Study Questions

Imagine for a minute - going to the doctor - not for a specific complaint, but for your annual checkup. Are you nervous about it? Isn't there always some nagging concern that the Doctor might find something wrong with you - something that you may have suspected but didn't really want to know about.

In the case of a business - any business - but your bank in particular - the Financial Performance review - is just about the same as going to the Doctor. Even as the medical profession as specialized - so has the area of Financial Reporting.

Bankers have an obvious need to understand financial reporting. Not only do you need to know about the health - or problems - in your own organization, but financial reporting is the tool that is most used to help you understand about your customers borrowing needs - and their financial strength. And, even though - your business is one of money - and theirs is manufacturing or selling some other commodity - there are many similarities in understanding the financial reports. Just as there are similarities - there are differences - not so much in the ratios used - but the application of those ratios - AND the 'benchmarks' that are used for comparison.

The liquidity ratio for a bank - should be (better be!) much higher than for that of a manufacturing firm. A bank MUST maintain a higher percentage of its assets in the form of CASH - since it is responsible for paying not only its own obligations - but through customer checking accounts - the obligations of the customer as well.

Every company - bank or otherwise - has other entities to which they are responsible for financial reporting. A bank - that issues stock - may be responsible for reporting to the SEC, the FDIC, the Comptroller of the Currency, (Esc) and THEIR STOCKHOLDERS. All of these require sound accounting practices - and consistency in reporting styles. Much of the reporting currently required by the Financial Regulators - is done in the manner they prescribe - so that the same information may be reported to different users in different formats.

I believe that I have made the point earlier that the banks most important personnel are those dealing with the customer - whether it be new accounts, tellers or loan officers. This is because the customer is the lifeblood of the organization.

At the same time - the job performed by the financial management team - is also of vital importance. The financial management team will consist of not only those departments that are responsible for investing excess funds - and determining interest rates - but also those that are responsible for reporting on the financial activities of the bank.

Much like my earlier comparison to visiting the Doctor - the review of the financial activities is a report on the health of the organization. This review is some vital to the ongoing health of your organization - that regulations and sound business practices - require that the banks financial activities be review by both internal staff - and external specialists, in the form of both bank examiners and Certified Public Accountants.

Ratio analysis is one of the foremost tools used by regulators to identify potential situations. Ratios are used for a number of reasons - but primarily because they can utilize the computer to rapidly analyze large numbers of financial institutions. Additionally, ratios can be utilized, to some extent, to analyze both large and small institutions in much the same manner. These rations should not be used for any definitive action - but merely to identify which institutions from a regulatory standpoint should be scrutinized further.

ASSIGNMENT:

The past two sessions have been devoted to the discussion of Bank Investments and Financial Reporting. Considering ALL the publicity recently concerning major corporations (Enron, Major Bankruptcies) - discuss the importance of Financial Reporting to both the bank and the banks stockholders. Include in your discussion the importance of third party review (auditors/examiners) in the reliance on information. Consider the impact of your lending decisions - to a company on which you relied on their Financial Reporting for information.

Use resources available from various web sites and information you can gather from your financial institution to assist you. Paper length should be two to three pages - double spaced. Include the url's (minimum of 4) of your information sources as references. Research paper must be emailed to the instructor by Friday of the twelfth week of classes.