The Principles of Banking

The ultimate guide for bank management: how to survive and thrive throughout the business cycle An essential guide for bankers and students of finance everywhere, The Principles of Banking reiterates that the primary requirement of banking sound capital and liquidity risk management had been forgotten in the years prior to the financial crash. Serving as a policy guide for market practitioners and regulators at all levels, the book explains the keys to success that bankers need to follow during good times in order to be prepared for the bad, providing in-depth guidance and technical analysis of exactly what constitutes good banking practice. Accessible to professionals and students alike, The Principles of Banking covers issues of practical importance to bank practitioners, including asset-liability management, liquidity risk, internal transfer pricing, capital management, stress testing, and more. With an emphasis on viewing business cycles as patterns of stable and stressful market behavior, and rich with worked examples illustrating the key principles of bank asset-liability management, the book is an essential policy guide for today and tomorrow. It also offers readers access to an accompanying website holding policy templates and teaching aids. Illustrates how unsound banking practices that were evident in previous bank crashes were repeated during the creation of the 2007-2008 financial market crisis Provides a template that can be used to create a sound liquidity and asset-liability management framework at any bank An essential resource for the international banking community as it seeks to re-establish its credibility, as well as for students of finance Explains the original principles of banking, including sound lending policy and liquidity management, and why these need to be restated in order to avoid another bank crisis at the time of the next economic recession Covers topics of particular importance to students and academia, many of which are marginally if ever addressed in current text books on finance Offers readers access to a companion website featuring invaluable learning and teaching aids Written by a banking practitioner with extensive professional and teaching experience in the field, The Principles of Banking explains exactly how to get back to basics in risk management in the banking community, essential if we are to maintain a sustainable banking industry. engaging and interesting and, more importantly, easily understood, allowing a clear picture to emerge of how the principle or concept under discussion is to be applied in the real world. - Graeme Wolvaardt, Head of Market & Liquidity Risk Control, Europe Arab Bank Plc

The ultimate guide for bank management: how to survive andthrive throughout the business cycleAn essential guide for bankers and students of financeeverywhere, The Principles of Banking reiterates that theprimary requirement of banking--sound capital and liquidityrisk management--had been forgotten in the years prior to thefinancial crash. Serving as a policy guide for market practitionersand regulators at all levels, the book explains the keys to successthat bankers need to follow during good times in order to beprepared for the bad, providing in-depth guidance and technicalanalysis of exactly what constitutes good banking practice.Accessible to professionals and students alike, ThePrinciples of Banking covers issues of practical importance tobank practitioners, including asset-liability management, liquidityrisk, internal transfer pricing, capital management, stresstesting, and more. With an emphasis on viewing business cycles aspatterns of stable and stressful market behavior, and rich withworked examples illustrating the key principles of bankasset-liability management, the book is an essential policy guidefor today and tomorrow. It also offers readers access to anaccompanying website holding policy templates and teachingaids.* Illustrates how unsound banking practices that were evident inprevious bank crashes were repeated during the creation of the2007-2008 financial market crisis* Provides a template that can be used to create a soundliquidity and asset-liability management framework at any bank* An essential resource for the international banking communityas it seeks to re-establish its credibility, as well as forstudents of finance* Explains the original principles of banking, including soundlending policy and liquidity management, and why these need to berestated in order to avoid another bank crisis at the time of thenext economic recession* Covers topics of particular importance to students andacademia, many of which are marginally--ifever--addressed in current text books on finance* Offers readers access to a companion website featuringinvaluable learning and teaching aidsWritten by a banking practitioner with extensive professionaland teaching experience in the field, The Principles ofBanking explains exactly how to get back to basics in riskmanagement in the banking community, essential if we are tomaintain a sustainable banking industry."engaging and interesting and, more importantly, easilyunderstood, allowing a clear picture to emerge of how the principleor concept under discussion is to be applied in the realworld." Graeme Wolvaardt, Head of Market & Liquidity RiskControl, Europe Arab Bank Plc

Forewords xiiiPreface xviiAcknowledgements xxiiiAbout the Author xxvPart I A Primer On Banking 1Chapter 1 A primer on bank business and balance sheet risk 3Chapter 2 Bank regulatory capital 75Chapter 3 Banking and credit risk 131Chapter 4 A primer on securitisation 179Chapter 5 The yield curve 221Part Ii Bank Asset and Liability Management 351Chapter 6 Asset-liability management I 353Chapter 7 Asset-liability management II 385Chapter 8 Asset-liability management III: Trading and hedging principles 445Chapter 9 Asset-liability management IV: The ALCO 493Chapter 10 The ALCO: Terms of reference and treasury operating model 503Chapter 11 Risk reporting, risk policy and stress testing 531Part Iii Bank Liquidity Risk Management 587Chapter 12 Principles of bank liquidity management 589Chapter 13 Liquidity risk metrics 653Chapter 14 Liquidity risk reporting and stress testing 687Chapter 15 Internal funds pricing policy 715Part Iv Bank Strategy and Governance 759Chapter 16 Bank strategy I: Formulating strategy and direction 761Chapter 17 Bank strategy II: Capital and funding management 801Chapter 18 Principles of corporate governance 831Part V Applications Software, Policy Templates and Teaching Aids 861Chapter 19 Applications software, policy templates and spreadsheet models 863Afterword 867List of terms and their abbreviations 869Index 875