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  1. 1. The Financial Aspect of Enterprise Management Strategy Prof. Jo B. Bitonio, DPA Pangasinan State University Urdaneta City 1
  2. 2. Report Goals To better understand the Financial Aspect of Enterprise Management Strategy, the following goals are the object of achievement in my report:1. To be enlightened on the role of commercial banks in regional economic investment.2. To understand the role of IMF / ADB and WB in global economy and venture capital.3. To be aware of “financial traffic lights” as an instrument of overcoming economic insolvency of business structures. 2
  3. 3. The Role of Banks in Enterprise Management StrategyBANKS according to Mr. Arnold J. Padilla of thebook in Philippine Financial Systems, are institutionsthat receive and hold deposits of funds from others,make loans or extend credit, and transfer funds bywritten order of depositors. Depositors may beindividuals, organizations, or corporations. 3
  4. 4. A BANK according to Wikipedia, July 2008, can also be defined asa financial institution and a financial intermediary that acceptsdeposits and channels those deposits into lending activities, eitherdirectly or through capital markets. A bank connects customers thathave capital deficits to customers with capital surpluses. Banking in the modern sense of the word according to Wikipedia can be traced to medieval and early Renaissance , Italy, to the rich cities in the north like Florence, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. One of the most famous Italian banks was the Medici Bank, set up by Giovanni di Bicci de Medici in 1397. The earliest known state deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy. 4
  5. 5. The oldest bank still in existence is Monte dei Paschi di Siena,headquartered in Siena, Italy, which has been operatingcontinuously since 1472.[It is followed by Berenberg Bank ofHamburg (1590) and Sveriges Riksbank of Sweden (1668). 5
  6. 6. Banks offer many different channels to access theirbanking and other services:• Automated Teller Machines• A branch is a retail location• Call center• Mail: most banks accept cheque deposits via mail anduse mail to communicate to their customers, e.g. bysending out statements• Mobile banking is a method of using ones mobilephone to conduct banking transactions• Online banking is a term used for performingtransactions, payments etc. over the Internet 6
  7. 7. Banks offer many different channels to access their banking andother services:• Relationship Managers, mostly for private banking or businessbanking, often visiting customers at their homes or businesses• Telephone banking is a service which allows its customers toperform transactions over the telephone withautomated attendant or when requested with telephone operator• Video banking is a term used for performing bankingtransactions or professional banking consultations via a remotevideo and audio connection. Video banking can be performedvia purpose built banking transaction machines (similar to anAutomated teller machine), or via a video conference enabledbank branch clarification. 7
  8. 8. •Banks borrow money by •Banks borrow money by accepting funds deposited on accepting funds deposited on current accounts, by accepting current accounts, by accepting term deposits, and by issuing debt term deposits, and by issuing debt securities such as banknotes and securities such as banknotes and bonds. bonds.The bank profits from the The bank profits from the Banks uses the above resources todifference between the level of difference between the level of lend money by making advancesinterest ititpays for deposits and interest pays for deposits and to customers on deposit accounts,other sources of funds, and the other sources of funds, and the by making installment loans, andlevel of interest ititcharges in its level of interest charges in its by investing in marketable debtlending activities. lending activities. securities and other forms of money lending. 8
  9. 9. Banks also face a number of risks in order to conduct their business, and howwell these risks are managed and understood is a key driver behindprofitability, and how much capital a bank is required to hold. Some of themain risks faced by banks include:• Credit risk: risk of loss arising from a borrower who does not make paymentsas promised.• Liquidity risk: risk that a given security or asset cannot be traded quicklyenough in the market to prevent a loss (or make the required profit).• Market risk: risk that the value of a portfolio, either an investment portfolio ora trading portfolio, will decrease due to the change in value of the market riskfactors.• Operational risk: risk arising from execution of a companys businessfunctions.• Reputational risk: a type of risk related to the trustworthiness of business.• Macroeconomic risk: risks related to the aggregate economy the bank isoperating in. 9
  10. 10. The economic functions of banks include:1.Issue of money, in the form of banknotes and current accounts subject tocheck or payment at the customers order. These claims on banks can act asmoney because they are negotiable or repayable on demand, and hence valuedat par. They are effectively transferable by mere delivery, in the case ofbanknotes, or by drawing a check that the payee may bank or cash.2.Netting and settlement of payments – banks act as both collection and payingagents for customers, participating in interbank clearing and settlement systemsto collect, present, be presented with, and pay payment instruments. Thisenables banks to economize on reserves held for settlement of payments, sinceinward and outward payments offset each other. It also enables the offsetting ofpayment flows between geographical areas, reducing the cost of settlementbetween them.3.Credit intermediation – banks borrow and lend back-to-back on their ownaccount as middle men. 10
  11. 11. 4. Credit quality improvement – banks lend money toordinary commercial and personal borrowers (ordinarycredit quality), but are high quality borrowers. Theimprovement comes from diversification of the banksassets and capital which provides a buffer to absorb losseswithout defaulting on its obligations. However, banknotesand deposits are generally unsecured; if the bank gets intodifficulty and pledges assets as security, to raise the fundingit needs to continue to operate, this puts the note holdersand depositors in an economically subordinated position. 11
  12. 12. 5. Maturity transformation – banks borrow more ondemand debt and short term debt, but provide more longterm loans. In other words, they borrow short and lendlong. With a stronger credit quality than most otherborrowers, banks can do this by aggregating issues (e.g.accepting deposits and issuing banknotes) and redemptions(e.g. withdrawals and redemption of banknotes), maintainingreserves of cash, investing in marketable securities that canbe readily converted to cash if needed, and raisingreplacement funding as needed from various sources (e.g.wholesale cash markets and securities markets).6. Money creation – whenever a bank gives out a loan in afractional-reserve banking system, a new sum of virtualmoney is created. 12
  13. 13.  According to the survey of Wikipedia, ASSETS of the largest1,000 banks in the world grew by 6.8% in the 2008/2009 financialyear to a record US$96.4 trillion while profits declined by 85% toUS$115 billion.Growth in assets in adverse market conditions was largely a resultof recapitalization. EU banks held the largest share of the total,56% in 2008/2009, down from 61% in the previous year. Asianbanks share increased from 12% to 14% during the year, while theshare of US banks increased from 11% to 13%. Fee revenuegenerated by global investment banking totaled US$66.3 billion in2009, up 12% on the previous year. All these banks are beingregulated locally and internationally by an institution of nationalinterest. 13
  14. 14. Unlike most other regulated industries, the regulator is typicallyalso a participant in the market, being either a publicly orprivately governed central bank. Central banks also typically havea monopoly on the business of issuing banknotes. However, insome countries this is not the case. In the UK, for example, theFinancial Services Authority licenses banks, and somecommercial banks (such as the Bank of Scotland) issue their ownbanknotes in addition to those issued by the Bank of England,the UK governments central bank. 14
  15. 15. The Philippine’s central bank is TheBangko Sentral ng Pilipinas (English:Central Bank of the Philippines)sometimes in (Spanish: Banco Centralde las Filipinas) and abbreviated as BSP.It was rechartered on July 3, 2004,pursuant to the provision of the 1987Philippine Constitution and the NewCentral Bank Act of 1993. The BSP wasestablished on January 3, 1949, as thecountry’s central monetary authority. 15
  16. 16. As prescribed by the New Central Bank Act, the mainfunctions of the Bangko Sentral are:1. Liquidity Management, by formulating andimplementing monetary policy aimed at influencing moneysupply, consistent with its primary objective to maintain pricestability,2. Currency issue; the BSP has the exclusive power toissue the national currency. All notes and coins issued by theBSP are fully guaranteed by the Government and areconsidered legal tender for all private and public debts,3. Lender of last resort, by extending discounts, loans andadvances to banking institutions for liquidity purposes Ex. Caseof Banco Filipino 16
  17. 17. 4. Financial Supervision, by supervising banks andexercising regulatory powers over non-bank institutionsperforming quasi-banking functions,5. Management of foreign currency reserves, bymaintaining sufficient international reserves to meet anyforeseeable net demands for foreign currencies in order topreserve the international stability and convertibility of thePhilippine peso,6. Determination of exchange rate policy, bydetermining the exchange rate policy of the Philippines.Currently, the BSP adheres to a market-oriented foreignexchange rate policy, and7. Being the banker, financial advisor and officialdepository of the Government, its political subdivisionsand instrumentalities and GOCCs. 17
  18. 18. The Central Bank is active in promoting financialinclusion policy and is a leading member of the Alliancefor Financial Inclusion. It is also one of the original 17regulatory institutions to make specific nationalcommitments to financial inclusion under the MayaDeclaration[2] during the 2011 Global Policy Forum heldin Mexico. This is one way that Central Bank participatesinternationally in global economic activities. However,let us differentiate Central Bank from AsianDevelopment Bank, International Monetary Fund andWorld Bank because all of these banks contribute tofinancing most of the development programs and projectsof a country. 18
  19. 19. Over the past 6 years, ADB, through the Asian Development Fundhas: • built or upgraded over 135,000 classrooms; • trained over 660,000 teachers; • built or upgraded over 44,300 kilometers (km) of roads; • installed or rehabilitated over 17,800 km of water supply pipes; • upgraded sanitation in over 269,000 households; • improved over 1.8 million hectares of land as a result of irrigation, drainage, and flood management initiatives; • installed 300 megawatts of new generating capacity, and built or upgraded more than 34,127 kilometers of transmission and distribution lines; and • enabled new microfinance accounts and end borrowers to grow to over 2.7 million. 19
  20. 20. The INTERNATIONAL MONETARY FUNDOR IMF, according to the website of IMFitself, works to foster global growth andeconomic stability. It provides policy adviceand financing to members in economicdifficulties and also works with developingnations to help them achieve macroeconomicstability and reduce poverty.The IMF has 188 member countries. It is a specializedagency of the United Nations but has its own charter,governing structure, and finances. Its members arerepresented through a quota system broadly based ontheir relative size in the global economy. 20
  21. 21. The IMF primarily does the following in order tofoster global growth and economic stability:1. promotes international monetary cooperation andexchange rate stability;2. facilitates the balanced growth of international trade;and3.provides resources to help members in balance ofpayments difficulties or to assist with poverty reduction. 21
  22. 22. According to the World Bank Website, the World Bankis one of the five institutions started at the BrettonWoods Conference in Bank says that there are five key factors The World 1944. necessary for economic growth: 1.Build capacity: Making governments stronger and more educated. 2.Infrastructure creation: Making laws to encourage business, and protect individual and property rights. 3.Development of Financial Systems: Starting strong systems that can lend and borrow in many different situations. 4.Combating corruption: Stopping corruption in governments. 5.Research, Consultancy and Training: helping students, academics and organizations who are interested do research into financial affairs. 22
  23. 23. The World Bank is composed of two entities :1. IBRD - International Bank of Reconstruction andDevelopment. The IBRD deals with nations such asChina, South Korea, and other developing nations that aremore economically stabilized.2.IDA- International Development Association. Morespecifically, the IDA deals with the poorer nations such asIraq, Afghanistan, and Libya that have the potential ofbeing major contributors to the global economy in thefuture. 23
  24. 24. The focus of the World Bank is broader than that ofthe Asian Development Bank (ADB), covering developingnations the world over that are credit-worthy borrowers formajor infrastructure projects. The World Bank does notactually deal with humanitarian issues, but specifically largescale projects that serves regions and countries. Tax havensMonaco and  Liechtenstein, Norway, Luxembourg,*Switzerland, and Denmark were among the highest percapita Gross National Income (GNI) in the world in 2009,according to World Bank Development Indicators2010 . 24
  25. 25. GNI (or gross national product in the terminology ofthe 1968 United Nations System of National Accounts)measures the total domestic and foreign value addedclaimed by residents. GNI comprises GDP plus netreceipts of primary income (compensation ofemployees and property income) from nonresidentsources. The World Bank uses GNI per capita in U.S.dollars to classify countries for analytical purposes andto determine borrowing eligibility. 25
  26. 26. The International Monetary Fund and the World Bank at a Glance International Monetary Fund World Bank• oversees the international monetary • seeks to promote the economic system development of the worlds poorer• promotes exchange stability and countries orderly exchange relations among its • assists developing countries through member countries long-term financing of development• assists all members--both industrial and projects and programs developing countries--that find • provides to the poorest developing themselves in temporary balance of countries whose per capita GNP is less payments difficulties by providing than $865 a year special financial short- to medium-term credits assistance through the International• supplements the currency reserves of Development Association (IDA) its members through the allocation of • encourages private enterprises in SDRs (special drawing rights); to date developing countries through its affiliate, SDR 21.4 billion has been issued to the International Finance Corporation member countries in proportion to (IFC) their quotas • acquires most of its financial resources• draws its financial resources principally by borrowing on the international bond from the quota subscriptions of its market member countries • has an authorized capital of $184 billion,• has at its disposal fully paid-in quotas of which members pay in about 10 now totaling SDR 145 billion (about percent $215 billion) • has a staff of 7,000 drawn from 180• has a staff of 2,300 drawn from 182 member countries member countries 26
  27. 27. The Financial Traffic Light model should be as fairas possible, while at the same time being a simple model thatcan be applied by all companies obligated to report. Inprinciple, Financial Institutions are obliged to acceptmeasuring interest-rate risk, equity risk and real-estate riskfor both assets and liabilities without further breaking downthese three risk factors. At present, such a solution wouldyield the same results as the somewhat more detailed modelbeing proposed in this draft. Foreign interest-bearingsecurities and inflation-linked bonds would then beconsidered equivalent to Swedish interest-bearing securities.Credit risks and exchange-rate risks would then be ignored.Such a model has the advantage of being simple and clear.  27
  28. 28.   However, in order to obtain a better impression ofthe financial risks to which a portfolio is exposed, FI haselected to also include simplified measurements of theforeign interest-rate risk, the real interest-rate risk and thecredit risk. On the other hand, FI has deliberately refrainedfrom measuring a specific risk in equities, real estate andcredit exposures. The equity risk, however, is divided into aSwedish and a foreign equity risk. Even the ex-change-raterisk is treated schematically, in that the model measures therisk as the total net exposure to all foreign currencies.  28
  29. 29. The model measures how both assets andliabilities are affected by asset price changes,which means that it is the companies’ net risksthat are being studied. Furthermore, the modelassumes zero correlation between the variousasset classes, which means that it takes intoconsideration diversification effects betweenasset types. Risk reduction and risk increasesthrough the use of financial derivatives arecaptured by the model in a simplified manner. . 29
  30. 30. The traffic light model is only one of severalsupervisory tools used by FI. Since not all financial risks aremeasured by the model, it needs to be supplemented byother supervision. FI is interested in the companies’ actualrisk profile. The traffic light model is only an approximationof the risk profile, which means that financial instruments orinvestment strategies that do not result in any measurementresults in the traffic light model, despite constituting afinancial risk for the company, are not regarded as risk freeby FI. The opposite applies to financial instruments orinvestment strategies that de facto reduce the risk, but whoserisk reduction is not indicated by the traffic light model.Accordingly, the traffic light model, like other supervisorytools, is used to sort out companies for more in-depthinvestigation. 30  .
  31. 31.   The traffic-light model is a supervisory tool andmeasures the companies’ resistance to sharp asset-pricechanges over the short term. The traffic light is not anportfolio optimization model. Neither is the modeldesigned to be used as an internal risk management tool.The companies are themselves responsible fordeveloping models for these purposes that take their ownoperations into consideration. 31
  33. 33. THANK YOU. 33