PowerPoint - 4-Banking


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PowerPoint - 4-Banking

  1. 1. Financial Institutions -- Banking
  2. 2. Functions of Financial Institutions <ul><li>1. Aids the flow of capital </li></ul><ul><li>2. Credit allocation </li></ul><ul><li>3. Provides economies of scale and scope </li></ul><ul><li>4. Satisfies the needs of general public </li></ul><ul><li>5. Provides specialization and expertise </li></ul><ul><li>6. Assists asset transformation </li></ul><ul><li>7. Offers INTERMEDIATION </li></ul>
  3. 3. Intermediation <ul><li>The process of transforming a secondary security into a primary security by a financial institution. </li></ul><ul><li>It relates to financial investments by savors </li></ul>
  4. 4. Dis-intermediation <ul><li>The process of reversing or rejecting the transfer of funds into the financial institutions. </li></ul><ul><li>This refers to the low deposit interest rates or high operating costs charge to customers. </li></ul>
  5. 5. Illustration of Disintermediation <ul><li>The removing of Middlemen </li></ul><ul><li>The dis- or re-channeling funds flow from the FI </li></ul><ul><li>Changing Role to the Servicing of Markets </li></ul><ul><ul><li>Security Investments </li></ul></ul><ul><ul><li>Mutual Funds </li></ul></ul><ul><ul><li>Insurance </li></ul></ul>
  6. 6. Types of Intermediation <ul><li>1. Liquidity </li></ul><ul><li>2. Maturity </li></ul><ul><li>3. Denomination </li></ul><ul><li>4. Risk </li></ul>
  7. 7. Types of Financial Institutions <ul><li>By Banking Business Nature: </li></ul><ul><ul><li>Banks </li></ul></ul><ul><ul><li>Non-Banks </li></ul></ul><ul><ul><li>Non-Finance </li></ul></ul>
  8. 8. <ul><li>By Business Operations: </li></ul><ul><ul><li>Thrift type </li></ul></ul><ul><ul><li>Contractual type </li></ul></ul><ul><ul><li>Investment type </li></ul></ul><ul><ul><li>Other type </li></ul></ul>
  9. 9. Thrift-type Financial Institutions <ul><li>Banks: </li></ul><ul><ul><li>Commercial Banks </li></ul></ul><ul><ul><li>Savings Banks </li></ul></ul><ul><ul><li>Investment Banks (Merchant Banks) </li></ul></ul><ul><ul><li>etc </li></ul></ul><ul><li>Non-Banks: </li></ul><ul><ul><li>Deposit-taking Company, Savings and Loan, Home Loans, Building Society, </li></ul></ul><ul><ul><li>Credit Unions </li></ul></ul>
  10. 10. Contract-type Financial Institutions <ul><li>Insurance Companies: </li></ul><ul><ul><li>Life Insurance </li></ul></ul><ul><ul><li>Accident and Healthy Insurance </li></ul></ul><ul><li>Pension Funds: </li></ul><ul><ul><li>Mandatory Providence Funds </li></ul></ul><ul><ul><li>Retirement Funds/Pension Funds </li></ul></ul>
  11. 11. Investment-type Financial Institutions <ul><li>Investment Companies: </li></ul><ul><ul><li>Closed-end Investment Companies - Investment Brokers </li></ul></ul><ul><ul><li>Open-end Investment Companies - Mutual Funds/Unit Trust </li></ul></ul><ul><ul><li>Real Estate Trust Investment Companies </li></ul></ul>
  12. 12. Other Financial Institutions <ul><li>Finance Companies </li></ul><ul><li>Factors Companies </li></ul><ul><li>Lease Companies </li></ul><ul><li>Mortgage Companies </li></ul><ul><li>Credit Card Companies </li></ul><ul><li>Non-finance Financial Institutions: </li></ul><ul><ul><li>General Electric, Ford Motors, Toyota Motors </li></ul></ul><ul><ul><li>wholesalers, Manufactures, Department Stores </li></ul></ul>
  13. 13. Why Financial Institutions? <ul><li>Fulfill economic goals </li></ul><ul><li>Reduce transaction and information costs </li></ul><ul><li>Provide liquidity </li></ul><ul><li>Prevent risks </li></ul><ul><li>As transmission of monetary policy </li></ul><ul><li>Provide payment mechanism </li></ul><ul><li>Supply credit allocation </li></ul>
  14. 14. Analysis of Financial Institutions <ul><li>1. Transaction Costs </li></ul><ul><li>2. Information Asymmetry -- Moral Hazard </li></ul><ul><li>3. Financial Risks </li></ul><ul><li>4. Financial Innovation </li></ul>
  15. 15. High Transaction Costs: Solutions <ul><li>Economy of Scale--to reduce the average unit costs of production as output increase (%  Output  , AC  ) </li></ul><ul><li>Economy of Scope --to generate cost synergies by producing multiple services ( C{x 1 , x 2 } < C{x 1 } +C{x 2 } ) </li></ul><ul><li>Specialization: market niche </li></ul>
  16. 16. Solution <ul><li>Information Asymmetry--Moral Hazard: </li></ul><ul><li>Information Symmetry and Full Disclosure </li></ul><ul><li>Regulation Reform </li></ul><ul><li>Financial Intermediation </li></ul><ul><li>Financial Risks: </li></ul><ul><li>Risk Management and Control </li></ul><ul><li>Burden Administration </li></ul>
  17. 17. Solutions <ul><li>Financial Innovations: </li></ul><ul><li>Enhance Internal Control-- </li></ul><ul><li>Planning, Control, and Administration </li></ul><ul><li>Tighten Asset Management and Quality </li></ul><ul><li>Modernized Operation System </li></ul><ul><li>Strengthen Regulation and Monitoring </li></ul>
  18. 18. Duties of the Management of Financial Institutions <ul><li>1. Determining the optimal capital structure </li></ul><ul><li>Assets, Liabilities, and Capital </li></ul><ul><li>2. Managing interest rate/currency/credit risks </li></ul><ul><li>3. electing/Pricing investments and liabilities </li></ul><ul><li>Maturity Matching, Profit Making </li></ul><ul><li>4. Operating effectively </li></ul><ul><li>Information Processing </li></ul><ul><li>Communication Technology </li></ul>
  19. 19. Basic Concept -- Banking <ul><li>What is a Bank? </li></ul><ul><ul><li>A bank is a financial intermediary which provides special types services relating to finance. </li></ul></ul><ul><ul><li>A bank is a company which carries on “banking business” with a valid banking license. (Banking Ordinance) </li></ul></ul>
  20. 20. Banking Business Banking Ordinance - section 2 <ul><li>A. Receiving from the general public money on current deposit, savings deposit or other similar account repayable on demand or within less than three months or at call or notice of less than three months; </li></ul><ul><li>B Paying or collecting cheques drawn by or paid in by customers. </li></ul>
  21. 21. Universal Definition of A Bank <ul><li>A Bank is a licensed organization that </li></ul><ul><li>1. Accepts Deposits from the general public </li></ul><ul><li>2. Grants Loans </li></ul>
  22. 22. Special Features of a Bank <ul><li>1. It is a regulated organization. </li></ul><ul><li>2. It offers checking accounts (Demand Deposit Accounts, or Current Accounts) </li></ul><ul><li>3. It acts as payment mechanism. </li></ul><ul><li>4. It can create money </li></ul>
  23. 23. Money Creation Feature <ul><li>1. Assumptions: </li></ul><ul><ul><li>No cash outflow (Depositors will not make any drawing) </li></ul></ul><ul><ul><li>Comply with the Reserves Requirement on Deposits </li></ul></ul><ul><ul><li>No Excess Reserves set by the Bank </li></ul></ul><ul><ul><li>Excess Balance on the Deposits will be loaned out </li></ul></ul><ul><ul><li>All Loans will be re-deposited back to the Bank </li></ul></ul>
  24. 24. <ul><li>Process of Money Creation: </li></ul><ul><li>(Minimum Deposit Reserves equal to 20%) </li></ul><ul><li>1. Deposits $1,000 into the Banking System </li></ul><ul><ul><li>bank will maintain deposit reserves $200 </li></ul></ul><ul><ul><li>At the same time, $800 will be lent out </li></ul></ul><ul><ul><li>Borrower will immediately deposit the $800 back to the bank </li></ul></ul><ul><ul><li>The Bank will then have $1,800 in its Deposit account </li></ul></ul>
  25. 25. <ul><li>B. The additional $800 deposited into the Bank. </li></ul><ul><ul><li>20% of $800 ($160) will be taken out as reserves. </li></ul></ul><ul><ul><li>The remaining balance of $640 will be lent out. </li></ul></ul><ul><ul><li>Borrower(s) will not withdraw cash and deposit the $640 into the Bank </li></ul></ul><ul><ul><li>The Bank will have a total of 2,440 in Deposits. ($1,000+$800+$640) </li></ul></ul>
  26. 26. <ul><li>C. The process repeats again until the reserves requirement equal to the original deposits amount. The “Multiple Effect” appears. </li></ul><ul><li>D = deposits; r= reserves requirement </li></ul><ul><li>MC=Money Creation </li></ul><ul><li>MC = D/r)$1,000 x (1/0.2) = $5,000 ….. (M1) </li></ul><ul><li>Minimum Reserves is $5,000 x 0.2 =$1,000 </li></ul>
  27. 27. <ul><li>The “multiplier” is 5 </li></ul><ul><li>Money creation equals $4,000 </li></ul><ul><li>r = 0.2; Multiplier = 5 </li></ul><ul><li>r = 0.1; Multiplier = 10 </li></ul><ul><li>r = 0.25; Multiplier = 4 </li></ul><ul><li>r = 0.08; Multiplier = 12.5 </li></ul>
  28. 28. <ul><li>In Reality, the “Multiplier” may not be exactly the same (as 5 on the reserves requirement is 20%). </li></ul><ul><li>M1 is always larger than original deposits. </li></ul><ul><li>Monetary Policy can increase or decrease the reserves requirement to control the money supply. </li></ul>
  29. 29. Bank Organization Structure <ul><li>Unit Banking </li></ul><ul><li>Branch Banking </li></ul><ul><li>Dual Banking </li></ul><ul><li>Bank Holding Company </li></ul><ul><li>Multinational Banking </li></ul><ul><li>Retail Banking </li></ul><ul><li>Wholesale Banking </li></ul>
  30. 30. HK Banking System <ul><li>3 tier Banking System: (Structure): </li></ul><ul><li>1981: Licensed Banks </li></ul><ul><li>Licensed Deposit-taking Companies </li></ul><ul><li>Registered DTC </li></ul><ul><li>1989: Licensed Banks </li></ul><ul><li>Registered Licensed Banks </li></ul><ul><li>Deposit-taking Companies </li></ul>
  31. 31. Banks in Hong Kong Source: HKMA Monthly Statistical bulletin, January 2002
  32. 32. Balance Sheet of HK Banks Source:HKMA Monthly Statistical Bulletin, January 2002
  33. 33. Funds Flow of a Bank <ul><li>Funds Flow-in: </li></ul><ul><ul><li>Deposits </li></ul></ul><ul><ul><li>Borrowing / NCD </li></ul></ul><ul><ul><li>Contributed Capital </li></ul></ul><ul><li>Funds Flow-out: </li></ul><ul><ul><li>Loans and Advances </li></ul></ul><ul><ul><li>Investments </li></ul></ul><ul><ul><li>Capital Expenditures </li></ul></ul>
  34. 34. Balance Sheet Presentation <ul><li>Assets Side: </li></ul><ul><li>- Cash and Balance due from Depository Institutions </li></ul><ul><li>- Investments (Short- and Long-term) </li></ul><ul><li>- Loans and Advances </li></ul><ul><li>- Plant and Equipment </li></ul><ul><li>- Investments in Subsidiaries </li></ul>
  35. 35. <ul><li>Liabilities: </li></ul><ul><li>- Core Deposits </li></ul><ul><li>- Certificate Deposits </li></ul><ul><li>- Borrowings (Short- and Long-term) </li></ul><ul><li>Equity Capital </li></ul><ul><li>- Paid-in Capital </li></ul><ul><li>- Retained Earnings (Reserves) </li></ul>
  36. 36. Bank Assets and Liabilities Structure <ul><li>Rate Sensitive Assets Rate Sensitive Liab. </li></ul><ul><li>Fixed Rate Assets Fixed Rate Liab. </li></ul><ul><li>Non-Rate Assets Equity </li></ul>
  37. 37. Bank Balance Sheet Characteristics <ul><li>1. Few Fixed Assets -- Low Degree of Operating Leverage </li></ul><ul><li>2. Substantial Amount Short-term Liabilities (Deposits) -- Requires High Liquidity </li></ul><ul><li>3. Substantial Amount of Assets Relative to Equity Capital -- High Degree of Financial Leverage </li></ul>
  38. 38. Services Provided by Banks <ul><li>General Areas: </li></ul><ul><li>- Intermediation: Liquidity, Maturity </li></ul><ul><li>Risk, Denomination </li></ul><ul><li>- Cost Reduction </li></ul><ul><li>- Price Reduction </li></ul><ul><li>- Information </li></ul>
  39. 39. Special Services Provided by Banks <ul><li>1. Money Supply Transmissions </li></ul><ul><li>2. Credit Allocation </li></ul>
  40. 40. Development Factors in Financial Institutions <ul><li>1. Crossing Traditional Boundaries </li></ul><ul><li>2. Global Competition </li></ul><ul><li>3. New Opportunities </li></ul><ul><li>4. Deregulation/Re-regulation </li></ul><ul><li>5. Corporate Restructuring </li></ul>
  41. 41. The Development in Banking Industry <ul><li>1. Institutionalization </li></ul><ul><li>2. Globalization </li></ul><ul><li>3. Securitization </li></ul>
  42. 42. Structural Change in Banking <ul><li>1. T echnological Change </li></ul><ul><li>2. R egulation Change </li></ul><ul><li>3. Economical Change - I nterest Rate Fluctuation </li></ul><ul><li>4. C ompetition Induced Change </li></ul><ul><li>5. Bank International Settlement Requirement --Capital ( K apital) Change </li></ul><ul><li>** TRICK ** </li></ul>
  43. 43. Financial Innovation in Banking <ul><li>TRICK + Rational Self-Interest = </li></ul><ul><li>Financial Innovation </li></ul><ul><li>New financial products and processes that improve the economic efficiency with which financial transactions are conducted, either by serving customers’ needs in new unregulated ways or by lowering costs. </li></ul>
  44. 44. <ul><li>Examples of Financial Innovations: </li></ul><ul><li>Negotiable Certificate Deposits </li></ul><ul><li>ZERO-Coupon Securities </li></ul><ul><li>Financial Futures </li></ul><ul><li>Negotiable Order of Withdrawal (NOW a/c) </li></ul><ul><li>Money Market Deposit Account (MMDA) </li></ul><ul><li>Euro-Dollar Deposits </li></ul><ul><li>Securitization </li></ul>
  45. 45. Banking Regulations
  46. 46. Reasons for Banking Regulations <ul><li>1. Protect Customers </li></ul><ul><li>2. Improve Implementation of Monetary Policy </li></ul><ul><li>3. Ensure Competitive Markets </li></ul><ul><li>4. Prevent from Bank Run </li></ul><ul><li>5. Eliminate Prejudice in Supply </li></ul><ul><li>6. Pursue Desirable Credit Allocation </li></ul><ul><li>7. Protect Taxpayers from Bailouts </li></ul><ul><li>8. Reduce Information Asymmetries </li></ul>
  47. 47. What IF There is NO Regulations <ul><li>Money will be destroyed </li></ul><ul><li>Payment Mechanism will be Disrupted </li></ul><ul><li>Credit will be Shrink </li></ul><ul><li>Risk will be increased </li></ul><ul><li>Information Flow will be retarded </li></ul>
  48. 48. Objectives of Bank Regulations <ul><li>1. Safety </li></ul><ul><li>2. Stability </li></ul><ul><li>3. Structure </li></ul>
  49. 49. Forms of Bank Regulations <ul><li>Entry Control - Licensed </li></ul><ul><li>Safety and Soundness Control: </li></ul><ul><ul><li>Liquidity </li></ul></ul><ul><ul><li>Capital Adequacy </li></ul></ul><ul><ul><li>Concentration Limits </li></ul></ul><ul><li>Credit Allocation Control </li></ul><ul><li>Geographical Expansion Control </li></ul>
  50. 50. Cost/Banefit Analysis of Regulation <ul><li>Cost </li></ul><ul><ul><li>Filing Cost </li></ul></ul><ul><ul><li>restricted Activities </li></ul></ul><ul><ul><li>Taxes </li></ul></ul><ul><li>Benefits: </li></ul><ul><ul><li>Restricted Competition </li></ul></ul><ul><ul><li>Government Support </li></ul></ul>
  51. 51. Banking Operating Structure <ul><li>Industry Organization Model: </li></ul><ul><li>Structure </li></ul><ul><li>Conducts </li></ul><ul><li>Performance </li></ul>
  52. 52. Bank Organization Structure <ul><li>Merge and Acquisition -- Super Size Banks </li></ul><ul><ul><li>Efficiency </li></ul></ul><ul><ul><li>Effectiveness </li></ul></ul><ul><li>Multinational Foreign Banks </li></ul><ul><li>Multinational Bank Holding Companies </li></ul><ul><ul><li>Double Leverage </li></ul></ul>
  53. 53. Double Leverage for MBHC <ul><li>Bank Parent Company: raise funds $10 Billion by issuing bonds or borrowing </li></ul><ul><li>This amount is then transferred/invested into the subsidiary Bank </li></ul><ul><li>The funds are used to expand the subsidiary bank’s capital size. </li></ul><ul><li>If the subsidiary bank maintain an 20% required ratio of Equity to Asset </li></ul>
  54. 54. <ul><li>The subsidiary bank’s assets will be increase by $50 billion while meeting the regulatory capital requirement of 20%. </li></ul><ul><li>Increase Injected Bank Equity Funds </li></ul><ul><li>in = </li></ul><ul><li>Assets Required Reserves Ratio </li></ul><ul><li>Increase in Assets = $10b / 0.20 = $50b </li></ul>
  55. 55. Bank Performance
  56. 56. Risks Faced by Bank Operations <ul><li>Liquidity Risk </li></ul><ul><li>Credit (Default) Risk </li></ul><ul><li>Interest Rate Risk </li></ul><ul><li>Technology/Operational Risk </li></ul><ul><li>Regulatory Risk </li></ul><ul><li>Country/Sovereign Risk </li></ul>
  57. 57. <ul><li>Currency (Foreign Exchange) Risk </li></ul><ul><li>Political Risk </li></ul><ul><li>Off-Balance Sheet Risk </li></ul>
  58. 58. Objectives of Bank Performance <ul><li>To Reduce Risks </li></ul><ul><li>To Maximize Net Worth </li></ul><ul><li>To Maximize Profit </li></ul><ul><li>To Comply with Regulations </li></ul><ul><li>To Fulfill Bank Policies </li></ul>
  59. 59. Features of Bank Performance <ul><li>Accepts general public’s savings as deposits and grant loans to those who need them. </li></ul><ul><li>Bank products are mainly services </li></ul><ul><li>The income and expenses are divided into </li></ul><ul><ul><li>Interest Portion </li></ul></ul><ul><ul><li>Non-interest Portion </li></ul></ul>
  60. 60. Profitability Analysis
  61. 61. Measurement of Profitability <ul><li>Net Interest Income (NII) = </li></ul><ul><li>Interest Income – Interest Expenses </li></ul><ul><li>Net Interest Margin (NIM) = </li></ul><ul><li>Interest Income – Interest Expenses </li></ul><ul><li>Total Earning Assets </li></ul><ul><li>Spread = (Average Interest Income Rate – </li></ul><ul><li>Average Interest Expense Rate) </li></ul>
  62. 62. Factors Affecting NIM/NII <ul><li>Credit Risk - Higher Risk; Higher Yields </li></ul><ul><li>Interest Rate Fluctuation </li></ul><ul><li>Funding Mix: S/T vs L/T </li></ul><ul><ul><li>Sources:wholesale vs retail; savings vs time </li></ul></ul><ul><ul><li>Uses: commercial vs mortgage vs consumers </li></ul></ul><ul><li>Pricing Mix: Fixed Rate vs Floating Rate </li></ul><ul><li>Non-performance Assets </li></ul><ul><li>Tax Exempted Investments </li></ul>
  63. 63. Impact of Interest Rate Fluctuation on NIM <ul><li>Monitoring Rate Sensitive Assets and Liabilities -- Gap Management RSA > RSL ..…….. Positive Gap RSA < RSL ……… Negative Gap RSA = RSL ……… Zero Gap When Interest Rate increases, + Gap:  IR >  IE … + NII ; + NIM – Gap:  IR <  IE … – NII ; – NIM </li></ul>
  64. 64. Measurement Return on Net Worth <ul><li>Return on New Worth (RONW) = </li></ul><ul><li>(Total Net Income / Total Equity on MV) </li></ul><ul><li>Return on Assets (ROA) = </li></ul><ul><li>(Total Net Income / Total Assets) </li></ul><ul><li>Return on Equity (ROE) = </li></ul><ul><li>(Total Net Income / Total Equity on BV) </li></ul>
  65. 65. Asset/Liability Management <ul><li>Monitoring Assets and Liabilities Mix: Actively Management the Which Assets are funded by What Liabilities The GAP (RSA = RSL) RSA financed by FRL FRA financed by FRL NRA financed by FRL </li></ul><ul><li>Determine the Amount, Rate Differential and the Expected Earnings of all the items. </li></ul>
  66. 66. Illustration of Active Mgt <ul><li>Example: </li></ul><ul><li>RSA 8% $ 170 RSL 6% $ 150 </li></ul><ul><li>FRA11% 155 FRL 8.5% 185 </li></ul><ul><li>NRA 30 Equity 20 </li></ul><ul><li>Total $ 355 Total $ 355 </li></ul><ul><li>Rate Differentials (Annual ) </li></ul><ul><li>On RSA and RSL (8% - 6%) 2% </li></ul><ul><li>On FRA and FRL (11% - 8.5%) 1.5% </li></ul><ul><li>On GAP and FRL (8,5% - 8%) 0.5% </li></ul><ul><li>On NRA and FRL (8.5% - 0%) ( 8.5%) </li></ul>
  67. 67. <ul><li>Profitability Analysis </li></ul><ul><li>RSA financed by RSL ($150 @ 2%) $3 </li></ul><ul><li>FRA financed by FRL ($155 @ 1.5%) 2.325 </li></ul><ul><li>GAP financed by FRL ($20 @ 0.5%) 0.1 </li></ul><ul><li>NRA financed by FRL ($10 @ 8.5%) (0.85) </li></ul><ul><li>NRA financed by Equity ($20 @ --) 0 Total Pre-tax Profits $4.575 </li></ul><ul><li>RONW (ROE) = $4.575  20 = 0.22875 ~ 22.875% </li></ul>
  68. 68. Liquidity Analysis
  69. 69. Nature of Liquidity <ul><li>1. The ability to maintain sufficient funds to fulfill the regulatory requirement </li></ul><ul><li>2. The ease with which a bank to convert the assets into cash to meet the claims of withdrawals and /or to repay the debts and expenses. </li></ul>
  70. 70. Concepts of Liquidity <ul><li>Narrow Concept : the ability to maintain sufficient funds or to raise a certain amount of deposits at a certain cost within a certain amount of time to meet the needs by the bank </li></ul><ul><li>-- Store Liquidity </li></ul><ul><li>Broad Concept: the ability to include the ease with which the bank can obtain cash by borrowing from external sources -- Purchasing Liquidity </li></ul>
  71. 71. Liquidity Requirement by Hong Kong Banking Ordinanace <ul><li>Any Licensed Bank should maintain the Liquidity Ratio of not less than 25% of Liquefiable Assets to its Qualifying Liabilities for each calendar month, based on the sum of net weighted amount of the liquefiable assets and the sum of the qualifying liabilities for each working day of the month. </li></ul>
  72. 72. Causes of Liquidity <ul><li>1. Liability-side Causes: </li></ul><ul><li>Depositors withdraw cash from their accounts or additional deposits do not come as expected </li></ul><ul><li>2. Asset-side Causes: </li></ul><ul><li>Lending commitments or Matured Loans do not pay on time. </li></ul>
  73. 73. Indicators of Liquidity Risk <ul><li>1. Mis-Matching of maturities of Qualifying Assets to Liquefiable Liabilities </li></ul><ul><li>2. Inadequate Liquidity Ratio on Qualifying Assets to Liquefiable Liabilities </li></ul>
  74. 74. Measurement of Liquidity Risk <ul><li>1. Static Measurement: </li></ul><ul><li>a. Liquidity Ratio: </li></ul><ul><li>Qualifying Assets </li></ul><ul><li>Liquefiable Liabilities </li></ul><ul><li>b. Net Cash Flows Analysis: </li></ul><ul><li>Cash In-flows — Cash Out-flows </li></ul>
  75. 75. <ul><li>2. Dynamic Measurement: </li></ul><ul><li>a. Liquidity Planning: to analyze the deposits withdrawals and additional deposits, and the loans commitments and loans repayments. To determine the net effect on the Liquidity Position. </li></ul><ul><ul><li>Liq.Bal Deposits Loans Net Change + – + – $140 $50 $75 $100 $80 $??? +Liq – Liq –Liq +Liq </li></ul></ul>
  76. 76. <ul><li>B. Trends Analysis on Loans and Deposits: </li></ul><ul><li>$ </li></ul><ul><li>Deposits </li></ul><ul><li>Liquidity </li></ul><ul><li>Gap </li></ul><ul><li>Loans </li></ul><ul><li>t </li></ul>
  77. 77. Management of Liquidity Risks <ul><li>1. Store Liquidity </li></ul><ul><li>a. Maintain sufficient CASH and Near Cash </li></ul><ul><li>b. Maintain Good Quality Loans </li></ul><ul><li>c. Retain Deposits in the Bank </li></ul>
  78. 78. <ul><li>2. Purchase Liquidity: </li></ul><ul><li>a. Maintain Diversified Borrowing Sources: </li></ul><ul><li>(I) Inter-bank Loans </li></ul><ul><li>(ii) Other Borrowings </li></ul><ul><li>(iii) Discount Windows (LAF) </li></ul><ul><li>(iv) REPO </li></ul><ul><li>(v) NCD </li></ul><ul><li>b. Increase Deposits </li></ul><ul><li>c. Seek Deposit Sources (Euro$ Deposit) </li></ul>
  79. 79. Lending Analysis
  80. 80. Nature of Lending <ul><li>Lending is the single and largest categories for banking </li></ul><ul><li>Lending provides the primary source of revenue for banking </li></ul><ul><li>Banking business is to grant loans to allocate capital </li></ul><ul><li>Lending classes: Commercial and Industry, Real Estate (Mortgage). Consumer, and others (leasing, agriculture, gov’t, etc) </li></ul>
  81. 81. Concepts of Bank Lending <ul><li>1. The possibility of total loss become less as the number of loans increases </li></ul><ul><li>2. The possibility of no losses also become less as number of loans increase </li></ul><ul><li>3. As loan portfolio getting larger, number of loans that will go bad can be predicted </li></ul><ul><li>4. The Larger the loan portfolio, the possibilities of total loss are very remote </li></ul><ul><li>5. In large loan portfolio, some losses are certain </li></ul>
  82. 82. Elements for Lending Policy <ul><li>Size </li></ul><ul><li>Maturity </li></ul><ul><li>Composition </li></ul><ul><li>Interest Rate: Loan Pricing </li></ul><ul><li>Fixed Rate or Floating Rate </li></ul><ul><li>Analyze Loan Loss </li></ul>
  83. 83. Strategies for Lending Policy <ul><li>Loan Analysis </li></ul><ul><ul><li>No Analysis </li></ul></ul><ul><ul><li>Subjective Analysis </li></ul></ul><ul><ul><ul><li>5 Cs’ </li></ul></ul></ul><ul><ul><ul><li>Ratio Analysis and Cash Flow Analysis </li></ul></ul></ul><ul><ul><li>Objective Analysis </li></ul></ul><ul><ul><ul><li>Credit Score </li></ul></ul></ul><ul><ul><ul><li>Z Score </li></ul></ul></ul>
  84. 84. <ul><ul><ul><li>Credit Score – Altman’s Z Score </li></ul></ul></ul><ul><ul><ul><li> Z = 1.2X 1 +1.4X 2 + 3.3X 3 + 0.6X 4 + 1.0X 5 </li></ul></ul></ul><ul><ul><ul><li> X 1 = Working Capital / Total Assets </li></ul></ul></ul><ul><ul><ul><li> X 2 =Retained Earnings / Total Assets] </li></ul></ul></ul><ul><ul><ul><li>X 3 = EBIT / Total Assets </li></ul></ul></ul><ul><ul><ul><li>X 4 = M. Value of Equity / B. Value of Total Debts </li></ul></ul></ul><ul><ul><ul><li> X 5 = Sales / Total Assets </li></ul></ul></ul><ul><ul><ul><li> Z Score Probability of Failure </li></ul></ul></ul><ul><ul><ul><li> 1.8 or less Very High </li></ul></ul></ul><ul><ul><ul><li> 1.81 – 2.99 Not Sure </li></ul></ul></ul><ul><ul><ul><li> 3.0 or Above Unlikely </li></ul></ul></ul>
  85. 85. <ul><li>Loan Administration </li></ul><ul><ul><li>Centralized Approval </li></ul></ul><ul><ul><li>Decentralized Approval </li></ul></ul><ul><li>Loan Authorization </li></ul><ul><ul><li>Personnel </li></ul></ul><ul><ul><li>Authorized Line of Credit </li></ul></ul><ul><li>Loan Monitoring </li></ul>
  86. 86. <ul><li>Loan Delinquency </li></ul><ul><li>a. Workout Agreement </li></ul><ul><li>b. Collateral Liquidation </li></ul><ul><li>c. Reducing Debt to Collecting Judgment </li></ul><ul><li>d. Charge off </li></ul><ul><li>e. Bankruptcy </li></ul>
  87. 87. Capital Analysis
  88. 88. Role of Capital <ul><li>To Support Operating Asset Commitments </li></ul><ul><li>To Promote Depositors’ Confidence </li></ul><ul><li>To Improve Growth - Loans and Deposits </li></ul><ul><li>- Earnings </li></ul><ul><li>To Prevent Morale Hazard </li></ul>
  89. 89. Composition of Capital <ul><li>Traditional Concept: (GAAP Concept) </li></ul><ul><li>1. Contributed Capital: </li></ul><ul><li>-- Core and Supplementary Capital </li></ul><ul><li>2. Book Value </li></ul><ul><li>Regulatory Concept: (Regulatory Accounting Principles) </li></ul><ul><li>1. Contributed Capital plus Debt Capital </li></ul><ul><li>2. Market Value </li></ul>
  90. 90. Debt as Source of Capital <ul><li>Attribute of Debt: (Regulatory point of view) 1. It is legally subordinate to deposits. 2. It does not require immediate repayment. 3. It offers some protection to depositors. 4. It is a sources of funds </li></ul>
  91. 91. Conditions for Debt as Capital <ul><li>Original maturity of 5 year or more </li></ul><ul><li>When Issue must Identify as Subordinate to deposits </li></ul><ul><li>Must be Uninsured </li></ul>
  92. 92. Capital Adequacy <ul><li>Regulatory Requirement: (Bank of International Settlement Requirement) Capital / Risk Adjusted Assets > 8% Core Capital / Risk Adjusted Assets > 4% </li></ul><ul><li>Internal Requirement: -Add a Premium onto the BIS requirement -Currently Average Ratio is 20% </li></ul>
  93. 93. Quantitative Analysis of Capital Adequacy <ul><li>1. Leverage Analysis: NW/ Total Assets NW / Risk Adjusted Assets NW / Average Loans NW / Average Deposits </li></ul><ul><li>2. Net Capital Ratio: Capital + R.E. – Problem Assets Risk Adjusted Assets NCR < 2.74 ---- Inadequate </li></ul>
  94. 94. Qualitative Analysis of Capital Adequacy <ul><li>Regulatory Analysis: CAMEL --- C apital size A sset Quality M anagement E arning History L iquidity Position </li></ul>
  95. 95. Continued <ul><li>For Bank Holding Company Institutes CAMEL + BOPEC B ank Subsidiary O ther Subsidiaries P arent Company E arnings (Consolidated) C apital (Consolidated) </li></ul>