Chapter 3
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This document discusses depository institutions such as commercial banks, savings and loan associations, savings banks, and credit unions. It describes their key characteristics and activities. Depository institutions obtain funds from deposits and use those funds to generate income through loans and investments. They face asset-liability problems in managing the mismatch between long-term assets and short-term liabilities. Regulators monitor various risks at these institutions including credit, liquidity, market, and operational risk. The document provides examples of major depository institutions in the Philippines within each category.
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Chapter 3
- 1. Chapter No. 3 Depository Institutions DEPOSITORY INSTITUTIONS: ACTIVITIES AND CHARACTERISTICS Professor: Genese Mariel S. Chua, MBA, RCA, MICB 1
- 2. Learning Objectives: Describe depository institutions. Discuss the asset/liability problem faced by depository institutions. Explain how depository institutions generates income. Differentiate commercial banks from savings and loan associations, savings bank and credit unions. Discuss the asset/liability problems faced by all depository institutions. Explain the risk faced by depository institution. Name the funding sources available to commercial and thrift banks. Recognize the value of discernment. 2
- 3. Asset/Liability Problem A financial institution that obtains its funds mainly through deposits from the public. These includes commercial banks, savings and loan associations, savings bank and credit unions. Deposit – represents the liabilities (debt) of the deposit accepting institution. Their income is derived in two sources: 1.Income generated from the loans they make and The securities they purchase 2.Fee Income 3 Depository Institutions
- 4. Asset/Liability Problem S&L’s (Savings and Loan Associations), savings bank and credit union are also known as “Thrifts” which are specialized types of depository institutions. The Philippines has a comprehensive banking system encompassing various types of banks, from large universal banks to small rural banks and even non-banks, all licensed with the Banko Sentral ng Pilipinas under Republic Act No.8791 also known as the General Banking Act of 2000. 4 Depository Institutions
- 5. Asset/Liability Problem As at 17 February 2014,there were 36 universal and commercial banks, 71 thrift banks 533 rural banks, 40 credit unions 6,267 non-banks with quasi-banking functions, 5 How many banks are there in the Philippines Reference: Chipongian, Lee (12 February 2014). "Total bank resources grow 24% to P10.423 trillion in 2013 – BSP | Manila Bulletin | Latest Breaking News | News Philippines". Manila Bulletin. Retrieved 14 April 2014.
- 6. Asset/Liability Problem A depository institution seeks to earn a positive spread between the assets in which it invests (loans and securities) and the cost of its funds (deposits and other sources). This spread is referred to as spread income or margin. 6 Asset/Liability Problem of Depository Institutions
- 7. Asset/Liability Problem Spread Income Types of Risk Credit Risk Regulatory Risk Interest Rate Risk/Funding Risk 7 Funding Risks
- 8. Liquidity Concerns Ways to accommodate withdrawals and loan demand Attract additional deposits Use currently-owned securities as collateral for loans from other institutions Raise short-term funds in the money market Sell currently-owned securities 8 Liquidity Concerns
- 9. Liquidity Concerns Depository Institutions are heavily regulated. The risks that regulators are concerned about depository institutions can be classified as follows: Credit Risk Settlement Risk Market Risk (value-at-risk) Liquidity Risk Operational Risk Legal Risk 9 Concerns of Regulators
- 10. Depository Institutions Commercial Banks Savings and Loan Associations Savings Banks Credit Unions 10 Depository Institutions
- 11. Depository Institutions Commercial Banks are institutions which individuals or firms may consider as sources for short-term financing. This is an institution that accepts or creates demand deposits subject to withdrawal by check. This is a bank that provides checking account, savings account and money market account and that accepts time deposits. 11 Commercial Banks
- 12. Depository Institutions A commercial bank shall have, in addition to the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking such as accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment 12 Powers of a Commercial Bank (PDIC) Commercial Banks Activities
- 13. Depository InstitutionsA commercial bank may, subject to the conditions stated in the succeeding paragraphs, invest only in the equities of allied enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial. Except as the Monetary Board may otherwise prescribe: The total investment in equities of allied enterprises shall not exceed thirty-five percent (35%) of the net worth of the bark; and The equity investment in any one enterprise shall not exceed twenty-five percent (25%) of tile net worth of the bank. The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investment. 13 Equity Investments of a Commercial Bank.
- 14. Depository Institutions A commercial bank may own up to one hundred percent (100%) of the equity of a thrift bank or a rural bank. Where the equity investment of a commercial bank is in other financial allied enterprises, including another commercial bank, such investment shall remain a minority holding in that enterprise Equity Investments of a Commercial Bank in Non- Financial Allied Enterprises. - A commercial bank may own up to one hundred percent (100%) of the equity in a non-financial allied enterprise. 14 Equity Investments of a Commercial Bank in Financial Allied Enterprises.
- 15. Commercial Banks 15 Commercial Banks in the Philippines
- 16. 16 Top 10 Best Bank in the Philippines as to Assets
- 17. 17 Top 10 Best Bank in the Philippines as to Deposits
- 18. 18 10 Best Bank in the Philippines as to Loans
- 19. 19 Top 10 Best Bank in the Philippines as to Capital
- 20. Top 30 Largest Banks 2020 Top 3 Best Bank in the Philippines 1. BDO (Banco de Oro) 2. Metrobank 3. BPI (Bank of the Philippine Islands)
- 21. Depository Institutions Hereinafter called the association shall include any corporation engaged in the business for accumulating the savings of its members or stockholders, and using such accumulations, together with its capital in the case of a stock corporation, for loans and/or for investment in the securities of productive enterprises or in securities of the Government, or any of its political subdivisions, instrumentalities or corporations: Provided, That they shall be primarily engaged in servicing the needs of households by providing personal finance and long- term financing for home building and development. 21 Savings and Loan Association
- 22. Depository Institutions A savings and loan association shall be organized either as a stock or non-stock corporation 22 Organization of savings and loan association
- 23. The Monetary Board shall fix the minimum paid-up capital of a savings and loan association organized as a stock corporation in such amount as said Board may consider necessary for the safe and sound operation of such association: In this connection, the paid-up capital be less than one hundred thousand pesos and at least 70% of the voting stock of a savings and loan association which may be established after the approval of this Act shall be owned by citizens of the Philippines, except where a new association is established as a result of the consolidation of existing associations in which there are foreign- owned voting stocks at the time of consolidation. 23
- 24. Regarding a savings and loan association organized as a non-stock corporation shall confine its membership to a well-defined group of persons and shall not transact business with the general public. It shall accept deposits from, and grant loans to, only its member-depositors. 24
- 25. Depository Institutions any corporation organized for the purpose of accumulating the small savings of depositors and investing them, together with its capital, in bonds or in loans secured by bonds, real estate mortgage, and other forms of security, as hereinafter provided, or in loans for personal finance and long-term financing for home building and home development. 25 Savings Bank
- 26. Depository Institutions 1. Malayan Bank 2. Banco Filipino 3. PsBank 26 List of Savings Bank in the Philippines
- 27. Depository Institutions Credit Unions(CUs) are internationally understood as Thrift, Savings, and Loans Associations.Credit unions are the smallest of the depository institutions. Member-owned financial co-operative. These institutions are created and operated by its members and profits are shared amongst the owners. As soon as you deposit funds into a credit union account, you become a partial owner and participate in the union's profitability. Credit unions are formed by large corporations and organizations for their employees and members. 27 Credit Unions
- 28. Depository Institutions 1. ACDI Credit Cooperative 2. MSU IIT National Multi Purpose Cooperative 3. Advance Credit Corporation 4. Global Resource Credit Co. Inc. 5. A+ Credit Corporation 6. Agricultural Service Credit 28 List of Credit Union in the Philippines
- 29. THRIFT BANKING SYSTEM Thrift banking system is composed of savings and mortgage banks, private development banks, stock savings and loan associations and microfinance thrift banks. Thrift banks are engaged in accumulating savings of depositors and investing them. They also provide short-term working capital and medium- and long-term financing to businesses engaged in agriculture, services, industry and housing, and diversified financial and allied services, and to their chosen markets and constituencies, especially small- and medium- enterprises and individuals.
- 30. Depository Institutions 30 List of Thrift Banks
- 31. RURAL & COOPERATIVE BANKS Rural and cooperative banks are the more popular type of banks in the rural communities. Their role is to promote and expand the rural economy in an orderly and effective manner by providing the people in the rural communities with basic financial services. Rural and cooperative banks help farmers through the stages of production, from buying seedlings to marketing of their produce. Rural banks and cooperative banks are differentiated from each other by ownership. While rural banks are privately owned and managed, cooperative banks are organized/owned by cooperatives or federation of cooperatives.
Editor's Notes
- With the funds raised through deposits and other funding sources, depository institutions make direct loans to various entities And also invest in securities. In this chapter, we look at depository institutions – the nature of their liabilities where they invest their funds and how they are regulated.
- Traditionally thrift banks were not permitted to accept deposits transferable by checks (negotiable) through checking accounts. Instead, they obtained funds primarily by tapping the savings of households. Since the early 1980’s, however, thrifts offer negotiable deposits entirely equivalent to ckecking accounts, although they bear a different name (NOW accounts shares drafts).
- On top of regular banking services offered by universal, commercial, thrift and rural banks, there are savings and loans association which are mainly based in communities and among retirees in the armed forces and the police organization and other employees of the government of the Philippines. Prominent of these small savings services is the Armed Forces of the Philippines Savings and Loans Association, Inc. or AFSLAI which is exclusive to active servicemen and retirees of the armed forces in the Philippines. Powers of a universal bank A universal bank has the same powers as a commercial bank with the following additional powers: the powers of an investment house as provided in existing laws and the power to invest in non-allied enterprises. Powers of a commercial bank In addition to having the powers of a thrift bank, a commercial bank has the power to accept drafts and issue letters of credit; discount and negotiate promissory notes, drafts, bills of exchange, and other evidences of debt; accept or create demand deposits; receive other types of deposits and deposit substitutes; buy and sell foreign exchange and gold or silver bullion; acquire marketable bonds and other debt securities; and extend credit. Powers of a thrift bank A thrift bank has the power to accept savings and time deposits, act as a correspondent with other financial institutions and as a collection agent for government entities, issue mortgages, engage in real estate transactions and extend credit. In addition, thrift banks may also maintain checking accounts, act as a depository for government entities and local government units and engage in quasi-banking and money market operations subject to the approval of the Bangko Sentral. As per the banker Derrick Low, thrift banks are generally smaller in scale than universal and commercial banks. Powers of cooperative and rural banks Rural and cooperative banks are the more popular type of banks in the rural communities. Their role is to promote and expand the rural economy in an orderly and effective manner by providing the people in the rural communities with basic financial services. Rural and cooperative banks help farmers through the stages of production, from buying seedlings to marketing of their produce. Rural banks and cooperative banks are differentiated from each other by ownership. While rural banks are privately owned and managed, cooperative banks are organized/owned by cooperatives or federation of cooperatives. A rural bank has the power to provide adequate credit facilities to farmers and merchants or to cooperatives of such farmers and merchants and, in general, to the people of the rural communities of which the rural bank operates in.
- Before we examine the specific institution, we begin with an overview of the asset/liability problem faced by the manager of a depository institution. The spread income allows the institutions to meet operating expenses and earn a fair profit on its capital.
- In generating spread income a depository institution faces several risks. Credit risks- refers to the risks that a borrower will default on a loan obligation to the depository institutions or the issuer of a security that the depository institution hold will default on its obligation. Regulatory Risk – is the risk that the regulators will change the rules and affect the earnings of he institutions. Funding Risk – Managers of a depository institutions with particular expectations about the future direction of interest rates will seek to benefit from these expectations. >Those who expect interest rates to rise may pursue a policy to borrow funds for a long time horizon (borrow long) and lend funds for a short time horizon (lend short). >If the interest rates are expected to drop, managers may elect to borrow short and lend long. No managers of a depository institutions can accurately forecast interest rates moves so consistently that the institutions can benefit in the long run. The assets/liability committee of D.I. assumes responsibility for monitoring the interest rate risk exposure.
- Besides facing credit risks and interest rate risk , a D.I. must be prepared to satisfy the funds by depositors and to provide loans to customers. A DI can accommodate withdrawal and loan demand in several ways…..
- Credit Risk – the risk that the obligator of a financial instrument held by a financial institutions will fail to fulfill its obligation on the due date or at any time thereafter. Settlement Risk – the risk when there is a settlement of a trade or obligation, the transfer fails to take place as expected. (Counterparty Risk - the risk that a counterparty in a trade or obligation, the transfer fails to take place as expected. The trade could involve the cash settlement of a contract or the physical delivery of some asset. Liquidity Risk – the context of settlement risk means that the counterparty can eventually meet its obligation but not in the due date) Market Risk- is the risk to a financial institutions economic well being that results from an adverse movement in the market price of an asset (debt obligations, equitites, commodities, currencies) it owns or the level of volatility of market prices. VALUE AT RISK – measure indorsed by bank regulators to measure a potential FI’s financial position associated with adverse price movement of a given probability over a specified time horizon Liquidity Risk – two forms a. market liquidity risk – risk that FI is unable to transact in a financial instrument at a price near its market value. B. funding liquidity risk – risk that FI will be unable to obtain funding to obtain cash flow necessary to satisfy its obligation. Operational Risk – the risk of loss resulting from inadequate or failed internal process, people and systems or from external events. Legal Risk - the risk of loss resulting from failure to comply with laws as well as prudent ethical standards and contractual obligations
- The following are the lists of best banks in the Philippines for 2014. The lists include the best commercial banks as to assets, deposits, capital, and loans. It would be great to have savings and investments with them. If you are still a student and you are looking for the best bank to work for, they are also recommended.
- the following as the best bank of the Philippines to be banking with this 2014 because of impressive growth. The top 3 are always BDO (Banco de Oro), Metrobank, and BPI (Bank of the Philippine Islands). It’s obvious why BDO came up to the rank number 1 because it started the bank operations for the weekends and because every SM mall has BDO. I can say BDO, Metrobank and BPI are also the best banks in terms of investment. Euromoney cited Metrobank as the best bank in the country for the past few years. Let’s see this 2014 if PNB would climb up since it was acquired by Allied Bank in February 2013.
- AFPSLAI stands for Armed Forces of the Philippines Savings and Loan Association, Inc.