A micro-analysis-system of a commercial bank based on a value chain

Transcription

1 A micro-analysis-system of a commercial bank based on a value chain H. Chi, L. Ji & J. Chen Institute of Policy and Management, Chinese Academy of Sciences, P. R. China Abstract A main issue often faced by a commercial bank is how to make an optimal business plan to increase profit and to improve competing potential based on its performance results and existing problems, such as adjustments of direction for business, structure of operating organization, and human resources. These adjustments must be considered systematically. Differing from conventional analysis methods, in this paper a micro-analysis-system of commercial bank is established based on its value chain, on which business and operating organization may be connected rationally and systematically. Several approaches have been developed for business organ assessment, business service assessment, diagnosis analysis, and adjustment analysis. The system has been applied successfully in some commercial banks in China. The results have shown the efficiency and feasibility of the system. Keywords: commercial bank, value chain, capital flow network, assessment, diagnosis, adjustment. 1 Introduction With the globalization of economy and finance, commercial banks are facing a drastic and unprecedented environment of competition. The operation management of a commercial bank is paid much more attention by financiers, bankers, and scientist. Nowadays, the research related to the operation management of commercial banks is mainly on the aspects of performance evaluation [3, 7, 9, 10], risk management [4, 11, 12], liquidity management [1, 2, 5, 6], and so on.

2 204 Computational Finance and its Applications Since Porter brought forward the concept of value chain in 1985 [8], it has been widely used in the study of enterprise strategy. In this paper, the concept of value chain was applied to the operation management of a commercial bank. The value chain of a commercial bank was built by capital flow network. The problems of assessment, diagnosis, and adjustment were described systematically in terms of the network. The approaches related to the problems, which have been applied to several Chinese commercial banks successfully, were presented. 2 Operating value chain of commercial bank Commercial banks absorb various liabilities, that is, deposits from individuals, enterprises, and public sectors and funds borrowed from the same trade if necessary. Then, these liabilities are transformed as different assets. They include the assets with interest, such as, various loans, security investments, and other services, and without interest. Due to the differences of market, environment, and management levels in different areas, the scale, structure of asset and liability, cost and benefit, of the banks are different, fig. 1. A commercial bank earns profit through the operation of capital. The operating process of a bank is a process of bankroll flowing. The different value of the capital is produced at different times, in different areas, different attributes, and with different risks in the process. For example, today s interest expenditure implies yesterday s amount and structure of liabilities. Similarly, today s amount and structure of liabilities will influence tomorrow s interest expenditure. Income of the same kind of loan is different in different areas because of a different economic environment and different customers. On the other hand, the different income results from the different kinds of loan, as well. Therefore, it can be said that the benefit of capital is a function of time, space, and attributes of the capital flowing. Here the attributes mean liability, owner s equity, assets, and so on. The liability can be further classified into liability with interest and without interest. The asset also can be divided into assets with interest and without interest. The assets with interest may include different kinds of loans, such as, industrial loans, commercial loans, individual consumption loans, student loans, and security investment. Indeed, the capital flow network is a value chain and systematically reflects the whole operating process of a commercial bank. There are three kinds of nodes on the network: business organs (such as saving banks and branches), business services (such as deposit services and loan services), and gathering nodes (such as the total liability, total asset, and owner s equity). During the capital flowing, its value is various dynamically, that is, at each node, the amount, cost, profit, and risk of the capital is changed. A system established based on the capital flow network can describe systematically bankroll flow and operating processes of a commercial bank that combines business organs with business services rationally. Consequently, the system can be used as a base of analysis for business status, business management, and decision making of a commercial bank.

3 Computational Finance and its Applications 205 Liabilities without interest Services for liabilities Owner s equity Total assets Total liabilities Assets with interest Liabilities with interest Loan Cash on hand Assets without interest Fixed asset Saving Business organs Business organs Figure 1: Capital flow network of a commercial bank. 3 Problems of assessment, diagnosis, and adjustment A commercial bank often faces these problems: (1) how about business performance? (2) any problems existing in business management? (3) how to adjust? Therefore, it is necessary to assess the performance of business organs and business services, to analyze the reasons behind the performance, and to analyze the results from different feasible adjustments. Indeed, these three problems concern assessment, diagnosis, and adjustment. These analyses must be made systematically. The purposes of the assessment and diagnosis are for final adjustment. The total profit, which is the embodiment at the gathering node of total assets, is the most important whatever adjustment scheme is adopted. Assessment is important work of business management for diagnosis, adjustment of business, and resource optimization. Also, it is indispensable for controlling and planning. Assessment for business management of commercial bank should include business organ assessment and business service assessment. Diagnosis is a deep analysis of reason search, that is, to seek for the reasons and influencing degrees of the whole benefit resulting from these reasons. Normally, there are two kinds of reasons, rigidness and flexibleness. The former

4 206 Computational Finance and its Applications cannot be changed by commercial bank self, for instance, basic interest and exchange rates are usually made by government. The latter may be changed or improved by the commercial bank itself, for example, structures of assets, operation costs, organization, business services, and human resource. The problem of business organ adjustments refers to closing down, mergers, and re-orientation of various business organs (saving banks, small branches, and other branches). These adjustments will bring a change of amounts and costs at the organ nodes and finally influence the change of the whole benefit. In other words, that is how to adjust the organ nodes in the capital flow network to maximize the whole benefit at the node of the total assets. Similarly, the problem of business service adjustments will bring a change of amount and cost at the service nodes and finally influence the change of the whole benefit. The problem still is to maximize the whole benefit at the node of the total assets by changing the amounts at the service nodes in the capital flow network. Both adjustments of organs and services must consider the environment of the market and competition. Usually, the environmental factor is uncertain which makes the problems so difficult. On the other hand, the amount, cost, and profit at each node in the capital flow network will be various while the structure of the network is changed, which results in increasing the complexity of the problem. Summarily, the goal of adjustment is to find a better solution for profit increase, including business service adjustment and business organ reorganization. Due to a limitation of resources, it is impossible that all business organs be involved in adjustment synchronously. Consequently, we must first select a part of business organs and business services as candidates for adjustment. Normally, the organs and services were classified into several groups respectively, such as, good, average, and bad. Then, each candidate was analyzed diagnostically to find the key factors for its performance and the influence degree for the whole profit. Finally, several adjustment schemes were designed in terms of the assessment and diagnosis. The problems of assessment, diagnosis and adjustment can be described systematically based on the capital flow network as follow: Assessment: comprehensively evaluating the nodes of business organs and services on the network separately and selecting some nodes as adjustment candidates. Diagnosis: analyze the sensitivity of factors at the nodes to the whole profit at the gathering node of the total assets. Adjustment: maximize the whole profit at the gathering node of the total assets through changing the amount at the nodes of organs and services or adding, (deleting, merging) the nodes of the organs and services. 4 Integrated approaches For assessment, firstly, several sets of indices of business performance assessment for different kinds of business organs and business services were designed in several aspects, such as, benefit, asset, liability, quality, and environment. For multi-index assessment, it is necessary to establish a

5 Computational Finance and its Applications 207 comprehensive assessment function. To avoid subjectivity of weight making, the approach of principal component analysis in statistics was employed to make the weights of the comprehensive assessment function. In this way, the comprehensive assessment function was built objectively since the weights were made through difference analysis among values of each index in principal component analysis. The diagnosis approach was to analyze the relationship between bankroll source and bankroll use systematically. Data drill and data mining were employed through the whole analysis process. The diagnosis approach included four steps as follow: cost apportion; calculation of the amount, cost, profit with risk at each node in the capital flow network; establishment of diagnosis standards at some nodes in the network; and difference seeking by comparison with the standards and sensitive analysis of the difference for the whole benefit. The standard may be built based on higher level or average level or lower level of the same kind of business organs or services. The level may be a value or a curve or a plane in n-dimension space, such as, there should be different levels for different scales of business organs or services. On the other hand, a risk always exists at some nodes. Commercial banks obtaining profit from the asset with interest is accompanied by a risk. Therefore, the benefit analysis of the asset must include risk estimation. Normally, the risk may be estimated by calculation of value at risk (VAR). However the calculation must be based on a great number of historical data about assets. Generally speaking, it is very difficult to describe the problem of systematic adjustment on the capital flow network mathematically since a feasible adjustment scheme must satisfy various conditions in the real market and environment. Therefore, in practice, firstly the principles of adjustment in terms of the real situation were made. Then, several adjustment schemes were designed based on the principles and the results of assessment and diagnosis. Finally, an optimal solution was obtained by solving an optimal model of adjustment schemes. The system has been applied successfully to two Chinese commercial banks; each one included over 10 local branches, about 40 small branches, and 140 saving banks. 5 Conclusion In this paper, a micro-analysis-system based on the capital flow network of a commercial bank, for analyses of assessment, diagnoses, and adjustments were established. The application results have shown the efficiency and feasibility of the system. References [1] Buraschi, A. & Menini, D., Liquidity risk and specialness. Journal of Financial Economics, 64, pp , 2002.

6 208 Computational Finance and its Applications [2] Cooper, R. & Ross, T.W., Bank runs: liquidity costs and investment distortions. Journal of Monetary Economics, 41, pp , [3] Dekker, D. & Post, T., A quasi-concave DEA model with an application for bank branch performance evaluation. European Journal of Operational Research, 132, pp , [4] Dowd, K., Beyond Value at Risk, John Wiley & Sons, [5] Huang, M., Liquidity shocks and equilibrium liquidity premia. Journal of Economic Theory, 109, pp , [6] Norland, E. & Wilford, D.S., Leverage, liquidity, volatility, time horizon, and the risk of ruin: a barrier option approach. Review of Financial Economics, 11, pp , [7] Oral, M. & Yolalan, R., An empirical study on measuring operating efficiency and profitability of bank branches. European Journal of Operational Research, 46, pp , [8] Porter, M., Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press, [9] Sherman, H.D. & Gold, F., Bank branch operating efficiency evaluation with data envelopment analysis. Journal of Banking and Finance, 9, pp , [10] Vassiloglou, M. & Giokas, D., A study of the relative efficiency of bank branches: an application of data envelopment analysis. Journal of Operational Research Society, 7, pp , [11] RiskMetrics, Technology Document, 4th Edition, J. P. Morgan, [12] CreditMetrics, Technology Document, 1st Edition, J. P. Morgan,