AN INTRODUCTION TO BANKING

PREFACE

Who among the world’s population of authors would not love to write a timeless work Ideally, a timeless work of fiction, but failing that, something factual that remains the undisputed benchmark for its subject. Somewhat paradoxically, I hold that the latter is actually harder to accomplish. Please don’t get me wrong, only a very small minority of us (of which I am not one) have it in them to produce Hamlet, or Dune, or The Iliad, or The Assistant, or Crime and Punishment, or The Adventures of Sherlock Holmes, or The Crab With The Golden Claws, or Seven Pillars of Wisdom, or Peanuts, Featuring Good Ol’ Charlie Brown, or countless other such immortal works. But once one has produced classic art, it lives forever. There is no need ever to update or modify it.
Practitioner textbooks, on the other hand, are rarely timeless. In almost every field of learning, society develops and adds to its knowledge base, such that a work of non-fiction rapidly becomes out of date. To maintain currency requires constant updates and further editions, which means more work. An author ambitious of producing a literary masterpiece should avoid the factual learning genre.
But there is an apparent paradox when it comes to works of fact concerning banking: in theory, unlike in so many commercial disciplines, the main principles have not changed since the first modern banks came into being in  the fifteenth century. Much of what held good for banks in 1808 and 1908 would have remained fine for banks in 2008, if certain senior bank executives had been competent enough to remember them (or even bothered to lear them in the first place). The traditionally staid and “conservative” field of banking has experienced considerable development and change of late. However, if anything, this “development” has not been all positive. While lauding the introduction of tools and techniques that have enabled borrowers to reduce their risk and assist economic growth worldwide, most of us are now rightly wary of ever-more sophistication and complexity in finance. It really is time for banks, and banking, to revert somewhat to the basics of finance and look to deliver genuine good customer service, and roll back the ever-increasing

CONTENTS

Foreword .......................................................................................ix
Preface ..........................................................................................xi
Preface to the First Edition ............................................................xv
Acknowledgements...................................................................... xvii
About the Author ...........................................................................xix

PART I BANK BUSINESS AND THE MARKETS ............................1
1 BANK BUSINESS AND CAPITAL ................................................3
2 CUSTOMER SERVICES AND MARKETING FOR BANK
PRODUCTS ....................................................................................29
3 CREDIT ASSESSMENT AND MANAGING CREDIT RISK .........49
4 THE MONEY MARKETS .............................................................95
5 THE YIELD CURVE................................................................... 131
6 INTRODUCTION TO MONEY MARKET DEALING AND
HEDGING .....................................................................................167

PART II ASSET–LIABILITY MANAGEMENT

AND LIQUIDITY RISK ...................................................................205
7 BANK ASSET AND LIABILITY MANAGEMENT I ......................207
8 ASSET AND LIABILITY MANAGEMENT II: THE ALCO............ 247
9 BANK LIQUIDITY RISK MANAGEMENT I................................. 265

10 LIQUIDITY RISK MANAGEMENT II: BASEL III LIQUIDITY,
LIABILITIES STRATEGY, STRESS TESTING, COLLATERAL
MANAGEMENT AND THE HQLA.................................................. 287
11 BUSINESS BEST-PRACTICE BANK INTERNAL FUNDS
TRANSFER PRICING POLICY ......................................................329
12 NET INTEREST INCOME (NII), NET INTEREST MARGIN
(NIM) AND THE MANAGEMENT OF INTEREST-RATE RISK
IN THE BANKING BOOK............................................................... 343
13 SECURITISATION MECHANICS FOR BALANCE SHEET
MANAGEMENT.............................................................................. 375

PART III STRATEGY, REGULATORY CAPITAL

AND CASE STUDIES ......................................................................391
14 STRATEGY SETTING 393
15 BANK REGULATORY CAPITAL, BASEL RULES AND ICAAP... 419
16 MANAGING OPERATIONAL RISK............................................. 493
17 ADVICE AND PROBLEM SOLVING: CASE STUDIES ...............505
Appendix A Financial Markets Arithmetic......................................... 531
Appendix B Abbreviations and Acronyms ........................................549
Index..................................................................................................553

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