Professional Documents
Culture Documents
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Learning outcomes
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Noncommercial banks
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The Bank for International Settlements (BIS)
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BIS - Structure
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International Monetary Fund (IMF)
• IMF is an organisation established by the Treasuries of the US
and the UK during the 2nd ww.
• Objectives:
– To assure free convertibility of currencies in trade.
– To avoid currency devaluations and make exports more competitive.
– To prevent international monetary crises.
• A pool of funds (gold and currencies) are available to countries
that experience deficits of their balance of payments.
• Initial agreement in Bretton Woods (1944) – 44 countries.
• Now membership is 150 country-members.
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IMF – Structure and quotas
• IMF has two main departments:
– The General department (GD)
– The Special Drawing Rights (SDR) department.
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IMF – Structure and quotas 2
• A country satisfies its quota subscription by depositing:
– Freely usable currencies (at least 25% of the total quota) – reserve
tranche on which interest is paid and
– Its own currency.
• The total quota subscriptions is available to all members.
• A country can freely use its reserve tranche to satisfy its
balance of payment deficit.
• There is no need to reverse this transaction (buy its own
currency).
• If the reserve tranche in insufficient credit tranches can be
obtained.
• Subsequent tranches are called upper credit tranches and are
available subject to scrutiny and payment of interest.
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World Bank Group
• The World Bank Group is comprised of four affiliates:
1. The International Bank for Reconstruction and Development (IBRD)
2. The International Development Association (IDA)
3. The International Finance Corporation (IFC)
4. The Multilateral Investment Guarantee Agency (MIGA).
• The IBRD (or WB) was created during the Bretton Woods
conference (1944).
• WB concentrates on long-term development.
• WB and IMF hold their annual meetings jointly and
membership in the IMF is a prerequisite for WB membership
• WB must lend for productive purposes and stimulate
economic growth in developing countries.
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The International Development Association (IDA)
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The International Finance Corporation (IFC)
• The IFC was established in 1956 and makes private sector
investment.
• It has 170 countries members.
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The Multilateral Investment guarantee agency (MIGA)
• MIGA is the newest member of the WB group (1988).
• Formed by 42 WB member countries (now 160+ members).
Retail banking is more relevant term that retail banks, since also non-banks offer
retail banking services.
Banking involves taking deposits and repackage the funds and on-lent as loans.
• Borrowings and
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The Balance Sheet of a bank (2)
The assets represent claims by the bank against others.
• Securities
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The Balance Sheet of a bank (3)
LIABILITIES ASSETS
Where the money comes from How liabilities (money) has been used
Deposits Cash
Borrowings Money market funds
Shareholders’ funds Other securities
Lending
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The Balance Sheet of a bank (4)
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The UK Retail banks
• English banks:
- Barclays
- Lloyds-TSB
- HSBC
- Abbey National
• Scottish banks:
- Royal Bank of Scotland
- Bank of Scotland (HBOS)
- Clydesdale
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The Balance Sheet of a Retail Bank (2)
In the liabilities side of the balance sheet we can see:
1. The small item ‘notes outstanding’ which refers to private bank notes.
4. Finally, the other major part of bank liabilities is the items in suspense or
transmission (such as cheques drawn and in the course of collection) and
capital and other funds (such as issued share capital, long-term debt and
reserves).
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The Balance Sheet of a Retail Bank (3)
In the asset side of the retail banks balance sheet we have:
1. Cash in form of notes and coins is a relatively small fraction of a bank’s
assets (around 0.7%).
2. Another small item is the cash balances with the BoE. This is mainly the
0.15%, non-interest-bearing, compulsory ‘cash ratio’ required on all liabilities
exceeding £400m.
3. Market loans provide additional liquidity.
These are mainly short-term loans made in money markets.
4. The bills are mainly Treasury bills or bank bills.
5. The repo bills are claims refer to sale and repurchase agreements, where
banks acquire balances through the operation of a new system of monetary
control.
6. The investments of a retail bank are mainly in holding marketable securities.
These are mainly government bonds or government guaranteed stocks and
therefore have the characteristics of low default risk and marketability.
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The Balance Sheet of a Retail Bank (4)
7. Sterling advances are the main asset of a retail bank, which is her around
50% of the total assets. Major parts of these advances are:
•Overdraft facilities to corporate clients
•Term loans to business (increasingly since mid 70s)
•Personal lending (increasingly since 80s):
- Mortgages
- Unsecured lending.
8. Other currency and miscellaneous assets include
Advances in other currencies (20%)
Market loans and investments in other currencies (80%)
Miscellaneous assets include the bank’s physical assets (premises
and equipment)
9. The final item, Banking Department lending to Central Government, refers to
the Banking Department of the BoE, which is included in the retail banks
classification owing to its involvement in the clearing system.
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Recent changes in Retail Banking
• ATMs
• Telephone banking
– First Direct (1989, Midland Bank)
• Internet banking
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Deconstruction of banking services
– Origination
• Mortgage broker to customer.
– Administration
• processing paperwork.
– Risk analysis
• assess creditworthiness of client.
– Funding
• Finance is raised - Assets held on balance sheet - capital allocated to the risk.
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Payment services
– Medium of exchange
– Means of payment.
– Temporary store of purchasing power (since payments and receipts are not
synchronised)
Original commodity satisfying these conditions was money.
Retail banks like all financial intermediaries have to manage the following risks:
1. Liquidity risk
Issued liabilities have shorter maturity (payable on demand) than the
assets’ term to maturity.
2. Asset risk
The risk that the realisable (redeemable) asset value is less than their
book value, due to default risk, price risk or fire sale discount.
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Liquidity risk - Reserve asset management
The marginal cost of raising additional retail deposit is high because the higher
rate has to be offered to all deposits.
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Asset Risk
The Bank of England identifies three types of Asset Risk (possibility that the
value of assets will fall below their ‘book value’:
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Asset Risk - cont.
2. Investment Risk.
This relates to capital-uncertain assets. A fall in price will reduce the value of
these assets.
Example: The value of government securities held by a bank will fall if interest
rates increase (even with no default risk)
This risk can be hedged by selling band futures contracts or buying bond put
options.
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Payments Risk
The payment system provides for the transfer of funds between accounts at
different financial institutions.
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The nature of Wholesale banking
The non-retail banks are a heterogeneous group subdivided into:
• UK merchant banks (30)
– members of the British Merchant Bankers and Security Houses Association.
– Originally they financed trade and commerce by ‘accepting’ bills.
– Now they have expanded their activities to direct lending, underwriting, new
issues, portfolio management, M&A advice, etc.
• Other UK banks
– Regional banks
– finance houses
– leasing companies
• US banks
Table 4.1 Sterling and foreign currency deposits (liabilities) of the non-retail
UK banks 31 December 1996 (in £million) [BT, p71].
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The nature of Wholesale banking (3)
Liabilities (deposits) of the wholesale banking:
FOREIGN CURRENCY
Market loans 5,811 6,778 105,210 70,567 311,900
Advances 4,706 1,789 34,237 41,884 136,650
Bills, investments etc. 5,142 3,645 12,311 17,487 116,650
Total Foreign currency 15,659 12,212 151,758 129,938 564,924
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The nature of Wholesale banking (5)
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The nature of Wholesale banking (6)
Maturity analysis of sterling and foreign currency activities with non-banking
customers of retail and wholesale banks in the UK at 31 Jan 1987:
The data in Table 4.4 above show the increasing importance of fee and
commission income over the interest income during the recent period (the
latter represents the difference between the borrowing and lending rates).
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Off-balance-sheet business (4)
• Factors determining the growth of the off-balance sheet business:
• 1) From the bank’s point of view:
• desire for fee income
• diversify operations
• expand into new business areas
• 2) Greater volatility of interest rates and exchange rates since 1970s has
led to increased demand for hedging instruments (some - like options and
futures - traded in exchanges and some provided by banks over the
counter).
• 3) Greater perception of credit risk by banks has led to shift away from
bank intermediation (deposits and lending) to capital market instruments
as source of financing (generates underwriting and securitisation fees).
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Off-balance-sheet business (5)
• 4) Arbitrage opportunities in capital markets as result of barriers such as
exchange rate controls, interest rate controls, reserve ratios, e.g. swaps
allow borrower to raise money in market with comparative advantage and
swap into currency in which he wants to borrow.