1. Guy Hargreaves ACF-104 Wechat: Guyhargreaves

2. Recap of yesterday Understand various components of an Australian commercial banking business Review of important functions of a commercial bank including liquidity, capital, margins, revenues, strategy by studying ANZ Form a sound understanding between the theory of banking and practice by studying ANZ bank case 2

4. Goals of today Understand commercial bank balance sheets and general principles of bank balance sheet management Compare off and on balance sheet products and structures Understand key considerations for the practice of good banking 4

5. Commercial bank management 5 Strategy: global, regional, local, products, retail / wholesale, technology Risk management: credit, market, legal / reputational, operational, country, liquidity –> diversification Financial: NIM, NPAT, ROE, RAROC, RoRWA, NIM Regulatory: CET1, RoRWA, LCR, NSFR Customers: product mix, KYC, X-sell Operations: technology, costs, risk management

6. Recall: commercial bank units Board of Directors Management Office Financial Control Risk Management Legal and Compliance Operations Human Resources Information Technology Financial Markets Wholesale Banking Retail Banking 6

7. Good commercial banking Good commercial banking requires sound management practices Set long term incentives, remove short term incentives Encourage longer term behaviour by staff, management Leads to better decisions = stable bank = strong share price and high liquidity / access to capital Good banking = healthy banking system = healthy financial system able to withstand crises/shocks 7

8. To avoid financial crises There are many types of financial crises, including: Banking crises Currency crises Speculative asset price bubbles Economic crises 2007-9 GFC was mostly a banking crisis but it came from a speculative asset bubble Economic crises are usually deep recessions or depressions where GDP falls sharply 8

9. In particular banking crises Loss of confidence in a bank or number of banks leading to bank run where depositors withdraw funds rapidly Often associated with periods of poor lending decisions leading to high loan portfolio loss provisions High leverage in the banking system means confidence is fragile Small loan losses can quickly turn into a banking crisis 9

10. Balance sheet principles Assets – Liabilities = Capital Liabilities: Defined maturity date Defined coupon (interest rate) Must be repaid or default occurs Capital: No maturity date (perpetual) No defined coupon (dividend may or may not be paid) No requirement for repayment - permanent 10

11. US commercial bank balance sheet 11

12. On or off balance sheet? If the item appears in the balance sheet financial statement then it is “on balance sheet” Risks that do not appear in the balance sheet financial statement are “off balance sheet” eg Letters of Credit (LCs) Guarantees Counterparty credit risk on derivatives Banks need to hold regulatory capital against on and off balance sheets exposures under BIS II and BIS II 12