Beruflich Dokumente
Kultur Dokumente
-- Banking
Intermediation
The process of transforming a secondary security into a primary security by a financial institution. It relates to financial investments by savors
cash Savors Financial Institutions secondary securities primary securities cash Borrowers
Dis-intermediation
The process of reversing or rejecting the transfer of funds into the financial institutions. This refers to the low deposit interest rates or high operating costs charge to customers.
Illustration of Disintermediation
The removing of Middlemen The dis- or re-channeling funds flow from the FI Changing Role to the Servicing of Markets
Security Investments Mutual Funds Insurance
Types of Intermediation
1. 2. 3. 4. Liquidity Maturity Denomination Risk
By Business Operations: Thrift type Contractual type Investment type Other type
Non-Banks:
Deposit-taking Company, Savings and Loan, Home Loans, Building Society, Credit Unions
Pension Funds:
Mandatory Providence Funds Retirement Funds/Pension Funds
Solution
Information Asymmetry--Moral Hazard: Information Symmetry and Full Disclosure Regulation Reform Financial Intermediation Financial Risks: Risk Management and Control Burden Administration
Solutions
Financial Innovations: Enhance Internal Control-Planning, Control, and Administration Tighten Asset Management and Quality Modernized Operation System Strengthen Regulation and Monitoring
Banking Business
Banking Ordinance - section 2
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; B Paying or collecting cheques drawn by or paid in by customers.
Process of Money Creation: (Minimum Deposit Reserves equal to 20%) 1. Deposits $1,000 into the Banking System
bank will maintain deposit reserves $200 At the same time, $800 will be lent out Borrower will immediately deposit the $800 back to the bank The Bank will then have $1,800 in its Deposit account
C. The process repeats again until the reserves requirement equal to the original deposits amount. The Multiple Effect appears. D = deposits; r= reserves requirement MC=Money Creation MC = D/r)$1,000 x (1/0.2) = $5,000 .. (M1) Minimum Reserves is $5,000 x 0.2 =$1,000
The multiplier is 5 Money creation equals $4,000 r = 0.2; Multiplier = 5 r = 0.1; Multiplier = 10 r = 0.25; Multiplier = 4 r = 0.08; Multiplier = 12.5
In Reality, the Multiplier may not be exactly the same (as 5 on the reserves requirement is 20%). M1 is always larger than original deposits. Monetary Policy can increase or decrease the reserves requirement to control the money supply.
HK Banking System
3 tier Banking System: (Structure): 1981: Licensed Banks Licensed Deposit-taking Companies Registered DTC 1989: Licensed Banks Registered Licensed Banks Deposit-taking Companies
As at end of
1995 1996 1997 1998 1999 2000 2001
Funds Flow-out:
Loans and Advances Investments Capital Expenditures
Liabilities: - Core Deposits - Certificate Deposits - Borrowings (Short- and Long-term) Equity Capital - Paid-in Capital - Retained Earnings (Reserves)
Examples of Financial Innovations: Negotiable Certificate Deposits ZERO-Coupon Securities Financial Futures Negotiable Order of Withdrawal (NOW a/c) Money Market Deposit Account (MMDA) Euro-Dollar Deposits Securitization
Banking Regulations
Benefits:
Restricted Competition Government Support
The subsidiary banks assets will be increase by $50 billion while meeting the regulatory capital requirement of 20%. Increase Injected Bank Equity Funds in = Assets Required Reserves Ratio
Bank Performance
Profitability Analysis
Measurement of Profitability
Net Interest Income (NII) = Interest Income Interest Expenses Net Interest Margin (NIM) = Interest Income Interest Expenses Total Earning Assets Spread = (Average Interest Income Rate Average Interest Expense Rate)
Pricing Mix: Fixed Rate vs Floating Rate Non-performance Assets Tax Exempted Investments
Asset/Liability Management
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 Determine the Amount, Rate Differential and the Expected Earnings of all the items.
Rate Differentials (Annual) On RSA and RSL (8% - 6%) On FRA and FRL (11% - 8.5%) On GAP and FRL (8,5% - 8%) On NRA and FRL (8.5% - 0%)
Profitability Analysis RSA financed by RSL ($150 @ 2%) FRA financed by FRL ($155 @ 1.5%) GAP financed by FRL ($20 @ 0.5%) NRA financed by FRL ($10 @ 8.5%) NRA financed by Equity ($20 @ --) Total Pre-tax Profits
Liquidity Analysis
Nature of Liquidity
1. The ability to maintain sufficient funds to fulfill the regulatory requirement 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.
Concepts of Liquidity
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 -- Store Liquidity Broad Concept: the ability to include the ease with which the bank can obtain cash by borrowing from external sources -Purchasing Liquidity
Causes of Liquidity
1. Liability-side Causes: Depositors withdraw cash from their accounts or additional deposits do not come as expected 2. Asset-side Causes: Lending commitments or Matured Loans do not pay on time.
2. Dynamic Measurement: 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.
Liq.Bal Deposits + $140 $50 $75 +Liq Liq Loans Net Change + $100 $80 $??? Liq +Liq
2. Purchase Liquidity: a. Maintain Diversified Borrowing Sources: (I) Inter-bank Loans (ii) Other Borrowings (iii) Discount Windows (LAF) (iv) REPO (v) NCD b. Increase Deposits c. Seek Deposit Sources (Euro$ Deposit)
Lending Analysis
Nature of Lending
Lending is the single and largest categories for banking Lending provides the primary source of revenue for banking Banking business is to grant loans to allocate capital Lending classes: Commercial and Industry, Real Estate (Mortgage). Consumer, and others (leasing, agriculture, govt, etc)
Objective Analysis
Credit Score Z Score
Credit Score Altmans Z Score Z = 1.2X1 +1.4X2 + 3.3X3 + 0.6X4 + 1.0X5 X1 = Working Capital / Total Assets X2 =Retained Earnings / Total Assets] X3 = EBIT / Total Assets X4 = M. Value of Equity / B. Value of Total Debts X5 = Sales / Total Assets Z Score Probability of Failure 1.8 or less Very High 1.81 2.99 Not Sure 3.0 or Above Unlikely
Loan Administration
Centralized Approval Decentralized Approval
Loan Authorization
Personnel Authorized Line of Credit
Loan Monitoring
Capital Analysis
Role of Capital
To Support Operating Asset Commitments To Promote Depositors Confidence To Improve Growth - Loans and Deposits - Earnings To Prevent Morale Hazard
Composition of Capital
Traditional Concept: (GAAP Concept) 1. Contributed Capital: -- Core and Supplementary Capital 2. Book Value Regulatory Concept: (Regulatory Accounting Principles) 1. Contributed Capital plus Debt Capital 2. Market Value
Capital Adequacy
Regulatory Requirement: (Bank of International Settlement Requirement) Capital / Risk Adjusted Assets > 8% Core Capital / Risk Adjusted Assets > 4% Internal Requirement: -Add a Premium onto the BIS requirement -Currently Average Ratio is 20%
Continued
For Bank Holding Company Institutes CAMEL + BOPEC Bank Subsidiary Other Subsidiaries Parent Company Earnings (Consolidated) Capital (Consolidated)