57. Bank Financial Management:

Nature of Financial Management

Bank financial management is the management of a bank’s financial assets and liabilities (the main items on its balance sheet) so as to achieve a desired balance of net returns and risk. Writings on the subject focus on the risk management side, and specialists within the bank – those in the asset liability management office – are usually located within the risk management group. At its simplest, bank financial management is concerned with the net interest paid on liabilities and obtained on assets, and with the risk on assets and liabilities.

The Bank’s financial management is a process having as its primary objective to establish and maintain financial viability. Financial viability ensures that the Bank continues to implement its mandate effectively in accordance with the Establishing Agreement. To support this objective, the Bank is primarily guided by market practice in its affairs and applies a conservative risk versus return oriented approach. Although the Bank does not intend to maximize profits it seeks at least to recover its operating costs and capital employed. Furthermore, the Bank’s financial management ensures transparency and efficiency towards its performance and in the management of resources by providing essential information needed to those who manage and govern the Bank, lenders, borrowers, rating agencies and other third parties. Treasury Operations (Funding & Investing) Although being a profit centre, the Treasury’s activities are auxiliary to the core business of the Bank. Under the overall guidelines established by ALCO, the Treasury identifies, measures and manages the risks inherent in the balance sheet and income statement in order to ensure that timely funding is available for the BSTDB’s Banking operations whilst ensuring that a reasonable return on the Bank’s capital , retained earnings (reserves and surpluses) and Special Funds resources is obtained

Financial management functions can be divided into three major decisions, which the firm must make, namely the investment decision, the finance decision, and the dividend decision. Each of these decisions must be considered in relation to the objective of the firm: an optimal combination of the three decisions will maximize the value of the share to its shareholders. The investment decision is the most important one among the three decisions. It relates to the selection of assets in which funds are invested by the firm. The assets, which can be acquired, fall into two broad groups: Long-term assets which will yield a return over a period of time in future, Short-term I current assets which are convertible into cash in the normal course of business usually within a year. Accordingly, the asset selection decision of a firm is of two types. The first of these involving the first category of assets is popularly known as capital budgeting. The other one, which refers to short-term assets, is designated as liquidity decision. Financing decision. The second major decision of the firm is the financing decision for determining the best financing mix of the firm. After determining the asset-mix, the financial manager must decide the mode of raising the funds to meet the firm's investment requirements. The major issue in this decision is to determine the proportion of equity and debt capital. Since the involvement of debt capital affects the return and risk of shareholders, the financial manager should get the optimal capital structure to maximise the shareholders' return with minimum risk. Financing decision. The third important decision of a firm is its dividend policy. The financial manager must decide whether the firm should distribute all profits or retain it in the firm or distribute part and retain the balance. The dividend decision should be taken in terms of its impact on the shareholders' wealth. The optimum dividend policy is one, which maximizes the market value of share.

Sovereign lending refers to lending to sovereign governments, either directly to the government or government agency or to a company within the country where the loan is guaranteed by the government. This form of lending grew rapidly following major oil price rises in 1973 and 1974. Oil producing countries placed their receipts on deposit in the Eurocurrency markets and these funds were on-lent by banks, mainly to developing countries.