Bank Financial Analysis: Key Ratios & Metrics
Risk-Adjusted Return on Capital (RAROC)
RAROC is calculated as:
(Expected Income – Financial Costs – Provisions – Operating Expenses) / Risk Capital
- Expected Income: (Loan * Interest Rate)
- Financial Costs: (Loan * Cost of Financing)
- Provisions: (Loan * Loss Given Default * Probability of Default)
- Risk Capital: (Loan * Loss Given Default * Unexpected Default Rate)
A higher RAROC is better, and it should be greater than the bank’s capital cost to create value. Value creation occurs when RAROC exceeds the
Read MoreInternational Purchases: Accounting and Tax Treatment
Accounting and Tax Treatment of International Purchases
The accounting and tax treatment of purchases of goods made abroad differs from domestic purchases primarily due to:
- Administrative, commercial, and tax regulations, including specific procedures.
- Customs duties on imports.
- Value Added Tax (VAT) application and treatment.
- Currency exchange operations for payments and euro recording.
- Specific payment arrangements in international trade.
Two types of operations are considered, based on the goods’ country
Read MoreImpact of Monetary & Fiscal Policies on Economies
Foreign Policy
1) ∇i Exterior
This causes i > i*, leading to capital inflows into the EU (increasing demand for the Euro (€) and appreciating the exchange rate (E)).
- ∆E (€ appreciates, $ depreciates), the i-E curve shifts to the right (without changing our i).
- If € appreciates (∆E), the real exchange rate increases (Real exchange rate = E * p), leading to a decrease in net exports (∇XN) and a decrease in output (∇Y).
The current account balance worsens. If initially, XN is in equilibrium
Read MoreKey Accounting Principles and Financial Statements
Chapter 1: Fundamental Accounting Concepts
Internal Users: Marketing managers, production supervisors, finance directors, and company officers.
External Users: Investors and creditors.
GAAP (Generally Accepted Accounting Principles): A common set of accounting standards and procedures.
Cost Principle: Companies must record assets at their original cost.
Monetary Unit Assumption: Companies record only transactions that can be expressed in monetary terms.
Economic Entity Assumption: Activities of an entity
Read MoreAccounting System Essentials: Key Concepts and Principles
Accounting System Activities
The three main activities of an accounting system are identifying, recording, and communicating financial information.
Bookkeeping vs. Accounting
Bookkeeping usually involves only the recording of economic events. Accounting, however, encompasses the entire process of identifying, recording, and communicating these events.
Users of Accounting Information
Accounting information is used both internally and externally:
- Internal Users: Marketing, finance, HR, and management
- External
Uncovered Interest Rate Parity: Risks and Returns
Uncovered Interest Rate Parity (UIP): Actors and Exchange Rate Risk
Exchange Rate Strategies and Returns
Uncovered Interest Rate Parity (UIP) states that the expected returns on investments are subject to potential variations in exchange rates. Let’s examine two strategies:
- Buying domestic treasury plans:
- Return (Rb) = (1 + R), where R is the domestic interest rate.
- Buying foreign treasury plans:
- Initial return: Rb = 1/S * (1 + Re), where S is the spot exchange rate and Re is the foreign interest rate.