1) NOR AKILAH BINTI IBRAHIM
2) NUR SYAZANA ASMAA’
BINTI AHMAD SAYUTY
3) NURUL FATIN ASYIQIN
4) NUR AZYAN AZWANI BINTI
5) NOORFAZIRAH BINTI AHMAD
NAMA PENSYARAH : DR. SHAZIDA JAN BINTI
A financial institution that provides services, such as
accepting deposits, giving business loans and auto
loans, mortgage lending, and basic investment
products like savings accounts and certificates of
Acceptance of Deposits
BALANCE SHEET OF
Cash in bank
Deposits at the central bank
Deposits at the commercial
Cash on collection
Banks operate in uncertainty & exposed to the risk
Exists a trade-off between risk & return
Four principles of management that should be noted
:1. Asset management
2. Liability management
3. Capital adequacy management
GENERAL PRINCIPLES OF BANK
FOUR PRIMARY CONCERNS OF THE BANK IS :Liquidity management.
Managing capital adequacy
Deposit outflows must match deposit inflows.
To keep enough cash on hand, the bank manager
must engage in liquidity management.
Financial institutions face liquidity management
problems because the volume of cash flowing in rarely
matches exactly the volume of cash flowing out.
Financial institutions are sensitive to interest rate
movements, which affect the flow of savings they
attract from the public and the earnings from the loans
and securities they acquire.
Liquidity managers usually meet their institutions’
cash needs through two methods :1. Asset management or conversion; ie., the selling
of selected assets.
2. Liability management ie, the borrowing of
enough liquidity to cover a financial
cash demands as they arise.
Liquidity indicators supply bank managers with signs
that a liquidity problem is developing. They include:
Ratio of cash to total assets.
Ratio of “hot money” assets to “hot money”
Cost of borrowing for liquidity needs relative to
the cost other institutions face.
Monitoring the intentions of the bank’s biggest
Four basic methods of asset management:
Find borrowers who will pay high interest rates and
are unlikely to default.
Purchase securities with high returns and low risk.
Lower risk by diversifying.
Manage the liquidity of its assets so that it can satisfy
its reserve requirements without incurring large costs.
Raising Funds for a Financial Institution. Factor to
be considered :The relative cost of raising funds from each source.
The risk (volatility or dependability) of each fund’s
The length of time (maturity) for which a source of funds
will be needed.
The size and market access of the financial institution
attempting to raise funds.
Laws and regulations that limit access to funds.
Relative Cost Factor.
The relative cost factor is important because, other
things remaining the same, a financial institution
would prefer to borrow from the cheapest sources of
Also, if an institution is to maintain consistent
profitability, its cost of fund raising must be kept
below the returns earned on the sales of its
Functions of bank capital:
Help to prevent bank failure
Affects returns for equity holders
Required by regulatory authorities
Assume that both banks write off $5 of their loan
portfolio. Total assets decline by $5, and bank
capital, which equals assets minus liabilities, also
declines by $5.
Theory of Bank
The approach that introduced in managing bank to
achieve the objective of maximizing profit
Commercial loan theory (Real Bills Doctrine)
Banks face a dilemma returns – liquidity
- if the assets were hold with high liquidity, it
cannot bring a lot of income
- if given a loan; higher income but liquid assets
to overcome the dilemma and balance between
liquidity, risk and return :- provide short-term bank loans like, loan to finance
the production of goods (self-liquidating loans or
- This loan is secured by finished products in the
production process in order to secure
when the goods are sold to end
- With this loan - the bank can create liquidity and
Weaknesses :- can even help banks keep liquidity, but the return /
- if all banks practice & there is a crisis in economy liquidity of the banking system cannot be
- To solve this problem - the role of the Central
Bank should be established & act as a
Transition theory (The Theory Shiftability)
Bank asset allocation shift is done to balance
between profitability, liquidity, risk
Liquidity can be created if banks buy long-term
assets (high risk, low liquidity) and short-term assets both reserve assets (low risk, high liquidity)
To obtain the liquidity, asset must be sale
The transition of this asset holdings will be if all
banks to sell assets at the same time
To ensure the success of adding liquidity of the
banking system - the Central Bank acted to buy all
The anticipated income theory
Introduced to overcome the liquidity level low
According to this theory: bank assuming the loan
portfolio (long-term) as a source of liquidity
- The bank will give the installment loans
(eg.mortgage), and loan repayment
continuously considered as
flow of funds to the
bank, and this increases the
level of bank
Asset-liability management theory
Emphasis on management / coordinating both sides
of the balance sheet - assets and liabilities
simultaneously to maximize profits
Bank combining and matching maturities and at the
same time choose the assets to be held and liabilities
are to be offered by taking into account interest rate
risk involved in make decisions about loans to be
Is a reserve bank, or monetary authority is a public
institution that manages a state's currency, money
supply, and interest rates.
Examples: European Central Bank (ECB) and the
Federal Reserve of the United States, Bank Negara
The chief executive of a central bank is normally
known as the Governor, President or Chairman
especially the US Federal Reserve's Board of
Functions of a central bank may include:
Implementing monetary policies.
Determining Interest rates
Controlling the nation's entire money supply
The Government's banker and the bankers' bank
("lender of last resort")
Managing the country's foreign exchange and gold
reserves and the Government's stock register
Regulating and supervising the banking industry
Setting the official interest rate – used to manage
both inflation and the country's exchange rate – and
ensuring that this rate takes effect via a variety of
MONETARY POLICY- THE USES OF
Central Bank plays a role in controlling the stability of the
economy by applying monetary policy to influence the money
supply (Ms) and the rate of interest (r).
Divided into two :(i) Policy of Quantitative Finance (Ms influence and r)
(ii)Qualitative Monetary Policy (influenced form of
loans and investment banks).
During inflation, the government will conduct a contractionary
monetary policy, while the expansionary monetary policy in use
POLICY OF QUANTITATIVE
Change the bank rate
- Bank rate is the interest rate the central bank
imposed on commercial banks.
Inflation: ↑ bank rate - the cost of borrowing
↑ -I ↓ - ↓ AD - P ↓
Deflation (Unemployment): bank rate ↓ borrowing costs ↓ - I ↑ - ↑ AD – P
Operating in open market
a) Inflation : @ BNM sell government bonds
treasury bills to commercial banks and
- money held ↓ - ↓ expenses - P ↓
b) Deflation : otherwise.
Change the statutory reserve ratio (RRR) and the
ratio of liquid assets
a) Inflation : RRR ↑ - ↓ amount of money to loan -
Ms. ↓ - ↓ AD - P ↓
b) Deflation : otherwise.
Funding : Funding delay the sale of securities by
commercial banks and the general public, this action
extends the maturity of government securities.
a) Inflation : Reduce the production of short-term
government securities and increase the
production of long-term securities
- Ms. ↓ - ↓ AD
b) Deflation : otherwise.
Selective credit control - efforts to promote @ BNM
prevent people making installment credit, mortgages and
Inflation : Prevent / reduce
(a) The purchase of assets by raising rates installment
payment, reducing the amount of loan
the repayment period;
(b) Restricting the purchase of fixed assets in mortgage;
(c) Prevent the purchase of shares for the purpose of
There are several mechanisms that can explain the
economic impact of the implementation of monetary
Among them include savings and investment, cash
flow, money and credit, asset prices and exchange
Savings and Investment :-
The interest rate that is too high will increase the
cost of borrowing to finance spending, the individuals
tend to save or defer expenses.
Rising mortgage rates tend to affect households
to postpone buying a house or reduce the quantity of
expenses for the purchase of a home.
Liquidity flow :-
• This section refers to the impact of interest rates in
influencing the amount of cash needed to spend.
• Most of the household at a time, taking advantage of
the financial arrangement that allows them to
• Net interest payments on the debt shows an
increasing trend in proportion of disposable income.
• Financial flows affect the business sector because
almost most business borrowers affected by this
• Changes in interest rates affect the overall cash flow.
Money and Credit :-
• The type of very important mechanism of monetary
policy in open market operations to make
in the financial system.
• The rate of interest charged by the bank have been
adjusted, and an essential part of this mechanism
monetary policy affects the economy through
• A policy that is too tight will reduce the supply of funds
to banks and this will force them to reduce their bank
• Although the price has not changed much loan,
potential borrowers to get a loan in the event
is somewhat less strict.
Asset Prices :-
• Interest rates are also found to affect the value of
assets, which in turn influence individual
and spending decisions.
• Based on theory, the interest rate is too high is
expected to increase the opportunity cost
holding the asset.
• In general, the fall in asset prices was found to
reduce spending and borrowing capacity
individual is also reduced.
Exchange Rate :-
• Fluctuations in exchange rates affect the economy
through changes in the relative price of
goods and services and imports.
• The import price of the direct relation with the
exchange rate, the higher the price of
higher exchange rate.
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