oBank Management Finance 408
SPRING 2016
Lecture Note Outline: Part 1 (Chapters 1, 5 and 6)
Overview: Commercial Bank Management
Chapter 1
How large is the financial services industry (commercial banks, investment banking, insurance) as a proportion of the US Economy’s corporate assets? 10%? 20%? 50%? More? ~70%
Why study commercial banks separate from other types of firms (Retail / Manufacturing)?

Because commercial banks have some fundamental differences from non-financial firms: 1) Commercial banks have primarily financial assets; non-financial firms have primarily real assets 2) Because of the above, commercial banks are exposed to different types of risk than non-financials (some of which are related to banks’ financial assets, like interest rate risk and default risk.) 3) Commercial banks market products from BOTH sides of the balance sheet making it more difficult to balance their sources of funds (i.e., deposits) and uses of funds (new loans). Non-financials determine how much capital is necessary to purchase new assets and then (assuming the project is +NPV) determine how to fund the purchase.

Big picture: How to non-financial firms earn profits? How to commercial banks earn profits?
Commercial banks earn profits from generating higher levels of interest income and fee income than they incur in interest expense (paid on deposits and other liabilities) and operating costs.
Non-financials earn net revenues generated from positive NPV investments, primarily in real assets

Current Topics in the News…

Bank Regulation and the Presidential Candidates: Sanders vs. Clinton vs. Republicans

Note that one reason banks are regulated is because government deposit insurance eliminates some of the market discipline (in higher cost liabilities) associated with high risk asset investment strategies. That is, if non-financial firms take