The Principles of Banking by Moorad Choudhry

Part I
A Primer on Banking
Part I is a primer on banking, and sets the scene for newcomers, be they
students or practitioners. It is essential to be familiar with the nature of
banking business, as well as the types of instruments used in money market
trading. We also need to be familiar with banking capital and financial
statements, the former preparatory to a discussion on regulatory capital and
the Basel rules, the latter simply for general knowledge purposes. So the
first part of this book covers these areas.
We begin with a look at the fundamentals of banking business, and the
different elements of bank capital. We also look at financial ratio analysis,
used when reviewing metrics such as return on capital.
The remainder of Part I looks at regulatory capital, credit risk and credit
limits, the use of securitisation and the yield curve.

Chapter 1
A Primer on Bank Business and Balance
Sheet Risk
This chapter is intended for newcomers to the market, junior bankers and
finance students. Everyone else should read it as an essential refresher
course. The purpose of this primer is to introduce all the essential basics of
banking necessary to gain a strategic overview of what banks do and to
manage what risk exposures they face. We begin with the concept of
banking, and follow with a description of bank cash flows, calculation of
return, the risks faced in banking, and organisation and strategy.
A summary of the bank product line is given in the Appendix at the end of
the chapter.
An Introduction to Banking
Banking has a long and honourable history. Banking operations encompass
a wide range of activities, all of which contribute to the asset and liability
profile of a bank. Table 1.1 shows selected banking activities, and the type
of risk exposure they represent. The terms used in the table, such as “market
risk”, are explained elsewhere in this book. In Chapter 2 we discuss
elementary aspects of financial analysis, using key financial ratios, that are
used to examine the profitability and asset quality of a bank. We also
discuss bank regulation and the concept of bank capital.

The Principles of Banking by Moorad Choudhry