Banks Management
Q1. Forever Savings Bank estimates that building a new branch office in the newly developed Washington township will yield an annual expected return of 12 percent with an estimated standard deviation of 10 percent. The bank’s marketing department estimates that cash flows from the proposed Washington branch will be mildly positively correlated (with a correlation coefficient of + 0.15) with the bank’s other sources of cash flow. The expected annual return from the bank’s existing facilities and other assets is 10 percent with a standard deviation of 5 percent. The branch will represent just 20 percent of Lifetime’s total assets. Will the proposed branch increase Forever’s the overall rate of return? Its overall risk? [1.5 Marks]
Q2. The following statistics and estimates were compiled by Big Moon Bank regarding a proposed new branch office and the bank itself:
Branch office expected return = 15%
Standard deviation of branch return = 8%
Existing bank’s expected return = 10%
Standard deviation of existing bank’s return = 5%
Branch asset value as a percentage of total bank assets = 16%
Correlation of net cash flows for branch and bank as a whole = +0.48
What will happen to Big Moon’s total expected return and overall risk if the proposed new branch project is adopted? [1.5 Marks]
Q 3. What do you think the Financial-Services industry will look like 20 years from now? What are the implications of your projections for its management today? [2 Marks- 500 words minimum]
Answer:
Q1.
Initial calculation of E(R) estimate rate of return is as follow =
E (R) = 0.20 (12%) + 0.80 (10%)
=0.024 +0.08 * 100
= 10.4%
The risk of return rate is:
σ2 = (0.20)2 (0.10)2 + (.80)2 (0.05)2 + 2(0.20)(0.80)(0.15)(0.10)(0.05)
σ2 =0.00224
σ = 4.73%
The figure of 4.73% shows that the bank's expected return will increase its overall risk by a little amount which is great news for the branch of the bank.
Therefore, since the return will also increase the bank should go ahead with the proposal because it's safe.
Q2.
Calculation of proposed bank's total expected return :
E (R) = 0.16 (15%) + 0.84 (10%)
= 0.024 + 0.084*100
= 10.80%
Risk of proposed bank =
σ2 = (.15)2 (.082 + (.85) 2 (.05)2 + 2(.15)(.85)(.48)(.08)(.05)
σ2 = .00244
And thus σ = 049395 *100
= 4.94%
Therefore, The proposed project in question 2 increases the savings of the big moon bank branch and the bank itself ''s expected return by a minimal amount and also increases its overall risk by a minimal amount. Which is great for an investment.
Q3.
Financial-Services industry in the future (20years from now)
The financial service industry which comprises other sectors: banking, insurance, credit unions, trust funds, and brokerage businesses, manages money for clients. This industry is facing massive changes due to the current rapid technology changes that have also affected their customers’ lives. In addition, according to a report by KPMG, in the next 20 years, the industry is likely to see more competitors, innovations, regulations, and a need for more security (Pollari, 2019).
Elements that will affect the changes in Financial-service Industry
Fintech startups becoming mainstream
According to PwC Global FinTech Survey, Fintech (or financial technology) businesses like Paypal, and several others, will continue to use technology to solve money and business issues online, as they provide the same services as those in the financial services value chain (PricewaterhouseCoopers, 2020).
Technology and new capabilities will impact relationships with clients
The increased use of Artificial Intelligence (AI) and Machine Learning (ML) to automate tasks.
Some customers will want their services to be automated and others will want to be more involved; Technology will be used to replace manual labor.
Blockchain/ Distributed ledger technology (DLT) becoming mainstream
The financial service sector is faced with the negative effects of blockchain and its digital currencies becoming more accepted modes of performing financial transactions. These negative effects are due to the decentralized management of transactions used by blockchain which is believed to be much more transparent, unregulated by central banks or governments, and much more secure, compared to the traditional financial sectors.
More devices are connected to the internet as the internet of things (IoT) increases
As almost every day electronic device gets to be connected to the internet because of the – internet of things – people would want to use their devices to perform financial transactions with ease. Therefore technology makes people’s lives more personalized, financial institutions have to use technology to keep up with customer demands.
Financial regulations
The regulation of financial institutions by the regulatory framework in place both locally and internationally will be much more and with restrictions and penalties. This is due to the handling of personal data, security of people’s financial information for potential problems, supervising procedures, quality reviews, and reports.
Cyber security powered by AI to protect data
The industry will face lots of threats from Cybercriminals.
Implications Of The Projections For Its Management Today
The management today has to invest heavily in innovative technology
To stay relevant or keep up with advancements in technology and competition from Fintech, financial institutions have to invest in innovative technology that makes them operate better and provide what the future customers need. Technologies like quantum computing that use advanced IoT, AI, and ML to learn faster and automate manual tasks in payments, retail banking, insurance, capital markets, and wealth management. (KPMG/The Future of Digital Banking report)
The management has to also prepare the institution’s architecture to connect to different things, and to any location, so that they have more, control and accessibility, address issues of cyber-threats, IoT sensors, Third-party ‘big data’ sources, and connections like Business-to-Consumer (B2C), Business-to-Business (B2B), Cloud services, data warehouses, and applications.
References
What The Future of Finance May Look Like. (2019, December 16). Northeastern University D’Amore-McKim School of Business. https://onlinebusiness.northeastern.edu/blog/what-the-future-of-finance-may-look-like/
Pollari, I., & Bekker, C. (2019, July 31). The Future of Digital Banking: Banking in 2030. KPMG. https://home.kpmg/au/en/home/insights/2019/07/future-of-digital-banking-in-2030.html
PricewaterhouseCoopers. (2020). Financial services technology 2020 and beyond: Embracing disruption. PwC. https://www.pwc.com/gx/en/industries/financial-services/publications/financial-services-technology-2020-and-beyond-embracing-disruption.htmlQ1. Forever Savings Bank estimates that building a new branch office in the newly developed Washington township will yield an annual expected return of 12 percent with an estimated standard deviation of 10 percent. The bank’s marketing department estimates that cash flows from the proposed Washington branch will be mildly positively correlated (with a correlation coefficient of + 0.15) with the bank’s other sources of cash flow. The expected annual return from the bank’s existing facilities and other assets is 10 percent with a standard deviation of 5 percent. The branch will represent just 20 percent of Lifetime’s total assets. Will the proposed branch increase Forever’s the overall rate of return? Its overall risk? [1.5 Marks]
Q2. The following statistics and estimates were compiled by Big Moon Bank regarding a proposed new branch office and the bank itself:
Branch office expected return = 15%
Standard deviation of branch return = 8%
Existing bank’s expected return = 10%
Standard deviation of existing bank’s return = 5%
Branch asset value as a percentage of total bank assets = 16%
Correlation of net cash flows for branch and bank as a whole = +0.48
What will happen to Big Moon’s total expected return and overall risk if the proposed new branch project is adopted? [1.5 Marks]
Q 3. What do you think the Financial-Services industry will look like 20 years from now? What are the implications of your projections for its management today? [2 Marks- 500 words minimum]
Answer:
Q1.
Initial calculation of E(R) estimate rate of return is as follow =
E (R) = 0.20 (12%) + 0.80 (10%)
=0.024 +0.08 * 100
= 10.4%
The risk of return rate is:
σ2 = (0.20)2 (0.10)2 + (.80)2 (0.05)2 + 2(0.20)(0.80)(0.15)(0.10)(0.05)
σ2 =0.00224
σ = 4.73%
The figure of 4.73% shows that the bank's expected return will increase its overall risk by a little amount which is great news for the branch of the bank.
Therefore, since the return will also increase the bank should go ahead with the proposal because it's safe.
Q2.
Calculation of proposed bank's total expected return :
E (R) = 0.16 (15%) + 0.84 (10%)
= 0.024 + 0.084*100
= 10.80%
Risk of proposed bank =
σ2 = (.15)2 (.082 + (.85) 2 (.05)2 + 2(.15)(.85)(.48)(.08)(.05)
σ2 = .00244
And thus σ = 049395 *100
= 4.94%
Therefore, The proposed project in question 2 increases the savings of the big moon bank branch and the bank itself ''s expected return by a minimal amount and also increases its overall risk by a minimal amount. Which is great for an investment.
Q3.
Financial-Services industry in the future (20years from now)
The financial service industry which comprises other sectors: banking, insurance, credit unions, trust funds, and brokerage businesses, manages money for clients. This industry is facing massive changes due to the current rapid technology changes that have also affected their customers’ lives. In addition, according to a report by KPMG, in the next 20 years, the industry is likely to see more competitors, innovations, regulations, and a need for more security (Pollari, 2019).
Elements that will affect the changes in Financial-service Industry
Fintech startups becoming mainstream
According to PwC Global FinTech Survey, Fintech (or financial technology) businesses like Paypal, and several others, will continue to use technology to solve money and business issues online, as they provide the same services as those in the financial services value chain (PricewaterhouseCoopers, 2020).
Technology and new capabilities will impact relationships with clients
The increased use of Artificial Intelligence (AI) and Machine Learning (ML) to automate tasks.
Some customers will want their services to be automated and others will want to be more involved; Technology will be used to replace manual labor.
Blockchain/ Distributed ledger technology (DLT) becoming mainstream
The financial service sector is faced with the negative effects of blockchain and its digital currencies becoming more accepted modes of performing financial transactions. These negative effects are due to the decentralized management of transactions used by blockchain which is believed to be much more transparent, unregulated by central banks or governments, and much more secure, compared to the traditional financial sectors.
More devices are connected to the internet as the internet of things (IoT) increases
As almost every day electronic device gets to be connected to the internet because of the – internet of things – people would want to use their devices to perform financial transactions with ease. Therefore technology makes people’s lives more personalized, financial institutions have to use technology to keep up with customer demands.
Financial regulations
The regulation of financial institutions by the regulatory framework in place both locally and internationally will be much more and with restrictions and penalties. This is due to the handling of personal data, security of people’s financial information for potential problems, supervising procedures, quality reviews, and reports.
Cyber security powered by AI to protect data
The industry will face lots of threats from Cybercriminals.
Implications Of The Projections For Its Management Today
The management today has to invest heavily in innovative technology
To stay relevant or keep up with advancements in technology and competition from Fintech, financial institutions have to invest in innovative technology that makes them operate better and provide what the future customers need. Technologies like quantum computing that use advanced IoT, AI, and ML to learn faster and automate manual tasks in payments, retail banking, insurance, capital markets, and wealth management. (KPMG/The Future of Digital Banking report)
The management has to also prepare the institution’s architecture to connect to different things, and to any location, so that they have more, control and accessibility, address issues of cyber-threats, IoT sensors, Third-party ‘big data’ sources, and connections like Business-to-Consumer (B2C), Business-to-Business (B2B), Cloud services, data warehouses, and applications.
References
What The Future of Finance May Look Like. (2019, December 16). Northeastern University D’Amore-McKim School of Business. https://onlinebusiness.northeastern.edu/blog/what-the-future-of-finance-may-look-like/
Pollari, I., & Bekker, C. (2019, July 31). The Future of Digital Banking: Banking in 2030. KPMG. https://home.kpmg/au/en/home/insights/2019/07/future-of-digital-banking-in-2030.html
PricewaterhouseCoopers. (2020). Financial services technology 2020 and beyond: Embracing disruption. PwC. https://www.pwc.com/gx/en/industries/financial-services/publications/financial-services-technology-2020-and-beyond-embracing-disruption.html
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