SIGNAL OR NOISE · FUNDING AND LIQUIDITY · 1 OF 4
A bank funds 60% of its loans from household deposits and 40% from wholesale markets that roll every three months. Wholesale rates have just jumped.
// THE GROUNDWORK / C · THE BANK18 FILES · ONE MINUTE EACH
THE IN-TRAY · THE GROUNDWORK · C
The Bank
Can the lender carry it?
The lender's own balance sheet: where its money comes from, the capital behind it, the loans going bad, and its exposure to rates.
// C1 · FUNDING AND LIQUIDITY
WHAT THEY HEAR · FUNDING AND LIQUIDITY · 2 OF 4
A bank treasurer tells the credit committee: 'Deposits grew nicely this quarter — mostly from a few large corporate customers.'
What should the committee hear?
THE NUMBER · FUNDING AND LIQUIDITY · 3 OF 4
A bank holds US$3bn of assets it could sell within days at little loss. In a severe stress, it estimates US$2.4bn of its funding would leave within 30 days.
What is its liquidity coverage?
SIGNAL OR NOISE · FUNDING AND LIQUIDITY · 4 OF 4
A bank's deposits have been steady for years. This month, after a rival's failure made the news, online withdrawals doubled in two days.
Signal or noise?
4 FILES · PICK A CALL ON ANY OF THEM
// C2 · CAPITAL
THE NUMBER · CAPITAL · 1 OF 4
A bank has US$10bn of loans: half to companies, half home mortgages. Suppose the capital rules weight company loans at 100% and these mortgages at 35%.
What are its risk-weighted assets?
THE CALL · CAPITAL · 2 OF 4
Two loans earn the same margin. One is a company loan that needs three times the capital of the other, a well-secured home loan.
Which earns the bank more on its capital?
THE NUMBER · CAPITAL · 3 OF 4
A bank holds US$900m of capital against US$10bn of risk-weighted assets, a ratio of 9%. A loan book goes bad and it writes off US$200m. Assume its risk-weighted assets are unchanged.
How much new capital takes it back to 9%?
THE CALL · CAPITAL · 4 OF 4
A bank's plan assumed lending would grow 10% a year. A new rule raises the capital it must hold on commercial property loans, a third of its book.
What does the plan need?
4 FILES · PICK A CALL ON ANY OF THEM
// C3 · ASSET QUALITY
THE FIRST QUESTION · ASSET QUALITY · 1 OF 5
A bank's problem loans rose from 1.2% to 2.0% of its book. Provisions held against them are unchanged in dollars. Profit is up.
What do you ask first?
SIGNAL OR NOISE · ASSET QUALITY · 2 OF 5
A regional bank's three largest borrowers are all dairy processors. Each one, read alone, is sound.
Signal or noise?
THE FIRST QUESTION · ASSET QUALITY · 3 OF 5
Under expected-loss accounting, a performing loan is moved to the stage for a significant increase in credit risk. The borrower has missed no payment, but the provision against the loan jumps.
Why does it jump before any payment is missed?
SIGNAL OR NOISE · ASSET QUALITY · 4 OF 5
A year ago a bank's watch list held 15 borrowers. It now holds 40. None has defaulted, and the bank's loss rate is unchanged.
Signal or noise?
SIGNAL OR NOISE · ASSET QUALITY · 5 OF 5
A bank extends a struggling borrower's repayments by two years and cuts its interest rate. The loan is now reported as performing, because no payment is overdue.
Signal or noise?
5 FILES · PICK A CALL ON ANY OF THEM
// C4 · RATE SENSITIVITY
THE CALL · RATE SENSITIVITY · 1 OF 5
A bank's loans reprice every five years on average; its deposits reprice within one. Rates rise by one percentage point tomorrow.
What happens to its net interest income next year?
WHAT THEY HEAR · RATE SENSITIVITY · 2 OF 5
A bank's annual report says: 'Our net interest margin widened as rates rose.' An analyst asks how long that will last.
What is the analyst getting at?
THE NUMBER · RATE SENSITIVITY · 3 OF 5
A bank holds US$10bn of fixed-rate loans with an average duration of four years. Market rates rise by one percentage point.
Roughly how much value have the loans lost?
WHAT THEY HEAR · RATE SENSITIVITY · 4 OF 5
Asked about interest rate risk, a bank's treasurer says: 'Our models assume deposits stay put when rates rise, and they have for years.' Rates have just risen faster than at any time in fifteen years.
What should the board hear?
THE FIRST QUESTION · RATE SENSITIVITY · 5 OF 5
A bank holds government bonds at amortised cost, on the basis that it will hold them to maturity. Rates have risen, and it now needs cash.
What happens if it sells the bonds?
5 FILES · PICK A CALL ON ANY OF THEM
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