Mode of Instruction
Lectures: Monday [11:00 am to 2:00 pm]
Lectures: Theoretical and some numerical examples
Learning Resources
Basic Text:
Commercial Bank Management- Peter S. Rose (Recent
Edition)
Reference Texts:
Bank Management: A Fund Emphasis - Dr. A R Khan
I will provide lecture notes, slides, problem sets,
etc. and encourage that you read the relevant part
of the textbook.
Assessment
It is all you know ………………
Central Exam
Final Exam 75% Marks
Internal Assessment: 20% Marks
Attendance and Class Participation
Presentation
Class Test and Works
Semester Plan
Total 15 Lectures
Each lecture is of 3 hours duration.
Overview of FIN-642
Let’s look at the SYLLABUS
Discussion Topic (Lecture-1)
Chapter Name: Introduction
• Commercial Banks
• Organization and Structure of the Commercial Banking Industry
• Internal Organization of the Banking Firm
• Changing Organization and Structure of Banking’s Principal Competitors
• Efficiency and Size: Do Bigger Financial Firms Operate at Lower Cost?
• Financial Firm Goals: Their Impact on Operating Cost, Efficiency, and
Performance
Chapter-3 [Peter S Rose]
Bank and Banking
Commercial Banks
According to US Law, commercial banks must two essential services to
qualify as banks for purposes of regulation and taxation, demand
(checkable) deposits and grant commercial loans.
Key Points:
1. Checkable Deposits
2. Commercial Lending
Organization and Structure
Advancing Size and Concentration of Assets
A Possible Countertrend
Internal Organization of the Banking Firm
Small community banks, also known as retail banks, generally have
four basic departments or divisions centered on lending (the credit
function), fund-raising and marketing, accounting and operations,
and perhaps, trust services. Daily operations are usually monitored by
a cashier and/or auditor and by the vice presidents in charge of each
department and division. Overall, the small bank's organization chart is
simple and uncomplicated.
In contrast, the larger banks, practicing wholesale and retail banking,
usually have many specialized departments and divisions. It includes
separate departments for different kinds of loans, departments to
manage security holdings and borrow in the money market, a division or
department to manage international operations, a marketing division,
and a planning unit along with other divisions.
Changing Organization and Structure
Banks are becoming larger and more complex organizations with more
departments and services and greater specialization.
Deregulation and service innovation have accelerated this trend as intense
competition at home and abroad has encouraged banks to become larger
organizations,
Serving broader and more diversified market areas.
Even small banks are reorganizing to meet these challenges by being more
efficient in meeting their broader-based customer needs.
Efficiency and Bank Size
Economies of scale and economies of scope if achieved can lead to significant
savings in operating costs with increases in service output.
Economies of scale mean that costs per unit decrease as more units of the same
service are produced because of greater efficiencies in using the firm’s resources
to produce multiple units of the same service or service package.
Economies of scope imply that as more different services are provided, the
operating cost reduces. This is because some resources are more efficiently used
in jointly producing multiple services than turning out one service.
A financial-service firm, regardless of its size, operating as efficiently as it
possibly can, raises an issue known as x-efficiency. Given the size of a financial
firm, is it operating near to or far away from its lowest possible operating cost?
Financial Firm Goals
Expense-preference behavior describes an approach where managers use the
financial resources of the firm to provide them with personal benefits not needed
to produce and sell the products. This behavior leads to increasing costs of
production and declining returns to the firm’s owners. Such expense-preference
behavior may show up in the form of staffs larger than required to maximize
profits or excessively rapid growth, which causes expenses to get out of control.
Financial Firm Goals
Agency theory analyzes the relationship between a firm’s owner (shareholder) and its
managers (agents). It explores whether there is a mechanism to compel managers to act in the
best interest and maximize the welfare of the firm’s owners. Owners do not have access to all
the information and cannot fully evaluate the performance of a manager.
One way to reduce costs from agency problems is, to develop better systems for
monitoring the behavior of managers and to put in place stronger incentives for managers to
follow the wishes of owners. Another way to accomplish this is by tying management
salaries more closely to the firm’s performance or giving management access to valuable
benefits (such as stock options). However, recent events suggest these steps may also
encourage managers to take on greater risk.
Question
&
Answer