Bank financial management Essay Example | Topics and Well Written Essays - 1500 words

Bank financial management - Essay Example While some considers the commodities and equity market as one of the riskiest assets for an investor to put his or her money, the riskiness of a bank is defined differently. The financial statement of a bank reflects the true picture of its assets and liabilities at a particular point of time for a particular period. The balance sheet of a bank shows the total assets owned by the bank and the total liabilities owed by the bank, on a given date. Different countries have different capital adequacy ratio and guidelines that help the banks to maintain adequate capital to protect the bank from defaulting. The global financial crisis that affected almost all the economies, directly or indirectly, changed the perception of risk in the multinational banks all over the world. The Basal committee on banking supervision which was established by the central bank authorities of ten countries encourages common standard and common capital adequacy requirements for its members to ensure investor protection of funds. Assessing the Financial Position of European & US Banks during the Period 2002-07 A bank is considered as one of the safest place for putting money when compared to other investments instruments like equities or corporate debt instruments, derivatives, hybrid instruments, etc. However, the perception of many people around the world has changed with time. If banks has inadequate capital base, it will need third party assistance to infuse capital which will increase borrowing cost and risk. Consider an example, and investor has the option to invest in Bank A, operating in US, or in Bank B, operating in Germany. Moreover, the rate of return from both the bank is same, say 5%. So, in this case, how does an investor decide in which bank he or she should park money? One way to answer this question is to ascertain the risk of default for both the banks, since the given expected return is same. To determine the riskiness of default, an individual or corporate need to assess the financial statement of both the banks. Key variables like the total assets, loans, deposits and short term funding, equity, net interest margin, liquidity, profit before tax, operating income, fee and commissions, loans to total asset ratio, interest coverage ratio, profitability ratio, etc. are used to evaluate the financial health of the banks (Selvavinayagam, 1995, pp.11-32). From the given data, if we analyse the performance of the European banks with US banks on the basis of Net Interest Margin, their efficiency can be assessed. To analyse the given data, we first concentrate on the NIM of commercial banks from the year 2002 to 2007. The net interest margin or NIM is defined as the difference between the interest income and the interest paid by the banks relative to other assets. This is similar to the gross profit margin of the non-financial institutions (Maudos & Guevara, 2002, pp.18-19). Higher values mean that the banks are earning higher spread between the interest receivable on loans given out and the interest payable on the loans taken. The average Net Interest Ma rgin for the U.S. from 2002-07 is above 3.00% compared to the European bank of is 2.9931%. Thus, keeping other things constant, on the basis of NIM, the US banks are marginally more efficient compared to the E