Case Study 1: Banc One Corporation Asset And Liability Management

Case Study 1: Banc One Corporation Asset and Liability Management
Gizem Akkan

So basically, the main problem Banc One Corporation has falling share prices as it is written from a 48 ¾ to 36 ¾ in April 1993. The basic reason behind this decline is that its exposure to derivative securities. This decline in share prices raises concerns among the Banc One’s Investors as well as its analysts since they are uncomfortable with huge amount of derivative usage particularly swaps. They think they are not able to measure risks they exposed so this create uncertainity about the firm’s financial stability. However, some belive as Dick Lodge, firm’s chief investment officer, said especially swaps were attractive investments which were lowering bank’s

Another action should be taken is that they should change acquisitions structure since companies they acquired are also asset sensitive so it makes sense to even stop acquisitions to prevent being asset sensitive. Basically, fixed- rate assets should be used instead of swaps to eliminate asset sensivity. To gain trust of market, Banc One Corporation should educate its analyts and investors about usage of swaps so that perception to riskiness of swaps could be changed in a good way as well as more disclosure is needed for this. Indeed, usage of swaps basically has many advantages. Since, swaps durations are shorter than many fixed- rated investments, usage of swaps improves liquidty of firms meaning campanies would raise cash easily when they need it using swaps because of the short- term structure of them. The other advantage of the swaps is that they are off-balance- sheet transactions meaning they aren’t appear any financial statements either asset or liability just swaps entered spesified as note et the end of the any financial statements which improves the profitability of the firms as well as capital ratios such as return on equity, return on assets which are the main ratios measure firms’ financial performance in income statements. Furthermore, swaps reduce the capital needed to meet requlatory

They tracked their mark to market exposure to each counterparty so that they could measure risk and limit counterparty exposure when they needed it. Beucase of these policies Banc One managed its counterparty risk all the time. Also they were trying to be prudent and transperant as much as they can so that perception of usage of derivate could be understood better. Even some analyts wrote about this issue pointing out that since swaps are new financial instruments it is inevitable investors to be risk averse about the swaps. They also stated that Banc One’s use of swaps has been prudent. Another point is important here that Banc One was very trasparent about swaps they disclousered, every single swap they enterered were footnoted in the financial