Review On The Banc One Finance Essay

Review On The Banc One Finance Essay Banc One was founded in 1863 and headquartered in Columbus, Ohio. The bank has accumulated a total of $76.5 billion assets and produced revenues of $4.3 billion by 1994, being the 8th largest in the country. Banc One can be seen as a three tiered organisation. The first tier controlling five state banks and holding 42 subsidiaries, the second being a regional affiliate group and holding 36 subsidiaries and finally ten non-banking organizations, varying from insurance to data processing. Its parent company employed around 100 workers, of which 12 were working in the Asset and Liability management which is going to be explored in this report. (Kusy et al., 1986) How does Banc One manage its interest rate exposure? In this question it will be necessary to determine how Banc One hedges itself against changes in interest rate levels and what the possible risks it faces from such changes. As a foreword, it has to be understood that if a bank was to be perfectly matched in terms of its assets and liabilities, then any change in the interest rates would have offsetting impacts on both the asset and liability side. Hence the bank would never feel the effect of changing interest rates. However, in a real world situation, especially for a bank this size with its big asset and liability portfolio (assets $76.5 billion), it is quite impossible to be perfectly matched, nevertheless this must be attempted. (Saunders et al., 2006) Prior to 1980, Banc One was seen to be improperly measuring its interest rate exposure by trying to add assets to its investment portfolio until it was felt that the fixed rate investments offset the fixed rate liabilities. As well as to this, they were evading long term investments, in the belief that such prolonged investments will bring pointless risks to its investment portfolio. (Esty et al., 1994) By 1980, when the second oil shock hit hard and volatility exceeded in the market, Banc One finally understood that they have to adhere to the task of measuring their interest rate risk due to some investments bringing losses to the organization. Hence in 1981, they started measuring their maturity gap, which grouped all of its assets and liabilities into categories, adjusted to their repricing-adjusted maturities (amount of time an interest rate remains fixed on a contract). The repricing-adjusted maturities was split (12 months) and a value of assets minus liabilities derived to. This was a key figure for the bank to understand their net interest margin, i.e. interest rate received on assets minus interest paid on liabilities and therefore earnings. This was great for the bank to play around with and to understand how interest rate changes could affect its earnings. However, a problem was faced, which was that this task was far too time consuming, taking a year to produce a single gap management report which by the time of publishing would be out of date already. (Esty et al., 1994) In the same year, Banc One was generating 13% in money market short-medium term investments, 21% in longer-term securities, such as municipal bonds, which had a larger spread due to no tax incurred. As of 1984, Banc One started using asset and liability simulations to improve its prediction for interest rate exposure. By indicating the exact asset and liability portfolios they were able to estimate how interest rate changes would affect their earnings. The procedure was that, firstly, a so called online balance sheet was created that contained the most recent information on its assets and liabilities, for example key features of each contract, the principal amounts, interest rates, maturity dates and amortization of assets and liabilities, as well as historic information. Finally, when the model was complete, they could simulate how an interest rate change would affect its balance sheet and earnings. These predictions were being run monthly and outcomes helped the bank to make changes in its interest rate positions. It was later developed further by introducing an automatic system which would download all of the available loans and deposits on each customer to derive to a better prediction on the banks exposure to interest rates. What role do derivatives play in its interest rate management? Banc One has been seen to start using interest rate swaps from the 1980s. An interest rate swap is an agreement between two counterparties in which one party swaps its fixed payment interest stream with the other party for a floating payment stream that is linked to an interest rate benchmark, usually being the LIBOR. From 1983, Banc one began using interest rate swaps, the procedure was that first they bought municipal bonds and received a 9.5% yield, after which entered into an interest rate swap which paid a fixed rate of 7% (LIBOR) and hence received a net position of LIBOR +2.5%. However, using interest rate swaps has caused some of the financial data to be distorted, for example if the derivatives were included in the balance sheet then their margin would have been 1.31% lower and their return on assets lowered by 0.2%. After they have started using interest rate swaps, it was seen that they would depend more on large short-term borrowings, also the swap positions affected the amount of risk-adjusted capital they held. The impact was also seen on the net interest margin, as well as the return on assets and equity. The bank presented a set of financials and compared these to two twin banks. One, which was exactly the same as Banc One except that it brought its swaps onto the balance sheet by replacing the notional principal of its receive-fixed swaps with investments in fixed-rate securities funded by variable-rate borrowings. This bank would differ in its accounting performance, dependence on large liabilities, and capital levels. First, swaps improved Banc Ones liquidity. They also freed up capital for short term investment which provided cash when needed to repay liabilities such as CD withdraws. Second, the off-balance sheet accounting of swaps increased ROA and ROE. The receive fix rate swaps did not appear as an asset or a liability, but were disclosed in footnotes to the financial statements. Yet gains and losses would still be placed on the income statement. If the bank were to use a traditional hedge, buying a fixed rate bond and selling a floating rate security both would appear on the balance sheet: the net result being to lower traditional profitability measures. Finally, the stress over meeting the minimum capital requirements was deduced as swaps did not use much capital. They started using swaps instead of conventional fixed-rate investments. swaps were attractive investments that lowered the banks exposure to movements in interest rates. Instead of investing in medium-term U.S. Treasury obligations, it could simply enter into a medium-term receive-fixed swap and put its money into short-term floating-rate cash equivalents. Interest rate swap in which it paid a floating rate of interest and received a fixed rate in return this would increase a banks fixed-rate inflows and reduce its periodic floating rate inflows The second would invest in floating-rate loans and investments (instead of fixed-rate investments) and in floating-rate assets financed by floating-rate deposits (instead of swaps). This bank did not manage its interest rate sensitivity. exposure to interest rate risk is determined by simulating the impact of the prospective changes in interest rates in the results of operations. Management seeks to insure that over a one year period, net income will to be impacted by more than 4 percent and 9 percent by a gradual change in market interest rates of 1 percent and 2 percent, respectively. The chief Investment Officer did not understand why everyone was unhappy about swaps which was an investment which lowered the banks exposure to movements in interest rates and in 1993, they held a In 1993, a meeting took place after the $10 drop in Banc Ones stock price. Banc one did not understand why everyone was criticizing their use of derivatives (swaps). Many of the investors and market players did not really understand how to use swaps and thought that this was a risky investment, however Banc One grasped this investment style and was using it very well to their own advantage in their asset and liability management. The bank was faced with three options. First, not to do anything and hope that share price will recover over time as investors would realised that derivatives were helping the bank manage interest rate and basis risk. Second, they could reduce their derivative position. Thirdly, they could attempt to educate investors about the use of derivatives by showing more of their positions. None of these three is what Banc One decided on, what they did was create a financial summary and presented it to the market presented on the next slide. Swaps instead of investing in medium term US treasury obligations it would enter into a medium term receive-fixed swap and put its money into short term floating rate cash equivalents. (this way they improved liquidity with stable principal values; also swaps are off-balance sheet transactions for receive-fixed swap this way banks return on assets would be overstated; also swaps reduce the amount of capital needed to meet regulatory requirements) Why is Banc One liability-sensitive? In the 1980s Banc One was seen to be asset sensitive which was mostly to do with its acquisition scheme, where their acquired portfolio reached more than 75 banks which were all high asset sensitive banks. Asset sensitivity is the name given to a position where the deposit (liability) is fixed, whilst the loan (asset) might be changing. In the 90s, this has changed and the bank seemed to have turned liability-sensitive due to the use of interest rate swaps in which a floating rate was paid and a fixed rate in return was received. These transactions were giving the impression on the balance sheet that the bank was earning a floating rate liability and at the same time investing into a fixed rate asset. Banc One, being a liability sensitive bank, indicates that their loans (assets) are fixed, whilst the deposit (liability) is moving up or down. Therefore only a drop in interest rate will bring a higher net interest margin, as the spread between the fixed deposit and the floating dropped loan would widen, creating more profit for the bank. However if an interest rate rise was to incur, then this would mean that its floating rate payments would alter its financial data by boosting the interest expense, and with interest income staying on the same level this would set Banc One as a liability sensitive bank. Should it be liability-sensitive? Banc One has turned liability-sensitive as it may have been anticipating that the interest rates would drop and thus profit could have been made, as is shown in the liability sensitive bank table in the last column where the interest rate has dropped. However, if their prediction is wrong and the interest rate goes up then they will make a loss, as shown in the same table, column 3 from left. A bank can restructure its position whichever way it wants, if a bank bets that interest rates will go up then it could turn asset sensitive and fix its deposits (liabilities) and use a floating rate for their loans (assets) in order to make profits. For a bank which bets the opposite, a liability sensitive position can be taken by using the same method described as for the asset sensitive, just reversed, such that was taken by Banc One. From the graph shown below (Interest Rate and Spreads) it is now clear why Banc One has become liability-sensitive from its previous position. This is due to the fact that prior to the 90s the bank would fix its deposits, either using the LIBOR 3 month or the 2 year US Treasury, however then it was more preferable to lock the deposits in the 3 month LIBOR as the rate was lower and a more liquid position could have been sustained. However, after the drop in the rates in 1984-1986 and 1989 and thereafter Banc One would have been facing problems if to continue sustaining its position at the fixed deposit level, as the loans were under the deposit level and the bank could not get out of its obligatory 3 month or 2 year position. Therefore it started using swaps, and with undertaking swaps, this has reversed its position to swapping its loans from floating to becoming fixed, as they received a fixed return or with deposits becoming floating, as they paid a floating amount, whichever was m ore preferable. In Banc Ones case it seemed that swapping the fixed deposit, into a floating deposit would be viable as they had to get out of a loss making position, if the market was dropping. Deriving from the above mentioned, Banc One should be liability-sensitive in the case where it is making a loss on its current positions due to changing interest rates and thus utilising a swap, however its original positions undertaken in the beginning (before the interest rate moved out of favour) might be still as of an asset-sensitive bank, therefore it can be said that swaps distort the banks image. (Esty et al., 1994) References Esty B., Tufano P., Headley J., (1994). Banc One Corporation, Asset and Liability Management, Harvard Business School. Saunders A., Cornett M. M, (2006). Financial Institutions Management: A Risk Management Approach, McGraw-Hill. Kusy M.I., Ziemba W. T., (May-June 1986). Operations Research, A Bank Asset and Liability Management Model, Vol. 34, No. 3, pp. 356-376, Informs. Bitner J. W., Goddard R. A., (1992). Successful bank asset/liability management: a guide to the future beyond gap, John Wiley Sons.

Fear and Redemption in Cry the Beloved Country :: Cry the Beloved Country Essays

Fear and Redemption in Cry the Beloved Country Fear grips all black societies and is widespread not only for black people but also white people. An unborn child will inherit this fear and will be deprived of loving and relishing his country because the greater he loves his country the greater will be his pain. Paton shows us this throughout this book but at the same time he also offers deliverance from this pain. This, I believe is the greater purpose of this book. When Stephen goes to Johannesburg he has a childlike fear for "the great city" Johannesburg. Khumalo's fears of his family are exactly the same as every other black person in South Africa. In the train he is afraid of living in a world not made for him. He opens his bible and starts reading it, this is one of Khumalo's great sources of alleviation. Gertrude is frightened that her life will now be exposed to her brother who is a priest. She is redeemed from this fear when she prays with Stephen. Stephen experiences great pain and fear during his search for Absalom, Msimangu comforts him, he gains comfort when plays with Gertrude's son, when he thinks of Ndotsheni, his wife and of rebuilding his home it consoles him. We also learn of white people's fear of native crime in the city. Absalom's girlfriend is afraid that he has deserted her. She gains comfort from Stephen. In his own pain and suffering he has the ability to comfort her, this is one of Stephen's admirable qualities. When Stephen realises that the police are searching for Absalom, he starts trembling and turns cold with fear. Msimangu and his bible comfort him. Msimangu takes him to Ezenzeleni where he is spiritually uplifted. When Absalom is asked why did he shoot Arthur he says that he was afraid. Msimangu, Mrs Lithebe, Mr Carmicheal and Father Vincent ease Stephens fear of Absalom's case and expenses in Johannesburg. This is very comforting for Stephen, we remember Mrs Lithebe's words "for what else are we born" and there are some white men who do care. We also learn of James Jarvis's (he was a British white) suffering and fear, he is comforted by an Afrikaner policeman who went out of his way to help him, he is also comforted when he reads Arthur's manuscripts.

Do environmentalists overstate their

Do Environmentalists Overstate Their Case? The very interesting article â€Å"Do Environmentalists Overstate Their Case? † is included in an academic book â€Å"Taking sides†. In the article writer provides articles for and against the motion. Both the sides are well addressed and are very convincing. However, I personally think that, environmentalists do overstate their case. According to environmentalists the world is going to hell in a handbasket but I disagree with the statement because Various individuals organizations and nations re taking initiatives to improve the condition of the environment.Like for instance, according to the article published in Japan Times in Feb 23, 2013, Tokyo and Beijing are cooperating to decrease the air pollution and it's menace. Similarly, according to article published in Delhi(lndia) government site various steps have been taken to reduce pollution like: ban of vehicles older than 15 years, ban in vehicles driven in conventional fue ls etc. These rules are being effectively implemented though transportation enforcement team.These are few among many examples of initiatives taken to improve the environment thus world is definitely getting better and not worse in days to come. Furthermore, environmentalists are focusing too much on environmental degradation and totally ignoring about the improvement in environmental condition. They fail to address the cases of environmental improvement. For example: according to â€Å"The economist† in the article â€Å"The east is gray† America and Europe combined are cutting down their emissions by 60m tones a year in spite of increase in industrial activities.The above shown chart as published by world bank clearly shows that sulphur- dioxide concentration in all the major places are in decreasing trend. These are some of the facts that environmentalists forget to mention. Most importantly environmentalists have to understand that environment is a dynamic and not static. If it's degraded today, it can always get better tomorrow. We don't really have to make a fuss out of it and exaggerate to the extent that it makes people panic. We can also notice it in our real lives that the environment is actually dynamic.For example: My father told me that â€Å"The Bagmati river† which is one of the most important river of my country Nepal was very clean when he was a child. However, as a child I saw only the polluted version the river. But, as the time passed by various measures were taken to clean up the river. At local level people started cleaning it up and at national level various policies were set up. Now, I can see it for myself that the river is cleaner than it used to be. Similarly, the western countries have followed the pattern of â€Å"grow first, clean up later†.During the process of development and progress the environment is affected adversely. However, later they take the initiatives and clean up the environment. In this way, the environment is changing, sometimes for bad and sometimes for good. Thus, environmental degradation is not a big issue. TO the environment is improving every passing day. The government policies and rules indicate that, the statistics proves that and our own experiences assures the point.

The New World A Clash of Cultures - 1571 Words

The New World: A Clash of Cultures. It all started with the Scandinavians who discovered native peoples in North America around A.D. 1000. Short lived as their stay was, this would be the beginning of a very violent and dangerous path for the Native American people. Spain, France, and England would follow the Vikings lead nearly 500 years later and the clash of cultures began. America was appealing to these European nations because of the desire to expand their countries power, the natural resources this new world offered and for some, religious freedom. The Europeans brought with them livestock, plant life, disease, and often times an attitude of superiority to these primitive native peoples. All of the aforementioned would forever†¦show more content†¦The livestock that included horses, cattle, sheep, goats, and pigs were changing the ecology and landscape as well. The livestock were loosed to graze on grasses; they trampled the grass, which destroyed the land as well as the inland native peoples crops. Pigs were destroying the clam and mussel banks that the coastal Indians relied upon as part of their diet (Calloway, 2012, p. 83). The whole environment was changing. Where the Indians showed stewardship of the land, the Europeans ravished the land and consequently destroyed the Indians way of life. The Europeans put forth a very clear message that there was no room for the Indians way of life. Their way was much more civilized and the Indians would have to submit or be ravished just as the land was. The Europeans were taking the native peoples land and ultimately their freedom. The Spaniards had very specific plans of taking the land and making the Indians their subjects. The goal was gold and God. 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