Valuation of Banks — both Art and Science

Abstract

There are usually two ways to determine the value of a bank asset. The philosophical approach can be described by applying the „bigger fool theory“: the value is irrelevant as long as there is a bigger fool around to buy the asset. It emphasises the „eye of the beholder“ — i. e., perception may be all that matters when the asset is, for example, a painting or a sculpture. In this case perception becomes reality. The financial approach implies that assets are acquired based on the expected cash flows or dividends obtained by owning them. The following essay will focus solely on the financial approach.