Assignment Instructions: The assignment is separated into two parts and must be 2600 words: Part A (1300 words): 1. The following is a summary of the accounts of Foverer Bank (£bn) Balance Sheet...

Part A:
1.
i) Cash Reserve Ratio = Cash & Balances with central banks/Customer Deposits
= £114,465 billion/£160,452 billion
= 0.71
Explanation:
Cash Reserve Ratio is also a mandatory requirement that the bank must keep keeping the liquidity at the bank to meet the withdrawal requirements, and therefore it is mandated that the bank must keep some of its reserves as cash. The cash reserve ratio indicates the liquidity of the bank which in this case is very good as the bank is maintaining a 0.71 cash reserve ratio which is more than the industry standards.
ii) Liquidity Coverage Ratio = Customer Deposits/Total Equity
= £160,452 billion/£107,436 billion
= 1.49
Explanation:
The liquidity coverage ratio is the total amount of liquidity which the company has in relation to its customer deposits which in this case is very high which means that the bank is doing great in this front by keeping high liquidity.
iii) Burden Ratio = (Overheads – Other Operating Income)/Total Assets
= (£25,924 billion – £25,800 billion)/ £483,698 billion
= 0.0003
Explanation:
The burden Ratio is the number of expenses which the company has to pay after deducting the other operating income that the bank is earning, this ratio helps in understanding what amount of burden the bank has after taking into consideration the interest income and interest expenditure.
iv) market-to-book ratio = Market Capitalization/Total Equity
= £183,567 billion/£107,436 billion
= 1.71
Explanation:
Market-to-book ratio is a ratio which is looked at by everybody be it internal stakeholders, external stakeholders or the central bank, this is because this tells the stakeholders about the rate at which the bank is trading in the market about its total equity in the bank. A high market-to-book ratio indicates that the market is expecting the bank to do very well in the future.
v) Net Interest Margin = (Net Interest Income – Net Fees and Commission)/Total Assets
= (£20,002 billion – £15,828 billion)/ £483,698 billion
= 0.86%
Explanation:
Net Interest Margin is the net interest that the bank is earning in relation to the total assets the bank has. This ratio is a very important profitability ratio because it tells us about the bank’s performance in the profitability area about how much is the bank earning after deducting the expenses related to gathering the deposits (i.e., net interest expenses).
Banks Performance
A bank’s performance depends on a lot of factors which include profitability, liquidity, leverage, and other things. Profitability is one of the areas which is the most important, but liquidity and leverage are of the same importance because a bank can earn high profitability by taking a lot of leverage and if that is happening it does not mean that the bank is doing good. Therefore, to measure a bank’s performance the bank must do good in all areas.
The above ratios indicate that the bank’s performance in terms of liquidity and value is good, but the bank is lacking behind in the interest earnings factor because the bank is only earning a mere 0.86% of net interest margin which is very low as compared to the industry standards (Yeh 1996).
Also, the major reason behind such a low net interest margin is the bank is keeping a very high cash reserve ratio of 0.71 which is making the bank let go of the investment opportunities which can be used to increase the net interest income and therefore the profitability and net interest margin of the bank.
Forever Bank is doing great in the liquidity and leverage areas but is lacking behind in the profitability front, therefore the bank has to focus on improving it.
References
Yeh, Q.J., 1996. The application of data envelopment analysis in conjunction with financial ratios for bank performance evaluation. Journal of the operational research society, 47(8), pp.980-988.
Carlson, M., Shan, H. and Warusawitharana, M., 2013. Capital ratios and bank lending: A matched bank approach. Journal of Financial Intermediation, 22(4), pp.663-687.
2.
Securitization is the pooling of various debt obligations like loans and other securities and then creating security by merging/pooling all the securities. Asset-backed securities, popularly known as ABS are financial securities which are backed by different income-generating assets like loans, etc.
Asset-backed securities are a good way to create liquidity in the financial sector but can be lethal if not given the required care. Here we look at the various benefits and drawbacks that asset-backed securities have.
Benefits of Addddddddddd Securities
· Protection: This benefit is from the lender’s perspective, as by creating asset-backed security out of the various debt...