01_BANKING REGULATIONS_PART2.pptx

Financial Statement Analysis for Banks Why do banks exist? In an ideal world: Those who have excess funds Those who need funds Capital allocation process! However… Information Asymmetry Availability of information is not the same for transacting parties. This can lead to:  Adverse Selection  Mora...

Financial Statement Analysis for Banks Why do banks exist? In an ideal world: Those who have excess funds Those who need funds Capital allocation process! However… Information Asymmetry Availability of information is not the same for transacting parties. This can lead to:  Adverse Selection  Moral Hazard Adverse selection  Situation: undesirable results occur because two parties in the transaction have asymmetric information (before the transaction)  In Business: Managers of the business know the potential returns and risk of the investments; investors (shareholders) do not.  In Lending: Borrowers know their ability to pay a loan (whether they can pay the proposed amount or not); Lenders do not know them. Solutions to adverse selection  Information Free collection. rider problem  Government F/S)  Screening required disclosures (annual report, Moral Hazard  Situation: One party takes an excessive amount of risk or reckless behavior because it knows another will bear the burden of such. (this happens after the transaction)  In Business: Investors (shareholders) prefer to take in risky project upon borrowing funds from lenders (bondholders).  In Lending: Borrowers gamble away the money lent by lenders. Solutions to moral hazard  Compensating  Restrictive balance. covenants. Why do banks exist? In the real world: Capital allocation process! Those who have excess funds Needs an intermediary Those who need funds Banks Takes deposits from parties with excess funds. Gives loans to parties who need funds. Creates money. How do banks create money Through the fractional reserve banking system… For example: Reserve Requirement of 10%; Initial deposit is P100. Bank A B/S Res. 10 Loan R 90 Depo 100 How do banks create money Through the fractional reserve banking system… For example: Reserve Requirement of 10%; Initial deposit is P100. Bank B B/S Bank A B/S Res. 10 Loan R 90 Depo 100 Res Loan R 81 9 Depo 90 How do banks create money Through the fractional reserve banking system… For example: Reserve Requirement of 10%; Initial deposit is P100. Res. 10 Loan R 90 Bank C B/S Bank B B/S Bank A B/S Depo 100 Res 9 Loan R 81 Depo 90 Res 8.1 Loan R 72.9 Depo 81 How do banks create money Through the fractional reserve banking system… For example: Reserve Requirement of 10%; Initial deposit is P100. Res. 10 Loan R 90 Bank C B/S Bank B B/S Bank A B/S Depo 100 Res 9 Loan R 81 Depo 90 Res 8.1 Loan R 72.9 Depo 81 … Will this ever end? If so, when?... Multiplier = 1 Res. Req. Ratio Multiplier = 1 10% Multiplier = 10 x Bank Financial Statement Analysis Common ratios for banks. Return on Equity Efficiency Ratio Nonperformin g loans Ratio Net income Average Equity Non-interest Expense Interest Revenue Nonperforming loans Total loans Loan to De- posit Ratio Capital Adequacy Ratio Total loans Total Deposits Capital Risk-weighted assets Calculate the following: 1. Return on Equity 2. Efficiency Ratio 3. NPL Ratio 4. Loan to Deposit Ratio Return on Calculate the following: 1. Return on Equity. 2. Efficiency Ratio. 3. NPL ratio. 4. Loan to deposit ratio. Equity Net Income Average Equity P560,000 (P17M +P19M)/2 3.11% Calculate the following: 1. Return on Equity. 2. Efficiency Ratio. 3. NPL ratio. 4. Loan to deposit ratio. Efficiency Ratio Non-interest Expense Interest Revenue P300,000 P1,800,000 16.67% Calculate the following: 1. Return on Equity. 2. Efficiency Ratio. 3. NPL ratio. 4. Loan to deposit ratio. Nonperformin g loans Ratio Nonperforming Loans Total loans P10,000,000 P123,000,000 8.13% Loan to De- posit Calculate the following: 1. Return on Equity 2. Efficiency Ratio 3. NPL Ratio 4. Loan to deposit Ratio Ratio. Total Loans Total Deposits P123,000,000 P127,000,000 96.85% Capital Adequacy Ratio  measures a bank's available capital expressed as a percentage of a bank's risk-weighted credit exposures.  Purpose: Ass ets to protect depositors Deposit Liabilities Debt & Equity Capital Capital Adequacy Ratio Capital Risk-weighted assets Risk weighted assets: Cash P 1M Due from BSP 25M x0 0 x0 0 LR – Performing 113M x.50 56.5 LR – Nonperforming x 1.0 10.0 Property, Plant, Eq Risk Weighted assets 10M 3M x 1.0 3.0 69.5 Capital Adequacy Ratio Capital Risk-weighted assets P19,000,000 Risk-weighted P69,500,000 27.34 % Basel Accords  Basel I Risk-based capital  Basel II Internal risk based approach  Basel III Capital conservation buffer BSP Circular no. 781 s.2013 Capital Min. Ratio To RWA Debt Tier 2 Preferred Shares Add’l Tier 1 Common Equity C/E Tier 1 10% 7.5% 6% + 2.5% Bank Regulation  Government Policy: Promote Maintain  a Stable Efficient Banking system competitiv e dynamic responsive Statutes and Regulations: General Bankin g Law Thrift Bank Act Rural Bank Act Phil. Coop Code Charter of Al Amanah Manual of Regulation for Banks (MORB) Bank Regulation  BSP  – via monetary board: Oversight and examination Philippine Deposit Insurance Corporation (PDIC)  Maximum coverage: P500,000 per deposit per bank Examination: every 12 mos.  Challenges  Know-Your-Customer (KYC) requirements  Data Privacy Act Bank Regulation  Consumer Protection Standards:  Disclosure  and Transparency  Protection of Client Anticipated informationfuture changes in Regulatory and Legal Policy  Alignment with international standards  Strengthening of anti money laundering capabilities and risk  Fair treatment  Effective Recourse  Financial Education  Financial inclusion  Addressing risk and encouraging innovation in technology Bank Regulation  Reserve  Requirement Ratio 12% Enforcing Banking Laws and Regulations  Fine: P50,000 – P100,000  Imprisonment: 1 – 5 years  Fine: P50,000 – P200,000  Imprisonment: up – 5 years  Fine: P50,000 – P200,000  Imprisonment: 2 – 10 years Refuse to file Refuse examination Willful misleading misstatements Willful violation of banking laws. Bank Regulation  Administrative sanctions  Fine: maximum of P30,000 per day for each violation  Suspension of rediscounting and access to BSP credit  Suspension of lending, forex operations and authority to accept new deposits and make new investments  Suspension of interbank clearing  Revocation of license Bank Regulation   Common enforcement issues  Cybersecurity  Money laundering Government takeovers  Conservator:   take charge of assets and liabilities Manage and reorganize    Collect monies due  Restore viability Receivership and liquidator: PDIC Capital Adequacy Requirements  Uni Bank of 100 branches P20B  ComBank of 100 branches P15B