatelyafterIPO.•BanksoftenofferIPOsharestofundmanagersandtheirbestcustomers.12InitialPublicOffering(IPO)DutchAuctionIPO•Individualsandcompaniesbidbyindicatingthenumberofsharestheywantandthepricetheyarepreparedtopay.•Thepricepaidisthelowestbidthatleadstoallthesharesbeingsold.14Example:Howare1millionsharesallocatedinthissituation?15BidderNumberofSharesPriceA100,000$30.00B200,000$28.00C50,000$33.00D300,000$29.00E150,000$30.50F300,000$31.50G400,000$25.00H200,000$30.25123456SecuritiesTrading•Whydobankstrade?–Tomeettheneedsofitscounterparties.(marketmaking)–Toreduceitsownrisks.(hedging)–Totakeaspeculativepositioninthehopeofmakingaprofit.(speculation)SecuritiesTrading•Banksoftengetinvolvedinsecuritiestrading,providingbrokerageservices.•Brokerageservices:–Fullservicebrokers•Offerinvestmentresearchandadvice.–Discountbrokers•Chargelowercommissions,butprovidenoadvice.–Onlineservice•Provideaplatformforcustomerstotradewithoutabroker.17PotentialConflictsofInterest•Bankrecommendssecuritiesthatinvestmentbankistryingtosell.•Commercialbankpassesconfidentialinformationonaclienttoinvestmentbank.•Stockrecommendedasa“buy”topleasecompany’smanagementinordertogetinvestmentbankingbusiness.•Investmentbankissuesecuritiesforacompanysothatcommercialbankcangetridofaloan.(商业银行部门不想再借钱给某公司)18TheRisksFacingBanks•Creditrisk–Defaultriskinloanandderivativestransactions.•Marketrisk–Declineinvalue.•Operationalrisk–Internalsystemsfailtoworkorexternalevents.Chapter3:InsuranceCompaniesandPensionPlansSemester2,2013-14Wu,Wei-ShaoTypesofLifeInsurance•Termlife(定期寿险)–Temporarylifeinsurance:Lastapredeterminednumberofyears.•Wholelife(终身寿险)–Permanentlifeinsurance:Overthewholelifeofthepolicyholder.•Variablelife(变额寿险)–在保险期内保险金额随资金运用的绩效而变化的一种人寿保险。21TypesofLifeInsurance•Universallife(万能寿险)–保险公司为投保人建立投资帐户并让客户参与账户内资金的投资活动，将保单的价值与独立运作的投保人投资帐户的业绩联系起来。•Endowmentlife(生死合险、养老保险)–以被保险人在保险期限内死亡或期满生存为条件，都可获得保险金的一种保险。•GrouplifeCostofWholeLifeInsuranceComparedwithAnnualPremium23010000200003000040000500006000070000404550556065707580CostperyearAnnualPremiumSurplusInvestmentofSurplus•Somecontractsallowthepolicyholdertochoosehowthesurplusisinvested.•Therearetaxdeferraladvantagescomparedwitharegularinvestmentbecausenotaxispaiduntilthereisapayoutonthepolicy.24AnnuityContracts(年金)•Typicallyalumpsumpaymentisusedtobuyalife-timeannuity.–Convertingalumpsumintoregularpayments.•Annuitycanbefixedorvariable.•Annuitycanstartimmediatelyorbedeferred.•Accumulatedvaluecandependinacomplicatedwayontheperformanceofstockindices.•Theremaybepenalty-freewithdrawals.25ExtractfromUSMortalityTables(2007):Male26AgeProb.deathwithinoneyearProb.SurvivalLifeexpectancy(yrs)300.0014280.9714747.13310.0014530.9700946.20320.0014870.9686845.27330.0015290.9672444.33Theprobabilityofaman