Foreword ix
About the Author xi
1 The Banking Background 1
1.1 Different types of banks and their risk profile 1
1.1.1 Bank failure and the financial services community 1
1.1.2 What do banks do? How do they earn their money? 3
1.1.3 Different types of banks and their revenue structures 6
1.1.4 Commercial banks 7
1.1.5 Investment banks 10
1.1.6 Risk profile of investment banks 13
1.1.7 Broking is a competitive business 13
1.1.8 Derivatives trading and AAA subsidiaries 13
1.1.9 The regulation of investment banks 14
1.1.10 Analyst of the year awards 14
1.2 Primary causes of bank failure 16
1.2.1 Types of failures 17
1.2.2 Causes of losses 18
1.2.3 Warning signals in predicting bank failure 24
1.2.4 Rescuing the bank! 28
1.2.5 Credit rating agencies 30
1.3 Bank failures - the four aces 31
1.3.1 Bank of Credit and Commerce International 31
1.3.2 Continental Illinois 34
1.3.3 Credit Lyonnais 36
1.3.4 Rumasa 39
1.4 The macroeconomic environment 41
1.4.1 Banking system and industry risks 41
1.4.2 Economic environment 43
1.4.3 Industry competition and its impact on banks 43
1.4.4 Technology 44
2 The Rating Framework 45
2.1 What is a rating? 45
2.2 The development of ratings 46
2.3 Background to rating agencies 46
2.3.1 Inconsistent initial foundations 48
2.3.2 Secretive deliberations 51
2.3.3 Main source of revenues 51
2.3.4 Generating value 53
2.3.5 Growth and the future 54
2.4 The rating analytical framework 56
2.4.1 CAMEL, CAMEL B-COM, and CAMELOT 58
2.4.2 Capital 59
2.4.3 Asset quality 60
2.4.4 Management 62
2.4.5 Earnings 64
2.4.6 Liquidity (liability management) 64
2.5 How the rating agencies analyse bank risk 65
2.5.1 What is a rating? 65
2.5.2 Rating scale comparisons 66
2.5.3 Standard & Poor's ratings 66
2.5.4 Moody's ratings 68
2.5.5 Fitch performance and legal ratings 69
3 The Regulatory Framework 73
3.1 Banking system: structure, governing law, and regulations 73
3.1.1 Banking supervision 75
3.2 Core principles for effective banking supervision 78
3.2.1 Core principles for effective banking supervision 78
3.2.2 Basel committee publications No. 30 (September 1997) on banking principles 80
3.3 Risk management 83
3.3.1 Generally accepted risk principles 83
3.3.2 Derivatives and market risk 84
3.3.3 Managing bank limits 86
3.3.4 Generally accepted risk principles risk map 87
3.4 Basle Capital Adequacy and international convergence 88
3.4.1 Background to the Basle Capital Adequacy regime 88
3.4.2 Pressures for change 89
3.4.3 The BIS paper: the response of the central banks 90
3.4.4 Foreign exchange and interest rate related exposure 93
3.4.5 Implementation 95
3.4.6 Impact of the BIS proposals 95
4 The Analytical Framework 97
4.1 Introduction 97
4.1.1 The specific nature of bank financial analysis 97
4.1.2 Sources of information on banks 98
4.1.3 Other sources of information 100
4.2 Financial criteria - the key factors 101
4.2.1 Financial statement analysis 101
4.2.2 Spreadsheet analysis 105
4.3 Understanding the bank's balance sheet 107
4.3.1 Overview 107
4.3.2 Balance sheet 110
4.3.3 Assets 111
4.3.4 Liabilities 114
4.3.5 Contingent liabilities 117
4.3.6 Income statement 118
4.3.7 Financial analysis of investment banks 121
4.3.8 Risk profile of investment banks 125
5 Bankscope and Comparative Techniques 127
5.1 Bankscope spreadsheet analysis 127
5.2 Bankscope ratios and ratio analysis 130
5.2.1 Lines of the Bankscope global format 130
5.2.2 Financial ratio analysis 131
5.2.3 The Bankscope ratios 131
5.3 Bank peer group analysis 139
5.3.1 Analytical techniques 139
5.4 Problems with intercountry comparisons 141
5.4.1 Local vs international accounting standards 141
5.4.2 Inflation accounting 142
5.4.3 Creative accounting and ratio manipulation 143
6 Country and Political Risk 145
6.1 Country risk 145
6.1.1 Introduction to country risk 145
6.1.2 Definition of country risk 145
6.1.3 Types of countries 146
6.1.4 Country risk assessment 147
6.2 Political risk 148
6.2.1 Introduction to political risk 148
6.2.2 Time dimension 149
6.2.3 Political risk analysis methodologies 149
6.2.4 World Bank list of countries 150
6.3 Typical sovereign ratings process 151
6.3.1 Introduction 151
6.3.2 Political risk 152
6.3.3 Economic risk 154
6.3.4 S&P's sovereign ratings profiles 160
6.3.5 Behind the sovereign ratings exercise 160
7 The World of E-finance 163
7.1 A quick definition of e-finance 163
7.2 CRM - Customer Relationship Management 164
7.3 STP/CLS 165
7.3.1 STP - Straight Through Processing 165
7.3.2 CLS - Continuous Linked Settlement 166
7.3.3 Establishment of Continuous Linked Settlement services 166
7.4 SWIFT 167
7.4.1 Background 167
7.5 Electronic funds transfer 169
7.6 Online banking 169
7.7 Day trading 169
7.8 Smart cards 170
7.9 Evolution of e-finance 172
7.10 Origin of e-finance and internet commerce 173
7.10.1 Rise Of e-finance and electronic trading 174
8 Conclusion 177
Glossary 179
Suggested Readings 201
Appendix I 203
Appendix II 209
Appendix III 217
Index 223
