Centre for Financial & Management Studies (CeFiMS) - University of London

Individual Professional Courses – IPC  

Bank Financial Management [FM203]

Introduction

This course has a somewhat more practical orientation than many other courses in the MSc programme, focusing as it does on the microeconomic problems of financial management of banking firms. This does not mean, however, that the course is devoid of theoretical interest. The course builds on theories and models covered elsewhere in the programme, particularly those detailed in the course Banking and Finance. It also raises some new theoretical problems for consideration, many of them concerned with the way we need to conceptualise the banking firm.

Aims & Objectives

This course examines the role and importance of bank financial management to the modern bank. It teaches the basic models of financial management taught by University Economics Departments and Business Schools, which were constructed from the experience of mature capitalist economies. The course discusses the various trends shaping banking markets, such as institutionalisation, securitisation, globalisation and concentration. Among its aims are the following

• To set the banking firm in the context of a changing financial services industry
• To look at the role of the financial manager within the banking firm
• To examine bank capital and capital structure, and to consider the question of the adequate regulation of the banking sector to ensure its safety, to preserve bank liquidity and prevent bank failures.

Resources

Students receive a looseleaf binder containing eight ‘course units’; these texts are carefully structured to provide the main teaching and are equivalent to traditional course lectures, defining and exploring the main concepts and issues, locating these within current economics debate and introducing and linking the further assigned readings. Two obligatory assignments, which are marked by your CeFiMS tutors, and a specimen examination paper are also included within the student pack, along with the following:

Textbook:

Timothy Koch and S Scott MacDonald, Bank Management, Fourth Edition, 2000, Dryden Press, ISBN0030244021.

Readings:

A compilation of further readings: recently published articles or seminal writings which augment and illustrate the main text.

Course Timetable:

This shows the linkage between the various components of the course and indicates the schedule for reading the texts, submitting assignments, etc.

Course Content

Unit 1 The Banking Sector

This unit introduces the financial services industry and outlines the main factors shaping and driving operating strategies of banks and other financial institutions. It includes an analysis of the types of institutions that form the banking sector and the factors that have brought about changes in the banking environment. Trends in the global markets affecting the whole of the financial services industry are also discussed. The continuing centrality of financial intermediation to the banking firm’s activities is highlighted.

Unit 2 Concepts of the Banking Firm

Unit 2 introduces the structure and components of a bank’s balance sheet as well as its profit and loss account, also known as its income and expense statement. The second part of this unit examines the way in which researchers have tried to model the behaviour and activities of banks and the interrelationships between banks and their environment.

Unit 3 Bank Valuation

Here are examined the role and functions of a bank financial manager. These involve maximising the value of the bank and hence shareholder wealth. The unit firstly focuses on how managers can maximise shareholder wealth, and what alternative objectives of their own such managers may have. The unit considers the way in which the value of banking firms can be assessed, and in its second part, outlines the way in which bank performance can be measured and assessed.

Unit 4 Liquidity Management

Different sorts of banking risks are introduced in Unit 4 — their sources and how they can be measured and accommodated. This unit then focuses particularly on liquidity risk. The concepts of solvency and liquidity are analysed, and the planning process and financial ratios used for managing liquidity discussed. Finally, the unit takes an extended look at interbank transactions and the potential dangers of payments risk, which can cause liquidity problems for the whole banking system.

Unit 5 Interest Rate Risk Management

This unit examines the importance of interest-rate risk and of managing interest-rate risk. Alternative ways of measuring interest-rate risk are discussed as well as the problems associated with these measuring techniques. Strategies for risk management based on alternative analytic models are presented. Finally, the unit discusses how bank financial managers can reduce a bank’s exposure to interest- rate risk through the use of OBS techniques, using derivative securities such as swaps, futures and options.

Unit 6 Cost of Funds and the Funding of Operations

The focus of Unit 6 is on banks’ sources and cost of funds. Particular attention is paid to the different measures of the cost of funds and the problems associated with such measures. The unit briefly examines the importance of the cost of capital and describes some of the risks associated with raising funds. An exercise is provided at the end of the unit to help students practise calculating the marginal cost of funds for a bank.

Unit 7 Credit Risk Analysis and Management

In this unit the Univesity examine the importance of credit risk to bank financial managers. The discussion includes the credit assessment, credit contracting and post-lending monitoring processes. These three phases are analysed for both corporate and retail sector lending. As part of the process of granting credit, the Univesity examine how loans are priced and the importance of risk premiums to adjust loan prices for credit risk.

Unit 8 Capital Management

The final unit explores the nature and importance of capital to the banking firm. Particular attention is paid to the risk-based capital requirements set out by the Bank for International Settlements, which are also known as the Basle regulations.

Tuition & Assessment

The course is assessed by two assignments, written at set intervals during the course, and a three-hour examination taken at the end of the study year after all coursework has been completed. Assignments count for 30% of the final course result, whilst the examination contributes the remaining 70%.