1 International finance management 2 =
banking
In International finance management 1 we talked about a lot
of the financial institutions, but in the second part we will
talk more about banking.
1.1 Quote of Henry Ford
“it is well enough that people of the nation do
not understand our banking and monetary
system, for if they did, I believe there would be
a revolution before tomorrow morning”
2 Objectives of learning this course
2.1 Identification of the different sources
of finance
2.2 You discern the drivers of the
international banking system
, 2.3 You identify the financial risks from
an international business point of view
the essence of modern banking is the
measuring, managing, and accepting of risk and
the heart of bank financial management is risk
management.
2.4 You understand how to manage
these risks from a banking point of view
2.5 You develop insight in managing the
balance sheet of a bank
, 2.6 You find differences in approach
between banks
3 Role of financial system & intermediaries
3.1 Why does financial intermediation
exist?
a) There are important differences in the
needs and objectives between funding
suppliers and funding demanders
Or
b) There are important market imperfections
such as transaction costs, information
asymmetries,…
3.1.1 Differences in need/objectives
Funding supply Funding demand
Minimalization Availability of
of risks (credit, funding
transformation, At a specific
market, moment in time
operational) For a specific
Minimalization period
of transaction For a certain
costs volume
Maximalization Minimalization of
of liquidity costs
(access to your …
money ST
preference)
Maximalization
, of returns
…
differences in needs/objectives create
difficulties and entailing costs to match
supply & demand
These difficulties & costs increase with
the presence of market imperfections
3.1.2 If you minimize market imperfections,
you minimize entailing costs
Information asymmetries lead to
transaction costs & potentially damaging
consequences…
Transaction costs Potential
damaging
consequences…
Information Adverse selection
gathering
Contract negotiation Principal-agent
& writing problems: moral
hazard
Enforcement of Free-rider problems
contracts
… …
Example adverse selection: the lemon’s
problem applied to bank loans
A bank only has imperfect
information with the risk profile
of individual borrowers
The interest rate charged on the
loan will have an impact on the
type of customers (in terms of
risk profile & appetite) interest
rates as screening device
o When interest rates are low,
both customers with a high
& low risk profile will want
to borrow
o When interest rates are
high, customers with a low
risk profile will look for
banking
In International finance management 1 we talked about a lot
of the financial institutions, but in the second part we will
talk more about banking.
1.1 Quote of Henry Ford
“it is well enough that people of the nation do
not understand our banking and monetary
system, for if they did, I believe there would be
a revolution before tomorrow morning”
2 Objectives of learning this course
2.1 Identification of the different sources
of finance
2.2 You discern the drivers of the
international banking system
, 2.3 You identify the financial risks from
an international business point of view
the essence of modern banking is the
measuring, managing, and accepting of risk and
the heart of bank financial management is risk
management.
2.4 You understand how to manage
these risks from a banking point of view
2.5 You develop insight in managing the
balance sheet of a bank
, 2.6 You find differences in approach
between banks
3 Role of financial system & intermediaries
3.1 Why does financial intermediation
exist?
a) There are important differences in the
needs and objectives between funding
suppliers and funding demanders
Or
b) There are important market imperfections
such as transaction costs, information
asymmetries,…
3.1.1 Differences in need/objectives
Funding supply Funding demand
Minimalization Availability of
of risks (credit, funding
transformation, At a specific
market, moment in time
operational) For a specific
Minimalization period
of transaction For a certain
costs volume
Maximalization Minimalization of
of liquidity costs
(access to your …
money ST
preference)
Maximalization
, of returns
…
differences in needs/objectives create
difficulties and entailing costs to match
supply & demand
These difficulties & costs increase with
the presence of market imperfections
3.1.2 If you minimize market imperfections,
you minimize entailing costs
Information asymmetries lead to
transaction costs & potentially damaging
consequences…
Transaction costs Potential
damaging
consequences…
Information Adverse selection
gathering
Contract negotiation Principal-agent
& writing problems: moral
hazard
Enforcement of Free-rider problems
contracts
… …
Example adverse selection: the lemon’s
problem applied to bank loans
A bank only has imperfect
information with the risk profile
of individual borrowers
The interest rate charged on the
loan will have an impact on the
type of customers (in terms of
risk profile & appetite) interest
rates as screening device
o When interest rates are low,
both customers with a high
& low risk profile will want
to borrow
o When interest rates are
high, customers with a low
risk profile will look for
