Tài chính doanh nghiệp - Chapter 2: The banking sector

Chapter 2The Banking SectorWebsites:  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonLearning ObjectivesEvaluate the functions and activities of commercial banksIdentify the main sources and uses of funds and reasons for changesAnalyse the importance of changes in the role of banks on the financial systemCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonLearning Objectives (cont.)Examine the market structure of the banking sectorOutline the nature and importance of banks off-balance-sheet (OBS) businessConsider the regulation and prudential supervision of banksCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation2.1 Introduction2.2 Functions of Banks2.3 Sources of Funds2.4 Uses of Funds2.5 Off-balance-sheet Business2.6 Regulation and Prudential Supervision2.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.1 IntroductionBanking Act 1959 (Cwlth)Authorises a financial institution to operate as a bankThree categories of banksIncorporated banks: domestic and foreignUnincorporated foreign bank branchesForeign bank representative officesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.1 Introduction (cont.)Importance of banksLargest share of assets of all institutionsShare declined 1950s to mid-1980s due to regulation whichconstrained development of bankssupported evolution and growth in NBFIsRole in international financial marketsIncrease in managed funds activities and OBS businessCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.1 Introduction (cont.)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation2.1 Introduction2.2 Functions of Banks2.3 Sources of Funds2.4 Uses of Funds2.5 Off-balance-sheet Business2.6 Regulation and Prudential Supervision2.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.2 Functions of BanksAsset management (−1980s)Loans portfolio is tailored to match the available deposit baseLiability management (1980s−)Deposit base and other funding sources are managed to fund loan demandCommercial bill marketProvision of other financial servicesOBSCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation2.1 Introduction2.2 Functions of Banks2.3 Sources of Funds2.4 Uses of Funds2.5 Off-balance sheet Business2.6 Regulation and Prudential Supervision2.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.3 Sources of FundsSources of funds appear in the balance sheet as either liabilities or shareholders fundsBanks offer a range of deposit and investment products with different mixes of liquidity, return, maturity and cash flow structure to attract the savings of surplus entitiesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.3 Sources of Funds (cont.)Current depositsFunds held in a cheque accountHighly liquidMay be interest or non-interest bearingCall or demand depositsFunds held in savings accounts that can be withdrawn on demande.g. passbook account, electronic statement account with ATM and EFTPOSCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.3 Sources of Funds (cont.)Term depositsFunds lodged in an account for a predetermined period at a specified interest rateTerm: one month to five yearsLoss of liquidity due to fixed maturityHigher interest rate than current or call accountsGenerally fixed interest rateCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.3 Sources of Funds (cont.)Negotiable certificates of deposit (CDs)Paper issued by a bank in its own name Issued at a discount to face valueSpecifies repayment of the face value of the CD at maturityHighly negotiable securityShort term (30 to 180 days)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.3 Sources of Funds (cont.)Bill acceptance liabilitiesBill of exchangeA security issued into the money market at a discount to the face value. The face value is repaid to the holder at maturityAcceptanceIssuer of bill agrees to pay bank face value of bill, plus a fee, at maturity dateAcceptance by bank guarantees flow of funds to its customers without using its own fundsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.3 Sources of Funds (cont.)Debt liabilitiesMedium- to longer-term debt instruments issued by a bankDebentureA bond supported by a form of security, being a charge over the assets of the issuer (e.g. collateralised floating charge)Unsecured noteA bond issued with no supporting securityCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.3 Sources of Funds (cont.)Foreign currency liabilitiesThe issue of debt instruments into the international capital markets that are denominated in a foreign currencyallows diversification of funding sources into international marketsfacilitates matching of foreign exchange denominated assetsmeet demand of corporate customers for foreign exchange productsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.3 Sources of Funds (cont.)Loan capitalSources of funds that have the characteristic of both debt and equity (e.g. subordinated debentures and subordinated notes)Subordinated means the holder of the security has a claim on interest payments or the assets of the issuer, after all other creditors have been paid (excluding ordinary shareholders)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation2.1 Introduction2.2 Functions of Banks2.3 Sources of Funds2.4 Uses of Funds2.5 Off-balance-sheet Business2.6 Regulation and Prudential Supervision2.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.4 Uses of FundsUses of funds appear in the balance sheet as assetsThe majority of bank assets are loans which give rise to an entitlement to future cash flows, i.e. interest and repayment of principalLending to governmentCommercial lendingPersonal financeCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.4 Uses of Funds (cont.)Lending to governmentTreasury notesShort-term discount securities issued by the Commonwealth GovernmentTreasury bondsMedium- to longer-term securities issued by the commonwealth government that pay a specified interest coupon streamState government debt securitiesLow risk and low returnCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.4 Uses of Funds (cont.)Commercial lending (business sector and other financial intermediaries)Fixed-term loanA loan with negotiated terms and conditionsPeriod of the loanInterest ratesFixed or variable rates set to a specified reference rate (e.g. BBSW)Timing of interest paymentRepayment of principalCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.4 Uses of Funds (cont.)OverdraftA facility allowing a business’s operating account into debit up to an agreed limitBank bills heldBills of exchange (see slide 15) accepted and discounted by a bank and held as assetsA rollover facility is where a bank agrees to discount new bills over a specified period as existing bills matureLeasingCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.4 Uses of Funds (cont.)Personal financeHousing financeMortgageAmortised loanInvestment propertyFixed-term loanCredit cardOther bank assets (e.g. infrastructure, shares in controlled entities)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation2.1 Introduction2.2 Functions of Banks2.3 Sources of Funds2.4 Uses of Funds2.5 Off-balance-sheet Business2.6 Regulation and Prudential Supervision2.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.5 Off-balance-sheet BusinessOBS transactions are a significant part of a bank’s businessOBS transactions includeDirect credit substitutesTrade and performance-related itemsCommitmentsMarket rate-related transactionsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.5 Off-balance-sheet Business (cont.)Direct credit substitutesAn undertaking by a bank to support the financial obligations of a client (e.g. ‘stand-by letter of credit’)The bank acts as guarantor on behalf of a client for a feeClient has a financial obligation to a third partyBank is only required to make a payment if the client defaults on a payment to a third partyCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.5 Off-balance-sheet Business (cont.)Trade and performance-related itemsA form of guarantee provided by a bank to a third party, promising financial compensation for non-performance of commercial contract by a bank clientExamplesDocumentary letters of creditPerformance guaranteesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.5 Off-balance-sheet Business (cont.)CommitmentsThe contractual financial obligations of a bank that are yet to be completed or deliveredBank undertakes to advance funds or make a purchase of assets at some time in the futureExamplesForward purchasesUnderwritingCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.5 Off-balance-sheet Business (cont.)Market rate-related transactionsThe use of derivative products to manage exposures to foreign exchange risk, interest rate risk, equity price risk and commodity risk, i.e. hedgingExamplesFutures, options, foreign exchange contracts, currency swaps, forward rate agreements (FRAs)Also used for speculatingCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.5 Off-balance-sheet Business (cont.)Volume of OBS businessAt June 2001, the face value of OBS business undertaken by banks in Australia was over six times the level of total assetsOver 92% of OBS business is based on market rate-related transactionsNature and size of contracts combined with the volatility and speed of contract repricing has resulted in extraordinary lossesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation2.1 Introduction2.2 Functions of Banks2.3 Sources of Funds2.4 Uses of Funds2.5 Off-balance-sheet Business2.6 Regulation and Prudential Supervision2.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.6 Regulation and Prudential SupervisionObjectives of regulation and prudential supervisionWallis ReportCapital adequacy requirementsLiquidity managementOther regulatory and supervisory controlsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonObjectives of regulation and prudential supervisionReasons for regulation of banksImportance of the banking sector for health of the economyPrudential supervisionControl of the money supplyThe imposition and monitoring of standards designed to ensure the soundness and stability of the banking sectorCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonWallis ReportInquiry into the Australian Financial System with a focus onthe effect of compulsory superannuation and changing savings patterns on customer needstechnology facilitating easy access to a greater range of financial productsthe need for a change in regulatory framework motivated by financial market globalisation and the Campbell Report findingsthe changing financial landscape due to the evolution of business needs, financial markets and productsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonWallis Report (cont.)Post-inquiry Regulatory StructureAustralian Securities and Investments Commission (ASIC)Market integrity and consumer protectionAustralian Prudential Regulation Authority (APRA)New prudent regulator of deposit-taking institutions (previously RBA)Australian Competition and Consumer Commission (ACCC)Competition policyRBASystem stability and monetary policyCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonCapital adequacy requirements (cont.)Capital StandardsBank for International Settlements (BIS) developed international capital adequacy requirements (1988)Adopted in all major industrial countries (including Australia)Banks required to hold minimum 8% capital to risk-weighted assets and OBS itemsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonCapital adequacy requirements (cont.)Capital measured in two tiersTier 1: core capitale.g. ordinary shares, general reserves, retained earningstier 1 capital required to be at least 50% of bank’s required capital baseTier 2: supplementary capitalupper tier 2: e.g. asset revaluation reserves perpetual subordinated debt lower tier 2: e.g. term subordinated debtCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonCapital adequacy requirements (cont.)Risk Weighting of Balance Sheet AssetsAsset risk weightings are based on the counterparty to the transaction0% notes and coins, claims against central governments and central banks20% claims against local governments, domestic banks and international banks50% loans secured by residential mortgages100% all other assets and claims against counterpartiesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonCapital adequacy requirements (cont.)Application of Asset Risk WeightingsAsset type Asset value Risk weight Risk-weighted asset ($billion) (%) value ($billion)Cash and cwth govt securities 2 000 0 0Loans to local govt 1 000 20 200Housing loans 24 000 50 12 000Loans to corporations 20 000 100 20 000TOTAL 47 000 32 200Total capital requirement: 8% x $32 200 billion = $2576 billionTier 1 capital requirement: $32 200 x 4% = $1288 billionTo fund these assets, the bank requires $2576 in capital. The remaining $44 424 billion could be raised as liabilitiesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonCapital adequacy requirements (cont.)OBS Credit ConversionSTEP 1: Convert face value of OBS transactions to on-balance sheet equivalents100% Direct credit substitutes, sales and repurchase agreements50% Performance-related contingencies, note issuance facilities, underwriting20% Trade-related contingencies, including documentary letters of credit, acceptance of trade bills0% Commitments with residual maturity less than  one yearSTEP 2: Apply risk-weightings based on counterpartyCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonCapital adequacy requirements (cont.)OBS Credit ConversionOBS items Face value Credit conversion Credit of contract ($m) factor (%) equivalent ($m)Financial guarantees issued 700 100 700 on behalf of corporationsPerformance bonds for 500 50 250 state governmentsHousing loan approvals 2000 100 2000Documentary letters of credit 250 20 50 issued for corporations TOTAL 3450 3000 The asset risk-weightings are then applied to the credit equivalent column (as per the on-balance-sheet items)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonLiquidity managementLiquidityAccess to sufficient funds for a bank to meet its business operating commitmentsAPS210-LiquidityReplaced PAR and LGSEmphasis on bank’s own internal liquidity management practicesAPRA reserves the right to specify minimum level of liquid assetsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonOther regulatory and supervisory controlsRisk management systems certificationAuditDisclosure and transparencyLarge exposureForeign currency exposuresOwnership and controlCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation2.1 Introduction2.2 Functions of Banks2.3 Sources of Funds2.4 Uses of Funds2.5 Off-balance-sheet Business2.6 Regulation and Prudential Supervision2.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.7 SummaryBanks are the dominant institution and have moved to liability managementSources of funds include deposits (current, call and term deposits) and non-deposit sources (bill acceptances, debt and foreign currency liabilities, OBS business and other services)Uses of funds include government, commercial and personal lendingCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson2.7 Summary (cont.)OBS transactions are a major part of a bank’s business and includedirect credit substitutestrade and performance-related itemscommitmentsmarket rate-related transactionsAPRA’s bank prudential supervision requirements include capital adequacy, liquidity management and other controlsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson