In the newly revised Second Edition of The Principles of Banking, Professor Moorad Choudhry delivers a comprehensive overview of the fundamentals of banking designed to offer senior management and regulators a roadmap toward a more sustainable business model for their banks. The book builds on the author's experience as a practitioner in commercial and investment banking over many years, and this makes it suitable for both academic and professional audiences.
The author explains the original principles of banking, including the need for sound lending policy, capital management and liquidity risk management, and why these need to be maintained robustly to ensure the industry avoids another banking crisis during the next economic recession. Readers can access a wide range of downloadable ancillary materials, including policy templates, spreadsheet models, risk metric dashboards, and PowerPoint slides.
This Second Edition offers:
- Updates to reflect new regulations published since the last edition, including Basel III Final Form and its constituent elements of The Fundamental Review of the Trading Book, Interest Rate Risk in the Banking Book, and Recovery and Resolution Planning
- New chapters in market risk management, foreign exchange risk management, and interest rate risk, as well as credit risk policy and management, and capital and liquidity adequacy stress testing regulations
- New material covering the impact of COVID-19 on banks, risk management, and balance sheet management and what this implied for the discipline of risk management going forward
- A recommended approach to bank asset-liability management good-practice, to enable a bank to deliver an optimised balance sheet for all stakeholders' benefit
Perfect for bank practitioners, including managers in retail and commercial banking, ALCO members, treasury professionals, all C-suite executives and board non-executive directors, The Principles of Banking is an indispensable resource for all professionals and students seeking an authoritative and practical guide to the foundations of modern banking and good banking practice.
Author(s): Moorad Choudhry
Series: Wiley Finance
Edition: 2
Publisher: Wiley
Year: 2022
Language: English
Pages: 863
City: Hoboken
Cover
Title Page
Copyright Pages
Contents
Foreword
Neal Ardley
Sharon Bowles
Henrique Fragelli
Oldrich Masek III
Jason Oakley
Helen Sachdev
Preface
Acknowledgements
Preface to the First Edition
About the Author
PART I Banking, Bank Customer Business and Regulation
Chapter 1 Banking, Bank Business and Financial Statements1
An Introduction to Banking
Bank Business Model
Banking Business And Capital
Bank Products and Net Interest Margin Management
Financial Statements and Ratios
The Money Markets
Loan Valuation
Risk Exposures in Banking
Chapter Summary
Appendix 1.1 Summary Overview of Bank Product Line
Appendix 1.2 Overnight Reference Rates (RFR)16
References and Further Reading
Chapter 2 Ethics, Conduct and Customer Service
A Bank’s Customers
Anti-Money Laundering and Know Your Customer
Ethics and Customer Service
Ethics and Conduct
Ethics, Conduct and Reputation Risk
Chapter Summary
References and Further Reading
Chapter 3 Bank Regulatory Capital and the “Basel Rules”1
Bank Regulatory Capital Requirements
Macroprudential Regulation
Basel I
Basel II
Basel III
The 2017 Basel III Reforms (“Basel IV”)
From 2017 to the Future
Cryptoassets
Climate Change Related Financial Risks
Chapter Summary
Appendix 3
References
PART II Bank Asset and Liability Management
Chapter 4 The Yield Curve
The Yield Curve
Importance of The Yield Curve
The Money Market and Capital Market Yield Curve
Types of Yield Curve
Analysing and Interpreting the Yield Curve
Further Views on the Yield Curve
Formal Policy for Setting the Bank’s Internal Funding Curve
Constructing The Bank Internal Funding Curve
Yield Curve Building from Market Rates
Chapter Summary
References and Further Reading
Chapter 5 Asset–Liability Management I
Origins of Bank ALM
Basic Concept Of ALM
Liquidity Risk
Managing Liquidity: Baseline Principles
Interest-Rate Risk and Source
The ALM Desk
Template ALM Policy for a Commercial Bank
Middle-Office Treasury Procedure and ALM Practice11
Strategic ALM
The Concept of ALM Optimisation13
ALM and Negative Interest Rates
Chapter Summary
Appendix 5.1
References and Further Reading
Chapter 6 Balance Sheet Management: Money Markets, FX, Trading and Hedging, and Securitisation
Money Market Instruments and Foreign Exchange
Money Markets Rates
Foreign Exchange Markets1
FX Balance Sheet Hedging
Trading Approach
Interest-Rate Hedging Tools
Interest-Rate Swap Hedging Applications
Hedging Interest-Rate Risk Using Interest-Rate Swaps
Overnight Index Interest-Rate Swaps
Interest-Rate Risk Exposure and Option Hedging
Hedging using Bond Futures Contracts
Balance Sheet Management and Securitisation10
Treasury Desk Investment Guidelines Template
Chapter Summary
References
Chapter 7 Managing Interest-Rate Risk in the Banking Book (IRRBB)1
Interest-Rate Risk in the Banking Book
The Interest-Rate Gap Report
NII Sensitivity
Economic Value of Equity (Eve) Sensitivity
The Management of Gap Risk
The Management of Basis and Optionality Risks
The Management of Prepayment Risk
The Management of Pipeline Risk
The Management of Cap and Floor Risk
The ALCO Report for IRRBB
Credit Spread Risk in The Banking Book (CSRBB)
BCBS386: The Basel Committee Principlesfor Interest- Raterisk in the Banking Book
A Final Word on IRRBB
Chapter Summary
Further Reading
Chapter 8 Bank Treasury Operating Model1
Locating the ALM Function
Treasury Operating Model
Group Treasury Operating Model
Chapter Summary
References and Further Reading
Chapter 9 ALCO Governance Framework and Terms of Reference
Traditional Alco Model and Policy
The Modern-Day ALCO
ALCO Reporting
Chapter Summary
References and Further Reading
Chapter 10 ALM Sundries: Asset Encumbrance, Hedge Accounting, IFRS 9 and EIR1
Asset Encumbrance
Hedge Accounting4
High Level Principles of IFRS 9 and EIR
Chapter Summary
References and Further Reading
PART III Bank Liquidity Risk Management
Chapter 11 Principles of Bank Liquidity Management
Bank Liquidity
Sustainable Banking: Ten Principles of Bank Liquidity Risk Management
The Bank Liquidity Policy Statement
Policy on Intra-Group Lending
The Liquid Asset Buffer5
Liquidity Management And Collateral
The Contingency Funding Plan
Chapter Summary
References and Further Reading
Chapter 12 Liquidity Risk Metrics1
Two Key Liquidity Metrics
Basel Liquidity Metrics
Chapter Summary
Further Reading
Chapter 13 Liquidity Risk Reporting
Liquidity Risk Reporting
Regulator Reporting
Chapter Summary
Chapter 14 Bank Funds Transfer Pricing1
The Concept of Funds Transfer Pricing
The Development of Funds Transfer Pricing
Pricing Liquidity
Funds Transfer Pricing Policy Template
Chapter Summary
References
PART IV Bank Strategy and Governance
Chapter 15 Bank Strategy IInputs and Setting
The Strategic Planning Process
Strategy and the Bank Business Model
Evaluation of the Strategic Plan
Conclusion
Chapter Summary
References and Further Reading
Chapter 16 Bank Strategy IICapital and Funding Management
Textbook Treatment of Bank Capital
Capital Management Policy
Benchmarking with the Market
An Integrated Capital And Liquidity Management Strategy
Capital Management: Capital Instruments
Capital Management Strategy
Chapter Summary
References and Further Reading
Chapter 17 Principles of Corporate Governance1
Effective Bank Corporate Governance: Conclusions from the 2008 Bank Crash
Market Observations
Conclusion
Policy Recommendations
Management Structure
Governance and Sustainable Banking
Chapter Summary
References
PART V Principles of Risk Management and Regulation
Chapter 18 The Risk Management Framework
Risk Exposures in Banking
Macro-Level Risk Management and Strategy
Risk Management Framework Template
Example of Board-Level Ras
A Final Word
Chapter Summary
Reference
Chapter 19 Credit Risk Assessment and Reporting Principles
Drivers of Credit Risk
Portfolio Risk Reporting
Risk Policy
Product Line Risk Reporting
Business Line Reporting
Chapter Summary
Reference
Chapter 20 Stress Testing, ICAAP, ILAAP and Reverse Stress Testing1
Stress Testing Policy
Sample Stress Test Results
Scenario Analysis: Economic Downturn Stress Test Report
Liquidity Stress Test Reports
Internal Capital Adequacy Assessment Process (ICAAP)
Internal Liquidity Adequacy Assessment (ILAAP)
Reverse Stress Testing: Definition, Approach and Relevance
Chapter Summary
Reference
Chapter 21 Recovery Planning and Resolution Planning
Recovery Planning and Resolution Planning1
Conclusion
Chapter Summary
Reference
Chapter 22 Sustainable Banking and Climate Change Risk Management
Sustainable Banking and Green Banking
Climate Change Risk Management
Chapter Summary
Reference
Chapter 23 Case Studies: Analysis, Problem Solving and Decision Making
Coherent Advice and Problem Solving: Case Studies
Appendix 23.1
Chapter 24 Everything Changes, and Nothing Changes: Excerpts from a Timeless Work1
Core Principles of Banking
The Balance Sheet is Everything
Reputation as a Safe Store of Value
Interest Rate
The High Quality Liquid Assets Buffer (HQLA)
The Original Capital Conservation Buffer
Corporate Governance Standards
The Basel Oxborough Guidelines
Chapter Summary
References
PART VI Guide to the Companion Website
Chapter 25 Applications Software, Policy Templates and Spreadsheet Models
Chapter Files
Afterword
List of Terms andtheir Abbreviations
Index
EULA
