【正文】 s portion of financing is relatively small, yet the owner reaps the profits. Debt, although a cheaper source of funds than equity, carries high fixed costs that must be paid to remain solvent. Bankers that focus on profits often prefer lower equity than regulators want. Bankers that focus on safety, as is the case with closely held banks where the bank represents the owner’s primary source of ine, typically prefer higher equity to reduce the likelihood of failure. Regulators generally focus on bank risk and safety, so prefer greater equity.2. Existing riskbased capital requirements focus on credit risk. The risk classes used, for example, are determined by a relative ranking of default risk on the underlying assets. The percentage requirements, which indicate how much capital a bank must hold in support of risk assets, increase as perceived default risk increases. The formal percentages ignore all risks other than default risk. Regulators can impose higher capital requirements when they determine that banks have assumed excessive liquidity or interest rate risk, but there is no formal procedure for such assessments at most banks. Large banks that are subject to substantive market risk, do have formal capital requirements tied to their risk exposure as measured by valueatrisk (Var) in their trading, interest rate risk, currency activity, etc. In practice, regulators have a staff of examiners who are physically located in large bank holding panies with the responsibility of monitoring the bank’s aggregate risk exposure on a daily basis. As such, the largest institutions are monitored closely.3. Bank capital reduces risk by 1) absorbing losses in an accounting framework so that banks can remain technically solvent, 2) providing access to financial market when liquidity needs arise, 3) limiting asset growth. Banks are operationally solvent as long as cash inflows exceed mandatory cash outflows. The existence of mon equity capital reduces mandatory cash outflows because management can defer dividend payments. Loses on assets can be charged against capital so that the market value of assets still exceeds the market value of liabilities.4. An increase in capital requirements raises operating costs, but enables banks to assume more of the other types of risk, such as credit, interest rate, and liquidity risk. Small banks do not have the same access to national financial markets as large banks do, and would therefore be under greater pressure to reduce asset growth or change the position of assets to meet higher requirements. Higher capital requirements should lead to greater and faster consolidation because one means of getting new capital is by selling the bank.5. Small and mediumsized banks do not have the name recognition needed to obtain funds externally in the national capital markets. As capital requirements are increased, these banks are locked out of sources of funds and must either shrink in size or bee part of a larger institution. Consolidation results.6. The leverage capital ratio pares a bank’s equity capital to its adjusted total assets and thus indicates how much equity versus debt a bank must have at a minimum. Regulators impose this requirement so banks will be forced to operate with some capital even if they were to hold only zero risk or low risk assets.7. If a bank is undercapitalized, the likelihood of failure increases and the bank insurance fund is at risk. The mandatory restrictions are designed to ensure that managers and regulators react quickly to possible problems, such that the potential costs of failure might be reduced. If a manager has an undercapitalized bank, the first priority should be to increase capital relative to risk assets. This may involve shrinking the bank, but typically forces management to get capital from external sources.Chapter 8 Liquidity Planning and Managing Cash Assets1. Vault cash: to meet customer withdrawalsDemand deposits held at the Federal Reserve: to meet clearing needs and reserve requirementsDemand deposits held at other financial institutions: to pay for servicesCIPC: part of the check clearing system2. Banks must have sufficient cash assets on hand to meet clearing needs. Liquidity requirements arise because of a mismatch in cash inflows and outflows. Thus, cash holdings are determined by anticipated and unanticipated cash outflows versus cash inflows.3. Advantage: reduced liquidity risk Disadvantage: high cost because it is a nonearning asset。 equity as a target measure of performance. GAP models are monly associated with net interest ine (margin) targeting.3. A rate sensitivity report classifies a bank’s assets and liabilities into time intervals according to the minimum number of days until each instrument can be repriced. It then reports GAP values on a periodic basis for each time interval, and on a cumulative basis through each time interval. The better reports incorporate a specific interest rate forecast and assign cash flows to time intervals based on when assets and liabilities are expected to reprice given the rate environment.4. A bank that is positioned to gain when rates rise and lose when rates fall is labeled asset sensitive. A bank that is positioned to gain when rates fall and lose when rates rise is labeled liability sensitive.5. Earnings sensitivity analysis consists of six general steps: forecasting interest rates, identifying changes in the position of assets and liabilities in different rate environments, forecasting when embedded options will be exercised, identifying when specific assets and liabilities will reprice given the rate environment, estimating net interest ine and net ine, and repeating the process to pare forecasts of net interest ine and net ine across rate environments. greater is the potential variation in earnings (earnings at risk), the greater is the amount of risk assumed by a bank. Alternatively, some banks focus