Bank Valuation and Value Based Management: Deposit and Loan Pricing, Performance Evaluation, and Risk, 2nd Edition / Edition 2

by Jean Dermine

Overview

With the Final Standard of Basel III published and implementation deadlines set, there's no better time for the revised and updated edition of the cornerstone resource bankers, bank regulators, auditors, and risk managers worldwide rely on—Bank Valuation and Value-Based Management. Whether you're complying with the new standards of practice, valuing a bank, or searching forsustainable value creation, you can do it quicker and more effectively with the insight only Jean Dermine can offer.

Renowned for his expertise in asset and liabilitymanagement, European financial markets, and banking theory, Dermine provides the most comprehensivereference available on the essence of banking—asset-liability management, with particular focus on an institution's banking book. Along with an in-depth exploration of what drives value in a bank, he equips you with his personal bank valuation model aimed at assessing decisions that enhance shareholder value. Complementing his toolbox of practical instruments for valuing banks, Dermine gives you a robust, integrated value-based management framework for addressing such managerialissues as fund transfer pricing, risk-adjusted performanceevaluation, deposit pricing, capital management, loan pricing and provisioning, securitization, and the measurement of interest-rate risk.

Relevant in banking systems across the globe, this new edition includes the latest methods and strategies for:

• Identifying the drivers of sustainable value creation
• Choosing a fund transfer price that includes liquidity and solvency risks
• Allocating economic capital to business unitsPricing deposits and loans
• Estimating the duration of nonmaturing accounts
• Allocating provisions on performing and nonperforming loans.

Throughout the book, extensive mathematical formulas and exercises ground conceptual coverage to hands-on practices. A wealth of exercises and real-world problems work to develop your intuitive sense for asset-liability management in the international banking community.

Bank Valuation and Value-Based Management, Second Edition, is your one-stop resource for all the information critical to your success.

PRAISE FOR BANK VALUATION AND VALUE BASED MANAGEMENT, Second Edition:

"Professor Dermine's book covers the full range of critical topics in banking today—valuation, pricing, and risk management. Analytical, complete, and relevant, this book is a gem! At a time of increased scrutiny of the banking industry, this volume uses an analytic approach that will serve the reader well for years to come. A must-read for anyone in the profession." — ANTHONY M. SANTOMERO, Director, Citigroup; former president, Federal Reserve Bank of Philadelphia; Senior Advisor, McKinsey & Company; and Richard K. Mellon Professor Emeritus of Finance, the Wharton School

"Valuing banks, especially large and complex ones, poses special challenges that recent history has made abundantly clear at great cost to investors and taxpayers. This second edition of the leading volume in the field builds on its strengths as a comprehensive treatment of thekey valuation and bank management components. It is a must-read for anyone seeking to understand modern banking and finance." — INGO WALTER, Seymour Milstein Professor of Finance, Corporate Governance, and Ethics at the Stern School of Business, New York University

"It is extraordinarily clear and very helpful for my day-to-day activity. It is significantly increasing my understanding of the bank." — PAOLO BELTRATTI, Professor of Finance, Bocconi University, and former chairman of the management board, Intesa Sanpaolo.

"A jewel. I will recommend it." — BRUNO COLMANT, Roland Berger, former member of

Product Details

ISBN-13:	9780071839488
Publisher:	McGraw Hill LLC
Publication date:	10/16/2014
Edition description:	New Edition
Pages:	528
Product dimensions:	5.90(w) x 8.90(h) x 1.80(d)

About the Author

JEAN DERMINE is Professor of Banking and Finance at INSEAD and has taught at the Wharton School of the University of Pennsylvania, the Universities of Louvain and Lausanne, CESAG, NYU, and the Stockholm School of Economics.

Table of Contents

Introduction vii

Acknowledgments ix

Chapter 1 Discounting, Present Value, and the Yield Curve 1

Chapter 2 Coupon Bond Rate, Zero-Coupon Bond Rate, Forward Rates, and the Shape of the Yield Curve 14

Chapter 3 Statistics: A Review 23

Chapter 4 The Economics of Banking and a Bank's Balance Sheet and Income Statement 32

Part 1 Bank Valuation

Chapter 5 The Valuation of Bank, Part 1 44

Chapter 6 The Valuation of Banks, Part 2 70

Chapter 7 Economic and Strategic Drivers of Bank Valuation 93

Chapter 8 Valuation of Fee-Based Activities 110

Part 2 Value-Based Management

Chapter 9 Value-Based Management in Banking: An Introduction 126

Chapter 10 Fund Transfer Pricing: Foundation and Advanced Approaches 145

Chapter 11 Deposit Pricing and Repurchase Agreements 172

Chapter 12 Capital Regulation (Basel I), Economic Capital Allocation, and Loan Pricing I (the Equity Spread) 183

Chapter 13 Capital Regulation (Basel II) 200

Chapter 14 Loss Given Default and Provisions on Nonperforming Loans 214

Chapter 15 Loan Pricing II, Loan Loss Provisions on Performing Loans, and Estimates of Probabilities of Default 226

Chapter 16 Securitization 245

Part 3 Risk Management

Chapter 17 Risk Management in Banking: An Overview 262

Chapter 18 The Control of Interest-Rate Risk on the Banking Book, The Earnings at Risk 268

Chapter 19 The Control of Interest-Rate Risk on the Banking Book, Part 2: The Economic Value at Risk 281

Chapter 20 Value at Risk in the Trading Book: The Aggregation of Risks 301

Chapter 21 Liquidity Risk and Value Creation 320

Chapter 22 The Basel III Global Regulatory Framework for More Resilient Banks and Banking Systems 336

Chapter 23 Credit Risk Portfolio Diversification: Credit Value at Risk 346

Chapter 24 Marginal Risk Contribution, Diversification, and Economic Capital Allocation 369

Chapter 25 Forwards, Futures, Swaps, and Options: Counterparty Risk 384

Chapter 26 Credit Derivatives 404

Chapter 27 Operational Risk 418

Part 4 Special Topics

Chapter 28 Islamic Banking, Interest-Free Banking 430

Chapter 29 Prudential Regulations, Safety Nets, and Corporate Structure of International Banks (Branches versus Subsidiaries) 435

Glossary 458

Solutions to Exercises 474

References 497

Index 509