Commercial Banking

Commercial bank — a financial intermediary that accepts deposits and issues loans. Banks perform critically important functions in the economy: maturity transformation (accepting short-term deposits and issuing long-term loans), reduction of transaction costs, informational intermediation (assessment of borrowers’ credit quality), creation of payment systems. The combined assets of the global banking system exceed $180 trillion.

A bank’s balance sheet: assets include loans (the largest item), an investment portfolio of securities, reserves at the central bank, interbank loans. Liabilities: deposits (current, term, savings), issued bonds, interbank borrowings, capital. Net Interest Margin (NIM) = (Interest income − Interest expenses) / Average interest-bearing assets. NIM is a key indicator of a commercial bank’s profitability.

Asset and liability management (ALM) is a central task of bank management. Gap Analysis: the difference between interest-sensitive assets and liabilities in each time period. Positive gap — the bank benefits when rates rise; negative gap — when they fall. Duration Gap: the difference between the duration of assets and liabilities. Adjustment is performed through interest rate swaps and futures. Banks balance between maximizing net interest margin and interest rate risk.

The loan portfolio and credit risk management. Segments of the loan portfolio: corporate loans, mortgages, consumer loans, loans to SMEs. Credit risk is the largest risk for a bank. Credit scoring (probability of default models), internal ratings (Internal Ratings Based approach in Basel), provisioning (IFRS 9 — Expected Credit Loss model). NPL ratio (Non-Performing Loans / Total Loans) is a key indicator of portfolio quality. Loan-to-Value (LTV) in mortgage lending.

Regulation and supervision: central banks and regulators set capital requirements (CET1 at least 4.5%, Tier 1 at least 6%, Total Capital at least 8% according to Basel III), liquidity (LCR — Liquidity Coverage Ratio at least 100%, NSFR — Net Stable Funding Ratio), and leverage. Deposit insurance prevents bank runs. Global systemically important banks (G-SIBs) bear an additional capital surcharge from 1 to 3.5%.