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The Principles of Banking
The ultimate guide for bank management: how to survive and thrive throughout the business cycle An essential guide for bankers and students of finance everywhere, The Principles of Banking reiterates that the primary requirement of banking―sound capital and liquidity risk management―had been forgotten in the years prior to the financial crash. Serving as a policy guide for market practitioners and regulators at all levels, the book explains the keys to success that bankers need to follow during good times in order to be prepared for the bad, providing in-depth guidance and technical analysis of exactly what constitutes good banking practice. Accessible to professionals and students alike, The Principles of Banking covers issues of practical importance to bank practitioners, including asset-liability management, liquidity risk, internal transfer pricing, capital management, stress testing, and more. With an emphasis on viewing business cycles as patterns of stable and stressful market behavior, and rich with worked examples illustrating the key principles of bank asset-liability management, the book is an essential policy guide for today and tomorrow. It also offers readers access to an accompanying website holding policy templates and teaching aids. Written by a banking practitioner with extensive professional and teaching experience in the field, The Principles of Banking explains exactly how to get back to basics in risk management in the banking community, essential if we are to maintain a sustainable banking industry.
“engaging and interesting and, more importantly, easily understood, allowing a clear picture to emerge of how the principle or concept under discussion is to be applied in the real world.”
- Graeme Wolvaardt, Head of Market & Liquidity Risk Control, Europe Arab Bank Plc
“engaging and interesting and, more importantly, easily understood, allowing a clear picture to emerge of how the principle or concept under discussion is to be applied in the real world.”
- Graeme Wolvaardt, Head of Market & Liquidity Risk Control, Europe Arab Bank Plc
912 pages, Hardcover
First published April 12, 2011
90 people are currently reading
176 people want to read
About the author
Moorad Choudhry
73 books20 followersMoorad Choudhry is Managing Director, Head of Business Treasury, Global Banking & Markets at Royal Bank of Scotland plc. Before joining RBS, He was Head of Treasury at Europe Arab Bank, a subsidiary of Arab Bank. He joined there from KBC Financial Products in London, the derivatives and convertible bond trading arm of KBC Bank N.V., Brussels. Prior to that he was a vice-president in Structured Finance Services sales and marketing at JPMorgan Chase Bank, a sterling proprietary trader in the Treasury division at Hambros Bank Limited, and a gilt-edged market maker and money markets trader at ABN Amro Hoare Govett Limited. He began his City career at the London Stock Exchange in 1989.
Choudhry is Visiting Professor at the Department of Economics, London Metropolitan University, a Visiting Research Fellow at the ICMA Centre, University of Reading, a Senior Fellow at the Centre for Mathematical Trading and Finance, Cass Business School, a Fellow of the Securities and Investment Institute and a Fellow of the Institute of Sales and Marketing Management.
Choudhry is Visiting Professor at the Department of Economics, London Metropolitan University, a Visiting Research Fellow at the ICMA Centre, University of Reading, a Senior Fellow at the Centre for Mathematical Trading and Finance, Cass Business School, a Fellow of the Securities and Investment Institute and a Fellow of the Institute of Sales and Marketing Management.
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April 16, 2025quality of liquidity they hold on the balance sheet as a cushion against unforeseen funding needs.
Nothing would be built, nothing would be traded, and very little would be consumed. This would result in all of us being much worse off than we are now.
that they could beat the market, that as long as the music was playing they should still be in the game
emperor’s new clothes
analysing the yield curve, bank capital, securitisation, Basel II, valueat-risk (VaR) methodology, interest-rate risk hedging, derivatives pricing, determinants of the swap spread, and money markets trading.
products such as bonds and floating-rate notes and derivatives such as credit default swaps (CDS) and caps/floors.
a bank as a financial institution that is in the business of taking deposits and advancing loans, and which makes money from the difference in interest rates paid and received on these two products (the ‘‘net interest income’’).
Bank operating costs comprise staff costs, as well as other costs such as regulatory costs, premises, information technology and equipment costs. Further, significant elements of cost are provisions for loan losses
‘‘Capital markets’’ is the term used to describe the market for raising and investing finance. There are two primary users of the capital markets: lenders and borrowers.
those who are investing funds wish to remain liquid, which means they have easy access to their investments. They also wish to maximise the return on their investment.
Banks accept deposits from investors, which make up the liability side of their balance sheet, and lend funds to borrowers, which form the assets on their balance sheet.
the bank reduces the risks it is exposed to by spreading and pooling risk across a wide asset and liability base.
‘‘retail’’ or ‘‘commercial’’ banking covers the more traditional lending and trust activities, while ‘‘investment’’ banking covers trading activity and fee-based income such as stock exchange listing and mergers and acquisitions (M&A). The one common objective of all banking activity is return on capital.
Asset Liability Management (ALM)
Provisions are set aside out of reserves to cover for these losses each year, and are a charge against the loan revenues of the bank.
The money market is where transactions in short-term funds take place. This is the borrowing and lending of funds that have a repayment date of within 12 months of the loan start date.
The T-bill market in any country is that country’s lowest risk instrument, and consequently carries the lowest yield of any debt instrument. Indeed, the first market that develops in any country is frequently the T-bill market.
Because the bills are backed by the government, they carry the lowest default risk in that market.
author’s book Bank Asset and Liability Management. That book includes a primer on f inancial markets arithmetic. This is required background for an understanding of interest rate mechanics.
pegged to the US dollar and move with that currency.
‘‘LIBOR’’ London Inter-bank Offered Rate
Therateis‘‘fixed’’bytheBritishBankers’Association (BBA)at11a.m. everybusinessdaymorning(inpractice, thefixis usuallyabout 20minutes later) by taking the averageof the rates suppliedbymemberbanks.Theterm‘‘Libid’’ isthebank’s‘‘bid’’rate; that is, therateatwhichitpaysforfundsintheLondonmarket.The quote spread for a selectedmaturity is therefore the difference betweenLiborandLibid.
The art of banking is not technically difficult, it simply requires good judgement and common sense. Successful management of a financial institution does not require a PhDin mathematics or physics.
Any business line that destroys value must be discontinued.
setting aside part of each year’s profit to cover for future loan defaults. This is known as loan provisioning
The interest rate on a loan is then set as a spread over the bank’s funding cost, being calculated as a function of the target RoE, a credit spread to cover anticipated loan losses, and any additional spread to cover its operating expenses.
Sovereign risk is a type of credit risk specific to government debt.
Nothing would be built, nothing would be traded, and very little would be consumed. This would result in all of us being much worse off than we are now.
that they could beat the market, that as long as the music was playing they should still be in the game
emperor’s new clothes
analysing the yield curve, bank capital, securitisation, Basel II, valueat-risk (VaR) methodology, interest-rate risk hedging, derivatives pricing, determinants of the swap spread, and money markets trading.
products such as bonds and floating-rate notes and derivatives such as credit default swaps (CDS) and caps/floors.
a bank as a financial institution that is in the business of taking deposits and advancing loans, and which makes money from the difference in interest rates paid and received on these two products (the ‘‘net interest income’’).
Bank operating costs comprise staff costs, as well as other costs such as regulatory costs, premises, information technology and equipment costs. Further, significant elements of cost are provisions for loan losses
‘‘Capital markets’’ is the term used to describe the market for raising and investing finance. There are two primary users of the capital markets: lenders and borrowers.
those who are investing funds wish to remain liquid, which means they have easy access to their investments. They also wish to maximise the return on their investment.
Banks accept deposits from investors, which make up the liability side of their balance sheet, and lend funds to borrowers, which form the assets on their balance sheet.
the bank reduces the risks it is exposed to by spreading and pooling risk across a wide asset and liability base.
‘‘retail’’ or ‘‘commercial’’ banking covers the more traditional lending and trust activities, while ‘‘investment’’ banking covers trading activity and fee-based income such as stock exchange listing and mergers and acquisitions (M&A). The one common objective of all banking activity is return on capital.
Asset Liability Management (ALM)
Provisions are set aside out of reserves to cover for these losses each year, and are a charge against the loan revenues of the bank.
The money market is where transactions in short-term funds take place. This is the borrowing and lending of funds that have a repayment date of within 12 months of the loan start date.
The T-bill market in any country is that country’s lowest risk instrument, and consequently carries the lowest yield of any debt instrument. Indeed, the first market that develops in any country is frequently the T-bill market.
Because the bills are backed by the government, they carry the lowest default risk in that market.
author’s book Bank Asset and Liability Management. That book includes a primer on f inancial markets arithmetic. This is required background for an understanding of interest rate mechanics.
pegged to the US dollar and move with that currency.
‘‘LIBOR’’ London Inter-bank Offered Rate
Therateis‘‘fixed’’bytheBritishBankers’Association (BBA)at11a.m. everybusinessdaymorning(inpractice, thefixis usuallyabout 20minutes later) by taking the averageof the rates suppliedbymemberbanks.Theterm‘‘Libid’’ isthebank’s‘‘bid’’rate; that is, therateatwhichitpaysforfundsintheLondonmarket.The quote spread for a selectedmaturity is therefore the difference betweenLiborandLibid.
The art of banking is not technically difficult, it simply requires good judgement and common sense. Successful management of a financial institution does not require a PhDin mathematics or physics.
Any business line that destroys value must be discontinued.
setting aside part of each year’s profit to cover for future loan defaults. This is known as loan provisioning
The interest rate on a loan is then set as a spread over the bank’s funding cost, being calculated as a function of the target RoE, a credit spread to cover anticipated loan losses, and any additional spread to cover its operating expenses.
Sovereign risk is a type of credit risk specific to government debt.
February 27, 2024
This book provides both - high level overview of the business as well as detailed coverage of more important topics such as ALM. Since my educational background is not in economics/banking (and I was working in the bank for several years) I was looking for a book to give me a more holistic understanding of the business - found it in this book. This is banking from a to z.
November 20, 2024
Best investment ($ and time) to learn about modern Banking
A marvel of lucid exposition of modern banking as a business and covering the basics to understand banking operations, governance, strategy and regulatory framework. Many good examples of illustration and informatics to explain complex processes like ICAAP/ILAAP and the values they embedded.
Must read for bankers all all levels.
A marvel of lucid exposition of modern banking as a business and covering the basics to understand banking operations, governance, strategy and regulatory framework. Many good examples of illustration and informatics to explain complex processes like ICAAP/ILAAP and the values they embedded.
Must read for bankers all all levels.
February 6, 2016
poorly explained (wrong?) math around the tax shield used to pay depositors
Displaying 1 - 4 of 4 reviews