Unit-IV-Fin-Institutions PDF

Topic IV. Financial Institutions and Intermediaries 12 Commercial Banking 13 Expanding the Boundaries of Banking 14 Philippine Banking Industry  The Basics of Lesson 12 Commercial Banking In today’s financial servi...

Topic IV. Financial Institutions and Intermediaries 12 Commercial Banking 13 Expanding the Boundaries of Banking 14 Philippine Banking Industry  The Basics of Lesson 12 Commercial Banking In today’s financial services marketplace, a financial institution exists to provide a wide variety of deposit, lending, and investment products to individuals, businesses, or both. The critical difference between the two types of banks is who they provide services to. Commercial banks accept deposits, make loans, safeguard assets, and work with many small and medium-sized businesses and consumers. Investment banks provide services to large corporations and institutional investors. COMMERCIAL BANKS  THE BANK BALANCE SHEET Balance Sheet is the bank’s sources and uses of funds are summarized in this report, which lists an individual’s or firm’s financial position on a particular period of time. Assets are anything of Value that is Owned by Commercial bank. Assets are anything that can be easily and quickly converted into cash. Liabilities is anything that Commerical bank Owes. To need to pay or repay. Anything which owned Somebody Else (the best example is Deposits) Bank Capital is the difference between the value of the bank’s assets and the value of its liabilities. The balance sheet of a commercial bank provides a picture of its functioning. It shows its assets and liabilities on a particular date at the end of one year. The assets are shown on the right- hand side and the liabilities on the left-hand side of the balance sheet.  THE BANK ASSETS Bank Assets is something of value that an individual or firm owns. These are acquired from the funds they receive from depositors, the funds they borrow, the funds they acquire from their shareholders purchasing the bank’s new stock issues and the profits they retain from their operations. Examples of the most important bank assets are: 1. Reserves and Other Cash Assets 2. Securities 3. Loans Receivables 4. Other Assets  THE BANK LIABILITIES AND CAPITAL Bank Liabilities is something that an individual or firm owes, particularly a financial claim on an individual or a firm. The most important bank liabilities are the funds a bank acquired from savers which the bank uses to make investments by buying bonds or to make loans to households and firms. Bank deposits offer households and firms certain advantages over other ways in which they might hold their funds. Main types of deposit accounts are: 1. Demand or Current Account Deposits 2. Non-Demand Deposits 3. Borrowings Bank capital also called shareholders’ equity is the difference between the value of the bank’s assets and the value of its liabilities. ILLUSTRATIVE CASE REQUIRED a. use the entries to construct a balance sheet, with assets on the left side of the BS and Liabilities and bank capital on the right side. b. the bank’s capital is what percentage of its assets?  Basic Operations of a Commercial Bank 1. Management of Bank Assets Strategies in Management of Bank Assets 1. Banks try to find borrower who will pay high interest rates and will most likely settle their loans on time. 2. Banks try to purchase securities with high returns and low risk. 3. Banks manage the liquidity of the assets so that its reserve requirement can be met without incurring huge costs  Basic Operations of a Commercial Bank 2. Management of Bank Liabilities Strategies in Management of Bank Liabilities 1. Banks aggressively set target goals for their asset growth. 2. Banks try to acquire funds (by issuing liabilities) as they were needed. 3. Management of Bank Capital Strategies in Management of Bank Capital 1. Banks manage the amount of capital they held to prevent bank failure and to meet bank capital requirements set by the regulatory authorities.  Basic Operations of a Commercial Bank 4. Management of Bank Risks Types of Bank Risk 1. Liquidity risk – is the possibility that a bank may not be able to meet its cash needs by selling assets or raising funds at a reasonable cost. 2. Credit risk – is the risk that borrowers might default on their loans. 3. Interest-rate risk – banks experience interest-rate risk if changes in market interest rates cause a bank’s profit or its capital to fluctuate. Strategies to Manage Credit Risk 1. Diversification Investors 4. Credit Rationing 2. Credit-Risk Analysis 5. Monitoring and Restrictive Covenant 3. Collateral 6. Long-term Business Relationships Methods to Manage Credit Risk 1. Banks with negative gaps can make more adjustable-rate or floating-rate loans. 2. Banks can also use interest-rate swaps.  Expanding the Lesson 13 Boundaries of Banking The activities of banks have changed dramaticaly during hte past five decades. Between 1960 and 2018, banks 1) increased the amount of funds they raise from time deposits and negotiable certificate of deposits; 2) increased their borrowings from repurchase agreements; reduced their reliance on commercial and industrial loans and on consumer loans; increased their reliance on real estate loans; and expanded into nontraditional lending activities and into activities where their revenue si generated from fees rather than from interest.  Off-Balance Sheet Activities They do not affect the bank’s balance sheet because they do not increase either the bank’s assets or its liabilities. 1. Loan commitments a. Upfront fee when the commitment is written. b. Non-Usage fee on the unused portion of the loan. 2. Standby letters of credit 3. Loan sales 4. Trading activities  INVESTMENT BANKS Investment Banks offer financial services, dealing with larger and more complicated financial deals than retail banks. It also assist in the initial sale of securities in the primary market, securities brokers and dealers assist in the trading of securities in the secondary markets. 2 Distinct Roles of Investment Banks 1. Corporate advising 2. Brokerage division 2 Typical divisions within Investment Banks 1. Industry coverage groups 2. Financial products groups  INVESTMENT BANKS Types of firms engaged in Investment Banks 1. Bulge Bracket Banks Services offered: (a) Trading, all types of financing , asset management services (b) Equity research and issuance (c) M & A services 2. Middle-Market Banks Services offered: (a) Equity and debt capital market services (b) Financing and asset manangement services (c) M & A and restructuring deals 3. Boutique Banks Divisions: (a) Regional Boutique Banks (b) Elite Boutique Banks  INVESTMENT BANKS Areas of Business of Invesment Banks A. Brokerage 1. Proprietary trading 2. Acting as a broker 3. Research analytics B. Corporate Advising 1. Bringing companies to market. 2. Bringing companies together. 3. Structuring products.  INVESTMENT BANKS How investment banks make money: They receive fees in return for providing advice, underwriting services, loans and guarantees, brokerage services and research analysis. They also receive dividends from investments they hold, interest from loans and charge a margin on financial transactions they facilitate. How investment banks lose money: The advising division may end up holding unwanted shares if the take-up of an IPO is lower than expected. The trading division of the bank may make the wrong decisions and end up losing the bank money.  Philippine Banking Lesson 14 Industry The outlook on the banking system remains positive given relatively 1 robust macroeconomic performance, 2. adequate liquidity, as well as 3. rising capital buffers and opportunities presented by the growing economy and technological innovations.  An update to Philippine Banking Industry BSP Financial Soundness Indicators 1. Capital Adequacy 2. Asset Quality, Earnings 3. Profitability, liquidity, and sensitivity to market risk Capital Adequacy Ratio: Capital adequacy or availability ultimately determines the robustness of financial institutions to withstand shocks to their balance sheets. 1. Net NPL to average capital ratio 2. Capital to asset ratio 3. NPL ratio 4. NPL coverage ratio 5. Loans by economic sectors Foreign Currency Deposit Unit handles the foreign currency transactions of the bank. Profitability is influenced by global market conditions, primarily on policy actions by advanced economies affecting global interest rates. Nonetheless, core earnings have been steady and relatively stable Identification. Write your answers on the space provided for. 1. These activities do not increase either the bank’s assets or its liabilities. ________________________ 2. Bank’s sources and uses of funds are summarized in this report. ________________________ 3. The risk that borrowers might default on their loans. ________________ 4. It is something that an individual or firm owes, particularly a financial claim on an individual or a firm. _______________________ 5. It determines the robustness of financial institutions to withstand shocks to their balance sheets. ___________________________ 6. Also called shareholders’ equity. ________________________________ 7. They offer financial services, dealing with larger and more complicated financial deals than retail banks. ________________________________ 8. FBBs is an acronym for _______________________________________ 9. BSP is an acronym for _______________________________________ 10. This risk cause a bank’s profit or its capital to fluctuate. _______________ Why is the banking sector considered a key anchor of the country’s growing economy?