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book chapter 4 deposit- taking Institutions (describe the structure of the…
book chapter 4 deposit- taking Institutions
describe the activities of banks
Authorised deposit-taking institutions (ADIs)
they provide the assets which allow transactions to be carried out.
are financial institutions that trade under an authorisation from the Australian Prudential Regulation Authority (APRA)
included
banks
building societies
credit unions
ADIs accept deposits from customers such as households, businesses and government authorities
make loans to households, businesses and, usually by buying securities, to governments.
roles of bank
important conduit of monetary policy
play a critical role in transmitting changes in official interest rates to the rest of the economy
market makers in many wholesale financial markets
Banking business
some basics
retail banking
accepting deposits and making loans to households. The transactions are usually of a small denomination
wholesale banking
which involves high denomination transactions with corporations, large institutions or very wealthy individual customers (commonly called high-net-worth individuals).
equity and deposits
Regulation
The regulation that is forcing banks to hold capital is the Bank for International Settlements (BIS) capital adequacy requirement.
Under this control, the amount of capital that banks hold depends on the riskiness of their assets.
Banks dominate the payments system
which is the general name given to the arrangements for transferring value from one person, business or government authority to another
The role of the banks in the Australian payments system
the issue of currency and coin over bank tellers’ counters and through their automatic teller machines (ATMs).
cheque (current) deposits, which are the core of the paper-based payments system
credit and debit card facilities using ATMs and electronic funds transfer at point of sale (EFTPOS)
the international payments system
Savings/investment accounts
retail accounts and usually allow withdrawals on demand
Certificates of deposit
are large-denomination tradable certificates.
They are traded on wholesale money markets and could also be regarded as being outside the payments system.
Since the payment of the face value of certificates of deposit is guaranteed by a bank, they are equivalent to bank bills and are traded interchangeably with them.
liquid assets
liquidity transformation
Banks offer customers call deposits or deposits that can be withdrawn after an agreed time has elapsed. These deposits are liquid; that is, they can be turned into cash.
Nevertheless, banks are able to offer borrowers long-term accommodation so that a loan will not be recalled until its term (which could be as long as 25 years) has expired.
The importance of liquid assets has been reduced by financial deregulation
asset–liability management
Banks can manage the size of their liabilities by selling certificates of deposit and bills.
Asset–liability management is mainly used by banks to manage their exposures to interest rate risk.
They can alter the structure of their balance sheets in respect of the maturities of their assets and liabilities so that they do not lose from changes in interest rates.
to achieve such objectives
insulating the bank against interest rate movements or creating a balance sheet configuration that will actually benefit from predicted interest rate change
replacing unprofitable products with profitable ones, thereby expanding the bank’s interest rate margin
ensuring that the bank’s cash flows are sufficient to allow it to meet its commitments
deregulation also made
asset–liability management more feasible by:
increasing the integration and liquidity of financial markets so that market transactions can be easily performed;
encouraging innovations such as mortgage-backed securities which have widened the range of market instruments, and
the creation of highly liquid derivatives markets. These markets allow banks to take off-balance sheet positions which offset their balance sheet exposures
lending
A major role of banks is to provide loans to households and businesses.
categories
home equity loans
The usefulness of mortgages has been extended by the introduction of home equity loans.
small business loans
take the form of a ‘bill line’ in which the borrower can issue a new bill every 90 days.
corporate lending
large denomination loans
specialised finance such as trade finance
off-balance-sheet activities
provide a number of services that generate fee income
The attraction of these activities is that they provide income without adding to assets, thereby increasing the return on assets.
examples
the provision of corporate advice
underwriting and management of share issues 股票发行的承销和管理
mergers and acquisitions
corporate restructures
managing loan syndication 管理贷款联合
securitisation programs and funds management 证券化项目和基金管理
financial services
Many of these activities are pursued through subsidiaries.
examples
insurance, fund management, travel services, stockbroking and real estate services
trading on wholesale financial markets
examples
cash market, the money market, the fixed-interest market, the foreign exchange market, and markets in derivative products
Income is earned by such trading from
position-taking 买卖证券赚钱
market making 坐市
banks underwrite the liquidity of the market because they ensure that market participants are also able to find a buyer or a seller when they need one.
Their reward for performing this service is the income they obtain from the difference between the buying price and the selling price
fees from providing related services to customers, including retail customers
bank strategies
the Citicorp approach
banks attempt to become ‘financial supermarkets’ (universal banks) which provide a comprehensive range of products and services to all possible customers. A bank pursuing this strategy will compete at both the retail and wholesale levels.
This strategy will work if
there are
economies of scale
, so that larger banks have lower unit costs
there are
economies of scope
, so that it is cheaper to provide a product in conjunction with others rather than on a stand-alone basis
customers prefer ‘one-stop shopping’ in carrying out their financial transactions
the BT approach
banks specialize in specific areas of banking, dealing with subsets of potential customers, and ignoring products and services that do not fit into the chosen specialization
analyse the efficiency of banks, their pricing decisions and the ways in which they determine their interest rate margins
bank’s interest rate margin (IRM)
IRM=IR/TA-IP
其中
IR = interest received on assets
IP = interest paid on liabilities
TA = total assets
depend on
the amount of capital that must be held against the product according to regulation or the bank’s internal risk management system, and the return that must be earned on that capital
the marginal cost of the product—that is, the cost of providing an additional unit of it.
any costs imposed by regulations
the costs of satisfying reserve requirements
the sensitivity of the demand for the product to changes in the interest rate charged on it. All things being equal, the margin will be smaller the more responsive the market is to interest rate changes
describe the structure of the
Australian banking industry
the major banks -nationally operating banks (NOBs)
Australia and New Zealand Banking Group (ANZ)
National Australia Bank (NAB)
Commonwealth Bank of Australia (CBA)
Westpac Banking Corporation (WBC)
regional and state banks-and others
Regional banks
Regional banks were created from state banks and building societies. They retain their original retail focus, with particular emphasis on home lending
state bank
For many years, state banks were government-owned state-based institutions which were initially set up to facilitate growth and to provide banking services on a more socially equitable basis in their home states
The remaining banks are a diverse assortment. They include both privately owned banks and foreign-owned banks (subsidiaries of overseas banks).
actual bank balance sheets
off-shore activities of banks
following an existing client base into global markets
competing in foreign markets at the retail level by acquiring existing branch networks or setting up new ones
providing specialised services in overseas markets
off-balance-sheet business
explain the current regulation
of banks
banking regulation
liquidity requirements
financial institutions are required to hold liquid assets so that they can meet above-normal withdrawals
variety of liquidity strategies
diversifying their sources of funds or holding liquid assets
capital requirements
The rationale for a required capital ratio
is that a bank should hold sufficient equity to protect depositors in a wind-up situation and to maintain confidence.
The required capital base
two categories
Core (Tier 1)capital
definition
Core capital consists of elements which have all the characteristics of capital: the funds cannot be withdrawn, holders rank behind depositors for repayment if the bank is wound up, and there is no contractual commitment to pay any specific rate of return.核心资本由具备资本所有特征的要素构成:资金无法提取，银行清盘时，持有者排在储户之后偿还，没有约定支付特定回报率的承诺
includes paid-up ordinary shares, general reserves and retained earnings
supplementary (Tier 2)capital
Supplementary capital includes liabilities which are similar to capital, but which lack one or other of its fundamental characteristics.
example：subordinated debt
It therefore provides a buffer which protects depositors, but is included in supplementary capital because a return must be paid on it
APRA now divides Tier 2 capital into two components:
lower Tier 2 capital
Lower Tier 2 capital consists of limited-life instruments, such as term subordinated debt. During the final five years to maturity of such debt, the proportion to be counted as lower Tier 2 capital will be reduced each year by 20% of the original amount issued
较低的二级资本包括期限有限的工具，比如定期次级债券。在这类债务的最后5年至到期日期间，被计入较低二级资本的比例将每年减少原发行金额的20%
upper Tier 2 capital
Upper Tier 2 capital consists of the other elements of Tier 2 capital, including perpetual subordinated debt永久次级债.
A more severe capital requirement is applied to bank holdings of the capital instruments issued by other banks.
The aim of this control is to prevent bank cross-holdings resulting in banks’ capital being used more than once. Such investments are therefore deducted from total capital (and assets) when calculating the capital adequacy requirement
对银行持有其他银行发行的资本工具的要求更为严格。这种控制的目的是防止银行交叉持有导致银行资本被多次使用。因此，在计算资本充足率要求时，这些投资将从总资本(和资产)中扣除
Basel II-the three pillar approach
three pillars
minimum capital requirements (to make capital more sensitive to risk)
The first pillar outlines the constituents of capital for regulatory purposes and the methodologies for the calculation of regulatory capital minimums for credit, market and operational risk exposures
a supervisory review process 监督审查程序(to ensure sound internal risk management processes are in place)
The second pillar explains the relevance and principles of supervisory review, including key principles for sound supervision
market discipline (through increased disclosure requirements)
The last pillar outlines strategies for enhancing market transparency through the implementation of minimum disclosure requirements
credit risk capital
Credit risk is the risk of loss from a default by a counterparty in a transaction
three increasingly sophisticated approaches to measure and manage their credit risk exposures
the foundations-based approaches
advanced internal ratings-based approaches
the standardised approach
operational risk capital
operational risk
: the risk of loss resulting from inadequate
or failed internal processes, people and systems or from external events
three increasingly sophisticated approaches
the basic indicator approach
operational risk is calculated as a fixed percentage (set at 15%) of a bank’s gross income
the standardised approach
the financial institution is required to break up its overall gross income into eight business lines specified by the Basel Committee.The total operational risk capital charge is the sum of the capital charges for individual business lines
the advanced measurement approach
value at risk(VaR)
VaR indicates the magnitude of the loss that an institution can suffer from movements in the market value of an exposure that it holds.
Market risk capital
Market risk is the risk of a loss arising from movements in market prices.
describe building societies and credit unions, and their relationship to the banking industry
Building societies and credit unions are mutual organisations; that is, they are cooperatives which do not have shareholders but which are owned by members. Any surplus made by the organisation belongs to its members, but it is not paid out to them. Indeed, this surplus represents the major source of capital for these institutions.
建房互助会和信用社是互助组织;也就是说，他们是合作社，没有股东，而是由成员所有。本组织的任何盈余都属于其成员，但不支付给他们。实际上，这些盈余是这些机构的主要资本来源。
From a management viewpoint, building societies and credit unions are consumer banks. They face the same competitive pressures as banks and, in addition, they must compete with the banks themselves.
suffer from three significant disadvantages in this competition
Small organizations have difficulty meeting the minimum outlays required to keep in step with technological developments.
Mutual organisations have difficulty in accumulating capital because they cannot sell shares and must rely on retained earnings.
Building societies and credit unions do not have access to asset–liability management techniques and must hold larger amounts of liquid assets than banks.