DIRE DAWA UNIVERSITY

COLLEGE OF BUSINESS & ECONOMICS

DEPARTMENT OF MANAGEMENT
Management Of Financial Institution Assignment
Group II members
NAME………………………….………..ID.NO

1. MAHIR SHAFI…………………...….1205757
2. FETHE ABDELLA…………………..1205586
3. KEDER HASSEN…………….….….1205698
4. MEGERSA ALIYI…………….……..1205778
5. IBSA MOHAMED…………..…….…1205686
6. HALIMA ABDELLA……………….…1205631
7. ZENEBE BOKONA……..……….....1205332
8. DAWIT AYNALEM……………….….1205525
9. MIKIYAS HABTAMU………...….…..1205829
10.HAMZA ABDUSAMED……………..1205641
Banking and the
Management of
Financial
Institutions
Banking plays a crucial role in channeling funds to
borrowers with productive investment opportunities. This
financial activity is essential for a smooth and efficient
financial system and economy.
Understanding Bank Balance Sheets
Total Assets = Liabilities + Capital

Assets Liabilities Capital

Assets represent the uses of Liabilities represent the Bank capital, or net worth, is
funds by a bank. They sources of funds for a bank. the difference between total
include items like reserves, They include items like assets and liabilities. It acts
securities, and loans, which checkable deposits, non- as a cushion against losses
generate income for the transaction deposits, and and ensures the bank's
bank. borrowings, which are funds solvency.
obtained from depositors
and other lenders.
 Liability
Checkable Deposits
1 Definition
Checkable deposits are bank accounts that allow account holders to write
checks to third parties. They include non-interest-bearing checking accounts,
interest-bearing NOW accounts, and money market deposit accounts.

2 Asset for Depositor

For the depositor, a checkable deposit is an asset as it represents part of
their wealth.

3 Liability for Bank

For the bank, checkable deposits are a liability because they are obligated to
pay the depositor upon withdrawal.

4 Low-Cost Source of Funds

Checkable deposits are usually the lowest-cost source of bank funds
because depositors are willing to forgo some interest for the convenience of
liquidity.
Non-Transaction Deposits
Savings Accounts Time Deposits Large-Denomination CDs
Savings accounts are non- Time deposits, also known Large-denomination CDs
transaction deposits where as certificates of deposit are available in
funds can be added or (CDs), have a fixed denominations of
withdrawn at any time. maturity length and $100,000 or more and are
They typically offer lower penalties for early typically bought by
interest rates than withdrawal. They offer corporations or other
checkable deposits. higher interest rates than banks. They are negotiable
savings accounts. and can be resold in a
secondary market.
Borrowings
Federal Reserve System
Banks borrow from the Federal Reserve System
through discount loans, also known as advances.

Federal Home Loan Banks

Banks also borrow from the Federal Home Loan
banks, which are government-sponsored institutions
that provide funding to financial institutions.

Other Banks and Corporations

Banks borrow from other banks in the federal funds
market and from corporations through various loan
arrangements.
Bank Capital
Bank capital, or net worth, is the difference between total
assets and liabilities. It is raised by selling new equity or
from retained earnings. Bank capital acts as a cushion
against losses and helps prevent bank failure.
 Asset
Reserves
Required Reserves Reserves held by banks
as mandated by reserve
requirements, which
specify a fraction of
checkable deposits that
must be kept as
reserves.
Excess Reserves Reserves held by banks
above the required
amount. They provide
liquidity and insurance
against deposit
outflows.
Cash Items In Process of Collecti
Banks The cash item process of collection involves a
check written on an account and a cash item collected
from another bank. The check is classified as a cash item
in the process of collection and is considered an asset for
the bank. This is because it represents a claim on
another bank for funds that will be paid within a few days.

Securities
Banks hold securities, primarily debt instruments, as an
important income-earning asset. They seek securities
with high returns and low risk, diversifying their holdings
to manage risk.
Deposit at other Banks
Loans Many small banks hold deposits in larger banks in
exchange for a variety of services, including check
collection, foreign exchange transactions, and help with
securities purchases. This is an aspect of a system
called correspondent bAnking. Collectively, reserves,
cash items in process of collection and deposits at other
banks are often referred to as cAsh items.
Loans
Loans are the primary source of income for banks. They
carefully screen borrowers to minimize the risk of default
and seek out loan opportunities with high interest rates.

Other Assets
The physical capital (bank buildings, computers, and
other equipment) owned by the banks is included in this
category.
Asset Transformation
1 Borrowing Short
Banks acquire funds through short-term
liabilities like deposits.

2 Lending Long
Banks use these funds to make long-term loans,
transforming short-term liabilities into long-term
assets.

3 Profit Generation
Banks earn profits by charging higher interest
rates on loans than they pay on deposits.
Bank
Management: A
Comprehensive
Overview
General Principles of Bank Management
Liquidity Management
Ensuring sufficient cash reserves to meet depositor withdrawals and obligations. This
involves acquiring liquid assets to manage potential deposit outflows.

Asset Management
Minimizing risk by acquiring assets with low default rates and diversifying asset
holdings. This involves selecting assets that offer a balance of return and risk.

Liability Management
Acquiring funds at the lowest possible cost. This involves strategically managing the
bank's liabilities to ensure efficient funding for its operations.

Capital Adequacy Management

Determining and maintaining the appropriate level of capital for the bank. This
involves acquiring capital to support the bank's growth and risk profile.
Liquidity Management and the Role
of Reserves
1 Deposit Outflow
Depositors withdraw cash or write checks deposited in other banks,
reducing the bank's reserves.

2 Reserve Requirement
Banks are required to maintain a certain percentage of deposits as
reserves, determined by the central bank.

3 Reserve Shortfall
If a bank's reserves fall below the required level, it faces a shortfall and
must take action to replenish its reserves.

4 Reserve Management Strategies

Banks employ various strategies to manage their reserves, including
borrowing from other banks, selling securities, or borrowing from the
central bank.
Strategies for Addressing Reserve
Shortfalls
1 Borrowing from Other Banks
Banks can borrow reserves from other banks in the federal funds market, which
involves short-term lending between banks.

2 Selling Securities
Banks can sell some of their securities, particularly highly liquid ones, to
generate cash and increase their reserves.

3 Borrowing from the Central Bank

Banks can borrow reserves from the central bank through discount loans,
which are typically used as a last resort.

4 Reducing Loans
Banks can reduce their loan portfolio by calling in loans or selling them to other
banks, although this can be costly and disruptive.
The Importance of Excess Reserves
Banks often hold excess reserves, which are reserves beyond the required level. This provides a
buffer against deposit outflows and avoids the costs associated with acquiring reserves through
other means.
Asset Management: Maximizing Returns
and Minimizing Risk
High-Yield Borrowers High-Return Securities Diversification

Banks seek borrowers who Banks invest in securities Banks diversify their asset
will pay high interest rates that offer high returns while holdings by investing in a
and are unlikely to default on minimizing risk, considering variety of assets, including
their loans, carefully factors such as maturity, short- and long-term loans,
screening potential credit rating, and market U.S. Treasury bonds, and
borrowers to assess their conditions. municipal bonds, to reduce
creditworthiness. overall risk.
Liability Management:
Acquiring Funds at Low Cost
Traditional Approach
Banks relied heavily on checkable deposits as their primary
source of funds, with limited flexibility in managing their
liabilities.

Evolution of Liability Management

The development of new financial instruments and markets,
such as negotiable CDs and the federal funds market, gave
banks greater flexibility in acquiring funds.

Modern Approach
Banks actively manage their liabilities to meet their funding
needs, seeking out the most cost-effective sources of funds.
Asset-Liability
Management (ALM)
Modern banks employ an integrated approach to
managing both assets and liabilities, known as asset-
liability management (ALM). This involves coordinating
asset and liability decisions to optimize the bank's overall
performance.
The Importance of Bank
Regulation
Bank regulation plays a crucial role in ensuring the safety
and soundness of the banking system. Regulators set
capital requirements, monitor bank activities, and
intervene when necessary to prevent financial instability.
A Dynamic and Evolving
Industry
The banking industry is constantly evolving, driven by
technological advancements, regulatory changes, and
changing customer needs. Banks must adapt to these
changes to remain competitive and profitable.
Understanding
Bank Reserves

This presentation will explore the concept of bank

reserves and how they play a crucial role in the banking
system. We will examine how banks gain and lose
reserves, and how they use these reserves to generate
profits through asset transformation.
The T-Account: A
Visual Representation

Assets Liabilities

Vault cash +$100 Checkable deposits +$100

The T-account is a simple yet powerful tool for visualizing

a bank's financial position. It shows the bank's assets on
the left side and its liabilities on the right side. In this
example, the bank has $100 in vault cash, which is an
asset, and $100 in checkable deposits, which is a liability.
Reserves and Checkable
Deposits
1 Reserves Increase
When a customer opens a checking account, the bank's reserves
increase by the amount of the deposit.

2 Reserves Decrease
When a customer withdraws funds from their checking account, the
bank's reserves decrease by the amount of the withdrawal.

The relationship between reserves and checkable deposits is fundamental

to understanding how banks operate. When a customer deposits money
into a checking account, the bank gains reserves equal to the amount of
the deposit. Conversely, when a customer withdraws money, the bank loses
reserves.
Check Clearing and Reserve
Transfers
Deposit at First National Bank
Jane Brown deposits a $100 check drawn on an account at Second National
Bank into her account at First National Bank.

First National Bank's T-Account

First National Bank's checkable deposits increase by $100, and it gains a
$100 asset in the form of cash items in process of collection.

Reserve Transfer
The Fed transfers $100 of reserves from Second National Bank to First
National Bank, reflecting the movement of funds.

When a check drawn on one bank is deposited into another, the receiving bank gains
reserves equal to the amount of the check, while the bank on which the check is written
loses reserves by the same amount. This process involves the Federal Reserve (Fed) as a
clearinghouse, transferring reserves between banks.
Required Reserves and Excess
Reserves
Required Reserves Excess Reserves

Banks are required to hold a certain percentage Any reserves held by a bank in excess of the
of their checkable deposits as reserves, known required reserves are called excess reserves.
as required reserves. This percentage is Banks can choose to hold excess reserves or
determined by the required reserve ratio set by lend them out to earn interest.
the central bank.

Banks are required to hold a certain fraction of their checkable deposits as reserves, known as
required reserves. Any reserves held in excess of this requirement are called excess reserves. This
distinction is important because excess reserves can be used for lending and profit generation.
Profit Generation through Asset
Transformation
1 Initial Situation
The First National Bank receives an additional $100 in checkable deposits,
increasing its required reserves by $10.

2 Loan Creation
The bank decides to lend out its $90 of excess reserves, creating new
loans and increasing its assets.

3 Profit Generation
The bank earns interest income from its loans, exceeding the costs
associated with servicing the checkable deposits, resulting in a profit.

Banks make profits by transforming short-term liabilities (checkable deposits) into longer-
term assets (loans). By lending out excess reserves, banks earn interest income, which
exceeds the costs associated with servicing the deposits, resulting in a profit.
The Importance of Asset
Transformation

Profitability
Asset transformation allows banks to generate profits by earning interest on loans while
paying interest on deposits.

Economic Growth
By lending out funds, banks facilitate economic growth by providing businesses and
individuals with access to capital.

Financial Stability

Asset transformation helps banks maintain financial stability by ensuring they have
sufficient reserves to meet customer demands.

Asset transformation is a crucial aspect of banking that enables banks to generate

profits, facilitate economic growth, and maintain financial stability. This process involves
transforming short-term liabilities into longer-term assets, allowing banks to earn interest
Conclusion: The Role
of Reserves in
Banking
Bank reserves play a vital role in the banking system,
influencing the profitability, economic growth, and
financial stability of banks. By understanding how banks
gain and lose reserves, and how they use these reserves
for asset transformation, we gain a deeper appreciation
for the intricate workings of the banking industry.
PRACTICAL PART
COMPANY PROFILE
Company name:- Dashen Bank
Year Of Formation:- 1990E.C
Head Quarter:- Addis Ababa
Practice Addressed Branch:- Dire Dawa – Megala Branch
Total Number Of Branches In Dire Dawa - 11

BASIC OPERATIONS
All bank activities carried out in Dashen bank this include:
• Deposit
• Cash with Draw
• Digital Banking Transaction
• International Money transfer and etc.
Management of bank’s asset & liability for

highest profit
The main profit the bank get is from interest of loans,
from international trade service conditions, from usage of
digital banking that assures maximum service with
minimum man-power.

Bank’s Capital in Preventing Failure

By properly applying these activities the bank defend against
failure
• Focuses on feasible productivity
• Win-win approach with customers
• Different recourse mobilization
• share-holders capital maximization
Strategies for Managements of the bank
Strong Customer Satisfaction based strategies that
reviewed annually that helps in achieving the ultimate
goal of the bank

Bank’s key Risk & ways of preventing

Fraud is the main key risk of the bank

Ways of fighting risk

this is how Dashen bank defend risk : fraud
• Building strong management team
• Creating responsible and accountable employees
• Segregations of tasks
• Strong audit inspection department
Thanks !!
!