The Principles of Banking
Description
The Second Edition of The Principles of Banking offers banking professionals, regulators, and students from a variety of backgrounds an authoritative and practical discussion of the foundations of modern banking and good banking practice. In the book, you'll find a comprehensive roadmap to a more sustainable business model for your banking organization.
The author draws on his many years' experience as a commercial and investment banker as he explains the original principles of banking--including sound lending policy, capital management, and liquidity risk management--as well as new material covering the impact of COVID-19 on banks, risk management, and balance sheet management.
The Principles of Banking also provides recommendations for bank asset-liability management best practices that enable banks to deliver optimized balance sheets for the benefit of all stakeholders. It also includes new chapters in market risk management, foreign exchange risk management, interest rate risk, and credit risk policy and management.
An essential update to a widely read and taught banking text, The Principles of Banking, Second Edition is an indispensable resource for banking professionals and students everywhere.
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Person
MOORAD CHOUDHRY is a non-executive director at Recognise Bank Limited, in London, a non-executive director at the Loughborough Building Society, and an independent non-executive advisor on the Risk Committee at Nubank, in Sao Paulo. He was born in Bangladesh and lives in Surrey, England.
Content
Forewords xix
Neal Ardley
Sharon Bowles
Henrique Fragelli
Oldrich Masek
Jason Oakley
Helen Sachdev
Preface xxxix
Acknowledgements xlv
About the Author li
Part I Banking, Bank Customer Business and Regulation 1
Chapter 1 Banking, bank business and financial statements 3
Chapter 2 Ethics, conduct and customer service 75
Chapter 3 Bank regulatory capital and the "Basel Rules" 97
Part II Bank Asset and Liability Management 159
Chapter 4 The yield curve 161
Chapter 5 Asset-liability management I 201
Chapter 6 Balance sheet management: money markets, FX, trading and hedging, and securitisation 251
Chapter 7 Managing interest- rate risk in the banking book (IRRBB) 303
Chapter 8 Bank Treasury operating model 333
Chapter 9 ALCO governance framework and terms of reference 351
Chapter 10 ALM sundries: asset encumbrance, hedge accounting, IFRS 9 and EIR 383
Part III Bank Liquidity Risk Management 401
Chapter 11 Principles of bank liquidity management 403
Chapter 12 Liquidity risk metrics 445
Chapter 13 Liquidity risk reporting 461
Chapter 14 Bank funds transfer pricing 469
Part IV Bank Strategy and Governance 491
Chapter 15 Bank strategy I: inputs and setting 493
Chapter 16 Bank strategy II: capital and funding management 521
Chapter 17 Principles of corporate governance 541
Part V Principles of Risk Management and Regulation 573
Chapter 18 The risk management framework 575
Chapter 19 Credit risk assessment and reporting principles 617
Chapter 20 Stress testing, ICAAP, ILAAP and reverse stress testing 647
Chapter 21 Recovery planning and resolution planning 693
Chapter 22 Sustainable banking and climate change risk management 703
Chapter 23 Case studies: analysis, problem solving and decision making 721
Chapter 24 Everything changes, and nothing changes: excerpts from a timeless work 753
Part VI Guide to the Companion Website 761
Chapter 25 Applications software, policy templates and spreadsheet models 763
Afterword 771
List of Terms and their Abbreviations 775
Index 781
Praise for The Principles of Banking, Second Edition
Creating competition and fresh ideas in UK banks remains a challenge. Working with Boards who understand and can appreciate the real risks involved is absolutely fundamental. I have had the opportunity to be invited to chair a number of challenger banks, and it is great to come across INEDs who understand, challenge and support. Moorad turns his knowledge to great practical value as he helps establish the fundamentals of the bank. He has the rare skill to bring together his fellow Directors, even in challenging scenarios.
-Phil Jenks
Chairman, Recognise Bank Limited, London
Whenever I see a book by Moorad Choudhry in a bookshop, I open and read a number of pages there and then. I always learn something. If you ever want a summary of where banking is at from the perspective of an insider, this is the book to read! A well-balanced text that is easy to understand and, once you understand it, you can understand the context of current debates and potentially what lies ahead. Moorad provides a wide-ranging canvass for the ways that the practice of banking and related products influence our world.
-Tanveer Bhatti
Group Head of Model Risk Management, Revolut, London
The Principles of Banking is easily the most important text for anyone in banking today and should be required reading for all personal development plans. When I was a regulator at the UK Financial Services Authority, managing the Change In Control team, I was responsible for assessing and granting regulatory approvals for complex banking transactions, such as Virgin Money's takeover of Northern Rock. I relied heavily on Professor Choudhry's text as a reference throughout the banking license approval process. Since then, I have referenced his book often, as a guide continuously during my career in banking as regulator, consultant, investor, CRO and now on the strategy/commercial side, and crucially while setting up a new bank and going through the bank license approval process myself."
-Nihar Mehta
Chief Corporate Development Officer, Monument Bank Ltd, London
I strongly recommend this book to anyone who is involved with Finance and Treasury. The book itself is a unique source of the most relevant and updated Banking concepts, a rare and generous opportunity not to be missed. I have not yet found an author with such a deep knowledge of a Financial Institution Balance Sheet. It has been a privilege to learn from Professor Choudhry's wisdom and expertise.
-Gustavomelo Vasconcelos
Treasurer, Nubank, Sao Paulo
Asset & Liability Management, the Treasury function and ALCO are the beating heart of every bank in the world. The Principles of Banking encapsulates expertly all the high-level principles, the technical nuances and real-world approaches necessary for banks to follow, whilst also providing both technical detail and insight to suit bank executives, practitioners and academics. Moorad utilises his experience to blend the academic theory with practical insight and provide material that continues to be "the" reference source across the industry.
-Colin Johnson
Treasurer, Chetwood Financial, Wrexham, and Chairman UK ALMA (2013-2017)
Moorad Choudhry is a real person.
The statement really summarises all I wanted to say about this book that I have the pleasure of reviewing, but I'm going to write a lot more explaining it! There is a cohort of middle-aged finance professionals who went into the industry a few decades ago, when mathematical modelling was beginning to be essential to value and manage the more complex products which were evolving, to handle the more complex risks inherent in an increasingly interconnected world. We went into an industry which we thought would be exciting and hard work, but above all, trustworthy, honest, stable, and transparent. These days we take stock of the ever-changing landscape and crises the industry has faced or been a part of.
In all of this time, Moorad stood out as a person whose work embodied everything the industry ought to stand for. Where others might fudge results, he could never vary from the truth. When some people were happy with a sketchy understanding of an area, he would drill down to the bedrock. And in all of this he has never lost his endless energy and enthusiasm, his quest for knowledge, and his drive to communicate, educate, and make the banking world a bit better than it might otherwise have been.
Finance would be poorer without Moorad's books. While being absolutely rigorous, they are also a lovely and easy read, and a fantastic introduction to the area. I frequently recommend them to students from my own first discipline, physics, as a perfect start to the world of finance - they are this, but also Moorad's integrity and professionalism come through on every page. This update to one of his most popular books is very welcome in a time when finance itself seems to be splintering into different disciplines, with spin-offs and new concepts coming thick and fast. Start off with this book and not only will you learn how finance works, but you'll also learn how it should be done from a personal and ethical viewpoint.
Enjoy this book - you can dip in and out if you are a practitioner researching an area, and you will not be disappointed by the level of detail and rigour. Or take a deep breath and start at the very beginning if you are new to it all - please come on in, and help us steer banking in the right direction!
-Professor Jessica James
Senior Quantitative Researcher, Commerzbank AG, London
This book is an impressive guide for all important elements of banking. It can help anyone in the business, from beginners to the more experienced. It compiles the theory with practical examples. I strongly recommend!
-Sílvia Valadares
ALM Director, Nubank, Sao Paulo
While designing software for balance sheet management of banks, Moorad's book The Principles of Banking was my friend, guide and philosopher. Banking has changed dramatically in the last few years and the Second Edition is surely the definitive book on new age banking. The original edition is the best textbook on banking that I have read and any management school teaching this subject is well advised to use it. I find it simple, exhaustive and encyclopaedic. Moorad is a terrific author and I look forward to this new edition.
-Prahlad D N
Chairman, Surya Software Pty, Bangalore
Professor Choudhry's 2012 The Principles of Banking was a genre classic - comprehensive, clear and bridging that most difficult of gaps - theory to practice. Equations and numbers on one hand are the details of banking yet on the other is people faced with making decisions in the real world. His use of Case Studies shows very well how to marry the two. His updated version is welcomed with enthusiasm.
-Mike Baliman
Head of Kleinwort Benson Fixed Income Investment Management (1988-92), Global Head of Risk, Kleinwort Benson (1992-98), London
Since its publication ten years ago, Professor Choudhry's book has deservedly established itself as the reference book for all matters banking, and bank balance sheet management. This second edition will undoubtedly ensure it remains so for the next ten years and probably beyond. Not only does it contain a wealth of technical material clearly articulated for both the novice and the more seasoned practitioner, it also reflects, on almost every page, the author's passionate view that managing a bank is not just a technical skill - it requires also common sense, judgement and, above all, personal integrity on the part of those making the decisions. A superlative work.
-Paul Newson
former Head of IRRBB Oversight, Lloyds Banking Group, London
Professor Moorad Choudhry never ceases to impress banking risk professionals including myself! His masterpiece books on Finance undeniably will elevate the tides of knowledge for all young leaders in banking. Amongst his treasures, The Principles of Banking has been my best information source, especially regarding liquidity risk concepts. But it is more than that, it is a "one stop shop" solution for banking regulations, operations, isk modelling and asset and liability management. Every work from the Professor will stand out as a reference for a lifetime to so many sprouting minds.
-Babu Sathyanarayanan
Liquidity Risk Manager, HSBC Bank, Chennai
If it had kicked off between you and him, every single one of us would have run down there to help you out.
-Alex Haigh
Captain, Newdigate FC, West Sussex League
Moorad, you are a great team player, and you have the heart that a South American footballer requires!
-Juan Carlos Sihuincha
Head of Planning Global Capital Markets, Scotiabank, Lima
Moorad is a breath of fresh air to deal with, he almost makes ALCO fun! Very knowledgeable in his areas of specialism, but also taking on board the wider workings of the Society and making a really positive contribution.
-Caroline Bradley
Non Executive Director, Chair of Audit Committee, Al-Rayan Bank, Birmingham
A strong economy pivots on a robust and effective banking system yet even the most reputed models have been severely tested in the past two...
