Ekz Banki 1

1. History and origin of multinational banks.
2. Branches and subsidiary banks of multinational banks.
3. Features of central banks activities.
4. The European Central Bank and the European system of central banks.
5. Risks of international banking.
6. Features of asset /liability in international banking.
7. The activity of the security department in multinational banks. Internal
banking control.
8. Features of bank frauds prevention.
9. Financial management in multinational banks.
10.Types of deposits and their features in different countries.
11.Savings institutions of foreign countries and the features of their activities.
12.Methods of interest rate risk assessment.
13.Interest rate risk management.
14.Types of international banking lending activity.
15.International syndicated loans.
16.International factoring and its advantages.
17.International forfeiting.
18.International leasing and its features.
19.Project financing.
20.Asset securitization and credit derivatives.
21.CRESCO and CREVCO committees in US banks. Risk management groups.
22.Credit risk management methods.
23.Credit rating techniques.
24.International credit ratings and rating agencies.
25.Features of dealing with problem loans in multinational banks.
26.Types of FX transactions.
27.Types of FX risk.
28.Methods of FX risk management.
29.Types of international settlements.
30.The struggle of international banks against money laundering.
31.Export-import banks.
32.Marketing in banking.
33.New requirements for banking competitiveness in Europe.
34.Features of banking development in developed countries.
35.Features of the US CAMELS system.
36.The U.S. banking system.
37.The Federal Reserve System.
38.The UK banking system.
39.The banking system of France.
40.The banking system of Germany.
41.The banking system of Japan.
42.The banking system of China.
43.Islamic banking.
44.International financial institutions.
45.Features of bankruptcies in banking.
46.International banking crises.
47.Features of the rehabilitation of problem banks.
48.Directions for reforming the banking industry after the crisis of 2008.
49.Problems of prudential supervision.
50.Deposit insurance and regulation of international banking.
1. History and origin of multinational banks.
The terms ‘multinational banking’ and ‘international banking’ are often used
interchangeably, particularly outside the MNB literature. Similarly, the descriptions
‘multinational bank’ and ‘international bank’ are often applied indiscriminately, or
at least casually. Although clear delineation is becoming increasingly difficult, it is
usual in the literature to find a distinction between ‘multinational’ and
‘international’; these phrases have more specific connotations than in everyday
idiom.
The earliest known examples of ‘international’ or, perhaps more appropriately,
‘inter-civilization’ banking, consisted of letters of credit and bills of exchange issued
across sovereign boundaries. These date back four thousand years. ‘Multinational’
or perhaps ‘multi-sovereign’ banking, however, is a much more recent development;
in the fifteenth century, the great bankers of Florence established subsidiaries or
branches in foreign jurisdictions (ibid.). But leaving aside these distant antecedents
and focusing on the modern era, the evolution of multinational banking is
characterized by two distinct waves.
The first wave of modern multinational banking accompanied and even
facilitated the rise of colonialism in the nineteenth century. So, in some ways the
patterns of development of multinational banking mirror those of the colonial era.
Given this symbiosis, it is not surprising that banks based in Britain, the colonial
superpower, dominated this wave of multinational banking. The first British MNBs
opened branches in the 1830s in the Australian, Caribbean and North American
colonies. These were followed two decades later by the establishment of branches
in Latin America, South Africa, British India and Asia (Jones, 1992, p. xvi). These
early MNBs financed much of the economic development in the British colonies and
are often labelled ‘British overseas banks’ or ‘Anglo-foreign banks’; they were
headquartered in London, then the global financial capital, but only provided
banking services outside the United Kingdom. British MNBs also expanded into the
Middle East and continental Europe.
The other colonial powers also engaged in multinational banking on a smaller scale.
In the decades following the 1870s, Belgian, French and German MNBs were
particularly active, opening branches in their own colonies, Latin America and even
in China. They also established a presence in London and elsewhere in Europe. The
European MNBs differed in profile from their early British counterparts, however,
typically conducting banking businesses in both home and foreign markets. The
decades of war and depression following 1914 effectively ended the first wave.
However, another set of factors was to culminate in the beginning of the second era
of dynamic growth for multinational banking in the 1960s. Huertas (1990, p. 261)
groups the catalysts for this second wave of multinational banking under three broad
headings: macroeconomic, regulatory and microeconomic.
2. Branches and subsidiary banks of multinational banks.
Bank Branches
A foreign bank branch is a branch located in a different country from the country of
incorporation of the parent bank, without the branch itself having separate
incorporation. As such, the branch is integral to the parent and is not separately
capitalized. The branch will carry on banking business, subject to the laws of the
host nation. The restrictions imposed on foreign branches are such that they usually
have the ability to offer a nearly comprehensive range of banking services, with
restrictions on access to the retail market being usual. As the branch is not legally
separate from the parent, it has access to the full support, credit rating, and capital
base of the parent.
Bank Subsidiaries
A bank subsidiary is a separately incorporated bank that is controlled by a parent
located in another country. Such subsidiaries are generally wholly owned, as this
reduces potential problems associated with dissenting minority shareholders. The
host nation regulations imposed on foreign bank subsidiaries often determine
whether this organizational structure is chosen. Generally, as discussed above,
multinational banks prefer the bank branch structure to the bank subsidiary structure.
However, in some cases, the host nation regulator will not permit foreign bank
branches to be established, mainly due to concerns regarding prudential regulation.
3. Features of central banks activities.
1. Issue of Currency:
The central bank is given the sole monopoly of issuing currency in order to secure
control over volume of currency and credit. These notes circulate throughout the
country as legal tender money. It has to keep a reserve in the form of gold and foreign
securities as per statutory rules against the notes issued by it.
2. Banker to Government:
Central bank functions as a banker to the government—both central and state
governments. It carries out all banking business of the government. Government
keeps their cash balances in the current account with the central bank. Similarly,
central bank accepts receipts and makes payment on behalf of the governments.
3. Banker’s Bank and Supervisor:
There are usually hundreds of banks in a country. There should be some agency to
regulate and supervise their proper functioning. This duty is discharged by the
central bank.
4. Controller of Credit and Money Supply:
Central bank controls credit and money supply through its monetary policy which
consists of two parts—currency and credit. Central bank has monopoly of issuing
notes (except one-rupee notes, one-rupee coins and the small coins issued by the
government) and thereby can control the volume of currency.
5. Exchange Control:
Another duty of a central bank is to see that the external value of currency is
maintained.
6. Lender of Last Resort:
When commercial banks have exhausted all resources to supplement their funds at
times of liquidity crisis, they approach central bank as a last resort. As lender of last
resort, central bank guarantees solvency and provides financial accommodation to
commercial banks (i) by rediscounting their eligible securities and bills of exchange
and (ii) by providing loans against their securities.
7. Custodian of Foreign Exchange or Balances:
It has been mentioned above that a central bank is the custodian of foreign exchange
reserves and nation’s gold. It keeps a close watch on external value of its currency
and undertakes exchange management control. All the foreign currency received by
the citizens has to be deposited with the central bank; and if citizens want to make
payment in foreign currency, they have to apply to the central bank. Central bank
also keeps gold and bullion reserves.
8. Clearing House Function:
Banks receive cheques drawn on the other banks from their customers which they
have to realise. Similarly, cheques on a particular bank are drawn and passed into
the hands of other banks which have to realise them from the drawee banks.
Independent and separate realisation to each cheque would take a lot of time and,
therefore, central bank provides clearing facilities, i.e., facilities for banks to come
together every day and set off their chequing claims.
9. Collection and Publication of Data:
It has also been entrusted with the task of collection and compilation of statistical
information relating to banking and other financial sectors of the economy.
4. The European Central Bank and the European system of Central banks.
The ESCB is not the monetary authority of the eurozone, because not all EU
member states have joined the euro. That role is performed by the Eurosystem,
which includes the national central banks of the 19 member states that have adopted
the euro. The ESCB's objective is price stability throughout the European Union.
Secondarily, the ESCB's goal is to improve monetary and financial cooperation
between the Eurosystem and member states outside the eurozone.
The ECB (since 01.01.1999) is responsible for conducting monetary policy for the
euro area.
The objective of the ESCB is to maintain price stability (Maastricht Treaty, Article
2: to promote economic and social progress … through the establishment of
economic and monetary union, ultimately including a single currency).
Tasks of the ESCB (Article 127):
 to define and implement the monetary policy of the Union;
 to conduct foreign-exchange operations;
 to hold and manage the official foreign reserves of the Member States (central
banks must transfer reserves for a total amount equivalent to ;
 to promote the smooth operation of payment systems.
Additional functions of the ESCB:
 issue of banknotes and coins;
 cooperation in the field of banking supervision (code of conducts and
recommendations);
 advisory functions on money circulation, payment means and systems,
statistics etc (for the Council of Europe, governments);
 collecting statistical data.
The ECB carries out specific tasks in the areas of banking supervision, banknotes,
statistics, macroprudential policy and financial stability of the financial system
within the EU and each participating Member State as well as international and
European cooperation. It is responsible for the prudential supervision of credit
institutions located in the euro area and participating non-euro area Member States.
The Governing Council of the ECB is the main decision-making body of the ECB.
It formulates the monetary policy of the euro area and adopts the guidelines and
takes the decisions necessary to ensure the performance of the tasks entrusted to the
ECB and the Eurosystem. It consists of six Executive Board members and the
governors of the central banks of 19 EU Member States that have adopted the euro.
The Executive Board of the ECB is an operational body of the ECB and the
Eurosystem which implements the monetary policy of the euro area in accordance
with the decisions of the Governing Council and manages day-to-day business of
the ECB. It consists of the ECB's President, Vice-President and four other members.
The General Council of the ECB has been established as the third decision-making
body of the ECB. It is a transitional body and will continue to exist until all EU
Member States adopt the euro, at which point it will be dissolved. It is composed of
the President and the Vice-President of the ECB and the governors of all 28 EU
national central banks, including the Governor of the CNB.
5. Risks of international banking.
Risk means “the possibility that a loss will occur”.
1. Interest rate risk - the exposure of a bank's financial condition to adverse
movements in interest rates (arises due daily interest rates fluctuations). A change in
overall interest rates will reduce the value of a bond or other fixed-rate investment.
When interest rate is high, price of bond is low.
2. Credit risk - the possibility of losing money due to the inability, unwillingness,
or nontimeliness of a counterpart to honor a financial obligation (e.g. Failure to make
payments). Basel I (Basel Accord) develops a uniform capital requirement for
capital risk. Basel II includes more risk-sensitive measures into capital requirements
of banks. Basel III prescribes measures for banks to limit counterparty credit risk.
3. Liquidity risks. Liquidity is the ability of a firm, company, or even an individual
to pay its debts without suffering catastrophic losses. If an individual investor,
business, or financial institution cannot meet its short-term debt obligations, it is
experiencing liquidity risk.
4. Market (systematic) risk – the risk that a bank may experience a loss in (on and
off) balance positions arising from unfavorable factors that affect the overall
performance of the financial markets (changes in interest rates, exchange rates, stock
prices, geopolitical events, recessions). Market risk affects the performance of the
entire market, it is difficult to hedge it as diversification will not help.
5. Operational risks - the risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events. The Basel II outlines 7
events that amount to operational risk: Internal fraud (misappropriation of assets, tax
evasion, bribery); External fraud (hacking damage); Workplace safety
(discrimination); Clients and business practice (improper trade); Damage to physical
assets; Systems failures (software failures); Execution, delivery, and process
management (data entry errors).
Settlement risk. This is the risk that the settlement of a transaction with a
counterparty fails. A bank that exchanges USS with another bank for yen has a
potential settlement risk due to the time difference between the USA and Japan; it
will deliver the USS before it receives the equivalent in yen.
• Model risk. Banks use models to estimate the value of instruments such as
options and to assess the level of risk that the bank is exposed to in its trading
activities. These models are complex and errors in these models pose a risk to banks.
They may overpay for financial instruments or underestimate the level of market or
trading risk being taken.
• Regulatory risk. Banks are highly regulated organizations. They are at risk
from regulatory and legislative changes that increase the costs of doing their
business and may even prohibit them from undertaking it at all. They may breach
regulatory requirements and be fined, face losing their license or suffer loss of
reputation.
•
Country risk. A US bank with operations in a foreign country is, for
example, at risk from the imposition of capital controls preventing it from remitting
any profits or other funds it has in that country. In extreme cases foreign banks may
even have their assets appropriated.
6. Features of asset /liability in international banking.
Bank balance sheets report the assets, liabilities, and bank capital for an individual
bank. The balance sheet identity is: Assets = Liabilities + Capital.
Assets are items that the bank owns. This includes loans, securities, and reserves. A
bank has assets such as cash held in its vaults and monies that the bank holds at the
Federal Reserve bank (called “reserves”), loans that are made to customers, and
bonds.
Liabilities are items that the bank owes to someone else, including deposits and
bank borrowing from other institutions. A bank uses liabilities to buy assets, which
earns its income. By using liabilities, such as deposits or borrowings, the owners of
the bank can leverage their bank capital to earn more.
Capital is sometimes referred to as “net worth”, “equity capital”, or “bank equity”.
Bank capital are funds that are raised by either selling new equity in the bank, or that
come from retained earnings (profits) the bank earns from its assets net of liabilities.
Current assets (converted to cash within 1 year) – Current Liabilities (payable within
1 year) = Working capital (measures liquidity, i.e. ability to meet short-term
liabilities).
In order to know how a bank balance sheet is changing, it is used T-accounts (assets
– on the left, liabilities – on the right). These are tables that look similar to the bank
balance sheet, except that they only record changes in the balance sheet, rather than
the totals. Net worth (equity) is included on the liabilities side to have the T account
balance to zero. For a healthy business, net worth will be positive. For a bankrupt
firm, net worth will be negative.
Assets (lecture): cash, due from the Central Bank, government (treasury) securities,
due from banks, marketable securities (book value), loans, fixed&tangible assets,
net long-term investment in marketable securities & debts, reserves, other assets.
Liabilities (lecture): loans&deposits from banks, corporate deposits, personal
deposits, other liabilities, stated capital, surplus.
7. The objectives of the security department in multinational banks.
Security Department aims at providing confidentiality, integrity and availability of
information.
Objectives:
 to identify and manage information security risks;
 to define information security policies, strategies and standards;
 to assist and advise owners of information in evaluating risks and required
levels of protection, and in choosing appropriate security measures;
 to make all employees aware of information security and importance of their
involvement;
 to develop organizational and technical measures to protect the personal
information of individuals, corresponding banks and other parties.
Organizational Measures: Security policy (adoption of Code of conduct), Security
Risk Management, Security Awareness, Professional Development (employees
must attend trainings or e-learnings in order to stay up-to-date with modern
technologies).
Technical Measures. To ensure trust in its professional services, Security
department protects its business and customer data from unauthorized access,
hacking attempts, malware infections, DDoS attacks, ATM fraud, data leakages,
phishing attempts, disclosure of sensitive information and other threats with
technical measures. Mitigation measures are implemented to ensure an appropriate
risk level concerning confidentiality, integrity, availability and resilience of all
systems.
Examples of technical measures: Cyber Threat Intelligence, Anti-Malware and
SPAM Protection, Access Control/Authentication and Authorization, Password
Security, Data Loss Prevention etc.
Internal banking control.
Internal banking control is a continuous process designed to supply a reasonable
insurance for fulfilling performance, information and conformity objectives and
which, in order to be effective, needs implantation of the following 3 functions: risk
control function, conformity function and internal audit function. Internal control
also includes organizing accounting, management of the information, risk
assessment and the systems that measure them.
Control activities are organized at each operational level of the bank and are part of
daily activities of the bank.
Objectives: Performance objectives (effectiveness and efficiency of all activities
developed), information objectives (legitimacy, integrity and supplying in due time
financial information and other information needed by the management) and
conformity objectives (conformity with applicable regulations as well as with
internal politics and procedures).
Control activities include at least one of the following:
 Analysis at the level of management structures;
 Operative analysis at the level of credit institutions structures;
 Factual controls that have in view limiting the access to assets — for example:
titles, cash — limiting the access to clients accounts etc.;
 Analyze inclusion in the limits imposed to risk exposure and follow up of the
way in which non-conformity situations are resolved;
 Approvals and authorizations in the case of operations that exceed certain
amounts.
8. Features of bank frauds prevention.
Bank fraud- an unethical and/or criminal act by an individual or organization to
illegally attempt to possess or receive money from a bank or financial institution.
Fraud detection involves a comprehensive approach to match data points with
activities to find what is abnormal. Fraudsters have developed sophisticated tactics,
so it’s essential to stay on top of these changing approaches of gaming the system.
To identify and stop an array of fraud attacks and crime quickly and accurately –
while improving customer and citizen experiences – organizations should follow
four critical steps:
1. Capture and unify all available data types from across departments or channels
and incorporate them into the analytical process.
2. Continually monitor transactions, social networks, high-risk anomalies, etc., and
apply behavioral analytics to enable real-time decision making.
3. Instill an enterprisewide analytics culture through data visualization at all levels,
including investigative workflow optimization.
4. Employ layered security techniques.
Just like the techniques fraudsters use, approaches to fraud prevention must
constantly evolve:
Next-gen anti-money laundering: Robotics, semantic analysis and artificial
intelligence – all can help financial institutions automate and improve effectiveness
of AML processes.
Using analytics to combat digital fraud: Digitalization creates both opportunities
and threats.
Attacking fraud, waste and abuse: Governments spend billions to combat fraud,
waste and abuse. And traditional methods of detection are no longer enough.
Shut the front door on insurance application fraud: Agent and customer gaming are
growing problems for insurance providers. As fraudsters grow more sophisticated in
their digital trickery, insurers are trying to keep pace and beat them at their own
game using analytics and artificial intelligence.
Fraud detection and prevention is not a static process. It’s an ongoing cycle
involving monitoring, detection, decisions, case management and learning to feed
improvements in detection back into the system. Organizations should strive to
continually learn from incidents of fraud and incorporate the results into future
monitoring and detection processes. This requires an enterprisewide analytics life
cycle approach.
Features: Data management- Consolidates and cleanses data from internal and
external sources for fraud analysis and investigation.
Advanced analytics with embedded AI and machine learning- Provides a broad set
of advanced analytic and AI techniques, including modern statistical, machine
learning, deep learning and text analytics algorithms, accessible from a single
environment.
Rule and analytic model management- Provides prepackaged heuristic rules,
anomaly detection and predictive models; Lets create and logically manage business
rules, analytic models and watch lists; Facilitates collaboration with other business
units on model development.
Detection and alert generation - Scores data in real time with an online scoring
engine that uses multilayered detection methods – business rules, anomaly detection,
advanced analytics, etc. – for greater accuracy
Alert management- Combines alerts from multiple monitoring systems, associates
them with common data, and gives analysts and investigators a more complete view
of risk.
Social network analysis- Provides a unique network visualization interface that lets
to go beyond transaction and account views to analyze related activities and
relationships at a network dimension, and identify linkages among seemingly
unrelated activities; Provides time slider functionality, which enables to see how
activity in a network develops over a time horizon.
Search and discovery- Enables free-text, field-based or geospatial searches across
all data (internal and external); Provides an intuitive interface that lets to construct
complex queries without the need to understand specific syntax.
Workflow and case management- Streamlines operations with a systematic process
for investigations, using a configurable workflow. Stores all information pertinent
to a case for future use.
9. Financial management in multinational banks.
Multinational banks (MNBs), by definition, are those that physically operate in more
than one country. For instance, Citibank operates offices in more than 90 countries
around the world. In contrast, international banks engage in cross-border operations
and do not set up operations in other countries. A Bank of America loan to a bank
in Poland is considered international banking.
MNBs basically work like this-they collect local currency, combine that with funds
borrowed from overseas, and then lend that money domestically. Hence, MNBs are
small net importers of capital, otherwise operating in a manner similar to domestic
banks. Yet, even though MNBs look like domestic banks, their entry and operations
are subject to international trade agreements, such as the General Agreement on
Trade in Services (GATS) at the World Trade Organization (WTO).
Since MNBs operate in a wide array of countries and regions, multinational
corporations (MNCs) become their natural clients. When MNCs establish new
operations, MNBs often follow. In their operations, MNBs focus on a select range
of activities for a small circle of clients. MNBs tend to provide services that other
banks are either less familiar with or do not offer, such as foreign currency loans,
acceptances and guarantees related to international trade, or syndicated loans. As a
result, MNB clients are usually MNCs or large domestic corporations engaged in
international transactions. In addition, MNBs also provide services for high-income
earners, or what is referred to as high net-worth individuals.
Like any finance function, international finance, the finance function of a
multinational firm has two functions namely, treasury and control. The treasurer is
responsible for financial planning analysis, fund acquisition, investment financing,
cash management, investment decision and risk
management. On the other hand, controller deals with the functions related to
external reporting, tax planning and management, management information system,
financial and management accounting, budget planning and control, and accounts
receivables etc.
For maximising the returns from investment and to minimise the cost of finance, the
firms has to take portfolio decision based on analytical skills required for this
purpose. Since the firm has to raise funds from different financial markets of the
world, which needs to actively exploit market
imperfections and the firm’s superior forecasting ability to generate purely financial
gains. The complex nature of managing international finance is due to the fact that
a wide variety of financial instruments, products, funding options and investment
vehicles are available for both
reactive and proactive management of corporate finance.
Multinational finance is multidisciplinary in nature, while an understanding of
economic theories and principles is necessary to estimate and model financial
decisions, financial accounting and
management accounting help in decision making in financial management at
multinational level.
Because of changing nature of environment at international level, the knowledge of
latest changes in forex rates, volatility in capital market, interest rate fluctuations,
macro level charges, micro level economic indicators, savings, consumption pattern,
interest preference, investment behaviour of investors, export and import trends,
competition, banking sector performance, inflationary trends, demand and supply
conditions etc. is required by the practitioners of international financial
management.
International Financial Management is designed to provide today’s financial
managers with an understanding of the fundamental concepts and the tools necessary
to be effective global managers. International Financial Management is written
from the perspective that the fundamental goal of sound financial management is
shareholder wealth maximization. Shareholder wealth maximization means that the
firm makes all business decisions and
investments with an eye toward making the owners of the firm– the shareholders–
better off financially, or more wealthy, than they were before.
Theoretically speaking, manager of an MNC/MNB should take decisions in
accordance with the latest changes/challenges from/in the environment. There may
be multiplicity of currency and associated unique risks a manager of an MNC has to
face. A well diversified MNC can actually reduce risks and fluctuations in earnings
and cash flows by making the diversity in geography and currency work in its favour.
10. Types of deposits and their features in different countries.
1. Time or term deposits – These are those deposits that are deposited by savers
for a fix period of time hence they can withdraw the deposit only on the maturity
of deposit. If it is withdrawn in advance then it involves penalty. They offer the
maximum amount of interest.
2. Saving deposits – This is a kind of demand deposit and there is certain limit
on number of withdrawals from the account during a specific period of time, also
account holder has to maintain minimum balance in the account which is decided
by the bank, non compliance of which leads to penalty. Interest rates offered pon
these deposit is lower than that of term deposits.
3. Current deposits – Though it is similar to saving deposit but it does not offer
any interest and hence there is no limit on the number of withdrawals by
individuals from his account. This type of account is normally maintained by
companies and individuals who have higher frequency of withdrawing from their
accounts.
Apart from above there is another type of deposit which is called recurring
deposit in which individual will have to pay a small sum every month for a
particular period of time; it can be on a daily, weekly or monthly basis. The
interest offered on this is almost equivalent to that of term deposits
A bank is a financial institution that accepts deposits and channels those deposits
into lending activities.
Interest-bearing and Non-interest-bearing Current Accounts are also known as
cheque accounts or (in the US) checking accounts, and are the simplest form of
short-term deposit or investment instrument. Customer funds may be withdrawn
instantly on demand, and banks generally pay interest on surplus balances, although
not in all cases. Current accounts are a cheap source of funding for banks, as well as
a stable one, but because their balances are instant access, the funds are less valuable
from a liquidity metrics point of view.
Demand Deposits are also referred to as sight deposits, similar to a cheque account,
but they are always interest bearing. The funds are available on demand, but cannot
be used for cheques or other similar payments.
Time Deposits or term deposits are interest-bearing deposit accounts of fixed
maturity. They are usually offered with a range of maturities ranging from one
month to five years, with the longer dated deposits attracting higher interest. This
reflects the positive yield curve, which reflects the funding value to the bank of
longer term liabilities. Most time deposits pay a fixed rate of interest, payable on
maturity. Accounts of longer than 1-year maturity often capitalize interest on an
annual basis.
Types of bank Deposits: 1. Savings Bank Account

It is often the first banking product people use

Lower interest rate as compared to other debt products,

It is highly liquid

It is suitable for inculcating the habit of saving among the customers
2. Bank Fixed Deposit (Bank FDs)

It Involves placing funds with the banks for a fixed term (generally not less
than 30 days) for a certain stipulated amount of interest

The ideal investment time for bank FDs is 6 to 24 months as normally interest
on bank less than 6 months bank FDs is likely to be low

The time frame assumes importance as early withdrawal may carry penalty
3. Special Bank Term Deposit Scheme (Tax Saver Fixed Deposits)

This is the Tax Saving Scheme available with banks.

Term deposit of five years maturity in a scheduled bank is mandatory. Tax
Saver Fixed Deposit cannot be pre-maturely withdrawn.

No loans, liens and sweep-in are allowed against Tax Saver Fixed Deposit
4. Recurring Deposit Account

In this product, some fixed amount is deposited at monthly intervals for a prefixed term

Earns higher interest than Savings Bank Account

Helps in the saving of a fixed amount every month and suitable for inculcating
habit f saving among the customers
The Recurring Deposit Accounts may be of the following types:

Home Safe Account or Money Box Scheme: For regular savings, the bank
provides a safe or box to the depositor. The safe or box cannot be opened by
the depositor, who can put money in it regularly, which is collected by the
bank’s representative at intervals and the amount is credited to the depositor’s
account. The deposits carry a nominal rate of interest.

Cumulative-cum-Sickness deposit Account: A certain fixed sum is deposited
at regular intervals in this account. The accumulated deposits over time along
with interest can be used for payment of medical expenses, hospital charges,
etc.

Home Construction deposit Scheme/Saving Account: In this account, we can
deposit the money regularly either for the purchase or construction of a flat or
house in future. The rate of interest offered on the deposit, in this case, is
relatively higher than in other recurring deposit accounts.
5. Current Deposit Account

Big businessmen, companies, and institutions such as schools, colleges, and
hospitals have to make payment through their bank accounts. Since there are
restrictions on the number of withdrawals from a savings bank account, that
type of account is not suitable for them. Banks open a current account for
them.

This account requires a certain minimum amount of deposit while opening the
account. On this deposit, the bank does not pay any interest on the balances.
Rather the account holder pays a certain amount each year as an operational
charge.

These accounts also have what we call the overdraft facility. For the
convenience of the accountholders banks also allow withdrawal of amounts
in excess of the balance of the deposit. This facility is known as an overdraft
facility.
When speaking about higher deposit rates in 2019, we can highlight the following
regions and countries:
Former Soviet Union countries (Uzbekistan, Ukraine,
Kazakhstan, Georgia, Azerbaijan, Turkmenistan), Middle East, South Asia, and
South America. There are plenty of countries in the World with high enough deposit
rates in 2018, most of them, on the other hand, are politically and economically
unstable and you could risk losing some or all of your money by choosing to invest.
11. Savings institutions of foreign countries and the features of their activities.
Savings institutions- savings and loan associations, mutual savings banks, building
societies and credit unions share a number of features, despite their different origins.
But at the same time they have many elements in common. 1- most liabilities take
the form of deposits whereby the gathering of funds is facilitated, and the
attractiveness of the liabilities enhanced, by the ability of customers to make smallscale deposits and withdrawals upon savings accounts with the intermediary. 2- no
depositor has an account which could be regarded a of significant size relative to the
intermediary’s total deposit liabilities. 3- the asset portfolio is, on average, of longer
maturity than the liability portfolio. 4- the asset portfolio contains a reserve of highly
liquid assets (cash, deposits at call etc.) in addition to earning assets such as
mortgages, securities, and so on. 5- earning assets still mostly consists of a large
number of small claims on different households or firms which in most cases are
individually not marketable.
Saving institutions are typically significant producers of liquidity. They undertake a
mortgage function, allowing depositors to save on the information and transactions
costs involved in searching out and evaluating potential borrowers. On the loan side,
saving institutions act like mortgage bankers and finance companies.
The institutionalization of savings by pension funds and life insurance companies is
bound to further develop in the future as demographic trends push for reforming
pension systems in many countries in order to increase the funding ratio of
mandatory pension systems and to encourage voluntary long term saving plans
through private pension funds and life insurance instruments. The primary function
of these institutions is to provide sufficient, sustainable and affordable retirement
income and survivors benefits.
Contractual savings institutions include national provident funds, life insurance
companies, private pension funds, and funded social pension insurance systems.
They have long-term liabilities and stable cash flows and are therefore ideal
providers of term finance, not only to government and industry, but also to municipal
authorities and the housing sector. Except for Singapore, Malaysia, and a few other
countries, most developing countries have small and insignificant contractual
savings industries that have been undermined by high inflation and inhibited by
oppressive regulations and pay-as-you-go social pension insurance systems.
Contractual savings institutions play a much bigger role in the financial systems of
developed countries. In some countries, such as Switzerland, the Netherlands, and
the United Kingdom, the resources mobilized by life insurance companies and
pension funds correspond to well over 100 percent of annual GDP.
12. Methods of interest rate risk assessment.
Interest rate risk is the risk where changes in market interest rates might adversely
affect a bank’s financial condition. The management of Interest Rate Risk should
be one of the critical components of market risk management in banks. The Basel
Committee defines Interest Rate Risk as being “the exposure of a bank’s financial
condition to adverse movements in Interest Rates.”
In its paper “Principles for the Management of Interest Rate Risk”, the Basel
Committee enumerates and briefly describes available Interest-Rate-Risk
assessment methods of varying complexity: repricing schedules (“Gap” and
“Duration”) and simulation approaches (static and dynamic).
Repricing schedules
The simplest techniques for measuring a bank's interest rate risk exposure begin with
a maturity/repricing schedule that distributes interest-sensitive assets, liabilities, and
OBS ( off-balance-sheet) positions into a certain number of predefined time bands
according to their maturity (if fixed-rate) or time remaining to their next repricing
(if floating-rate). Those assets and liabilities lacking definitive repricing intervals
(e.g. sight deposits or savings accounts) or actual maturities that could vary from
contractual maturities (e.g. mortgages with an option for early repayment) are
assigned to repricing time bands according to the judgement and past experience of
the bank.
1. Gap analysis- Simple maturity/repricing schedules can be used to generate simple
indicators of the interest rate risk sensitivity of both earnings and economic value to
changing interest rates. When this approach is used to assess the interest rate risk of
current earnings, it is typically referred to as gap analysis. Gap analysis was one of
the first methods developed to measure a bank's interest rate risk exposure, and
continues to be widely used by banks. The size of the interest rate movement used
in the analysis can be based on a variety of factors, including historical experience,
simulation of potential future interest rate movements, and the judgement of bank
management.
2. Duration- Duration is a measure of the percentage change in the economic value
of a position that will occur given a small change in the level of interest rates. It
reflects the timing and size of cash flows that occur before the instrument's
contractual maturity. Generally, the longer the maturity or next repricing date of the
instrument and the smaller the payments that occur before maturity (e.g. coupon
payments), the higher the duration (in absolute value). Higher duration implies that
a given change in the level of interest rates will have a larger impact on economic
value.
Simulation approaches - typically involve detailed assessments of the potential
effects of changes in interest rates on earnings and economic value by simulating the
future path of interest rates and their impact on cash flows. Simulation approaches
typically involve a more detailed breakdown of various categories of on- and offbalance-sheet positions, so that specific assumptions about the interest and principal
payments and non-interest income and expense arising from each type of position
can be incorporated.
1. Static simulation- the cash flows arising solely from the bank's current on- and
off-balance-sheet positions are assessed. For assessing the exposure of earnings,
simulations estimating the cash flows and resulting earnings streams over a specific
period are conducted based on one or more assumed interest rate scenarios. When
the resulting cash flows are simulated over the entire expected lives of the bank's
holdings and discounted back to their present values, an estimate of the change in
the bank's economic value can be calculated.
2. Dynamic simulation- the simulation builds in more detailed assumptions about
the future course of interest rates and the expected changes in a bank's business
activity over that time. Such simulations use these assumptions about future
activities and reinvestment strategies to project expected cash flows and estimate
dynamic earnings and economic value outcomes. These more sophisticated
techniques allow for dynamic interaction of payments streams and interest rates, and
better capture the effect of embedded or explicit options.
Approaches to Interest-Rate-Risk assessment, from the traditional, time-honored
methods
(maturity and repricing schedules) to the more complex and experimental ones, are
at least partially suited for software implementation. Using the Internet as medium,
fairly simple, yet effective methods of Interest-Rate-Risk assessment can be made
available to a vast audience, including current and potential bank employees
involved in risk management, individuals whose interest in the matter is academic
or members of the general public aware of the implications of Interest-Rate variation
upon their financial investments.
13. Interest rate risk management.
Interest-rate risk (IRR) is the exposure of an institution’s financial condition to
adverse movements in interest rates. Accepting this risk is a normal part of banking
and can be an important source of profitability and shareholder value. However,
excessive levels of IRR can pose a significant threat to an institution’s earnings and
capital base. Accordingly, effective risk management that maintains IRR at prudent
levels is essential to the safety and soundness of banking institutions.
As financial intermediaries, banks encounter IRR in several ways:
- The primary and most discussed source of IRR is differences in the timing of the
repricing of bank assets, liabilities, and off-balance-sheet (OBS) instruments.
Repricing mismatches are fundamental to the business of banking and generally
occur from either borrowing short-term to fund longer-term assets or borrowing
long-term to fund shorterterm assets. Such mismatches can expose an institution
to adverse changes in both the overall level of interest rates (parallel shifts in the
yield curve) and the relative level of rates across the yield curve (nonparallel shifts
in the yield curve).
- Another important source of IRR, commonly referred to as basis risk, occurs when
the adjustment of the rates earned and paid on different instruments is imperfectly
correlated with otherwise similar repricing characteristics (for example, a threemonth Treasury bill versus a threemonth LIBOR). When interest rates change,
these differences can change the cash flows and earnings spread between assets,
liabilities, and OBS instruments of similar maturities or repricing frequencies.
- An additional and increasingly important source of IRR is the options in many
bank asset, liability, and OBS portfolios. An option provides the holder with the
right, but not the obligation, to buy, sell, or in some manner alter the cash flow of
an instrument or financial contract. Options may be distinct instruments, such as
exchange-traded and over-the-counter contracts, or they may be embedded within
the contractual terms of other instruments.
As is the case in managing other types of risk, sound IRR management involves
effective board and senior management oversight and a comprehensive riskmanagement process that includes the following elements:
• effective policies and procedures designed to control the nature and amount of IRR,
including clearly defined IRR limits and lines of responsibility and authority
• appropriate risk-measurement, monitoring, and reporting systems
• systematic internal controls that include the internal or external review and audit
of key elements of the risk-management process
The formality and sophistication used in managing IRR depends on the size and
sophistication of the institution, the nature and complexity of its holdings and
activities, and the overall level of its IRR. Adequate IRR management practices can
vary considerably. For example, a small institution with noncomplex activities and
holdings, a relatively short-term balance-sheet structure presenting a low IRR
profile, and senior managers and directors who are actively involved in the details
of day-to-day operations may be able to rely on relatively simple and informal IRR
management systems.
Institutions should have clear policies and procedures for limiting and controlling
IRR. These policies and procedures should:
(1) delineate lines of responsibility and accountability over IRR management
decisions,
(2) clearly define authorized instruments and permissible hedging and positiontaking strategies, (3) identify the frequency and method for measuring and
monitoring IRR, and
(4) specify quantitative limits that define the acceptable level of risk for the
institution. In addition, management should define the specific procedures and
approvals necessary for exceptions to policies, limits, and authorizations.
Instruments for managing interest rate risk:
Forwards: A forward contract is the most basic interest rate management product.
The idea is simple, and many other products discussed in this article are based on
this idea of an agreement today for an exchange of something at a specific future
date.
Forward Rate Agreements (FRAs): An FRA is based on the idea of a forward
contract, where the determinant of gain or loss is an interest rate. Under this
agreement, one party pays a fixed interest rate and receives a floating interest rate
equal to a reference rate. The actual payments are calculated based on a notional
principal amount and paid at intervals determined by the parties. Only a net payment
is made – the loser pays the winner, so to speak. FRAs are always settled in cash.
FRA users are typically borrowers or lenders with a single future date on which they
are exposed to interest rate risk. A series of FRAs is similar to a swap (discussed
below); however, in a swap, all payments are at the same rate. Each FRA in a series
is priced at a different rate unless the term structure is flat.
Futures: A futures contract is similar to a forward, but it provides the counterparties
with less risk than a forward contract – namely, a lessening of default and liquidity
risk due to the inclusion of an intermediary.
Swaps: Just like it sounds, a swap is an exchange. More specifically, an interest rate
swap looks a lot like a combination of FRAs and involves an agreement between
counterparties to exchange sets of future cash flows. The most common type of
interest rate swap is a plain vanilla swap, which involves one party paying a fixed
interest rate and receiving a floating rate, and the other party paying a floating rate
and receiving a fixed rate.
Options: Interest rate management options are option contracts for which
the underlying security is a debt obligation. These instruments are useful in
protecting the parties involved in a floating-rate loan, such as adjustable-rate
mortgages (ARMs). A grouping of interest rate call options is referred to as an
interest rate cap; a combination of interest rate put options is referred to as an interest
rate floor. In general, a cap is like a call, and a floor is like a put.
14. Types of international banking lending activity.
International Lending Entities that borrow funds from banks include importers,
exporters, multinational corporations, foreign businesses, governments, consumers,
foreign banks, and overseas branches of U.S. banks. International lending is
concentrated at the largest global institutions and a number of smaller institutions in
select markets, such as New York City, Miami, and San Francisco.
Interest earned from lending to foreign borrowers, both internationally and
domestically, remains a major source of profit for banks that conduct international
activities.
Other international activities, such as fund transfers, are necessary components of
international banking and enhance a bank’s ability to service correspondent
relationships, but do not necessarily produce significant, if any, income after
expenses.
The tendency for international loans to be larger than domestic loans promotes
economies of scale by allowing banks to originate, monitor, and collect the loans
more efficiently than smaller loans. However, larger credits often attract strong price
competition from other global lenders, which may result in lower net interest
margins.
International Lending Risks
All loans involve some degree of default risk, and credit officers must effectively
assess the degree of risk in each credit extension. However, while foreign loans share
many of the same risks of domestic credits, several other risks are unique to
international lending.
Credit Risk refers to the potential inability of a borrower to comply with contractual
credit terms. Evaluation of foreign credit risk is similar to domestic credit analysis
and requires the review of appropriate information, including the amount of credit
requested, loan purpose, collateral, anticipated terms, and repayment source. In
addition, reviews should assess standard credit file information such as financial
statements covering several years and the borrower’s performance history on
previous loans. A key problem with assessing international credits is that applicable
information is often less readily available and less detailed than in domestic credit
files. Foreign loans are often extended in foreign currencies, and financial statements
are often in a foreign language and formats that vary from country to country.
Moreover, there are often barriers to acquiring such information from foreign
sources. Therefore, when evaluating international loans, credit decisions are
frequently based on information inferior to that available in domestic credit files.
Currency Risk reflects the possibility that variations in value of a currency will
adversely affect the value of investments denominated in a foreign currency.
Currency conversion exposure exists in every international credit extension, and
currency risk can affect financial transactions in several ways. For borrowers, rapid
depreciation in the home currency relative to the borrowing currency can
significantly increase debt service requirements. For lenders, rapid appreciation or
depreciation in currencies can substantially affect profit or loss depending on how
the institution finances the assets. If a U.S. bank lends in a foreign currency, it must
acquire that currency by either borrowing or exchanging dollars for the new
currency. In the latter situation, a bank might find itself effectively financing its
cross-border lending with domestic liabilities, exposing itself to currency risk. If the
foreign currency assets depreciate, a bank might suffer economic or accounting
losses even without a default because the foreign currency assets must be translated
back into dollars for financial statement purposes. In this capacity, currency risk is
a sub-set of market risk, and institutions should apply appropriate techniques to
monitor and manage this risk.
15. International syndicated loans.
Introduction
A syndicated loan is a loan from a group of banks to a single borrower. When an
individual lender is unable or unwilling to fund a particularly large loan, borrowers
can work through one or more lead banks to arrange financing. Usually, one bank is
appointed as the agency bank to manage the loan business on behalf of the syndicate
members.
Features
1. Large amount and long term. It is generally used for enterprises' M&A
financing, in transportation, petrochemical, telecommunication, power and other
industries projects.
2. Less time and effort for financing. It is usually the responsibility of the arranger
for doing the preparation work of establishing the syndicate after the borrower and
the arranger have agreed on loan terms by negotiation. During implementation of
the loans, the borrower does not need to face all members of the syndicate, and
relevant withdrawal, repayment of principal with interest and other management
work related to the loans shall be fulfilled by the agency bank.
3. Several different types of deb. The same loan syndications can include many
forms of loans, such as fixed-term loans, revolving loans, standby L/C line on
requirements of the borrower. Meanwhile, the borrower can also choose currency or
currency portfolio, if needed.
- Revolving debt allows borrowers to take only what they need, when they need it,
and come back for more later. Lenders set a maximum credit limit, and borrowers
may be able to borrow and repay repeatedly (or “revolve” the debt) against a line
of credit.
- Term loans provide one-time financing that borrowers typically pay off with
gradually with fixed payments. Some term loans feature a large balloon payment
at maturity instead of amortizing payments.
- Letters of credit (LOCs) are bank guarantees that provide security to somebody
the borrower is working with. For example, a standby letter of credit might protect
a municipality that pays millions of dollars for an infrastructure project—but the
contractor fails to complete the project. The LOC would provide funds to the
municipality (at the contractor’s expense), enabling them to pay other contractors
or fix the problem in other ways.
Advantages for borrower
• From a borrower’s perspective, syndicated loans make it relatively easy to borrow
a significant amount. The borrower can secure funding with one agreement instead
of attempting to borrow from several different lenders individually.
Advantages for lender
• From a lender’s perspective, syndicated loans enable financial institutions to take
on as much debt as they have an appetite for—or as much as they can afford due
to regulatory lending limits.Lenders can stay diversified but still participate in
large, high-profile deals.
• They also gain access to industries or geographic markets that they don’t ordinarily
work with.
• These loans are contractual obligations, making them similar to other senior
sources of capital, and they may even be secured with collateral.
16. International factoring and its advantages.
Factoring and forfeiting are two methods of financing international trade. These
are mainly used to secure outstanding invoices and account receivables. Factoring
involves the purchase of all receivables or all kinds of receivables. Unlike Forfaiting,
which is based on transaction or project.
Factoring is a method of managing book debt, in which a business receives
advances against the accounts receivables, from a bank or financial institution
(called as a factor). There are 3 parties to factoring i.e. debtor (buyer of goods), the
client (seller of goods) and the factor (financier)
• In a factoring arrangement, first of all, the borrower sells trade receivables to the
factor and receives an advance against it.
• The advance provided to the borrower is the remaining amount, i.e. a certain
percentage of the receivable is deducted as the margin or reserve, the factor’s
commission is retained by him and interest on the advance.
• After that, the borrower forwards collections from the debtor to the factor to settle
down the advances received.
Advantages
• working capital optimization
• credit protection against bad-debts, debtor insolvency and losses
• reduction of your DSO (Days Sales Outstanding)
• increased debt capacity
• transformation of fixed costs into variable costs
• efficiency in sourcing new customers using up-to date credit information and
experience
• credit and receivable management
• high liquidity with increasing bargaining power and discounts from your suppliers
• cash-flow optimization and better forecasting
• optimized treasury planning
• more time to focus on core business operations
17 International forfeiting.
Forfaiting is a mechanism, in which an exporter surrenders his rights to receive
payment against the goods delivered or services rendered to the importer, in
exchange for the instant cash payment from a forfaiter. In this way, an exporter
can easily turn a credit sale into cash sale, without recourse to him or his forfaiter.
The forfaiter is a financial intermediary that provides assistance in international
trade. It is evidenced by negotiable instruments i.e. bills of exchange and
promissory notes. It is a financial transaction, helps to finance contracts of medium
to long term for the sale of receivables on capital goods. However, at present
forfaiting involves receivables of short maturities and large amounts
The advantages of forfaiting for the exporter:
• Since the transactions are without recourse; fully eliminating political, transfer and
commercial risk of the importer,
• Forfaiting simplifies the transaction by transforming a credit-based sale into a
cash transaction. This credit-to-cash process gives immediate cash flow for the
seller and eliminates collection costs
• Protects the exporter from future interest rate increases or exchange rate
fluctuations
• Gives the ability to the exporter to provide longer payment terms and yet receive
the proceeds cash.
• Enables the exporter to do business in countries where the country risk would
otherwise be too high.
• The balance sheet of the exporter does not carry accounts receivable, bank loans
or contingent liabilities.
• No administrative and legal expenses, that normally accompany other financing
arrangements
• Importer receives additional credit through forfaiting from the supplier/exporter
18. International leasing and its features.
Lease is a financial contract between the business customer (user- lessee) and the
equipment supplier (normally owner - lessor) for using a particular asset/equipment
over a period of time against the periodic payments called “Lease rentals”.When a
lease is terminated, the leased equipment reverts to the lessor. However, the lease
agreement often gives the user the option to purchase the equipment or take out a
new lease.
Operating leases are short-term or cancelable during the contract period at the
option of the lessee.This type of leasing is common for equipment where there is a
well-established secondhand market (e.g. cars and construction equipment).The
lease period will always less than the working life of the machine. Assets financed
under operating leases are not shown as assets on the balance sheet. Instead, the
entire operating lease cost is treated as a cost in the profit and loss account.
Capital, financial, or full-payout leases extend over most of the estimated
economic life of the asset and cannot be canceled or can be canceled only if the
lessor is reimbursed for any losses. Company must show the leased asset on their
balance sheet as a capital item.
Leases also differ in the services provided by the lessor. Under a full-service, or
rental, lease, the lessor promises to maintain and insure the equipment and to pay
any property taxes due on it. In a net lease, the lessee agrees to maintain the asset,
insure it, and pay any property taxes. Financial leases are usually net leases.
Leveraged leases are financial leases in which the lessor borrows part of the
purchase price of the leased asset, using the lease contract as security for the loan.
This does not change the lessee’s obligations, but it can complicate the lessor’s
analysis considerably.
Advantages of leasing:
• you don't have to pay the full cost of the asset up front, so you don't use up your
cash or have to borrow money,
• you have access to a higher standard of equipment, which might be too expensive
for you to buy outright,
• you pay for the asset over the fixed period of time that you use it, which helps you
budget for the future,
• as interest rates on monthly rental costs are usually fixed, it is easier to forecast
cashflow
you can spread the cost over a longer period of time and match payments to your
income,
• tax shields can be used (the business can usually deduct the full cost of lease rentals
from taxable income, for example)
• leasing provides safety in financial distress. (If the company felt in bankruptcy,
and the court decides that the asset is “essential” to the lessee’s business, it affirms
(подтверждает) the lease. Then the bankrupt firm can continue to use the asset.
It must continue to make the lease payments, however.
Disadvantages of leasing:
• you can't claim capital allowances on the leased assets if the lease period is for less
than five years (and in some cases less than seven years),
• you may have to put down a deposit or make some payments in advance,
• it can work out to be more expensive than if you buy the assets outright,
• your business can be locked into inflexible medium or long-term agreements,
which may be difficult to terminate,
• leasing agreements can be more complex to manage than buying outright and may
add to your administration your company normally has to be VAT-registered to
take out a leasing agreement.
19. Project financing.
Project finance is the long-term financing of infrastructure and industrial projects
which have low technological risk, a reasonably predictable market, and the
possibility of selling to a single buyer or a few large buyers based on multi-year
contracts.The debt and equity used to finance the project are paid back from the cash
flow generated by the project.
Usually, a project financing structure involves a number of equity investors, known
as 'sponsors', a 'syndicate' of banks or other lending institutions that provide loans to
the operation. Project finance is especially attractive to the private sector because
companies can fund major projects off-balance-sheet. The financing is typically
secured by all of the project assets, including the revenue-producing contracts.
Types of sponsors
1. Industrial sponsors – They see the initiative as upstream and downstream
integrated or in some way as linked to the core business
2. Public sponsors – Central or local government, municipalities and
municipalized companies whose aims center on social welfare
3. Contractor/sponsors – Who develop, build, or run plants and are interested in
participating in the initiative by providing equity and or subordinated debt
4. Financial sponsors/investors – Plays part of a project finance initiative with a
motive to invest capital in high profit deals. They have high propensity of risk
and seek substantial return on investments
Features of project finance
• capital intensity
• financial leverage
• long-term payback period
• limited recourse
• specific order of funds’ use
• high value of funding
• high transaction costs
• risk sharing
• many participants
Project Finance is generally used in oil extraction, power production, and
infrastructure sectors. These are the most appropriate sectors for developing this
structured financing technique, as they have low technological risk, a reasonably
predictable market, and the possibility of selling to a single buyer or a few large
buyers based on multi-year contracts.
Project Finance is the structured financing of a specific economic entity – a Special
Purpose Vehicle (SPV) – created by the sponsors using equity or debt. The lender
considers the cash flow generated from this entity as the major source of loan
reimbursement. Because the priority use of cash flow is to fund operating costs and
to service the debt, only residual funds after the latter are covered can be used to pay
dividends to sponsors undertaking project finance.
20. Asset securitization and credit derivatives
Securitization is a way of raising funds by selling receivables, which are then
turned into asset–backed loan and securities. This method of financing brings
various benefits such as diversification of funding sources and improvement of cash
flow.
1. The customer sells its receivables to the SPC on a true–sale basis along
with necessary perfection.
2. The SPC obtains loans from the bank in order to purchase the
receivables.
3. The SPC makes the payment to the customer as the proceeds for
purchasing the receivables.
4. The customer’s buyer makes the payment regarding the receivables
directly to the SPC on the due date. (The customer may be required to collect
the payment from the buyer and deliver it to the SPC.)
5. The SPC applies such payment/collection from the customer to repay the
loan.
A credit derivative is a financial asset that allows parties to handle their
exposure to risk. Credit derivative consisting of a privately held, negotiable bilateral
contract between two parties in a creditor/debtor relationship. It allows the creditor
to transfer the risk of the debtor's default to a third party.
Various types of credit derivatives exist, including

Credit default swaps (CDS)

Collateralized debt obligations (CDO)

Total return swaps

Credit default swap options

Credit spread forward
In all cases, their price is driven by the creditworthiness of the parties
involved, such as private investors or governments.
Banks and other lenders can use credit derivatives to remove the risk of default
entirely from a loan portfolio—in exchange for paying an upfront fee, referred to as
a premium.
21. CRESCO and CREVCO committees in US banks. Risk management groups
Credit evaluation committee (CREVCO)
CRESCO Credit Strategy Committee is one of the important devices to
strengthen the credit process—and balance sheet and liquidity risks management. It
draws membership from EXCO, and heads of lending, risk management, treasury,
and legal divisions of the bank.
The structure and composition of membership of CRESCO varies with size
and risk management disposition of banks. It draws membership from EXCO, and
heads of lending, risk management, treasury, and legal divisions of the bank. The
roles of CRESCO in balance sheet and liquidity risks management are to:
1. Review of deposit placement memorandum (DPM) and credit approval
form (CAF)—together with their supporting spreadsheets—for purposes of
funds placements in the money market.
2. Determine appropriateness of proposed deposit placements, especially
in terms of risk mitigation, spread income, fit with target market definition,
risk acceptance criteria, and so on.
3. Recommend amendments (if considered necessary) to the DPM, CAF,
and spreadsheets to facilitate their approval.
4. Approve, with or without, conditions—or decline approval of—all
deposit placement limits which treasury unit proposes.
Risk management is the identification, evaluation, and prioritization
of risks followed by coordinated and economical application of resources to
minimize, monitor, and control the probability or impact of unfortunate events or to
maximize the realization of opportunities.
Risks are of different types and depending on the size and complexity of
the business volume of the bank, its risk philosophy and its magnitude of
operations, the following separate departments may be set up to handle
different risks:
1. Credit Risk Department,
2. Market Risk Department, and
3. Operational Risk Department.
Each of the above departments is responsible for identifying, measuring,
controlling and managing the respective risks in terms of the directives of the board
of directors/RMC. The departments are responsible for laying down the operating
instructions with a properly articulated management information system.
22. Credit risk management methods
Measurement of credit risk
Credit risk measurement methods
In order to assess the level of credit risk and profitability of loan portfolios,
the Bank uses different credit risk measurement and valuation methods, including:

Probability of Default (PD),

Expected Loss (EL),

Credit Value at Risk (CVaR),

effectiveness measures used in scoring methodologies (Accuracy Ratio),

share and structure of impaired loans (according to IAS),

coverage ratio of impaired loans with allowances (coverage ratio),

cost of risk.
The portfolio credit risk measurement methods allow i.a. to reflect the credit
risk in the price of products, determine the optimum conditions of financing
availability and determine impairment allowances.
The Bank performs analysis and stress-tests regarding the influence of
potential changes in macroeconomic environment on the quality of the Bank’s loan
portfolio. The test results are reported to the Bank’s authorities. The above
mentioned information enables the Bank to identify and take measures to limit the
negative influence of unfavourable market changes on the Bank’s performance.
The evaluation of credit risk related to financing institutional clients is
performed in two dimensions: in respect of the client and of the transaction. The
assessment measures comprise ratings of clients and transactions. The
comprehensive measure of credit risk which reflects both risk factors is the
aggregate rating.
23. Credit rating techniques
Credit rating is a codified rating assigned to an issue by authorized credit
rating agencies. These agencies have been promoted by well-established financial
Institutions and reputed banks/finance companies.
Methodology of Credit Rating:
1. Business Analysis or Company Analysis
This includes an analysis of industry risk, market position of the company,
operating efficiency of the company and legal position of the company.

Industry risk: Nature and basis of competition, key success factors;
demand supply position; structure of industry; government policies, etc.

Market position of the company within the Industry: Market
share; competitive advantages, selling and distributionarrangements; product
and customer diversity etc.

Operating
efficiency
of
the
company: Locational
advantages; labor relationships; cost structure and manufacturing as compared
to those of competition.
2. Economic Analysis
In order to evaluate an instrument an analyst must spend a considerable time
in investigating the various economic activities and also analyze the characteristics
peculiar to the industry, whose issue the analyst is concerned with. It will be an error
to ignore these factors as the individual companies are always exposed to changing
environment and the economic activates affect corporate profits, attitudes and
expectation of investors and the price of the instrument. hence the relevance of the
economic variables such as growth rate, national income and expenditure cannot be
ignored.
3. Financial Analysis
This includes an analysis of accounting, quality, earnings, protection
adequacy of cash flows and financial flexibility.

Accounting Quality: Overstatement/under statement of profits;
auditors qualification; methods of income recognition’s inventory valuation
and depreciation policies, off balance sheet liabilities etc.

Earnings Protection: Sources of future earnings growth; profitability
ratios; earnings in relation to fixed income changes.

Adequacy of cash flows: In relation to dept and fixed and working
capital needs; variability of future cash flows; capital spending
flexibility working capital management etc.

Financial Flexibility: Alternative financing plans in ties of stress;
ability to raise funds asset redeployment.
4. Management Evaluation

Track record of the management planning and control system, depth of
managerial talent, succession plans.

Evaluation of capacity to overcome adverse situations

Goals, philosophy and strategies.
5. Geographical Analysis

Location advantages and disadvantages

Backward area benefit to the company/division/unit
6. Fundamental Analysis
Fundamental analysis is essential for the assessment of finance
companies. This includes an analysis of liquidity management, profitability and
financial position and interest and tax sensitivity of the company.

Liquidity Management: Capital structure; term matching of assets and
liabilities policy and liquid assets in relation to financing commitments and
maturing deposits.

Asset Quality: Quality of the company’s credit-risk management;
system for monitoring credit; sector risk; exposure to individual
borrower; management of problem credits etc.

Profitability and financial position: Historic profits, spread on fund
deployment revenue on non-fund based services accretion to reserves etc.

Interest and Tax sensitivity: Exposure to interest rate changes, hedge
against interest rate and tax low changes, etc.
24. International credit ratings and rating agencies
A credit rating agency is a company that assigns credit ratings, which rate a
debtor's ability to pay back debt by making timely principal and interest payments
and the likelihood of default. An agency may rate the creditworthiness
of issuers of debt obligations, of debt instruments, and in some cases, of the
servicers of the underlying debt, but not of individual consumers.
The debt instruments rated by CRAs include government bonds, corporate
bonds, CDs, municipal bonds, preferred stock, and collateralized securities, such
as mortgage-backed securities and collateralized debt obligations.
The issuers of the obligations or securities may be companies, special purpose
entities, state or local governments, non-profit organizations, or sovereign nations.
A credit rating facilitates the trading of securities on a secondary market. It affects
the interest rate that a security pays out, with higher ratings leading to lower interest
rates. Individual consumers are rated for creditworthiness not by credit rating
agencies but by credit bureaus, which issue credit scores.
Credit rating is a highly concentrated industry, with the "Big Three" credit
rating agencies controlling approximately 95% of the ratings business. Moody's
Investors Service and Standard & Poor's (S&P) together control 80% of the global
market, and Fitch Ratings controls a further 15%.
International Credit Rating Agencies – Standard and Poor (S & P),
Moody’s and Fitch Rating agencies are the major rating agency in the world.
STANDARD AND POOR is a american based rating agency headquarter in
New York.
MOODY`S – MOODY`S was founded by John moody in 1909 and
headquarter is situated at New York City, United States.
FITCH – FITCH ratings was founded by John Knowles Fitch on December
24, 1913 in New York city.
Examples of Credit Rating Agencies globally:
1. A.M. Best Company, Inc. Insurance industry emphasis. US NRSRO
2. Capital Intelligence, Ltd. Cyprus
3. Caribbean Information & Credit Rating Services Ltd. (CariCRIS)
Caribbean
4. Central
European
Rating
Agency
(CERA)
a/k/a: Fitch Polska, S.A. Poland
5. Chengxin International Credit Rating Co., Ltd. China — Moody’s
Affiliate
25. Features of dealing with problem loans in multinational banks.
The loans, which cannot easily be recovered from borrowers, are called Problem
loans.
When the loans can’t be repaid according to the terms of the initial agreement or in
an otherwise acceptable manner, it will be called problem loans.
Detecting Problem Loans is for loan officers and other credit professionals who need
to understand the ways to minimize problem loans and to deal with them once they
surface.
The course is appropriate for junior to mid-level commercial lenders, credit review
and credit policy officers, and junior workout officers.
Importance of identifying problem loans early:
 Maintaining Profitability of Bank.
 Providing Client Support.
 Saving Lending Institution Image.
Problem loans must be identified early because they can affect profitability.
Repayments with interest are the primary income source of lending institutions. If
repayments are not made regularly, the ability to make a profit is severely affected.
If the bank can identify a problem loan early, it will be able to take steps to support
a client to pay. For instance, the banker may call them and offer them the option of
paying part of the repayment immediately and part later.
Problem loans cause delinquency and loss to the lending institution. Having
identified which loans are problematic, the banker needs to do the following:
 Create Policies and Procedures for Dealing with Problem Loan.
 Distinguish Between Can Pay versus Won’t Pay.
 Develop a Relationship with the Client Up-Front.
 Prompt and effective follow-up.
 Periodic stress testing of loans.
A policy is a set of decisions about how your company operates. Policies are written
guidelines that help operations. Procedures are written instructions that tell staff how
to implement policies. Each lender must have its policy for identifying problem
loans and dealing with problem loans. These instructions are the procedures that will
tell staff what to do to identify problem loans early. Sound policies and procedures
protect lenders from loss.
26. Types of FX transactions.
The Foreign Exchange Transactions refers to the sale and purchase of foreign
currencies. Simply, the foreign exchange transaction is an agreement of exchange of
currencies of one country for another at an agreed exchange rate on a definite date.
1. Spot Transaction: The spot transaction is when the buyer and seller of
different currencies settle their payments within the two days of the deal. It is
the fastest way to exchange the currencies. Here, the currencies are exchanged
over a two-day period, which means no contract is signed between the
countries. The exchange rate at which the currencies are exchanged is called
the Spot Exchange Rate. This rate is often the prevailing exchange rate. The
market in which the spot sale and purchase of currencies is facilitated is called
as a Spot Market.
2. Forward Transaction: A forward transaction is a future transaction where the
buyer and seller enter into an agreement of sale and purchase of currency after
90 days of the deal at a fixed exchange rate on a definite date in the future.
The rate at which the currency is exchanged is called a Forward Exchange
Rate. The market in which the deals for the sale and purchase of currency at
some future date is made is called a Forward Market.
3. Future Transaction: The future transactions are also the forward
transactions and deals with the contracts in the same manner as that of normal
forward transactions. But however, the transactions made in a future contract
differs from the transaction made in the forward contract on the following
grounds: The forward contracts can be customized on the client’s request,
while the future contracts are standardized such as the features, date, and the
size of the contracts is standardized. The future contracts can only be traded
on the organized exchanges, while the forward contracts can be traded
anywhere depending on the client’s convenience. No margin is required in
case of the forward contracts, while the margins are required of all the
participants and an initial margin is kept as collateral so as to establish the
future position.
4. Swap Transactions: The Swap Transactions involve a simultaneous
borrowing and lending of two different currencies between two investors.
Here one investor borrows the currency and lends another currency to the
second investor. The obligation to repay the currencies is used as collateral,
and the amount is repaid at a forward rate. The swap contracts allow the
investors to utilize the funds in the currency held by him/her to pay off the
obligations denominated in a different currency without suffering a foreign
exchange risk.
5. Option Transactions: The foreign exchange option gives an investor
the right, but not the obligation to exchange the currency in one denomination
to another at an agreed exchange rate on a pre-defined date. An option to buy
the currency is called as a Call Option, while the option to sell the currency is
called as a Put Option.
Thus, the Foreign exchange transaction involves the conversion of a currency of one
country into the currency of another country for the settlement of payments.
27. Types of FX risk.
Foreign Exchange Risk refers to the risk of an unfavorable change in the settlement
value of a transaction entered in a currency other than the base currency (domestic
currency). This risk arises as a result of movement in the base currency rates or the
denominated currency rates and is also called exchange rate risk or FX risk or
currency risk. Currency risk (or foreign exchange risk)—changes in exchange rates.
This risk may adversely affect sales by making competing imported goods cheaper.
Type # 1. Transaction Risk: The risk that changes in exchange rates during the
time it takes to settle a cross-border contract will adversely affect the profit of a party
to the transaction. Accounting Dictionary defines transaction risk as “The risk that
future cash transactions will be affected by changing exchange rates.”
Type # 2. Open Position Risk: Exchange control guidelines in India requires banks
to maintain at the close of every working day a square position in currencies. (a)
Practically, it is not possible to maintain a square position as the aggregate customer
transactions will not result in marketable lots. (b) Some open position, either
overbought or oversold is unavoidable in the very nature of foreign exchange
operations. (c) Exchange control does not altogether prohibit banks keeping
positions during the course of a day. (d) It may happen that a dealer may be expecting
the dollar to weaken during the day might square the deal later.
Type # 3. Mismatch Maturity Risks: Risk that, due to differences in maturities of
the long and positions in a cross hedge, the value of the risk offsetting positions will
fail to move in concert. Measures to mitigate such risks: a. A monthly gap limit for
each currency, b. A cumulative gap limit for each currency and c. A cumulative gap
limit for all currencies taken together.
Type # 4. Credit or Settlement Risks: I. Can arise when a counterparty whether a
customer or a bank, fails to meet his obligation and the resulting open position has
to be covered at the going rate. If the rates have moved against the bank, a loss can
result. II. Can arise if a bank has discounted the bills under L/C of ABC Ban. On the
maturity, the L/C opening bank fails. The Bank incurs a loss. Measures to mitigate
credit risk: a. Prudential Exposure limit for customers. b. Fixing of
counterparty/bank exposure limit and reviewing the same at regular intervals.
Type # 5. Sovereign Risk: Arises if a country suddenly suspends or imposes a
moratorium on foreign payments because of balance of payments or other problems.
Measures to Mitigate Sovereign Risk: 1. Depending on the status, past record,
economic conditions and other factors, a country limit is stipulated by banks to
reduce risk element. 2. Also, cross-country exposures limit may be laid down.
Type # 6. Operational Risks: Operational risk is the risk of direct or indirect loss
resulting from inadequate or failed internal procedures, people and systems, or from
external events. Operational risk for foreign exchange, in particular, involves
problems with processing, product pricing, and valuation. These problems can result
from a variety of causes, including natural disasters, which can cause the loss of a
primary trading site or a change in the financial details of the trade or settlement
instructions on a Forex transaction. Operational risk may also emanate from poor
planning and procedures, inadequate systems, failure to properly supervise staff
defective controls, fraud, and human error.
Type # 7. Translation risk: A parent company owning a subsidiary in another
country could face losses when the subsidiary's financial statements, which will be
denominated in that country's currency, have to be translated back to the parent
company's currency.
Type # 8. Economic risk: Also called forecast risk, refers to when a company’s
market value is continuously impacted by an unavoidable exposure to currency
fluctuations.
28. Methods of FX risk management.
Foreign Exchange Risk refers to the risk of an unfavorable change in the settlement
value of a transaction entered in a currency other than the base currency (domestic
currency). This risk arises as a result of movement in the base currency rates or the
denominated currency rates and is also called exchange rate risk or FX risk or
currency risk. Currency risk (or foreign exchange risk)—changes in exchange rates.
This risk may adversely affect sales by making competing imported goods cheaper.
Technique # 1. Forward contracts: A forward contract is a commitment to buy or
sell a specific amount of foreign currency at a later date or within a specific time
period and at an exchange rate stipulated when the transaction is struck. The delivery
or receipt of the currency takes place on the agreed forward value date. A forward
transaction cannot be cancelled but can be closed out at any time by the repurchase
or sale of the foreign currency amount on the value date originally agreed upon. Any
resultant gains or losses are realized on this date. Generally, there is variation in the
forward price and spot price of a currency. In case the forward price is higher than
the spot price, a forward premium is used whereas if the forward price is lower, a
forward discount is used. To compute annual percentage premium or discount, the
following formula may be used: Forward premium or discount = (Forward rate –
Spot rate)/Spot rate x 360/Number of days under the forward contract. If a currency
with higher interest rates is sold forward, sellers enjoy the advantage of holding on
to the higher earning currency during the period between agreeing upon the
transaction and its maturity. Buyers are at a disadvantage since they must wait until
they can obtain the higher earning currency. The interest rate disadvantage is offset
by the forward discount. In the forward market, currencies are bought and sold for
future delivery, usually a month, three months, six months, or even more from the
date of transaction.
Technique # 2. Future contracts: Commonly used by MNEs as hedging instruments,
future contracts are standardized contracts that trade on organized futures markets
for a specific delivery date only. The major difference in forward and future markets
is summarized as follows: i. The forward contract does not have lot size and is
tailored to the need of the exporter, whereas the futures have standardized round lots.
ii. The date of delivery in forward contracts is negotiable, whereas future contracts
are for particular delivery dates only. iii. The contract cost in future contracts is
based on the bid/offer spread, whereas brokerage fee is charged for futures trading.
iv. The settlement of forward contracts is carried out only on expiration date,
whereas profits or losses are paid daily in case of futures at the close of trading. v.
Forward contracts are issued by commercial banks, whereas international monetary
markets or foreign exchanges issue futures contracts.
Technique # 3. Options: Foreign currency options provide the holder the right to
buy or sell a fixed amount of foreign currency at a pre-arranged price, within a given
time. An option is an agreement between a holder (buyer) and a writer (seller) that
gives the holder the right, but not the obligation, to buy or sell financial instruments
at a time through a specified date. Thus, under an option, although the buyer is under
no obligation to buy or sell the currency, the seller is obliged to fulfil the obligation.
There are two types of foreign currency options: Call option gives the holder the
right to buy foreign currency at a pre-determined price. It is used to hedge future
payables. Put option gives the holder the right to sell foreign currency at a predetermined price. It is used to hedge future receivables. Foreign currency options
are used as effective hedging instruments against exchange- rate risks as they offer
more flexibility than forward or future contracts because no obligation is required
on the part of the buyer under the currency options.
Technique # 4. Swap: In order to hedge long-term transactions to currency rate
fluctuations, currency swaps are used. Agreement to exchange one currency for
another at a specified exchange rate and date is termed as currency swap. Currency
swaps between two parties are often intermediated by banks or large investment
firms. Buying a currency at a lower rate in one market for immediate resale at higher
rate in another with an objective to make profit from divergence in exchange rates
in different money markets is known as ‘currency arbitrage’. To capitalize on
discrepancy in quoted prices, arbitrage is often used to make riskless profits.
29. Types of international settlements.
Methods of payment represents the defined form of how the payment shall be made,
ie on open account payment terms through a bank transfer, or through documentary
collection or letter of credit. Terms of payment defines the obligations of both
commercial parties in relation to the payment, detailing not only the form of payment
and when and where this payment shall be made by the buyer, but also the
obligations of the seller; not only to deliver according to the contract, but also, for
example, to arrange stipulated guarantees or other undertakings prior to or after
delivery. Methods of payment can be categorized in different ways, depending on
the purpose. This is often based on the commercial aspect seen from the exporter's
perspective in terms of security. In security order, the basic methods of payment
could be listed as follows:
▪
cash in advance before delivery;
▪
documentary letter of credit;
▪
documentary collection;
▪
bank transfer (based on open account trading terms);
▪
other payment mechanisms, such as barter or counter-trade.
However, the security aspect is usually not that simple to define in advance. In
reality, there are many different variations and alternatives that will affect the order
of such a listing; for example, if the open account is supported by a guarantee, a
standby letter of credit (L/C) or separate credit insurance, or how a barter or countertrade is structured. Even the nature and wording of the letter of credit will eventually
determine what level of security it offers the seller.
The costs of the alternatives are mainly governed by what function the banks will
have in connection with the execution of payment. Other forms of fees, which can
have an indirect connection to the payment, do sometimes arise, such as different
charges related to the creation of the underlying documents, for example consular
fees and stamp duties. However, such fees are related more to the delivery than to
the payment and are normally borne by the party that has to produce these documents
according to the terms of delivery. Other costs, such as payment of duties and taxes,
are also governed by the agreed terms of delivery.
Bank charges will arise not only in the seller's but also in the buyer's country; they
can vary hugely between different countries, both in size and, more importantly, in
structure. In some cases they are charged at a fixed rate, in others as a percentage of
the transferred amount. Sometimes they are negotiable, sometimes not, and these
differences occur not only between countries but also between banks.
The best solution for both parties is often to agree to pay the bank charges in their
respective country, but whatever the agreement, it should be included in the sales
contract. However, such a deal would probably minimize the total costs of the
transaction since each party would have a direct interest in negotiating these costs
with their local bank. Bank charges in one's own country are more easily calculated
and, even if the difference between banks in the same country is relatively small,
they are often negotiable for larger amounts.
Bank charges are often divided into the following groups:
▪
standard fees for specified services — normally charged at a flat rate;
▪
handling charges, ie for checking of documents — normally charged as a
percentage on the underlying value of the transaction;
▪
risk commissions, ie the issuing of guarantees and confirmation of letters of
credit -normally charged as a percentage of the amount at a rate according to
the estimated risk and the period of time.
Detailed fee schedules, applicable in each country and for each major bank, can
easily be obtained directly from the banks or found on their websites, but as pointed
out earlier, for larger transactions, fees, charges and commissions are often
negotiable.
30. The struggle of international banks against money laundering.
Over the past several decades, money laundering has become an increasingly
prevalent issue. Both financial institutions and governments are constantly looking
for new ways to fight money launderers, and several anti-money laundering policies
have been put in place to help this effort. The term “anti-money laundering”
specifically refers to all policies and pieces of legislation that force financial
institutions to proactively monitor their clients in order to prevent money laundering
and corruption. These laws also require both that financial institutions report any
financial crimes they find and that they do everything possible to stop them. Antimoney laundering laws entered the global arena soon after the Financial Action Task
Force was created. The FATF was responsible for the creation of most anti-money
laundering standards, and it made a framework for countries to follow. After putting
this framework into effect, the FATF then began to systematically identify countries
that did not have proper legislation regarding money laundering. This tactic helped
motivate countries to alter their legislation and start properly enforcing the policies
that were in already place. Currently, the FATF counts 37 member countries. Banks
found gaps in the screening process, which aims to meet so-called “know your
customer” (KYC) requirements that are a cornerstone of global anti-money
laundering controls. Regulators around the world require banks to vet customers so
that criminals cannot mask their identity through complex company and ownership
structures to launder money or sidestep international sanctions. The two recent
reviews show how the bank is still grappling with procedures to ensure it knows who
it is dealing with, in part because of staff turnover. In the 13-page June report, which
was shared with the ECB, Deutsche Bank found a pass rate of zero per cent in the
Republic and other countries such as Russia, Spain, Italy and South Africa when it
checked how client files had been processed. The pass rate measures the percentage
of files that meet the bank’s own KYC standards. Deutsche Bank strives for 95 per
cent, according to the documents. Banks have been fined billions of dollars for lax
oversight, including the failure to identify customers. In January 2017, Deutsche
Bank agreed to pay US and UK regulators $630 million in fines over artificial trades
between Moscow, London and New York that authorities said were used to launder
$10 billion out of Russia. The US Federal Reserve fined the bank an additional $41
million for failing to ensure its systems would detect money laundering in May 2017.
Overall, banks procedures are to identify potential anti-money laundering and KYC
risks.
31. Export-import banks.
Export–Import Bank is the export credit agency. It can be full agency of the
government or semi-private institution, such as a state-owned corporation or a
public–private partnership. There are some Exim Banks: Export–Import Bank of the
United States, Export–Import Bank of Korea, Export–Import Bank of the Republic
of China, Nigerian Export-Import Bank, Export–Import Bank of Thailand, Export–
Import Bank of Romania, African Export–Import Bank, Exim Bank of China,
Export–Import Bank of Pakistan, Exim Bank (India), State Export-Import Bank of
Ukraine, Exim Bank (Bangladesh), Export Development Bank of Iran. EXIM
intervenes when private sector lenders are unable or unwilling to provide financing,
equipping national businesses with the financing tools necessary to compete for
global sales. The Export–Import Bank of the United States is a government agency
that provides a variety of tools intended to aid the export of American goods and
services. The mission of the Bank is to create and sustain U.S. jobs by financing
sales of U.S. exports to international buyers. EXIM equips U.S exporters and their
customers with tools such as buyer financing, export credit insurance, and access to
working capital. The Bank is chartered as a government corporation by the Congress
of the United States; it was last chartered for a three-year term in 2012. The Charter
details the Bank's authorities and limitations. Among them is the principle that
EXIM does not compete with private sector lenders, but rather provides financing
for transactions that would otherwise not occur because commercial lenders are
either unable or unwilling to accept the political or commercial risk inherent in the
deal. The Export-Import Bank of the Republic of China was established with the aim
of facilitating export and import trade of Taiwan through offering Export Credit
Insurance, Relending Facility and other various kinds of financing facilities.
32. Marketing in banking.
Banking is a personalized service oriented industry and hence should provide
services which satisfy the customers’ needs. Marketing of bank products is the
aggregate function absorbed at providing facility to satisfy customer’s monetary
needs and wants, more than the rivalry keeping in view the organizational objectives.
To meet these needs, bankers are expected to provide satisfactory benefits through
provision of form, place, time, and ownership utilities. This strategy will develop
and introduce new banking schemes or services catering to specific needs of various
market segments of bank customers. Banks increasingly compete outside of their
home countries, and operating environments often differ sharply across countries,
both in terms of financial markets and credit risk. The marketing tactic includes
forestalling, classifying, responding and satisfying the customers’ needs and wants
effectually, professionally, and beneficially. It can be said that the presence of the
bank has miniature value without the presence of the customer. The main role of the
bank is not only to attain and win more and more customers but also to preserve
them through operative customer facility. Marketing as associated to banking is to
explain a suitable promise to a customer through a variety of products and services
and also to confirm operative distribution through satisfaction. Marketing of bank
products refers the various ways in which a bank can help a customer, such as
operating accounts, making transfers, paying standing orders and selling foreign
currency. Customers are offered innovative products to redefine banking
convenience. With bank’s expertise, customer can rest assured that your wealth is
protected and nurtured at the same time.
33. New requirements for banking competitiveness in Europe.
European banks, represented by the Board of the European Banking
Federation, today urged the European Union to step up its efforts for improving
Europe’s global competitiveness as part of the agenda of the next European
Commission. Specifically, the EBF Board called on governments in Europe to
recognize the key economic role of banks in funding growth and supporting
prosperity. Members of the Board also emphasized the sector’s unabated
commitment to supporting the fight against financial crime and against money
laundering and called on EU policymakers and national governments to move
towards a more efficient and coherent framework for Anti-Money Laundering. The
banking industry is keen to establish more effective cooperation with public
authorities when it comes to dealing with financial crime and tax evasion. EBF
Board also underlined the need for the European Commission to thoroughly analyze
the impact of the financial regulation that has been introduced in recent years and to
properly determine any unintended consequences. A comprehensive impact analysis
is necessary to ensure concrete and proportionate future proposals that will prevent
further fragmentation of global markets and regulation, a G20 goal supported by the
EU. Members of the EBF Board acknowledged the importance of further pursuing
the digital transformation in the banking sector, in order to provide clients –
businesses as well as households – with innovative and secure financial services. the
Board wants to draw attention to the potential adverse effects of Basel IV on the
European economy. Implementing the additional Basel IV measures would mean a
further significant increase in capital requirements for European banks of possibly
more than 20 percent. This could lead to a severe reduction in the funding available
for the economy.
34. Features of banking development in developed countries.
The broad range of trends identified in this report can be summarised as
following three major themes. A first set of trends can be grouped along the theme
of the cost/income pressures to which banks are exposed. There is growing
competition in the financial sector because of factors such as deregulation and
internationalisation. Financial firms have become increasingly active in each others’
business areas, and in more and more European countries non-financial firms are
now also offering traditional banking services. At the same time banks are facing
growing pressure to create “shareholder value”.
These driving forces translate into a need for banks to increase income and
control costs. On the income side, this is reflected in continued diversification across
geographical areas and business lines. Some of these diversification efforts, such as
in private banking, investment banking and asset management, have suffered from
the poor market conditions, which in turn has resulted in some scaling back of
ambitions. The long-term potential for these activities remains, however, as they are
underpinned by structural trends such as increasing financial wealth and an ageing
population. Difficult market conditions have also encouraged banks to explore
alternative and often more complex investment strategies.
A second set of trends can be grouped along the theme of changes in risk and
risk management. Financial innovation allows banks to (un)bundle risk more
efficiently for proprietary purposes as well as customer-related business. This is
reflected in the rapid development of more sophisticated approaches to risk
management, such as the use of credit derivatives and securitisation. These
techniques may help promote the stability of the financial system by spreading risk
more widely, although their development poses challenges for supervisors, both in
monitoring developments and in determining appropriate responses. Further
improvements in risk management techniques have been observed – especially in
the area of credit risk and operational risk – as banks have started to prepare
themselves for the new regulatory framework for capital adequacy (“Basel II”).
A third important theme, which is related to the previous one, is the growing
importance of consumer issues. This reflects the extent to which commercial banks
have themselves participated in the disintermediation process in recent years,
moving into areas such as investment banking and asset management. Financial
innovation also permits banks to increasingly offer products where the customer
takes on market risk, which is fundamentally absent in deposits repayable at par.
Banks have found themselves coping with new issues relating to the sale of such
products, the handling of complaints and questions of consumer redress.
35. US CAMELS features.
CAMELS Rating is the rating system wherein the bank regulators or
examiners (generally the officers trained by RBI), evaluates an overall performance
of the banks and determine their strengths and weaknesses. CAMELS Rating is
based on the financial statements of the banks, Profit and loss account, balance sheet
and on-site examination by the bank regulators. In this Rating system, the officers
rate the banks on a scale from 1 to 5, where 1 is the best and 5 is the worst. The
parameters on the basis of which the ratings are done are represented by an acronym
“CAMELS”.
1. Capital Adequacy: Capital adequacy asses an institution’s compliance with
regulations on the minimum capital reserve amount. Regulators establish the
rating by assessing the financial institution’s capital position currently and over
several years. Future capital position is predicted based on the institution’s plans
for the future, such as whether they are planning to give out dividends or acquire
another company. The CAMELS examiner would also look at trend analysis, the
composition of capital, and liquidity of the capital. The capital adequacy measures
the bank’s capacity to handle the losses and meet all its obligations towards the
customers without ceasing its operations. A ratio of Capital to Risk Weighted
Assets determines the bank’s capital adequacy.
2. Asset Quality: The examiner looks at the bank’s investment policies and
loan practices, along with credit risks such as interest rate risk and liquidity risk.
The quality and trends of major assets are considered. The ratio of Gross NonPerforming Loans to Gross Advances is one of the criteria to evaluate the
effectiveness of credit decisions made by the bankers.
3. Management Quality: The board of directors and top-level managers are
the key persons who are responsible for the successful functioning of the banking
operations. The category depends on the quality of a bank’s business strategy,
financial performance, and internal controls. In the business strategy and financial
performance area, the CAMELS examiner looks at the institution’s plans for the
next few years. It includes the capital accumulation rate, growth rate, and
identification of the major risks. For internal controls, the exam tests the
institution’s ability to track and identify potential risks. Areas within internal
controls include information systems, audit programs, and record keeping.
4. Earnings. Earnings help to evaluate an institution’s long term viability. A
bank needs an appropriate return to be able to grow its operations and maintain its
competitiveness. The examiner specifically looks at the stability of earnings,
return on assets (ROA), net interest margin (NIM), and future earning prospects
under harsh economic conditions.
5. Liquidity: The bank’s ability to convert assets into cash is called as
liquidity. The ratio of Cash maintained by Banks and Balance with the Central
Bank to Total Assets determines the liquidity of the bank. This category of
CAMELS examines the interest rate risk and liquidity risk. Interest rates affect the
earnings from a bank’s capital markets business segment. If the exposure to
interest rate risk is large, then the institution’s investment and loan portfolio value
will be volatile. Liquidity risk is defined as the risk of not being able to meet
present or future cash flow needs without affecting day-to-day operations.
6. Sensitivity: Through this parameter, the bank’s sensitivity towards the
changing market conditions is checked, i.e. how adverse changes in the interest
rates, foreign exchange rates, commodity prices, fixed assets will affect the bank
and its operations.
The ratings are assigned based on a ratio analysis of the financial statements,
combined with on-site examinations made by a designated supervisory regulator.
Ratings are not released to the public but only to the top management to prevent a
possible bank run on an institution which receives a CAMELS rating downgrade.
Institutions with deteriorating situations and declining CAMELS ratings are subject
to ever increasing supervisory scrutiny. Failed institutions are eventually resolved
via a formal resolution process designed to protect retail depositors.
36. The U.S. banking system.
There are 3 notable features of US central banking system:
1. a central governing Board,
2. a decentralized operating structure of 12 Reserve Banks, and
3. combination of public and private characteristics
2 groups play important roles in the Federal Reserve System's functions:
1 Depository institutions-banks, thrifts, and credit unions.
2 Federal Reserve System advisory committees, which make
recommendations to the Board of Governors and to the Reserve Banks.
Depository Institutions
Depository institutions offer transaction, or checking, accounts to the public,
and may maintain accounts of their own at their local Federal Reserve Banks.
Depository institutions are required to meet reserve requirements-that is, to keep a
certain amount of cash on hand or in an account at a Reserve Bank based on the total
balances in the checking accounts they hold.
Depository institutions that have higher balances in their Reserve Bank
account than they need to meet reserve requirements may lend to other depository
institutions that need those funds to satisfy their own reserve requirements. This rate
influences interest rates, exchange rates, and thereby, aggregate demand in the
economy. The FOMC sets a target for the federal funds rate and authorizes actions
called open market operations to achieve that target.
Advisory Councils
1 Federal Advisory Council (FAC). This council, established by the
Federal Reserve Act, comprises 12 representatives of the banking industry.
2 Community Depository Institutions Advisory Council (CDIAC). The
CDIAC was originally established by the Board of Governors to obtain information
and views from thrift institutions (savings and loan institutions and mutual savings
banks) and credit unions.
3 Model Validation Council. This council was established by the Board
of Governors in 2012 to provide expert and independent advice on its process to
strictly assess the models used in stress tests of banking institutions.
4 Community Advisory Council (CAC). This council was formed by the
Federal Reserve Board in 2015 to offer perspectives on the financial services needs
of consumers and communities, with a particular focus on the concerns of low- and
moderate-income populations.
A dual banking system is the system of banking that exists in the United States
in which state banks and national banks are chartered and supervised at different
levels. Under the dual banking system, national banks are chartered and regulated
under federal law and standards and supervised by a federal agency. State banks are
chartered and regulated under state laws and standards, which includes supervision
by a state supervisor. The law that created the modern banking system is believed to
be the Federal Reserve Act in 1913.
A bank's primary federal regulator could be the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or the Office of the Comptroller of the
Currency. Within the Federal Reserve System are 12 districts centered around 12
regional Federal Reserve Banks, each of which carries out the Federal Reserve
Board's regulatory responsibilities in its respective district. Credit unions are subject
to most bank regulations and are supervised by the National Credit Union
Administration. The Financial Institutions Regulatory and Interest Rate Control Act
of 1978 established the Federal Financial Institutions Examination Council (FFIEC)
with uniform principles, standards, and report forms for the other agencies. tate
regulation of state-chartered banks and certain non-bank affiliates of federally
chartered banks applies in addition to federal regulation. State-chartered banks are
subject to the regulation of the state regulatory agency of the state in which they
were chartered.
There are several different types of banking institutions. Retail banks are the
ones you come across most often. These banks focus on the consumer and provide
the public with a place to deposit money into their own checkings and savings
accounts. Commercial banks were initially established to provide services for
businesses. Savings banks were meant to provide a place for lower-income workers
to save their money. Savings and loan associations and cooperative banks were
established to make it possible for lower-income workers to buy homes. Credit
unions were started by people who shared a common bond (such as working in the
same place or living in the same community) to provide emergency loans for people
who couldn’t afford to get loans from traditional lenders. Mutual banks are similar
to credit unions in that they are owned by the members or customers instead of
outside investors.
37. The Federal Reserve System
The Federal Reserve System is the central bank of the United States. It performs five
general functions to promote the effective operation of the U.S. economy and, more
generally, the public interest. The Federal Reserve functions:
- conducts the nation’s monetary policy to promote maximum employment,
stable prices, and moderate long-term interest rates in the U.S. economy;
- promotes the stability of the financial system and seeks to minimize and
contain systemic risks through active monitoring and engagement in the U.S. and
abroad;
- promotes the safety and soundness of individual financial institutions and
monitors their impact on the financial system as a whole;
- fosters payment and settlement system safety and efficiency through services
to the banking industry and the U.S. government that facilitate USD transactions and
payments;
- promotes consumer protection and community development through
consumer-focused supervision and examination, research and analysis of emerging
consumer issues and trends, community economic development activities, and the
administration of consumer laws and regulations.
The FRS was created on December 23, 1913, with the enactment of the FR
Act, after a series of financial panics (particularly the panic of 1907) led to the desire
for central control of the monetary system in order to alleviate financial crises. Over
the years, events such as the Great Depression in the 1930s and the Great Recession
during the 2000s have led to the expansion of the responsibilities of the FRS.
The U.S. Congress established three key objectives for monetary policy in
the Federal Reserve Act:
- maximizing employment,
-
stabilizing prices, and
moderating long-term interest rates.
The first two objectives are sometimes referred to as the Federal Reserve's
dual mandate. Its duties have expanded over the years, and currently also include
supervising and regulating banks, maintaining the stability of the financial system,
and providing financial services to depository institutions, the U.S. government, and
foreign official institutions.
There are 3 key entities in the Federal Reserve System:
The Board of Governors directs monetary policy and directly
accountable to congress. Its seven members are responsible for setting the discount
rate and the reserve requirement for member banks. Staff economists provide all
analyses.
- The Federal Reserve Banks supervise commercial banks and implement
policy. They work with the board to supervise commercial banks. There is one
located in each of their twelve districts.
- The Federal Open Market Committee (FOMC) oversees open market
operations. That includes setting the target for the fed funds rate, which guides
interest rates. The board members and four of the twelve bank presidents are
members.
38. The UK banking system
After 1945 up to the end of the 1960s the UK financial system was characterized
by separation between the various types of financial institutions. So banks
provides banking services and building societies provides housing finance
services. As a consequence there was little competition between the different
types of institution.
In 1980 controls on banking lending were rejected, leaving banks free to
expand into new areas, especially in housing finance. Banks entered into
competition with building societies.
The UK’s banking system falls into the “restricted universal” category
because banks are prevented from owning commercial concerns. It is made up
of: commercial banks consisting of the “Big Four” such as HSBC (Hong Kong
& Shanghai Banking Corporation), the Royal Bank of Scotland group,
HBOS (Halifax Bank of Scotland) and Barclays, so other major banks are
Lloyds-TSB,Alliance and Leicester. The big four, and some of the other banks,
engage in retail, wholesale and investment banking, and some have insurance
subsidiaries
Regulation structure in UK
First level of regulation in UK refers to the regulation and supervision of
individual firms in the financial sector, to ensure that they remain solvent and
operate in the interests of consumers.(если более заумно, то этот тип
регулирования называется microprudential regulation и переводится как
микропруденциальное регулирование)
Following the Financial Services Act 2012 regulation of this type was given to
a new regulatory authority - the Prudential Regulation Authority (PRA). In
addition, the creation of the Financial Conduct Authority (FCA) attempted to
maintain high levels of competition in the financial sector.
The Prudential Regulation Authority (PRA)
The main objective of the PRA, which is part of the Bank of England, is to
create a stable financial system. For ensuring stability, the PRA was given
responsibility for the regulation financial institutions, such as banks, building
societies and credit unions, insurers and large
investment firms.
The Financial Conduct Authority (FCA)
The FCA, which is separate from the Bank of England, was given responsibility
for ensuring that financial markets work effectively. The FCA ensures
competition is maintained.The FCA is also responsible for the regulation of
financial services firms not supervised by the PRA, including asset managers.
Second level of regulation, focuses on the financial system as a whole. (Здесь
это так же называется «macroprudential regulation» и переводится как
макропруденциальное регулирование) (According to the IMF, objective of
macroprudential regulation is to avoid long run losses in wealth by limiting the
of system-wide financial risk).
The Financial Policy Committee (FPC)
In the UK, this type of regulation under the new framework is the
responsibility of the Financial Policy Committee (FPC) of the Bank of
England. Its role is to identify, monitor and take action to remove or reduce
‘systemic risk’. The FPC can make recommendations and also give directions
to the PRA and the FCA on actions that should be taken to remove or reduce
risk. However, the FCA has no direct powers over the individual financial
institutions
The UK banking system is one of the oldest. It is characterized by a high
degree of concentration and specialization, well developed banking infrastructure,
a close relationship with the international market for loan capital. In a world
financial center – London is working more and more foreign banks than English.
This is primarily American and Japanese banks. The share of foreign currency
deposits in UK banks is significantly higher than in other countries. The English
banking system has the most extensive worldwide network of foreign affiliates.
Until 1979 in Britain there was no specific legislation governing the banking, has
never published an official list of banks, there was no legal definition of the bank.
Control of the central bank for the banks was informal. With the adoption of the law
on banking in 1979, all credit institutions that take deposits are classified by the
Bank of England, or as a “recognized bank” or as “a company licensed to accept
deposits.” Banks do not need a license, but they must be “recognized” by the Bank
of England. Bank of England recognizes as a “bank” credit institution enjoys an
impeccable reputation in financial circles and provides a wide range of banking
services and specializes in a certain category of services.
The most important credit institutions that have received the status of the bank
are depository banks, trade, foreign banks, savings banks, discount houses. The
banking system is a two-tier in the UK. At the top level is the central bank, on the
ground – other banks: commercial (depository) and specialized – trade, foreign
banks, savings banks, discount houses.
The Bank of England was founded by a special act of Parliament in 1694
with the aim of providing a loan to the king for the war with France as a JSC.
The mission of the Bank of England is to promote the good of the people of
the UK by maintaining monetary and financial stability. That includes things like
making sure you can pay for things securely, keeping the cost of living stable, and
ensuring you can rely on banking or payment services.
The Bank has Court of Directors. It sets the strategy and makes the most
important decisions on spending and appointments. It consists of five full-time
members – the Governor and four deputy governors – and seven non-executive
directors. All are appointed by the Government. In 1946, the Bank of England was
nationalized. The share capital of the Bank of England was transferred to the
Treasury, and the former shareholders received compensation in the form of
government bonds.
The Bank of England is working closely with the Treasury. According to
Robert Peels Act (1844), the Bank of England is to publish its balance sheet weekly.
After the nationalization of the Bank it was to publish an annual report on its
activities, and from 1961 – a quarterly newsletter. The balance of the Bank of
England is divided into two parts in accordance with the Act, introduced by Robert
Peel, – the division of the Bank into two departments (and the Issuing Bank), which
merely serves the purpose of accounting. Emission Accounts Department is related
only to the issue of banknotes and software, net profit is transferred to the
Department of National Fund loans.
39. The banking system of France
The French banking system underwent a fundamental structural reform in
1984, which removed most of the distinction between commercial banks and
merchant banks and grouped most financial institutions under a single supervisory
system. The largest commercial banks, such as Crédit Agricole - LCL, BPCE,
Société Générale, BNP Paribas, Natixis, Crédit Mutuel - CIC group, and HSBC
France rank among the largest banks in the world. These commercial banks offer all
classic financing instruments, including short, medium, and long-term loans, shortand medium-term credit facilities, and secured and non-secured overdrafts.
Commercial banks also assist in public offerings of shares and corporate debt, as
well as mergers, acquisitions and takeovers. Banks offer hedging against interest
rate and currency fluctuations. France also has 132 foreign banks; some with
sizeable branch networks.
The Bank of France (Banque de France) is a member of the European Central
Bank (ECB) system and the Banque de France's governor sits on the executive board
of the ECB. The Banque de France introduced Euro-denominated banknotes and
coins in January 2002, completing the transition to the Euro and eliminating the
French franc.
The Banque de France participates in the regulation and supervision of the
French banking and financial system. Its governor is also president of the Prudential
Control Authority, which grants or withdraws banking licenses, ensures that banks
adhere to banking regulations, and supervises insurance companies. In July 2013,
France passed a reform of the banking law which separates customer services from
the proprietary trading activities in order to reduce the risks incurred by the
depositors. The Prudential Control Authority was renamed the Prudential
Supervisory and Resolution Authority as it is supervising the preparation and
implementation of measures to prevent and resolve bank crises.
The most commonly used card in France is CB. CB cards are standardly issued
when you open a French bank account. More than 94% of French people over 15
years old have a CB card. It is relatively easy to get a French CB. Nevertheless,
barriers start with non-EU nationals, who might wait longer until being approved for
an account. Cash remains popular in France for holding different transactions (a bit
over 50%). However, it is used for small amounts, usually less than 20 Euros, and
in value terms, cash accounts for just 15% of French transactions. Credit cards are
not so prevalent, but Visa, Mastercard and American Express are more common for
large, online payments.
To sum up, France has a stable and organized banking system. The banks are
reliable and efficient, as what was expected from one of the leaders of the European
Union.
40. The banking system of Germany
Germany’s banking system comprises three pillars — private commercial
banks, public-sector banks, and cooperative banks — distinguished by the legal form
and ownership structure.
The private commercial banks represent the largest segment by assets,
accounting for 40% of total assets in the banking system. An important feature of
the private banks is that they compete keenly not only with banks in other sectors of
the industry, but also among themselves. The private banks play a key role for the
German export economy, they are involved in 88% of German exports and maintain
almost three quarters of the German banking industry’s foreign network.
The public banking sector comprises savings banks, which acts as the central
asset manager of the Savings Banks Finance Group, representing 26% of total banks’
assets. There are currently 385 savings banks. They are normally organised as
public-law corporations with local governments as their guarantors/owners. Their
business is limited to the area controlled by their local government owners. Other
than this regional focus, their business does not differ in any way from that of the
private commercial banks. As a result of the so-called regional principle, savings
banks do not compete with one another.
The cooperative sector consists of 875 cooperative banks (Volks- und
Raiffeisenbanken) and one central cooperative bank (DZ Bank AG). It accounts for
50% of institutions by number and 18% of total bank assets. The cooperative banks
are owned by their members, who are usually their depositors and borrowers as well.
By virtue of their legal form, cooperative banks have a mandate to support their
members, who represent about half of their customers. However, cooperative banks
also provide banking services to the general public. Like the savings banks,
cooperative banks have a regional focus and are subject to the regional principle.
The number of banks in Germany has dropped sharply in recent years, and by
52% since 1995. Consolidation to achieve economies of scale has taken place largely
within the existing pillars. In most cases in the savings bank and cooperative sectors,
consolidation has been the result of stress rather than proactive business
considerations.
Germany has its Central Bank. Eurosystem monetary policy is the
Bundesbank's core business area. Its main task is to secure monetary stability in the
euro area. This requires in-depth analyses, a long-term view and impartiality towards
individual interests. The Bundesbank's stability policy also relies on support from
economic, fiscal and wage policy. The Bundesbank performs other key tasks at both
the national and international level. Amongst these are national supervision of credit
institutions, including a role in the European Single Supervisory Mechanism, as well
as cash management and payment systems, financial and monetary stability. The
Bundesbank is involved in all international institutions and committees that are
dedicated to stabilising the financial system.
Moreover, the Bundesbank manages Germany's foreign reserves, acts as the
government's fiscal agent and carries out important statistical tasks. It also advises
the Federal Government on issues of importance to monetary policy.
41. The banking system of Japan
While financial system deregulation and international competitive pressure
have changed the face of Japanese banking, the connection between corporate
finance and banking institutions and non-financial corporations remains tight in
Japan and extends far beyond simple lender/borrower relationships. Much corporate
banking business is rooted in either business groups with interlocking shareholding
(keiretsu) or in regional relationships. Japanese banks are frequently shareholders in
companies that conduct banking business with them.
This unique relationship between a company and its bank has been longstanding; until recently, a Japanese company rarely changed its primary lender,
although it would occasionally "shop around" for better credit arrangements. Even
when credit is loose, companies sometimes borrow more than their need in order to
maintain good relations with their bank and to ensure that funds will be available in
leaner years. Banks are often large shareholders in publicly traded corporations, have
close relationships with both local governments and national regulatory agencies,
and often play a coordinating role among their clients. The Japanese commercial
bank system is relationship-oriented. Japanese banks were able to avoid the direct
impact from the global financial crisis due to their limited exposure to structured
securities.
While large corporations with suitable credit ratings can rely on corporate
bond issues rather than banks for financing, bank lending continues to be the primary
financing method for SMEs and for many larger companies as well. Japanese banks
offer regular and time deposits and checking accounts for businesses. Checks are
negotiable instruments that are in effect payable to the bearer. This limits the
usefulness of checks, and in fact, most payments are made by electronic bank
transfer, or by sending cash through the postal system.
Personal checking accounts are almost unknown in Japan. Most individuals
use electronic bank transfers to settle accounts. Cash settlement is also very
common, and the Post Office has a mechanism for payment by "cash envelope"
which is widely used in direct marketing and other applications. Many Japanese
banks operate 24-hour cash machines (as do some credit card companies). Bank and
other credit cards are easy to obtain and are widely accepted. Some bank credit cards
offer revolving credit, but in most cases, balances are paid in full monthly via
automatic debiting from bank accounts.
The relationship among trading company, end user and exporter is an
important feature of the financing environment in Japan. The Japanese general
trading company (sogo shosha) is an integrated, comprehensive organization that
embraces a range of functions including marketing and distribution, financing and
shipping and the gathering of commercial information.
42.The banking system of China
The Chinese banking system used to be monolithic, with the People's Bank of
China (PBC), its central bank, as the main entity authorized to conduct operations in
that country. In the early 1980s, the government opened up the banking system and
allowed four state-owned specialized banks to accept deposits and conduct banking
business. These five specialized banks are The Industrial & Commercial Bank of
China (ICBC), China Construction Bank (CCB), Bank of China (BOC), Bank of
Communications (BoCom), Agricultural Bank of China (ABC).
In 1994, the Chinese government established three more banks, each of which
is dedicated to a specific lending purpose. These policymaking banks include the
Agricultural Development Bank of China (ADBC), the China Development Bank
(CDB), the Export-Import Bank of China.
The specialized banks have all conducted initial public offerings (IPOs) and
have varying degrees of ownership by the public. Despite these IPOs, the banks are
all still majority owned by the Chinese government.
China has also allowed a dozen joint stock commercial banking institutions
and more than a hundred city commercial banks to operate in the country. There are
also banks in China dedicated to rural areas of the country. Foreign banks were also
allowed to establish branches in China and to make strategic minority investments
in many of the state-owned commercial banks.
The total assets of the Chinese banking system were 254.3 trillion yuan, or
US$14.4 trillion, in mid-2018. The five specialized banks controlled 90.4 trillion
yuan or approximately 35.5% of these assets.
The main regulatory body that oversees the Chinese banking system is the
China Banking Insurance Regulatory Commission. The CBIRC is charged with

writing the rules and regulations governing the banking and insurance
sectors

conducts examinations and oversight of banks and insurers;

collects and publishes statistics on the banking system;

approves the establishment or expansion of banks;

resolves potential liquidity, solvency, or other problems that might
emerge at individual banks.
The People's Bank of China also has considerable authority over the Chinese
banking system. The PBC's role includes:

responsibility for monetary policy

representing the country in an international forum

reduce overall risk and promote the stability of the financial system

regulates lending and foreign exchange between banks

supervises the payment and settlement system of the country.
China's Deposit Insurance Regulations went into effect in May 2015. Deposit
insurance is provided to protect depositors from the loss of their funds and eliminate
the possibility of a run on the bank if rumors spread about problems associated with
a particular bank.
The Chinese banking system is undergoing a program of reform to transition
from state to private ownership and support the economy's move to capitalism. This
reform started a generation ago and will continue for many years.
43.Islamic banking.
Islamic banking, also known as non-interest banking. The principles of
Islamic banking follow Sharia law, which is based on the Quran and the Hadith, the
recorded sayings, and actions of the Prophet Muhammad. Islamic law prohibits
collecting interest. Two fundamental principles are
1. the sharing of profit and loss
2. the prohibition of the collection and payment of interest by lenders and
investors
Typically, financial transactions within Islamic banking are a culturally
distinct form of ethical investing. For example, investments involving alcohol,
gambling, pork, and other forbidden items is prohibited. There are over 300 Islamic
banks in over 51 countries, including the United States.
When more information or guidance is necessary, Islamic bankers turn to
learned scholars or use independent reasoning based on scholarship and customs.
The bankers also ensure their ideas do not deviate from the fundamental principles
of the Quran.
The origin of Islamic banking dates back to the beginning of Islam in the
seventh century. The Prophet Muhammad's first wife, Khadija, was a merchant. He
acted as an agent for her business, using many of the same principles used in
contemporary Islamic banking.
To earn money without the use of charging interest, Islamic banks use equity
participation systems. Equity participation means if a bank loans money to a
business, the business will pay back the loan without interest, but instead gives the
bank a share in its profits. If the business defaults or does not earn a profit, then the
bank also does not benefit.
While an Islamic bank is one based on and managed with Islamic principles,
an Islamic window refers to the services provided by a conventional bank but based
on Islamic principles. For example, in Oman, there are two Islamic banks, Bank
Nizwa and Al Izz Islamic Bank. Six of the seven commercial banks in the country
also offer Islamic banking services through dedicated windows or sections.
44International financial institutions.
An international financial institution (IFI) is a financial institution that has
been established (or chartered) by more than one country, and hence are subjects of
international law. Its owners or shareholders are generally national governments,
although other international institutions and other organizations occasionally figure
as shareholders. The most prominent IFIs are creations of multiple nations, although
some bilateral financial institutions (created by two countries) exist and are
technically IFIs.
The best-known IFIs were established after World War II to assist in the
reconstruction of Europe and provide mechanisms for international cooperation in
managing the global financial system. They include the World Bank, the IMF, and
the International Finance Corporation.
Today, the world's largest IFI is the European Investment Bank, with a
balance sheet size of €573 billion in 2016.
A multilateral development bank (MDB) is another specific IFI type. It is an
institution, created by a group of countries, that provides financing and professional
advising for the purpose of development. MDBs have large memberships including
both developed donor countries and developing borrower countries. MDBs finance
projects in the form of long-term loans at market rates, very-long-term loans (also
known as credits) below market rates, and through grants.
The following are usually classified as the main MDBs:
- World Bank
- European Investment Bank (EIB)
- Islamic Development Bank (IsDB)
- Asian Development Bank (ADB)
- European Bank for Reconstruction and Development (EBRD)
There are also several multilateral financial institutions (MFIs). MFIs are
similar to MDBs but they are sometimes separated since they have more limited
memberships and often focus on financing certain types of projects.
- European Commission (EC)
- International Finance Facility for Immunisation (IFFIm)
- International Fund for Agricultural Development (IFAD)
- Nordic Investment Bank (NIB)
-
OPEC Fund for International Development (OFID)
45 Features of bankruptcies in banking.
Bankruptcy is the legal proceeding involving a person or business that is
unable to repay outstanding debts. The bankruptcy process begins with a petition
filed by the debtor, which is most common, or on behalf of creditors, which is less
common. All of the debtor's assets are measured and evaluated, and the assets may
be used to repay a portion of outstanding debt.
A bank failure occurs when a bank is unable to meet its obligations to its
depositors or other creditors because it has become insolvent or too illiquid to meet
its liabilities. More specifically, a bank usually fails economically when the market
value of its assets declines to a value that is less than the market value of its
liabilities.
Features of bankruptcies in banking:
- Increasing Interest Rates
- Decreasing Liquidity
- Fluctuation Of Markets
- Domino’s Effect
The insolvent bank either borrows from other solvent banks or sells its assets
at a lower price than its market value to generate liquid money to pay its depositors
on demand. The inability of the solvent banks to lend liquid money to the insolvent
bank creates a bank panic among the depositors as more depositors try to take out
cash deposits from the bank. As such, the bank is unable to fulfill the demands of all
of its depositors on time. Also, a bank may be taken over by the regulating
government agency if Shareholders Equity (i.e. capital ratios) are below the
regulatory minimum.
The failure of a bank is generally considered to be of more importance than
the failure of other types of business firms because of the interconnectedness and
fragility of banking institutions. Research has shown that the market value of
customers of the failed banks is adversely affected at the date of the failure
announcements. It is often feared that the spill over effects of a failure of one bank
can quickly spread throughout the economy and possibly result in the failure of other
banks, whether or not those banks were solvent at the time as the marginal depositors
try to take out cash deposits from these banks to avoid from suffering losses.
Thereby, the spill over effect of bank panic or systemic risk has a multiplier effect
on all banks and financial institutions leading to a greater effect of bank failure in
the economy. As a result, banking institutions are typically subjected to rigorous
regulation, and bank failures are of major public policy concern in countries across
the world.
46. International banking crises.
A banking crisis is a financial crisis that affects banking activity. Banking
crises include bank runs, which affect single banks; banking panics, which affect
many banks; and systemic banking crises, in which a country experiences many
defaults and financial institutions and corporations face great difficulties repaying
contracts.
Causes of Banking Crises:
Bank Run: occurs when many people try to withdraw their deposits at the
same time. As much of the capital in a bank is tied up in investments, the bank’s
liquidity will sometimes fail to meet the consumer demand. This can quickly induce
panic in the public, driving up withdrawals as everyone tries to get their money back
from a system that they are increasingly skeptical of.
Stock Market Positive Feedback Loops: dynamic factor in recent banking
crises (i.e. 2007-2009 sub-prime mortgage disaster). Interdependent and potentially
self-fulfilling investment thought process can create dramatic rises and falls (bubbles
and crashes), which in turn can throw banks with poorly designed leverage into huge
losses.
Regulatory Failure: lack of governmental oversight is hazardous as banks
often leverage themselves to capture gains despite extremely high risks (such as
over-dependence on derivatives).
Contagion: Due to globalization and international interdependence, the failure
of one economy can create something of a domino effect. In 2008, when the U.S.
economy collapses, the reduced buying power and economic output from that
economy dramatically damaged all economies dependent upon it (which includes
most of the world).
The Great Depression in 1929 resulted from a variety of complex inputs, but
the turning point came in the form of a mass stock market crash (Black Tuesday)
and subsequent bank runs. As fear began to grip consumers across the United States,
people became protective of their assets (including their cash). This caused a large
number of people to the banks to withdraw, which in turn motivated others to go to
the banks and get their capital out also. Since banks lend out some of their deposits,
they did not have enough cash on hand to meet the immediate withdrawal requests
(they became illiquid) and therefore went bankrupt. Within a few weeks this resulted
in a systemic banking crisis.
Irresponsible and unethical leveraging in assets by the banks, and mass
governmental failure to listen to economists predicting this over the past decade,
caused the 2008 stock market crash and subsequent depression
47. Features of the rehabilitation of problem banks
The essence of the financial rehabilitation of the bank is to carry out a set of measures
aimed at restoring its liquidity, resuming profitable activities, provided that all
requirements of banking legislation are met.
Every country has its own set of bank rehabilitation legislation, which may differ a
lot. In Russia the pricedure is the following:
If a bank loses financial stability, the Bank of Russia has the right to send the Deposit
Insurance Agency a proposal to participate in the prevention of bankruptcy of this
credit institution. Employees of the Central Bank and DIA conduct a joint
assessment of the financial standing of the bank, on the basis of which the Agency
decides or refuses to participate in the rehabilitation.
The law lists two main mechanisms for bank rehabilitation:
1) rehabilitation of a credit institution with the involvement of a private investor or,
if there is none at the initial stage, with the acquisition by the Agency of its shares
(shares in the authorized capital)
2)so-called partial rehabilitation, involving the transfer of liabilities and assets for
an equivalent amount from a troubled bank to a financially stable one.
The choice of the rehabilitation mechanism depends on the prospects for the
restoration of normal activities by the bank. Partial rehabilitation is applied if the
bank cannot continue operations due to the low quality of assets and the lack of
investors.
The most preferred form of financial recovery of a bank is to attract interested
investors who are ready to invest the funds necessary to restore the activities of a
problem credit institution and its further development.
The timing of the implementation of anti-crisis measures depends on the financial
situation of the bank at the time the rehabilitation began. In fact, during the period
of rehabilitation, a bank must restore profitable activity and earn enough funds to
recapitalize, create the necessary level of reserves for possible losses and return to
creditors (including the Agency) the funds provided for financial recovery.
48. Directions for reforming the banking industry after the crisis.
The global banking system has undergone significant changes after the financial and
economic crisis of 2007–2009.
In the banking sector, the main areas of reform have become: global systemically
important banks (GSZB), “shadow” banking activity and banking regulation
(understood as compliance with Basel Agreement).
After the global crisis, G20 leaders decided to lower reduction of systemic risks,
increase of transparency and level of protection from abuse of the OTC derivatives
market.
The problem of too-big-to-fail banks is still unresolved. During last years the share
of 30 biggest banks is growing. The activities of the largest transnational banks are
difficult to regulate, which may again lead to the formation of financial bubbles in a
crisis situation.
Currently, the world financial community is taking measures to combat shadow
banking, but there is a certain likelihood of this sphere expanding due to tightening
measures in the sphere of regulating world banking system. At the same time, a
number of analysts believe that the shadow banking sector is an important high-tech
part world banking system that raises the level of financial interactions.
An important area of global banking reform became banking regulation and
supervision. The Basel II agreement adopted in 2004 was not effective enough to
reliably assess the risks inherent in traded securitized tools, which, in turn,
stimulated banks to securitize assets that seemed less risky.
In addition, there was no proper regulation of the activities of rating agencies; lack
of necessary oversight of asset transfers from bank balances to special investment
companies; market derivatives was completely uncontrolled. In this regard, the
agreement was finalized, and in 2010 appeared new edition of banking standards
(Basel III).
The main provisions of this document are aimed at increasing the ability of banks
absorb financial and economic shocks, increase the effectiveness of risk
management, as well as increase the level of transparency and disclosure of
information by banks.
Most likely, after the global crisis in the global monetary system, a new stage of
financial globalization has begun. In the post-crisis period, there is a steady tendency
to strengthen the position of developing countries and emerging markets in the
global financial system (in particular, the role of China has increased).
Another characteristic trend that arose after the global crisis, it became an increase
in the level of regionalization, especially in the Asia-Pacific region.
49. Problems of prudential supervision
Prudential regulation is a type of financial regulation that requires financial firms to
control risks and hold adequate capital as defined by capital requirements, liquidity
requirements, by the imposition of concentration risk (or large exposures) limits, and
by related reporting and public disclosure requirements and supervisory controls and
processes. This is in contrast to consumer protection and market conduct rules that
are also part of financial regulations.
There should be three major objectives of regulation, as follows:
• To make sure that there is micro-prudential supervisions, so that customers and
taxpayers are protected against excessive risk taking that may cause a single
institution to fail.
• To make sure that whole financial sector retains its balance and does not become
unstable. That means someone has to warn about the build up of risk across several
institutions and perhaps take regulatory actions to restrain lending used to purchase
assets whose prices are creating a speculative bubble.
• To regulate the conduct of business. That means to watch out for the interests of
consumers and investors, whether they are small shareholders in public companies
or households deciding whether to take out a mortgage or use a credit card.
For objectives-based regulation to work, it is essential to harness the power of the
market as a way to enhance stability. It will never be possible to have enough smart
regulators in place that can outwit private sector participants who really want to get
around regulations because they inhibit profit opportunities or because of the
burdens imposed. A good regulatory environment is structured so that people who
take risks stand to lose their own money if their bets do not work out.
Prudential supervision is usually seen as flawless when banks are operation without
difficulty. But when banks ail in large numbers, and the system itself is threatened,
supervision needs to be reformed. These days supervision is focused on misguided,
inept and dishonest bank management as the principal cause of bank failure.
The largest limitation of PS is monetary policy and exogenous shock. Banks, being
participants of the larger economy, as vulnerable to macro-economic disruption.
The second limitation revolves around the US financial system being a core part of
the world’s financial system. As seen in the crisis of 2008-2009, when there is an
economic shock in the US economy, it would inevitably cause a wave-like disruption
all over the world.
50. Deposit insurance and regulation of international banking.
Deposit insurance is part of the regulatory mechanism in international banking.
Countries have different
types of deposit insurance. It is usual to define deposit insurance as either implicit
or explicit.
Implicit deposit insurance is the lender-of-last-resort (LOLR) guarantee which the
central bank or
regulatory authorities provides to banks and depositors. Under implicit deposit
insurance, deposits are
protected by the bank monitoring and regulatory authority – which does so without
specifying guarantees
regarding the extent of the protection. Usually implicit deposit insurance is not
specifically funded.
In a country where there is explicit deposit insurance, deposits are protected up to a
preset limit by the
bank monitoring and regulatory authorities.
All schemes are designed to provide a mechanism with which the bank regulatory
authority can protect
deposits in banking institutions.
But as a result of the differences in the structure of financial and legal systems in
different countries, it is
difficult to envisage a readily internationally transferable deposit insurance system.
It is not easy to generalize about deposit insurance design since it would be a
function of the nature of the
banking and financial services sector, which are in them- selves a function of other
factors.