COMMERCIAL BANK

MANAGEMENT
DINH THI PHUONG ANH, PhD
FACULTY OF BANKING AND FINANCE
Textbooks
[1] Peter S.Rose (2002), Commercial Bank Management, Texas A&M University.
Copyright @ 2002. Exclusive rights by the McGraw-Hill companies.

[2] Peter S.Rose (2008), Bank Management and Financial Services, Mc Graw Hill Higher
Education
Course outline
Chapter 1: Overview of commercial bank management
Chapter 2: Managing bank sources of funds
Chapter 3: Bank lending management
Chapter 4: Asset-Liability Management
Chapter 5: Measuring and evaluating bank performance
 Course objectives
- Understand the nature of the commercial banking business.
- Learn the basics of commercial bank management, including: managing bank’s equity, managing
deposit services, managing non-deposit liabilities and other sources of borrowed funds, bank lending
management.
- Equip students with basic knowledge about the administration of asset-liability management in
commercial banks; Help students become familiar with the financial statement of a bank as well as off
balance sheet financing in banks.
- Provide students with methods in measuring and evaluating bank performance.
- Use information technology as a tool to do essential business tasks specifically by using the web to
find information.
- Use quantitative analytical skills to identify and analyze material factors that are involved in business
problems. The students can practice and implement managing activities at commercial banks and other credit
institutions.
 CHAPTER 1
INTRODUCTION TO
COMMERCIAL BANKS AND
BANKING SERVICES
1. What is a bank?
2. The organization and structure of commercial banks
3. Services offered by banks
3. Financial statement of a bank
4. Vietnam commercial bank system
How Financial System Works?
Indirect Finance

Financial
Funds Intermediaries Funds

Funds

Lenders Borrowers
Savers Spenders
Households Financial Households
Funds Funds
Business markets Business firms
Governments Governments
Foreigners Foreigners
Direct Finance
1.What is bank?
A bank is a financial intermediary accepting deposits and granting loan and offering the
widest menu of services of any financial institution.

=> Vietnam bank law?

Questions:
1. How do banks differ from non-bank institutions?
2. Why is bank important as a financial intermediary?
Roles of banks
Financial
Intermediation

Instrument of
Government’s Payment
monetary Intermediation
policies

Promote
Agency and
economy
Utility Services
growth.
Types of banks in the world
• Commercial Banks • Limited Purpose Banks
• Savings Banks • Bankers’ Banks
• Cooperative Banks • Minority Banks
• Mortgage Banks • National Banks
• Community Banks • State Banks
• Money Center Banks • Insured Banks
• Investment Banks • Member Banks
• Merchant Banks • Affiliated Banks
• International Banks • Virtual Banks
• Wholesale Banks • Fringe Banks
• Retail Banks • Universal Banks
Types of commercial banks in
Vietnam
1. State-owned commercial banks

2. Joint-stock commercial banks

3. Joint-venture commercial banks

4. 100% foreign-owned commercial banks

5. Foreign banks’ branches

2. The organization and structure of banks
2. The organization and structure of banks
3. An overview of banking services
Traditional banking services
Carrying out Currency Exchanges
The first service banks offered was currency exchange. A banker stood ready to trade one form
of coin or currency (such as dollar) for another (such as francs and pesos)
Discounting Commercial Papers and Making Business Loans
Early in history, bankers began discounting commercial papers, making loans to local
merchants who sold the debts.
Offering Saving Deposits:
Making loans proved so profitable that banks began searching for ways to raise additional
loanable funds. One of the earliest sources of these funds consisted of offering savings
deposits.
Banking services
Traditional banking services (cont.)
Safekeeping of Valuables and Certification of Value:
During the Middles Ages, bankers and other merchants began practice of holding gold
and other valuables owned by their customers inside secure vault, thus reassuring
customers of their safekeeping.
Supporting Government Activities with Credit
Offering Checking Accounts (Demand deposits)
A checking account that permitted depositors to write drafts in payment for goods and
services that the bank or other service provider to honor immediately.
Banking services
New services provided by banks
Financial Advising
Many service providers today offer a wide range of financial advisory services, from
helping to prepare financial plans for individuals to consulting about marketing
opprtunities at home or abroad for business.
Managing Cash
Some banks tend to specialize mainly in business cash management services, bank
agrees to handle cash collection for business firm and to invest any temporary cash
surpluses.
Banking services
Providing consumer loans
Offering Equipment Leasing
Dealing in securities
Offering Security Brokerage and Investment Banking Services
…
Trends Affecting Banks and Other
Financial Service Firms Today
• Service Proliferation
• Rising Competition
• Government Deregulation
• Increased Interest Rate Sensitivity
• Technological Change and Automation
• Consolidation and Geographic Expansion
• E-Banking and E-Commerce
• Convergence
• Globalization
4. The Bank Balance Sheet
The Balance Sheet is a list of a bank’s assets and liabilities
Total assets = total liabilities + capital

Copyright © 2009 Pearson Prentice Hall. All

17-21
rights reserved.
The Bank Balance Sheet
A bank’s balance sheet lists sources of bank funds (liabilities) and uses to which they
are put (assets)
Banks invest these liabilities (sources) into assets (uses) in order to create value for their
capital providers

Copyright © 2009 Pearson Prentice Hall. All

17-22
rights reserved.
The Bank Balance Sheet

Flow of funds (tab down to commercial banks)

http://www.federalreserve.gov/releases/z1/
Copyright © 2009 Pearson Prentice Hall. All current/z1r-4.pdf
17-23
rights reserved.
The Bank Balance Sheet:
Liabilities (a)
Checkable Deposits: includes all accounts that allow the
owner (depositor) to write checks to third parties; examples
include non-interest earning checking accounts (known as
DDAs—demand deposit accounts), interest earning negotiable
orders of withdrawal (NOW) accounts, and money-market
deposit accounts (MMDAs), which typically pay the most
interest among checkable deposit accounts

Copyright © 2009 Pearson Prentice Hall. All

17-24
rights reserved.
The Bank Balance Sheet:
Liabilities (b)
Nontransaction Deposits: are the overall primary source of bank liabilities (74%) and
are accounts from which the depositor cannot write checks; examples include savings
accounts and time deposits (also known as CDs or certificates of deposit)

Copyright © 2009 Pearson Prentice Hall. All

17-25
rights reserved.
The Bank Balance Sheet:
Liabilities (c)
Borrowings: banks obtain funds by borrowing from the
Federal Reserve System, other banks, and corporations; these
borrowings are called: discount loans/advances (from the Fed),
fed funds (from other banks), interbank offshore dollar deposits
(from other banks), repurchase agreements (a.k.a., “repos”
from other banks and companies), commercial paper and
notes (from companies and institutional investors)

Copyright © 2009 Pearson Prentice Hall. All

17-26
rights reserved.
The Bank Balance Sheet:
Liabilities (c)
Certain borrowings can be more volatile than other liabilities, depending on
market conditions. They currently make up about 12% of bank liabilities, but have been
as high as 26% (2004) and as low as 2% (1960) in recent history.

Copyright © 2009 Pearson Prentice Hall. All

17-27
rights reserved.
The Bank Balance Sheet:
Liabilities (d)
Bank Capital: is the source of funds supplied by the bank owners, either directly through
purchase of ownership shares or indirectly through retention of earnings (retained
earnings being the portion of funds which are earned as profits but not paid out as
ownership dividends). This is about 8% of assets.

Copyright © 2009 Pearson Prentice Hall. All

17-28
rights reserved.
The Bank Balance Sheet:
Assets (a)
Reserves: funds held in account with the Fed (vault cash as well). Required reserves
represent what is required by law under current required reserve ratios. Any reserves
beyond this area called excess reserves.

Copyright © 2009 Pearson Prentice Hall. All

17-29
rights reserved.
The Bank Balance Sheet:
Assets (a)
Cash items in Process of Collection: checks deposited at a bank, but where the funds
have not yet been transferred from the other bank.
Deposits at Other Banks: usually deposits from small banks at larger banks (referred to
as correspondent banking)

Copyright © 2009 Pearson Prentice Hall. All

17-30
rights reserved.
The Bank Balance Sheet:
Assets (a)
Reserves, Cash items in Process of Collection, and Deposits at Other Banks are
collectively referred to as Cash Items in our balance sheet, and account for 2% of
assets.

Copyright © 2009 Pearson Prentice Hall. All

17-31
rights reserved.
The Bank Balance Sheet:
Assets (b)
Securities: these are either U.S. government/agency debt, municipal debt, and other
(non-equity) securities. These make-up about 17% of assets. Short-term Treasury debt
is often referred to as secondary reserves because of its high liquidity.

Copyright © 2009 Pearson Prentice Hall. All

17-32
rights reserved.
The Bank Balance Sheet:
Assets (c)
Loans: representing 74% of assets, these are a bank’s income-earning assets, such as
business loans, auto loans, and mortgages. These are generally not very liquid. Most
banks tend to specialize in either consumer loans or business loans, and even take that
as far as loans to specific groups (such as a particular industry).

Copyright © 2009 Pearson Prentice Hall. All

17-33
rights reserved.
The Bank Balance Sheet:
Assets (d)
Other Assets: bank buildings, computer systems, and other equipment.

Copyright © 2009 Pearson Prentice Hall. All

17-34
rights reserved.
Off-Balance-Sheet Activities
1. Loan sales (secondary loan participation)
2. Fee income from
◦ Foreign exchange trades for customers
◦ Servicing mortgage-backed securities
◦ Guarantees of debt
◦ Backup lines of credit
3. Trading Activities and Risk Management Techniques
1. Financial futures and options
2. Foreign exchange trading
3. Interest rate swaps
All these activities involve risk and potential conflicts

Copyright © 2009 Pearson Prentice Hall. All

17-35
rights reserved.