ANDREW FIGHT provides financial training and consulting services in the areas of Financial Analysis, Commercial, Syndicated, and Project Finance Lending, Asset Liability Management, Credit Risk Management, and Problem Loan Management.He has over 15 years of experience in international banking and financial analysis gained in Paris and London with Chase Manhattan Bank, IBCA Rating Agency, Euromoney Training, and the French Banker's Training Institute.He is a financial trainer and consultant to several banks, central banks, and IT companies, and a successful author, having written over 15 books on financial analysis, banking risk analysis, credit risk management, credit rating agencies, and information technology in financial services.He divides his time between London, where he works, and his home in the South of France.

• Foreword ixAbout the Author xi1 The Banking Background 11.1 Different types of banks and their risk profile 11.1.1 Bank failure and the financial services community 11.1.2 What do banks do? How do they earn their money? 31.1.3 Different types of banks and their revenue structures 61.1.4 Commercial banks 71.1.5 Investment banks 101.1.6 Risk profile of investment banks 131.1.7 Broking is a competitive business 131.1.8 Derivatives trading and AAA subsidiaries 131.1.9 The regulation of investment banks 141.1.10 “Analyst of the year” awards 141.2 Primary causes of bank failure 161.2.1 Types of failures 171.2.2 Causes of losses 181.2.3 Warning signals in predicting bank failure 241.2.4 Rescuing the bank! 281.2.5 Credit rating agencies 301.3 Bank failures – the four aces 311.3.1 Bank of Credit and Commerce International 311.3.2 Continental Illinois 341.3.3 Crédit Lyonnais 361.3.4 Rumasa 391.4 The macroeconomic environment 411.4.1 Banking system and industry risks 411.4.2 Economic environment 431.4.3 Industry competition and its impact on banks 431.4.4 Technology 442 The Rating Framework 452.1 What is a rating? 452.2 The development of ratings 462.3 Background to rating agencies 462.3.1 Inconsistent initial foundations 482.3.2 Secretive deliberations 512.3.3 Main source of revenues 512.3.4 Generating value 532.3.5 Growth and the future 542.4 The rating analytical framework 562.4.1 CAMEL, CAMEL B-COM, and CAMELOT 582.4.2 Capital 592.4.3 Asset quality 602.4.4 Management 622.4.5 Earnings 642.4.6 Liquidity (liability management) 642.5 How the rating agencies analyse bank risk 652.5.1 What is a rating? 652.5.2 Rating scale comparisons 662.5.3 Standard & Poor’s ratings 662.5.4 Moody’s ratings 682.5.5 Fitch performance and legal ratings 693 The Regulatory Framework 733.1 Banking system: structure, governing law, and regulations 733.1.1 Banking supervision 753.2 Core principles for effective banking supervision 783.2.1 Core principles for effective banking supervision 783.2.2 Basel committee publications No. 30 (September 1997) on banking principles 803.3 Risk management 833.3.1 Generally accepted risk principles 833.3.2 Derivatives and market risk 843.3.3 Managing bank limits 863.3.4 Generally accepted risk principles risk map 873.4 Basle Capital Adequacy and international convergence 883.4.1 Background to the Basle Capital Adequacy regime 883.4.2 Pressures for change 893.4.3 The BIS paper: the response of the central banks 903.4.4 Foreign exchange and interest rate related exposure 933.4.5 Implementation 953.4.6 Impact of the BIS proposals 954 The Analytical Framework 974.1 Introduction 974.1.1 The specific nature of bank financial analysis 974.1.2 Sources of information on banks 984.1.3 Other sources of information 1004.2 Financial criteria – the key factors 1014.2.1 Financial statement analysis 1014.2.2 Spreadsheet analysis 1054.3 Understanding the bank’s balance sheet 1074.3.1 Overview 1074.3.2 Balance sheet 1104.3.3 Assets 1114.3.4 Liabilities 1144.3.5 Contingent liabilities 1174.3.6 Income statement 1184.3.7 Financial analysis of investment banks 1214.3.8 Risk profile of investment banks 1255 Bankscope and Comparative Techniques 1275.1 Bankscope spreadsheet analysis 1275.2 Bankscope ratios and ratio analysis 1305.2.1 Lines of the Bankscope global format 1305.2.2 Financial ratio analysis 1315.2.3 The Bankscope ratios 1315.3 Bank peer group analysis 1395.3.1 Analytical techniques 1395.4 Problems with intercountry comparisons 1415.4.1 Local vs international accounting standards 1415.4.2 Inflation accounting 1425.4.3 Creative accounting and ratio manipulation 1436 Country and Political Risk 1456.1 Country risk 1456.1.1 Introduction to country risk 1456.1.2 Definition of country risk 1456.1.3 Types of countries 1466.1.4 Country risk assessment 1476.2 Political risk 1486.2.1 Introduction to political risk 1486.2.2 Time dimension 1496.2.3 Political risk analysis methodologies 1496.2.4 World Bank list of countries 1506.3 Typical sovereign ratings process 1516.3.1 Introduction 1516.3.2 Political risk 1526.3.3 Economic risk 1546.3.4 S&P’s sovereign ratings profiles 1606.3.5 Behind the sovereign ratings exercise 1607 The World of E-finance 1637.1 A quick definition of e-finance 1637.2 CRM – Customer Relationship Management 1647.3 STP/CLS 1657.3.1 STP – Straight Through Processing 1657.3.2 CLS – Continuous Linked Settlement 1667.3.3 Establishment of Continuous Linked Settlement services 1667.4 SWIFT 1677.4.1 Background 1677.5 Electronic funds transfer 1697.6 Online banking 1697.7 Day trading 1697.8 Smart cards 1707.9 Evolution of e-finance 1727.10 Origin of e-finance and internet commerce 1737.10.1 Rise Of e-finance and electronic trading 1748 Conclusion 177Glossary 179Suggested Readings 201Appendix I 203Appendix II 209Appendix III 217Index 223

ANDREW FIGHT provides financial training and consulting services in the areas of Financial Analysis, Commercial, Syndicated, and Project Finance Lending, Asset Liability Management, Credit Risk Management, and Problem Loan Management.He has over 15 years of experience in international banking and financial analysis gained in Paris and London with Chase Manhattan Bank, IBCA Rating Agency, Euromoney Training, and the French Banker's Training Institute.He is a financial trainer and consultant to several banks, central banks, and IT companies, and a successful author, having written over 15 books on financial analysis, banking risk analysis, credit risk management, credit rating agencies, and information technology in financial services.He divides his time between London, where he works, and his home in the South of France.

• Foreword ixAbout the Author xi1 The Banking Background 11.1 Different types of banks and their risk profile 11.1.1 Bank failure and the financial services community 11.1.2 What do banks do? How do they earn their money? 31.1.3 Different types of banks and their revenue structures 61.1.4 Commercial banks 71.1.5 Investment banks 101.1.6 Risk profile of investment banks 131.1.7 Broking is a competitive business 131.1.8 Derivatives trading and AAA subsidiaries 131.1.9 The regulation of investment banks 141.1.10 “Analyst of the year” awards 141.2 Primary causes of bank failure 161.2.1 Types of failures 171.2.2 Causes of losses 181.2.3 Warning signals in predicting bank failure 241.2.4 Rescuing the bank! 281.2.5 Credit rating agencies 301.3 Bank failures – the four aces 311.3.1 Bank of Credit and Commerce International 311.3.2 Continental Illinois 341.3.3 Crédit Lyonnais 361.3.4 Rumasa 391.4 The macroeconomic environment 411.4.1 Banking system and industry risks 411.4.2 Economic environment 431.4.3 Industry competition and its impact on banks 431.4.4 Technology 442 The Rating Framework 452.1 What is a rating? 452.2 The development of ratings 462.3 Background to rating agencies 462.3.1 Inconsistent initial foundations 482.3.2 Secretive deliberations 512.3.3 Main source of revenues 512.3.4 Generating value 532.3.5 Growth and the future 542.4 The rating analytical framework 562.4.1 CAMEL, CAMEL B-COM, and CAMELOT 582.4.2 Capital 592.4.3 Asset quality 602.4.4 Management 622.4.5 Earnings 642.4.6 Liquidity (liability management) 642.5 How the rating agencies analyse bank risk 652.5.1 What is a rating? 652.5.2 Rating scale comparisons 662.5.3 Standard & Poor’s ratings 662.5.4 Moody’s ratings 682.5.5 Fitch performance and legal ratings 693 The Regulatory Framework 733.1 Banking system: structure, governing law, and regulations 733.1.1 Banking supervision 753.2 Core principles for effective banking supervision 783.2.1 Core principles for effective banking supervision 783.2.2 Basel committee publications No. 30 (September 1997) on banking principles 803.3 Risk management 833.3.1 Generally accepted risk principles 833.3.2 Derivatives and market risk 843.3.3 Managing bank limits 863.3.4 Generally accepted risk principles risk map 873.4 Basle Capital Adequacy and international convergence 883.4.1 Background to the Basle Capital Adequacy regime 883.4.2 Pressures for change 893.4.3 The BIS paper: the response of the central banks 903.4.4 Foreign exchange and interest rate related exposure 933.4.5 Implementation 953.4.6 Impact of the BIS proposals 954 The Analytical Framework 974.1 Introduction 974.1.1 The specific nature of bank financial analysis 974.1.2 Sources of information on banks 984.1.3 Other sources of information 1004.2 Financial criteria – the key factors 1014.2.1 Financial statement analysis 1014.2.2 Spreadsheet analysis 1054.3 Understanding the bank’s balance sheet 1074.3.1 Overview 1074.3.2 Balance sheet 1104.3.3 Assets 1114.3.4 Liabilities 1144.3.5 Contingent liabilities 1174.3.6 Income statement 1184.3.7 Financial analysis of investment banks 1214.3.8 Risk profile of investment banks 1255 Bankscope and Comparative Techniques 1275.1 Bankscope spreadsheet analysis 1275.2 Bankscope ratios and ratio analysis 1305.2.1 Lines of the Bankscope global format 1305.2.2 Financial ratio analysis 1315.2.3 The Bankscope ratios 1315.3 Bank peer group analysis 1395.3.1 Analytical techniques 1395.4 Problems with intercountry comparisons 1415.4.1 Local vs international accounting standards 1415.4.2 Inflation accounting 1425.4.3 Creative accounting and ratio manipulation 1436 Country and Political Risk 1456.1 Country risk 1456.1.1 Introduction to country risk 1456.1.2 Definition of country risk 1456.1.3 Types of countries 1466.1.4 Country risk assessment 1476.2 Political risk 1486.2.1 Introduction to political risk 1486.2.2 Time dimension 1496.2.3 Political risk analysis methodologies 1496.2.4 World Bank list of countries 1506.3 Typical sovereign ratings process 1516.3.1 Introduction 1516.3.2 Political risk 1526.3.3 Economic risk 1546.3.4 S&P’s sovereign ratings profiles 1606.3.5 Behind the sovereign ratings exercise 1607 The World of E-finance 1637.1 A quick definition of e-finance 1637.2 CRM – Customer Relationship Management 1647.3 STP/CLS 1657.3.1 STP – Straight Through Processing 1657.3.2 CLS – Continuous Linked Settlement 1667.3.3 Establishment of Continuous Linked Settlement services 1667.4 SWIFT 1677.4.1 Background 1677.5 Electronic funds transfer 1697.6 Online banking 1697.7 Day trading 1697.8 Smart cards 1707.9 Evolution of e-finance 1727.10 Origin of e-finance and internet commerce 1737.10.1 Rise Of e-finance and electronic trading 1748 Conclusion 177Glossary 179Suggested Readings 201Appendix I 203Appendix II 209Appendix III 217Index 223

ANDREW FIGHT provides financial training and consulting services in the areas of Financial Analysis, Commercial, Syndicated, and Project Finance Lending, Asset Liability Management, Credit Risk Management, and Problem Loan Management.He has over 15 years of experience in international banking and financial analysis gained in Paris and London with Chase Manhattan Bank, IBCA Rating Agency, Euromoney Training, and the French Banker's Training Institute.He is a financial trainer and consultant to several banks, central banks, and IT companies, and a successful author, having written over 15 books on financial analysis, banking risk analysis, credit risk management, credit rating agencies, and information technology in financial services.He divides his time between London, where he works, and his home in the South of France.

• Foreword ixAbout the Author xi1 The Banking Background 11.1 Different types of banks and their risk profile 11.1.1 Bank failure and the financial services community 11.1.2 What do banks do? How do they earn their money? 31.1.3 Different types of banks and their revenue structures 61.1.4 Commercial banks 71.1.5 Investment banks 101.1.6 Risk profile of investment banks 131.1.7 Broking is a competitive business 131.1.8 Derivatives trading and AAA subsidiaries 131.1.9 The regulation of investment banks 141.1.10 “Analyst of the year” awards 141.2 Primary causes of bank failure 161.2.1 Types of failures 171.2.2 Causes of losses 181.2.3 Warning signals in predicting bank failure 241.2.4 Rescuing the bank! 281.2.5 Credit rating agencies 301.3 Bank failures – the four aces 311.3.1 Bank of Credit and Commerce International 311.3.2 Continental Illinois 341.3.3 Crédit Lyonnais 361.3.4 Rumasa 391.4 The macroeconomic environment 411.4.1 Banking system and industry risks 411.4.2 Economic environment 431.4.3 Industry competition and its impact on banks 431.4.4 Technology 442 The Rating Framework 452.1 What is a rating? 452.2 The development of ratings 462.3 Background to rating agencies 462.3.1 Inconsistent initial foundations 482.3.2 Secretive deliberations 512.3.3 Main source of revenues 512.3.4 Generating value 532.3.5 Growth and the future 542.4 The rating analytical framework 562.4.1 CAMEL, CAMEL B-COM, and CAMELOT 582.4.2 Capital 592.4.3 Asset quality 602.4.4 Management 622.4.5 Earnings 642.4.6 Liquidity (liability management) 642.5 How the rating agencies analyse bank risk 652.5.1 What is a rating? 652.5.2 Rating scale comparisons 662.5.3 Standard & Poor’s ratings 662.5.4 Moody’s ratings 682.5.5 Fitch performance and legal ratings 693 The Regulatory Framework 733.1 Banking system: structure, governing law, and regulations 733.1.1 Banking supervision 753.2 Core principles for effective banking supervision 783.2.1 Core principles for effective banking supervision 783.2.2 Basel committee publications No. 30 (September 1997) on banking principles 803.3 Risk management 833.3.1 Generally accepted risk principles 833.3.2 Derivatives and market risk 843.3.3 Managing bank limits 863.3.4 Generally accepted risk principles risk map 873.4 Basle Capital Adequacy and international convergence 883.4.1 Background to the Basle Capital Adequacy regime 883.4.2 Pressures for change 893.4.3 The BIS paper: the response of the central banks 903.4.4 Foreign exchange and interest rate related exposure 933.4.5 Implementation 953.4.6 Impact of the BIS proposals 954 The Analytical Framework 974.1 Introduction 974.1.1 The specific nature of bank financial analysis 974.1.2 Sources of information on banks 984.1.3 Other sources of information 1004.2 Financial criteria – the key factors 1014.2.1 Financial statement analysis 1014.2.2 Spreadsheet analysis 1054.3 Understanding the bank’s balance sheet 1074.3.1 Overview 1074.3.2 Balance sheet 1104.3.3 Assets 1114.3.4 Liabilities 1144.3.5 Contingent liabilities 1174.3.6 Income statement 1184.3.7 Financial analysis of investment banks 1214.3.8 Risk profile of investment banks 1255 Bankscope and Comparative Techniques 1275.1 Bankscope spreadsheet analysis 1275.2 Bankscope ratios and ratio analysis 1305.2.1 Lines of the Bankscope global format 1305.2.2 Financial ratio analysis 1315.2.3 The Bankscope ratios 1315.3 Bank peer group analysis 1395.3.1 Analytical techniques 1395.4 Problems with intercountry comparisons 1415.4.1 Local vs international accounting standards 1415.4.2 Inflation accounting 1425.4.3 Creative accounting and ratio manipulation 1436 Country and Political Risk 1456.1 Country risk 1456.1.1 Introduction to country risk 1456.1.2 Definition of country risk 1456.1.3 Types of countries 1466.1.4 Country risk assessment 1476.2 Political risk 1486.2.1 Introduction to political risk 1486.2.2 Time dimension 1496.2.3 Political risk analysis methodologies 1496.2.4 World Bank list of countries 1506.3 Typical sovereign ratings process 1516.3.1 Introduction 1516.3.2 Political risk 1526.3.3 Economic risk 1546.3.4 S&P’s sovereign ratings profiles 1606.3.5 Behind the sovereign ratings exercise 1607 The World of E-finance 1637.1 A quick definition of e-finance 1637.2 CRM – Customer Relationship Management 1647.3 STP/CLS 1657.3.1 STP – Straight Through Processing 1657.3.2 CLS – Continuous Linked Settlement 1667.3.3 Establishment of Continuous Linked Settlement services 1667.4 SWIFT 1677.4.1 Background 1677.5 Electronic funds transfer 1697.6 Online banking 1697.7 Day trading 1697.8 Smart cards 1707.9 Evolution of e-finance 1727.10 Origin of e-finance and internet commerce 1737.10.1 Rise Of e-finance and electronic trading 1748 Conclusion 177Glossary 179Suggested Readings 201Appendix I 203Appendix II 209Appendix III 217Index 223