Measuring the Cash Flows of Banks: The FCFA Asset-Side Approach

Abstract

According to the theoretical framework of the AMM, we consider the free cash flow from asset measurement. In particular, we propose a valuation framework which splits bank cash flows into those originating from assets and those from liabilities. Specifically, the most important assumption is that bank debt is considered as a financial liability. This has several implications for the balance sheet, income statement and cash flow reclassifications. For those reasons, we develop a new model for reclassifying a bank’s financial statements in order to obtain a measure of free cash flow from assets. In addition, we reconcile the latter to the free cash flow to equity, taking into account the overall debt financial operations. Such a model reconstruction is very important, as all the current literature directly estimates a cash flow to equity without reconciling it to a cash flow from operations. Our model tries to close this gap in the literature. Besides, in Chap. 3 we proposed a solution to the problems related to the net working capital and capital expenditures estimation of banks. After having discussed the free cash flow model in theory, we propose the application of the free cash flow from assets to a real case.