Financial Market Essay Example Pdf - Free Essay Example

Sample details Pages: 18 Words: 5318 Downloads: 10 Date added: 2017/06/26 Category Finance Essay Type Narrative essay Did you like this example? A commercial bank is a type of financial intermediary and a type of bank. After the Great Depression, the U.S. Congress required banks only engage in banking activities, whereas investment banks were limited to capital market activities. Since the two no longer have to be under separate ownership, some use the term commercial bank to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses. Commercial bank is the term used for a normal bank to distinguish it from an investment bank. This is what people normally call a bank. The term commercial was used to distinguish it from an investment bank. Since the two types of banks no longer have to be separate companies, some have used the term commercial bank to refer to banks which focus mainly on companies. In some English-speaking countries outside North America, the term trading bank was and is used to denote a commercial bank. During the great depr ession and after the stock market crash of 1929, the U.S. Congress passed the Glass-Steagall Act 1930 (Khambata,1996) requiring that commercial banks only engage in banking activities (accepting deposits and making loans, as well as other fee based services), whereas investment banks were limited to capital markets activities. This separation is no longer mandatory. It raises funds by collecting deposits from businesses and consumers via checkable deposits, savings deposits, and time (or term) deposits. It makes loans to businesses and consumers. It also buys corporate bonds and government bonds. Its primary liabilities are deposits and primary assets are loans and bonds. 10 Commercial banking can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public (retail banking). Origin: The name bank derives from the Italian word banco desk/bench, used during the Renais sance by Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth (de Albuquerque, Martim, 1855). However, there are traces of banking activity even in ancient times. In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank are derived. As a moneychanger, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome- that of the Imperial Mint (Matyszak and Philip, 2007). In the most basic terms, commercial banks take deposits from individual and institutional customers, which they then use to extend credit to other customers. They make money by earning more in interest from borrowers than they pay in interest to those whose deposits they accept. Theyre different from investment banks and brokerage s in that those kinds of institutions focus on underwriting, selling, and trading corporate and municipal securities. The Balance Sheet: A banks balance sheet is different from that of a typical company. You wont find inventory, accounts receivable, or accounts payable. Instead, under assets, youll see mostly loans and investments, and on the liabilities side, youll see deposits and borrowings. Loans represent the majority of a banks assets (Saunders and Cornett, 2005). A bank can typically earn a higher interest rate on loans than on securities, roughly 6%-8%. Loans, however, come with risk. If the bank makes bad loans to consumers or businesses, the bank will take a hit when those loans arent repaid. Because loans are a banks bread and butter, its critical to understand a banks book of loans. Other assets, including property 11 and equipment, represent only a small fraction of assets. A bank can generate large revenues with very few hard assets. Compare this to some other co mpanies, where plant, property, and equipment (PPE) is a major asset. Surprisingly, cash represents only about 2% of assets. Thats because the bank wants to put its money to work earning interest. If the bank simply sticks its cash in a vault and forgets about it, it will have a hard time making a profit. Thus, a bank keeps most of its money tied up in loans and investments, which are called earning assets in bank-speak because they earn interest. Banks dont like putting their assets into fixed-income securities, because the yield isnt that great. However, investment-grade securities are liquid, and they have higher yields than cash, so its always prudent for a bank to keep securities on hand in case they need to free up some liquidity. Assessing Assets: A banks assets are its meal ticket, so its critical for investors to understand how its assets are invested, how much risk they are taking, and how much liquidity the bank has in securities as a shield against unforeseen probl ems. In general, investors should pay attention to asset growth, the composition of assets between cash, securities, and loans, and the composition of the loan book. Also, investors should note a banks asset/equity (equity multiplier) ratio, which measures how many times a dollar of equity is leveraged. The liability side of a banks balance sheet is made up of various types of deposit accounts and other forms of borrowings used to fund their investments. A major difference between banks and other is their high leverage or debt-to-asset ratio. Assets and liability management (ALM) is the management of the structure of a banks balance sheet in such a way that interest related earnings are maximized within the overall risk tolerance of the banks management (J.S.G Wilson, 1988). 2.2-The Bank for International Settlement (BIS) and the Basel Accords: 2.2.1-The Bank for International Settlement (BIS): 12 The Bank for International Settlements (or BIS) is an internation al organization of central banks which exists to foster cooperation among central banks and other agencies in pursuit of monetary and financial stability (Wikipedia online, 2008). It carries out its work through subcommittees, the secretariats it hosts, and through its annual General Meeting of all members. The BIS also provides banking services, but only to central banks, or to international organizations like itself. Based in Basel, Switzerland, the BIS was established by the Hague agreements of 1930. As an organization of central banks, the BIS seeks to make monetary policy more predictable and transparent among its 55 member central banks. While monetary policy is determined by each sovereign nation, it is subject to central and private banking scrutiny and potentially to speculation that affects foreign exchange rates and especially the fate of export economies. Two aspects of monetary policy have proven to be particularly sensitive, and the BIS therefore has two specific go als: to regulate capital adequacy and make reserve requirements transparent. Capital adequacy policy applies to equity and capital assets. These can be overvalued in many circumstances. Accordingly the BIS requires bank capital/asset ratio to be above a prescribed minimum international standard, for the protection of all central banks involved. The BIS main role is in setting capital adequacy requirements. From an international point of view, ensuring capital adequacy is the most important problem between central banks, as speculative lending based on inadequate underlying capital and widely varying liability rules causes economic crises as bad money drives out good (Greshams Law). The BIS sets requirements on two categories of capital, Tier 1 capital and Total capital. Tier 1 capital is the book value of its stock plus retained earnings. Tier 2 capital is loanloss reserves plus subordinated debt. Total capital is the sum of Tier 1 and Tier 2 capital. Tier 1 capital must be at least 4% of total risk-weighted assets. Total capital must be at least 8% of total risk-weighted assets. When a bank creates a deposit to fund a loan, its assets and liabilities increase equally, with no increase in equity. That causes its capital ratio to drop. Thus the capital requirement limits the total amount of credit that a bank 13 may issue. It is important to note that the capital requirement applies to assets while the bank reserve requirement applies to liabilities. 2.2.2-The Basel Accords: The Basel Accord(s) refers to the banking supervision accords (recommendations on banking laws and regulations), Basel I (first published in 1988 and enforced by law in 1992 by the G-10 countries) and Basel II (published in June 2004) issued by the Basel Committee on Banking Supervision (BCBS). They are called the Basel Accords as the BCBS maintains its secretariat at the Bank of International Settlements in Basel, Switzerland and the committee normally meets there. The Basel Committe e consists of representatives from central banks and regulatory authorities of the G10 countries, plus others (specifically Luxembourg and Spain). The committee does not have the authority to enforce recommendations, although most member countries (and others) tend to implement the Committees policies. This means that recommendations are enforced through national (or EU-wide) laws and regulations, rather than as a result of the committees recommendations thus some time may pass between recommendations and implementation as law at the national level. Tier 1 capital is the core measure of a banks financial strength from a regulators point of view. It consists of the types of financial capital considered the most reliable and liquid, primarily Shareholders equity. Examples of Tier 1 capital are common stock, preferred stock that is irredeemable and non-cumulative, and retained earnings. Capital in this sense is related to, but different from, the accounting concept of shareholders equity. Both tier 1 and tier 2 capital were first defined in the Basel I capital accord. The new accord, Basel II, has not changed the definitions in any substantial way. Each countrys banking regulator, however, has some discretion over how differing financial instruments may count in a capital calculation. This is appropriate, as the legal framework varies in different legal systems. 14 Tier 2 capital is a measure of a banks financial strength with regard to the second most reliable form of financial capital, from a regulators point of view. The forms of banking capital were largely standardized in the Basel I accord, issued by the Basel Committee on Banking Supervision and left untouched by the Basel II accord. Tier 1 capital is considered the core capital and more reliable form of capital 2.3- VALUE-AT-RISK 2.3.1-BANK LOANS: A loan is a debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the l ender and the borrower. The borrower initially receives an amount of money from the lender, which he pays back, but sometimes not always in regular installments, to the lender. This service is generally provided at a cost, known as interest on the debt. The lender may subject the borrower to certain restrictions known as loan covenants. One of the principal duties of financial institutions is to provide loans, this is typically the source of income to banks, bank loans and credit also constitute one of the ways of increasing money supply in the economy. 2.3.2-VALUE AT A RISK (VAR): This is a technique used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends and volatilities. Value at risk is commonly used by banks, security firms and companies that are involved in trading energy and other commodities. VAR is able to measure risk while it happens and is an important consideration when firm s make trading or hedging decision (Simon Manganelli and Robert Engle, 2001). Some people have described VAR as the new science of risk management, but you do not need to be a scientist to use VAR. Here, we look at the idea behind VAR and the three basic methods of calculating it. Basically, VAR is represented by; 15 VAR= (dollar value of position)(price sensitivity)(potential adverse move in price/yield). .(1) For financial institutions, risk is about the odds of losing money given out as loans, and VAR is based on that common-sense fact. By assuming financial institutions care about the odds of a really big loss on loans, VAR answers the question, What is my worstcase scenario? or How much could I lose in a really bad month? To be more specific, a VAR statistic has three components: a time period, a confidence level and a loss amount (or loss percentage). Keep these three lets take note of this as we give some examples of variations of the questions that VAR answers: What is the most I can with a 95% or 99% level of confidence expect to lose in default on loan repayment over the next month? What is the maximum percentage I can with 95% or 99% confidence expect to lose over the next year? We can see how the VAR question has three elements: a relatively high level of confidence (typically either 95% or 99%), a time period (a day, a month or a year) and an estimate of lose on loan default (expressed either in dollar or percentage terms) (David Harper, 2008). 2.4- PORTFOLIO THEORY AND TRADITIONAL METHOD TO CREDIT RISK MANAGEMENT 2.4.1- PORTFOLIO APPROACH: Since the 1980s, banks have successfully applied modern portfolio theory (MPT) to market risk. Many banks are now using earnings at risk (EAR) and value at risk (VAR) models to manage their interest rate and market risk exposures. Unfortunately, however, even though credit risk remains the largest risk facing most banks, the practical of MPT to credit risk has lagged (William Margrabe, 2007). 16 Banks recognize how credit concentrations can adversely impact financial performance. As a result, a number of sophisticated institutions are actively pursuing quantitative approaches to credit risk measurement, while data problems remain an obstacle. This industry is also making significant progress toward developing tools that measure credit risk in a portfolio context. They are also using credit derivatives to transfer risk efficiently while preserving customer relationships. The combination of these two developments has precipitated vastly accelerated progress in managing credit risk in a portfolio context over the past several years. 1. Asset-by-asset Approach: Traditionally, banks have taken an asset-by-asset approach to credit risk management. While each banks method varies, in general this approach involves periodically evaluating the credit quality of loans and other credit exposures, applying a credit risk rating, and aggregating the results of this analysis to identify a portfolios expected losses. The foundation of the asst-by-asset approach is a sound loan review and internal credit risk rating system. A loan review and credit risk rating system enable management to identify changes in individual credits, or portfolio trends in a timely manner. Based on the results of its problem loan identification, loan review, and credit risk rating system management can make necessary modifications to portfolio strategies or increase the supervision of credits in a timely manner. 2. Portfolio Approach: While the asset-by-asset approach is a critical component to managing credit risk, it does not provide a complete view of portfolio credit risk, where the term risk refers to the possibility that actual losses exceed expected losses. Therefore to gain greater insight into credit risk, banks increasingly look to complement the asset-by-asset approach with a quantitative portfolio review using a credit model. Banks increasingly attempt to address the inability of the asset-by-asset approach to measure unexpected losses sufficiently by pursuing a portfolio approach. One weakness with the asset-by-asset approach is that it has difficulty identifying and measuring 17 concentration. Concentration risk refers to additional portfolio risk resulting from increased exposure to a borrower, or to a group of correlated borrowers. Table 1 summerises strategies for reducing and coping with portfolio credit risk. Table 1: Strategies for Reducing and Coping with Portfolio Credit Risk Technique Advantages Disadvantages Implication Geographic Diversification External shocks (climate, price, natural disasters, etc.) are not likely to affect the entire portfolio if there is spatial diversification. If the country is small or the Institution is capital constrained, it may not be able to apply this principle. It will become vulnerable to covariate risk, which is high in agriculture. Loan Size Limits (Rationing) Prevents the institution from being vulnerable to nonperformance on a few large loans. Can be carried to the extreme where loan size does not fit the business needs of the client and results in suboptimal use and lower positive impact by client. Client could become dissatisfied Protects asset quality in the shortrun but creates client retention problems in the long run. Inimical to relationship banking. Over Collateralization Assures the institution that enough liquidation value will exist for foreclosed assets. Excludes poor, low-income clients who are the vast majority of the market. Not a recommended technique if goal is to better serve the low- and moderate income clients. Credit Insurance Bank makes clients purchase credit insurance. In event of default, bank collects from insurer. Databases and credit bureaus may not exist to permit insurer to engage in this line of business in cost-effective manner. Portfolio Securitization Lender bundles and sells loans to a third party. Transfers default risk and improves liquidity so that it can continue to lend. Allows lender to develop expertise in analyzing creditworthiness in one sector or niche. Requires well documented loans and long time series of performance data to permit ratings and reliable construction of financial projections. Requires a well developed secondary market, standardized underwriting practices, and existence of rating companies. 18 Source: Publication of the Inter-American Development Bank, May 2007. 2.4.2-TRADITIONAL APPROACH: It is hard to differentiate between the traditional approach and the new approaches since many of the ideas of traditional models are used in the new models. The traditional approach is comprised of four classes of models 1. Expert Systems In the expert system, the credit decision is left in the hands of the branch lending officer. His expertise, judgment, and weighting of certain factors are the most important determinants in the decision to grant loans. the loan officer can examine as many points as possible but must include the five Cs these are; character, credibility, capital, collateral and cycle (economic conditions) in addition to the 5 Cs, an expert may also take into consideration the interest rate. 2. Artificial Neural Networks: Due to the time consuming nature and error- prone nature of the computerized expertise system, many systems use induction to infer the human experts decision process. The artificial neural networks have been proposed as solutions to the problems of the expert system. This syste m simulates the human learning process. It learns the nature of the relationship between inputs and outputs by repeatedly sampling input/output information. 3. Internal Rating at Banks: Over the years, banks have subdivided the pass/performing rating category, for example at each time, there is always a probability that some pass or performing loans will go into default, and that reserves should be held against such loans. 4. Credit Scoring Systems: 19 A credit score is a number that is based on a statistical analysis of a borrowers credit report, and is used to represent the creditworthiness of that person1. A credit score is primarily based on credit report information. Lenders, such as banks use credit scores to evaluate the potential risk posed by giving loans to consumers and to mitigate losses due to bad debt. Using credit scores, financial institutions determine who are the most qualified for a loan, at what rate of interest, and to what credit limits (Wikipedia, 2008). 2.5-SUPERVISORY AUTHORITY OF BANK CREDIT RISK MANAGEMENT The Bank of International Settlement (BIS) on November 28th 2005 in a press release issued a series of ten principles on Sound Credit Risk Assessment and valuation for Loans: Principle 1: The banks board of directors and senior management are responsible for ensuring that the banks have appropriate credit risk assessment processes and effective internal controls to consistently determine provisions for loan losses in accordance with the banks stated policies and procedures, the applicable accounting framework and supervisory guidance commensurate with the size, nature and complexity of the banks lending operations. Principle 2: Banks should have a system in place to reliably classify loans on the basis of credit risk. Principle 3: A banks policies should appropriately address validation of any internal credit risk assessment models. Principle 4: A bank should adopt and document a sound loan loss methodology, which addresses risk assessment policies, procedures and controls, for assessing credit risk, identifying problem loans and determining loan provisions in a timely manner. Principle 5: A banks aggregate amount of individual and collectively assessed loan provisions should be adequate to absorb estimated credit losses in the loan portfolio. 1 That is, the likelihood that the person will pay his or her debts. 20 Principle 6: A banks use of experienced credit judgment and reasonable estimates are an essential part of the recognition and measurement of loan losses. Principle 7: A banks credit risk assessment process for loans should provide the bank with the necessary tools, procedures and observable data to use for credit risk assessment purposes, account for impairment of loans and the determination of regulatory capital requirements. Principle 8: Banking supervisors should periodica lly evaluate the effectiveness of a banks credit risk policies and practices for assessing loan quality. Principle 9: Banking supervisors should be satisfied that the methods employed by a bank to calculate loan loss provisions produce a reasonable and prudent measurement of estimated credit losses in the loan portfolio that are recognized in a timely manner. Principle 10: Banking supervisors should consider credit risk assessment and valuation practices when assessing a banks capital adequacy. I. Individual Credit Rating: A credit rating assesses the credit worthiness of an individual, corporation, or even a country. Credit ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan. However, in recent years, credit ratings have also been used to adjust insurance premiums, determine employment eligibility, and e stablish the amount of a utility or leasing deposit. II. Corporate credit ratings: The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds. These are assigned by credit rating agencies2 such as Standard Poors, Moodys or Fitch Ratings and have letter designations such as AAA, B, CC. The Standard Poors 2 In the United States, the main credit bureaus are Experian, Equifax, and TransUnion. A relatively new credit bureau in the US is Innovis. In the United Kingdom, the main credit reference agencies for individuals are Experian, Equifax, and Callcredit. In Canada, the main credit bureaus for individuals are Equifax, TransUnion and Northern Credit Bureaus/ Experian. The leading credit bureau in Sweden is Upplysningscentralen AB. In India, the main credit bureaus are CRISIL and ICRA. The largest credit rating agencies are Moodys, Standard and Poors and Fitch Ratings. 21 rating scale is as f ollows: AAA, AA, A, BBB, BB, B, CCC, CC, C, D. Anything lower than a BBB rating is considered a speculative or junk bond. The Moodys rating system is similar in concept but the verbage is a little different. It is as follows: AAA, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C. III. A sovereign credit rating is the credit rating of a sovereign entity. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad. It takes political risk into account. The countries with the least sovereign risk are ranked as follows. Table 2: Country risk rankings (Least risky countries), Score out of 100 Source: Euromoney, Country risk, March 2008. Rank Previous Rank Country Score 1 1 Luxembourg 99.88 2 2 Norway 97.47 3 3 Switzerland 96.21 4 4 Denmark 93.39 5 5 Sweden 92.96 6 6 Ireland 92.36 7 10 Austria 92.25 8 9 Finland 91.95 9 8 Netherlands 91.95 10 7 United States 91.27 According to the results (see table 2), Austrias country rating has improved from 10th to 7th position while the USA has dropped to the10th position from 7th. 2.6-MANAGING CREDIT RISK USING FINANCIAL RATIOS: 22 Ratio analysis (financial and accounting ratios) is a measurement system to analyse the strength, weakness, opportunity and threats (SWOT Analysis) of an FI. The table below depicts some of the frequently used ratios in credit analysis (table 2): Table 3: Frequently Used Ratios in Credit Analysis3 Category Ratio Operating Performance Earnings before interest, taxes, depreciation and amortization(EBITDA)/Sales Net Income/ Sales Net Income/ Net Worth Sales/ Fixed Assets Debt Service Coverage EBITDA/ Interest Payment1.5 Free Cash-flow expenditure/ Interest payments Free Cash-flow expenditures-dividend/Interest Financial Leverage Long-term debt/Capitalization Long-term debt/Tangible net worth Total liabilities/Tangible net worth Current liabilities/Tangible net worth Liquidity Current ratio (current assets/current liabilities) Quick ratio (current assets-inventory/current liabilities) Inventory turnover(inventory/Net sales) Inventory to Net working capital Current debt to Inventory Raw materials,WIP, and finished goods as a percentage of total Inventory Receivables Aging of receivables:30,60,90,90+days 3 These ratios are commonly used in credit analysis but have to be adapted to specific environment of industries and countries. 23 Average collecting period Source: Caoutte, et al., 1998 2.7 Credit Risk Models Over the last decade, a number of the worlds largest banks have developed sophisticated systems in an attempt to model the credit risk arising from important aspects of their business lines. Such models are intended to aid banks in quantifying, aggregating and managing risk across geographical and product lines. The outputs of these models also play increasingly important roles in banks risk management and performance measurement processes, including performance-based compensation, customer profitability analysis, risk-based pricing and, to a lesser (but growing) degree, active portfolio management and capital structure decisions. The Task Force recognizes that credit risk modeling may indeed prove to result in better internal risk management, and may have the potential to be used in the supervisory oversight of banking organizations. However, before a portfolio modeling approach could be used in the formal process of setting regulatory capital requirements for credit risk, regulators would have to be confident not only that models are being used to actively manage risk, but also that they are conceptually sound, empirically validated, and produce capital requirements that are comparable across institutions. At th is time, significant hurdles, principally concerning data availability and model validation, still need to be cleared before these objectives can be met, and the Committee sees difficulties in overcoming these hurdles in the timescale envisaged for amending the Capital Accord (BIS, credit risk modeling, 19th April 1999). Credit scoring models use data on observed borrower characteristics either to calculate the probability of default or to borrowers into different default risk classes (Saunders and Cornett, 2007). Prominent amongst the credit scoring models is the Altmans Z-Score. The Z-score formula for predicting Bankruptcy of Dr. Edward Altman (1968) is a multivariate formula for measurement of the financial health of a company and a powerful diagnostic 24 tool that forecast the probability of a company entering bankruptcy within a two year period with a proven accuracy of 75-80%. The Altmans credit scoring model takes the following form; Z=1.2X1+ 1.4X2 + 3.3X3 + 0.6X4 +1.0X5 (2) Where, X1 = Working capital/ Total assets ratio X2 = Retained earnings/ Total assets ratio X3 = Earnings before interest and taxes/ Total assets ratio X4 = Market value of equity/ Book value of long-term debt ratio X5 = Sales/ Total assets ratio. The higher the value of Z, the lower the borrowers default risk classification. According to Altmans credit scoring model, any firm with a Z-Score less than 1.81 should be considered a high default risk, between 1.81-2.99 an indeterminate default risk, and greater than 2.99 a low default risk. Critics: Use of this model is criticized for discriminating only among three borrower behavior; high, indeterminate, and low default risk. Secondly, that there is no obvious economic reason to expect that the weights in the Z-Score model or, more generally, the weights in any credit-scoring model- will be constant over any but very short periods. Thirdly the problem is that these models ignore important, hard to quantify factors (such as macroeconomic factors) that may play a crucial role in the default or no-default decision. Outstanding also is the KMV credit Monitor Model4. In recent years, following the pioneering work on options by Merton, Black, and Scholes, we now recognize that when a firm raises funds either by issuing bonds or by increasing bank loans, it holds a very valuable default or repayment option ( Black and Scholes, 1973) and (Merton, 1974). The KMV Model is a credit monitor model that helps to solve the lending problems of banks 4 KMV is a trademark of KMV Corporation that was founded in 1989. The KMV model calculates the Expected Default Frequency (EDF) based on the firms capital structure, the volatility of the assets returns and the current asset value. This model best applies to publicly traded companies for which the value of equity is market determined. 25 and further look at the repayment incentive problem (Gilbert, 2004). To try resolving the problems, the KMV Model uses the structural relationship between the volatility of a firms asset and the volatility of the firms equity. The KMV Corporation (purchased by Moodys in 2002) has turned this relatively simple idea into a credit-monitoring model now used by most of the large US banks to determine the Expected Default Frequency (EDF) that is the probability of default of large corporations (KMV Corporation, 1994). The expected default frequency that is calculated reflects the probability that the market value of the firms assets will fall below the promised repayments on debt liabilities in one year. If the value of a firms assets falls below its debt liabilities, it can be viewed as being economically insolvent. Simulations by the KMV have shown that this model outperforms both accounting-based models and SP ratings (Saunders and Cornett, 2007). The relevant net worth of a firm is therefore the market value of the firms assets minus the firms default point. Net worth= (Market Value of Assets) (Default Point) (3) A firm will default when its market net worth reaches zero. (Market Value of Assets)(Asset Volatility) (Market Value of Assets) (Default Point) Distant to Default = (4) (Source: Moodys KMV; Modeling Default Risk, 18th December 2003.) The KMVs empirical EDF is an overall statistics that can be calculated for every possible distance to default (DD) using data either aggregated or segmented by industry or region. To find the EDF for any particular firm at any point in time, one must look at the firms EDF as implied by its calculated DD. As a firms DD fluctuates, so do its EDF. For firms that are actively traded, it would be possible in theory to update the EDF every few minutes (Gilbert, 2004). CRITICS: The KMV EDF Model has been criticized on the basis that they are not true probabilities of d efault. This is reflected in the poor results obtained using KMV empirical EDFs in order to replicate risky bond prices (Kao, Eom et al, 2000). 26 An increasingly popular model used to evaluate the return on a loan to a large customer is the Risk-Adjusted Return on Capital (RAROC) Model. This model, originally pioneered by Bankers Trust (acquired by Deutsche Bank in 1998) is now adopted by virtually all the large banks in Europe and the US, although with some differences among them (Saunders and Cornett, 2007). The essential idea behind RAROC is that rather than evaluating the actual promised annual cash flow on a loan as a percentage of the amount lent or (ROA), the lenders balance the loans expected income against the loans expected risk. The RAROC Model is basically represented by, RAROC = (one year net income on loan)/ (Risk adjusted assets). (5) For denominator of RAROC, duration approach can be used to estimate worst case loss in valu e of the loan: DLn = -DLnx Ln x (DR/ (1+R)) .(6) Where, DR is an estimate of the worst change in credit risk premiums for the loan class over the past year. Ln= Loan DLn= Change in loan class R=Interest Rate According to James Christopher (1996), the immediate purpose of the RAROC riskmeasurement systems is to provide bank managements with a more reliable way to determine the amount of capital necessary to support each of their major activities and, thus, to determine the overall leverage for the bank as a whole. This paper also stipulates that the RAROC system provide a uniform measure of performance and that management can, in turn use this measure to evaluate performance for capital budgeting and as an input to the compensation system used for senior managers. 27 Don’t waste time! Our writers will create an original "Financial Market Essay Example Pdf" essay for you Create order

Film Analysis Of Vincent Gallos Buffalo 66 - 1083 Words

â€Å"All my life I’ve been a lonely boy.† Vincent Gallo’s Buffalo 66 is a peculiar, surreal film to analyze. As a semi-autobiographical work, Buffalo 66 greatly exaggerates the events in the film and makes the viewers suspend disbelief on more than one occasion. Yet despite this, the main focus of this film is a broken Billy Brown’s emotionally raw journey seeking revenge but instead finding unconditional love through Layla in the end, and the formalist film techniques used here enhance this. Through the deliberate use of photography, staging, and movement, Buffalo 66 works as a formalistic classicism film, a predominantly classicism film with strong elements of formalism, on the style continuum. Gallo’s use of cinematography, even though his†¦show more content†¦The camerawork emphasizes the sense of detachment between the characters, and Billy’s inability with connecting with others. In addition, the film has a contrasty, bleak look to it, like a faded photograph. Gallo shot the movie on reversal film stock to capture that contrast and grain, in attempt to reproduce the same look of football games from the late 1960’s and early 1970’s. Buffalo 66’s staging conveys many themes. One memorable use of staging is the dinner table scene with Billy, Layla, and Billy’s mother and father. To exaggerate the emotional emptiness of the scene, the scene is framed in a medium long shot; however, the viewers see only three sides of the dinner table at any given moment, like a stage. The characters in the scene range from a personal to social distance. A most prominent detail in this scene, aside from the empty space, is the Buffalo memorabilia present in both the background and foreground. All conversations are either three way or two way, with one person constantly disappearing. The viewer has no way to identify with any particular character; thus, the viewers feel alienated from the dysfunctional family much like how Billy feels with his parents. As mentioned previously in the car scene, Billy is a character who has difficulty connecting with others. Towards the end of the second act of the film, there is a scene when Billy and Layla lie on a motel bed, attempting to be more intimate with

Heart Of Darkness 3 Essay Research Paper free essay sample

Heart Of Darkness 3 Essay, Research Paper Joseph Conrad # 8217 ; s Heart of Darkness The bordering narration of Heart of Darkness is presented by an nameless, vague talker, who is one of a group of work forces, former crewmans, now professionals, likely middle-aged, on the deck of a yacht at the oral cavity of the Thames River, London England. The clip is likely modern-day with the authorship and publication of the novel, so around the bend of the twentieth century. One among the group, Charlie Marlow, a cryptic figure who is still a crewman, tells the narrative of something that happened to him several old ages earlier, when he drove a steamboat up a river in Africa to turn up an agent for a Belgian company involved in the promising tusk trade. Most of the novel is Marlow # 8217 ; s narrative, although Conrad sometimes brings us back to the yacht and ends the novel at that place. Besides, as in Wuthering Heights, the technique of a framing narrative brings up inquiries of memory: how a narrative is dependable when related by person many old ages after the fact, so reported by person else. The construction of Heart of Darkness is much like that of the Russian nesting dolls, where you open each doll, and there is another doll indoors. Much of the significance in Heart of Darkness is found non in the centre of the book, the bosom of Africa, but on the fringe of the book. There is an outside storyteller stating us a narrative he has heard from Marlow. The narrative which Marlow tells seems to focus on around a adult male named Kurtz. However, most of what Marlow knows about Kurtz, he has learned from other people, many of whom have good ground for non being true to Marlow. Therefore Marlow has to patch together much of Kurtz # 8217 ; s narrative. We easy get to cognize more and more about Kurtz. Part of the significance in Heart of Darkness is that we learn about # 8220 ; world # 8221 ; through other people # 8217 ; s histories of it, many of which are, themselves, twice-told narratives. Marlow is the beginning of our narrative, but he is besides a character within th e narrative we read. Marlow, 32 old ages old, has ever # 8220 ; followed the sea # 8221 ; , as the novel puts it. His ocean trip up the Congo river, nevertheless, is his first experience in fresh water travel. Conrad uses Marlow as a storyteller in order to come in the narrative himself and state it out of his ain philosophical head. When Marlow arrives at the station he is shocked and disgusted by the sight of otiose human life and destroyed supplies. The director # 8217 ; s senseless inhuman treatment and foolishness overwhelm him with choler and disgust. He longs to see Kurtz- a fantastically successful tusk agent and hated by the company director. More and more, Marlow turns off from the white people ( because of their pitiless ferociousness ) and to the dark jungle ( a symbol of world and truth ) . He begins to place more and more with Kurtz- long before he even sees him or negotiations to him. Kurtz, like Marlow, originally came to the Congo with baronial purposes. He thought that each tusk station should stand like a beacon visible radiation, offering a better manner of life to the indigens. Kurtz # 8217 ; s female parent was half-English and his male parent was half-French. He was educated in England and speaks English. The civilization and civilisation of Europe have contributed to the devising of Kurtz ; he is an speechmaker, author, poet, musician, creative person, politician, ivory pimp, and main agent of the tusk company # 8217 ; s Inner Station at Stanley Falls. In short, he is a # 8220 ; cosmopolitan mastermind # 8221 ; ; nevertheless, he besides described as a # 8220 ; hollow adult male, # 8221 ; a adult male without basic unity or any sense of societal duty. Kurtz wins control of work forces through fright and worship. His power over the indigens about destroys Marlow and the party aboard the steamboat. Kurtz is the violent Satan whom Marlow describes at the beginning. Kurtz might neer hold revealed his evil nature if he had non been spotted and tortured by the director. A major subject of Heart of Darkness is civilization versus savageness. The book implies that civilisations are created by the scene of Torahs and codifications that encourage work forces to accomplish higher criterions. It acts as a block to forestall work forces from returning back to their darker inclinations. Civilization, nevertheless, must be learned. While society seems to keep these barbarian inclinations, it does non acquire rid of them. The inclination to return to savagery is seen in Kurtz. When Marlow meets Kurtz, he finds a adult male who has wholly thrown off the bondage of civilisation and has reduced to a crude province where he cheats everybody even himself. Conrad recognized that misrepresentation is the worst when it becomes self-deceit and the single takes earnestly his ain fictions. Kurtz # 8220 ; could acquire himself to believe anything- anything. # 8221 ; His friendly words of his study for the International Society for the Suppression of Savage imposts was meant to be sincere, but a deeper significance of it was instead # 8220 ; Exterminate all the beasts! # 8221 ; Marlow and Kurtz are two opposite illustrations of the human status. Kurtz represents what every adult male will go if left to his ain intrinsic desires without a protective, civilized environment. Marlow represents the civilised psyche that has non been drawn back into savageness by a dark, alienated jungle. The book implies that every adult male has a bosom of darkness that is normally drowned out by the visible radiation of civilisation. However, when removed from civilized society, the natural immorality of within his psyche will be released. The implicit in subject of Heart of Darkness is that civilisation is superficial. Thymine he degree of civilisation is related to the physical and moral environment they are soon in. It is a much less stable or province than society may believe. The wilderness is a really important symbol in Joseph Conrad # 8217 ; s Heart of Darkness. It is non merely the background in which the action of the narrative takes topographic point, but besides a character of the narrative in and of itself. The enormousness and savageness of the wilderness contrast with the folly of the pilgrims, and the wilderness besides shows the greed and ferociousness that fell even behind the noblest ideals. The wilderness is non a individual as such, but instead an almighty force that continually watches the invasion of the white adult male. The activities of the white people are viewed throughout the book as insane and pointless. They spend their clip seeking for tusk or contending against each other for place and position within their ain environment. Marlow remarks: # 8220 ; The word # 8216 ; tusk # 8217 ; rang in the air, was whispered, was sighed. You would believe they were praying to it. . . I # 8217 ; ve neer seen anything so unreal in my life # 8221 ; In contrast, the wilderness appears immoveable, and endangering. During Marlow # 8217 ; s remain at the Central Station, he describes the environing wilderness as a # 8220 ; rioting invasion of silent life, a turn overing moving ridge of workss, piled up, crested, ready to. . . sweep every small adult male of us out of his small being # 8221 ; It is hard to state, nevertheless, what the purposes of the wilderness really ar e. We see the wilderness wholly through Marlow # 8217 ; s eyes, and it remains ever an unfastened inquiry. It is # 8220 ; an implacable force incubation over an cryptic purpose # 8221 ; . The indigens, who are excessively simple to hold false motivations and pretences, live absolutely at peace with the wilderness. At some topographic points in the narrative their voices can be considered the voices of the wilderness. Particularly when they are shouting out in heartache through the impenetrable fog, their voices seem to be coming from the wilderness itself. ( # 8221 ; # 8230 ; to me it seemed as though the mist itself had screamed # 8230 ; # 8221 ; ) The indigens reflect the barbarian but really existent quality of the wilderness. Consider Marlow # 8217 ; s description of the indigens in the canoes on the seashore: # 8220 ; # 8230 ; they had bone, musculus, a wild verve, and intense energy of motion, that was as natural and true as the breaker along their seashore. They wanted no alibi for being there # 8221 ; . The people who are successful in contending the wilderness are those who create their ain structured environments. For illustration, the main comptroll er of the authorities station preserved himself by keeping an faultless visual aspect. Marlow says of him, # 8220 ; # 8230 ; in the great demoralisation of the land he kept up his visual aspect. That # 8217 ; s anchor. His starched neckbands and got-up shirt-fronts were accomplishments of character # 8221 ; . On the whole, the white work forces are successful in contending the influence of the wilderness. They are either excessively avaricious and stupid to recognize that they are under onslaught, such as the pilgrims who are runing for tusk, or they have managed to protected themselves with work, such as the comptroller. There is, nevertheless, one noteworthy exclusion. Kurtz stops defying to the savageness of the wilderness. He gives up his high aspirations, and the wilderness brings out the darkness and ferociousness in his bosom. All the rules of European society are gone off from him, and the passions and greed of his true nature are revealed. He collects loyal indigens who worship him as a God, and they raid environing small towns and collect immense sums of tusk. The heads must utilize ceremonials when nearing Kurtz which Marlow feels disgust of. Marlow says, # 8220 ; # 8230 ; such inside informations would be more unbearable than those caputs drying on the bets under Mr. Kurtz # 8217 ; s windows # 8230 ; . I seemed at one edge to hold been transported into some lightless part of elusive horrors. . . # 8221 ; The debasement of Kurtz has deductions for more than merely himself. It besides remarks on humanity. At his decease, he sees the true province of world. His regard is # 8220 ; piercing plenty to perforate all the Black Marias that beat in the darkness # 8221 ; His concluding statement of # 8220 ; The horror! The horror! # 8221 ; is his judgement on all of life. The wilderness brings Kurtz to the point where he has a full consciousness of himself, and from there he makes his dictum about the world. Heart of Darkness explores something truer, more cardinal than merely a personal narration. It is a dark journey into the unconscious, and confrontation within the ego. Certain fortunes of Marlow # 8217 ; s ocean trip, looked at in these footings, has new importance. Marlow insists on the surreal quality of his narrative. # 8220 ; It seems to me I am seeking to state you a dream # 8211 ; doing a vain effort, because no relation of a dream can convey the dream # 8211 ; sensation. # 8221 ; Even before go forthing Brussels, Marlow felt as though he # 8220 ; was about to put off for centre of the Earth, # 8221 ; non the centre of a continent. The introverted voyager leaves his familiar rational universe, is # 8220 ; cut off from the comprehension # 8221 ; of his milieus, his soft-shell clam labors # 8220 ; along easy on the border of a black and inexplicable frenzy. # 8221 ; As the crisis attacks, the dreamer and his ship moves through a silence that # 8220 ; seemed unnatural , like a province of enchantment ; so come in a deep fog. # 8221 ; In the terminal, there is a symbolic integrity between the two work forces. Marlow and Kurtz are the light and dark egos of a individual individual. Marlow is what Kurtz might hold been, and Kurtz is what Marlow might hold become.

Picasso And Perugino Essays - Art Movements, Modern Art,

Picasso And Perugino The Picasso and the Perugino paintings in the art book are in no way really similar; they are infact very different aside from the fact that the main piece of the painting is a female. The colors used in Picasso's Weeping Woman are a lot of Brights. But the colors in Perugino's The Virgin and Child with Saints uses nice colors, neither bright nor dull but there are many different colors in both of the paintings. I feel as though that there is much more detail in the Perugino then the Picasso using much more texture as well as detail in the people in the painting and the landscape. The Picasso is an up close cubism type of painting and is very distorted but that is the intention of the painter. As for the Perugino there is much detail in the painting showing fine details in the clothing the people the ground it is a very in-depth painting. Comparison Color: The Picasso has yellows, reds, blues, greens, black, purple and white. Picasso uses his colors in a pretty uneven manner he uses 3-4 colors on the face of the Weeping woman in stead of the usual black white colors of the usual person. Personally, I love the naked picture of the woman. The Perugino has more colors then I can really count but he didn't use brights its more or less just regular colors but he uses the colors great to get the details of the painting out and helps you get a better feel for the painting. Some of the colors he uses are lots of blues, whites, greens, and some reds. The colors in both are very well chosen I think that the colors chosen are what really make the paintings what they have come to be "two of the best paintings made by each respective artiest." Lines: In the Perugino there aren't really too many lines in this painting. I feel that this painting is right out front as in he doesn't try to hide any thing some painters put hidden messages in there paintings or what they paint means something different then it really looks it doesn't appear that this is what Perugino was going for. The Picasso on the other hand this was done when he changed his style to cubism this is when people say he "lost it". He uses a lot of lines in this painting because he is going for the look of sorrow and being broken up so he uses a lot of lines to get the broken up and distorted. Look in the painting it looks like he takes the painting after it is painted and just cuts it up and moves pieces around to get what ever effect he feels like he wants in the painting. I think that Picasso love to use all shapes. I like the fact that both of them have triangles they both us them but the Picasso uses them as well as lines squares and many other shapes. The squares make the paintings so much stronger they give it a different feeling a feeling of order and balance. I think this is what draws me to these paintings in one there is so much detail and in the other there is a very good amounts of shapes. The one I like more out of the two has got to be by far is Picasso's Weeping Woman. I like this painting the most out of the who is because he is my favorite painter out of all that I know I like his stuff because like I said it looks like he just paints it, and just cuts it up. I like how it looks abstract I like the odd I guess I could say. I like how he uses shapes that have no name and our out of wacko I guess that's what I've always liked his work. I like his stuff more when he changed his ways and started with cubes and wacky colors as well as the Brights. The things that make Perugino's The Virgin and Child with Saints one of my favorites out of the Art Book are; all the wonderful colors and the triangle that he has using the people at one big triangle pretty much taking up the whole canvas. I also like the texture and the life of the people they look really real like the eyes you can actually see them the cloths they ware