INTERNATIONAL FINANCE

Session 9

International banking

 

Main text books :

Bourget, Figliuzzi, Zenou, Monnaies et systèmes monétaires, 9e édition, Bréal, 2002

J.C. Baker, International Finance, Prentice Hall, 1998

 

Internet sources :

Bank - what is it?

Asian banking systems

Banking Digest

BIS Publications and Statistics and BIS Publications and Statistics - Banking Statistics

The New Basel Capital Accord

World Economist- daily news and current events

United States' Largest Banks

http://www.worldbanknews.com/

The World Bank Group

Regulation K - International Banking Operations

 

What is a bank ?

The largest US banks

The balance sheet of a bank

The various liabilities items 

The various assets items

Cooke ratios

Reserves on the assets side

How do banks participate in the "creation" of money

Tracing a deposit on our checking account

Securization (in French : Titrisation)

A sight draft

The circuit of a banker's acceptance

 

An overview on banking :

(source : An Overview on Banking)


     I.     Banks and Banking
   II.    The Revolution in the Banking Business
   III.   Types of Banks
   IV.   Banks and Development Finance
   V.    Managing Bank Risks
   VI.   Bank Supervision

 

I. BANKS AND BANKING: What is a bank? What is its business?

Banks are institutions which help people and businesses manage their money.

The business of banking refers to taking deposits and making loans.

 

BANKS AND BANKING: How banks create money?

Banks keep primary and secondary reserves. Primary reserves are cash deposits due from other banks and the reserves required by the central banking system. Secondary reserves are securities banks purchase in the open market which may be sold to meet short-term cash needs. These securities are usually government bonds. The amount of deposits a bank must keep on reserve is regulated by law. Any excess of the required amount is excess reserves. It is the excess reserves that create money. (See also Heilbronner & Thurow, Economics explained, Prentice-Hall)

 

BANKS AND BANKING: How do banks make profit?

Banks make profit or loss in three ways:

  1. Interest Spread: They make money from what they call the spread, the difference between the interest rate they apply for deposits and the interest rate they receive on the loans they make.

  2. Fees: They earn fees from customer services such as checking accounts, financial counseling, and loan servicing.

  3. Trading profits: from buying and selling securities to capitalize on movements in interest rates, exchange rates or equity prices.

 

BANKS AND BANKING: A short history of banking


The first American banks appeared in the early 18th century to provide currency to colonists who needed means of exchange. Originally, banks only made loans and issued notes for money deposited. Checking accounts appeared in the 19th century, the first of many new bank products and services. These now include credit cards, automatic teller machines, NOW accounts, individual retirement accounts, home equity loans, and other financial services.

 

II. THE REVOLUTION IN THE BANKING
BUSINESS: Diversification of Products and Services

Bank products and services have diversified over the years. Banks can now venture fully into the financial industry from stock markets to mortgage and project financing to insurance. The banking environment of the 90’s is highly competitive and the traditional lines between the basic banking and other financial services is continually blurring.

 

THE REVOLUTION IN THE BANKING
BUSINESS: Structure and Functions of a Modern Bank

1. Basic Commercial Banking

2. Corporate Finance and Brokerage Activities of Universal Bank

3. Investment Management

4. Internal Bank Management

 

THE REVOLUTION IN THE BANKING BUSINESS: Online Banking

Online Banking: What is it?

Online system allows customers to plug into a host of banking services from a personal computer by connecting with the bank’s computers over the telephone wires. By virtue of technology, banking becomes easier for the average consumer.

 

ONLINE BANKING: Advantages

 

ONLINE BANKING: Disadvantages

 

III. TYPES OF BANKS

  1. Commercial Banks
  1. Investment Bank or Merchant Banks
  1. Universal Banks
  1. Mortgage Banks
  1. Brokerage House

 

OTHER TYPES OF BANKS

  1. Thrift Banks
  1. Credit Unions

 

IV. BANKS AND DEVELOPMENT FINANCE

What is development finance?

Development finance refers to long-term financial intermediation that includes raising long term funds, and extending long term loans for financing projects and development programs; and providing advisory and non-lending financial services to sustain success of projects financed.

 

Types of Development Finance Activities

 

Financial Institutions Doing Development Finance

 

V. MANAGING BANK RISKS: Why banks fail?

 

MANAGING BANK RISKS: Why banks fail?

 

MANAGING BANK RISKS: Three Main Risks

  1. Credit Risk. The risk that the interest and principal on a loan will not be paid in a timely manner.
  1. Interest Rate Risk. The risk that a mismatch in the maturity structure of the fixed interest liabilities and assets of the bank will result in an unexpected loss if market interest rates fluctuate in an unanticipated way.
  1. Liquidity Risk. The risk that the bank will run short of liquid funds (i.e., cash) to meet short-term obligations, even though the bank has a surplus of assets that could be sold given sufficient time and effort.

 

MANAGING BANK RISKS: Sources and types of risks

  1. Balance Sheet/Financial Risk
  1. Financial Services/Delivery Risk
  1. Environment Risk

 

MANAGING BANK RISKS: Risk Management Policy

Risks of financial loss
versus
Risk of opportunity loss

 

MANAGING BANK RISKS: Principle of Risk Management

Identifying and evaluating exposures

Control

Risk Financing

Administration

 

VI. BANK SUPERVISION: Defined

Bank Supervision, in its broadest sense, is a system that government uses to help ensure the financial system remains stable, safe, and sound.

 

Organization of Effective Bank Supervision

  1. A Central Bank is the heart of a financial sector; most central banking law accord the bank the responsibility for the sector’s soundness. Thus, bank supervision is a common function of Central Banks.
  1. In some countries, the Ministry of Finance holds control over virtually all aspects of the financial sector, with main powers related to banking vested in the Minister.
  1. A third option is to have an independent agency, responsible to the Parliament or the President, to conduct bank supervision. This could include a deposit insurance corporation which takes primary responsibility for supervision.
  1. With its complex banking system, the United States conduct supervision through its Central Bank (Federal Reserve), its Ministry of Finance known as the Treasury Department through the Comptroller of the Currency, and its independent agency for deposit insurance known as the Federal Deposit Insurance Corporation.

 

Approaches to Bank Supervision

Four (4) basic approaches:

  1. Information disclosure
  1. Self-regulation through
  1. Government bank examination (implicit guarantee of deposits)
  1. Deposit guarantee scheme (explicit guarantee of deposits)

 

Main Objectives of Bank Supervision Systems

  1. To ensure the banking sector is healthy to promote and enhance economic growth.
  1. To protect depositors who have placed their funds in banks.

 

Principles of Bank Supervision

Why banks should be regulated?

 

Bank Examination Activities

 

Verification of Asset Quality

Includes complete review of credit policy such as:

 

C.A.M.E.L. Test

 

Possible Remedial Measures by Central Bank

 

Levels of Supervision & Control of Banks

  1. AT THE MANAGEMENT LEVEL:

Chief Executive Decisions

 

Levels of Supervision & Control of Banks

  1. AT THE BANK LEVEL

 

Levels of Supervision & Control of Banks

  1. AT THE NATIONAL LEVEL

Regular Central Bank measures for banks and financial institutions

 

Levels of Supervision & Control of Banks

  1. BY THE NATIONAL DEVELOPMENT AUTHORITY OR EQUIVALENT

 

 

The balance sheet of a bank

An example (made up) : The "First Mulibank" Balance Sheet

 

Bank regulation

An application of the Basle Accord Bank Capital Standards

The Bank for International Settlements (Basle, Switzerland)

Bank risks :

 

The specificities of international banking

Large international banks are like MNC's. They are confronted with specific problems and risks related to dealing with many different currencies, in different political environments.