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It is a bank that provides transactional, savings, and money market accounts and that accepts time deposits.
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S. law, some use the term "commercial bank" to refer to a bank or a division of a bank primarily dealing with deposits and loans from corporations or large businesses. In some other jurisdictions, the strict separation of investment and commercial banking never applied. Commercial banking may also be seen as distinct from retail banking, which involves the provision of financial services direct to consumers. Many banks offer both commercial and retail banking services.
remunerative. Foreign currency deposits became less attractive due to the rise in forward cover charged by the SBP. Banks reduced return on deposits to maintain their spread. However, they were not able to contain the decline in ROA due to declining stock and remuneration of their earning assets. Liquidity
Movement in liquidity indicators since 1997 indicates the painful process of adjustments. Ratio of liquid assets to total assets has been on a constant decline. This was consciously brought about by the monetary policy changes by the SBP to manage the crisis-like situation created after 1998. Both the cash reserve requirement ((CRR) and the statutory liquidity requirement (SLR) were reduced in 1999. These steps were reinforced by declines in SBP's discount rate and T-Bill yields to help banks manage rupee withdrawals and still meet the credit requirement of the private sector.
Foreign banks have gone through this adjustment much more quickly than other banks. Their decline in liquid assets to total assets ratio, as well as the rise in loan to deposit ratio, are much steeper than other groups. Trend in growth of deposits shows that most painful part of the adjustment is over. This is reflected in the reversal of decelerating deposit growth into accelerating one in year 2000. Sensitivity to market risk
Rate sensitive assets have diverged from rate sensitive liabilities in absolute terms since 1997. The negative gap has widen. Negative value indicates comparatively higher risk sensitivity towards liability side, while decline in interest rates may prove beneficial. Deposit Mobilization
Deposit mobilization has dwindled considerably after 1997. Deposits as a proportion of GDP have been going down. Growth rate of overall deposits of banks has gone down. However, the slow down seems to have been arrested and reversed in year 2000.
Group-wise performance of deposit mobilization is the reflection of the varying degree with which each group has been affected since 1998. Foreign banks were affected the most due to their heavy reliance of foreign currency deposits. They experience 14 per cent erosion in 1999. However, they were able to achieve over 2 per cent growth in year 2000. Similar recovery was shown by private banks.
Deposit mobilization by NCBs seems to be waning after discontinuation of their rupee deposit schemes linked with lottery prizes. Growth in their deposits were on the decline. Despite the decline NCBs control a large share in total deposits. Aggressive posture of private banks in mobilizing more deposits in year 2000 is clearly reflected in their deposit growth, from 1.9 per cent in year 1999 to 21.7 per cent in year 2000. This has also helped them in increasing their share in total deposits to over 14 per cent in year 2000.
Due to the shift in policy, now banks are neither required nor have the option to place their foreign currency deposits with the SBP. Although, the growth in foreign currency deposits increase the deposit base, it does not add to their rupee liquidity. The increasing share of foreign currency deposits in total base is a worrying development. In order to check this trend, SBP made it compulsory for the banks not to allow foreign currency deposits to exceed 20 per cent of their rupee deposits effective from January 1, 2002. Credit extension
Bulk of the advances extended by banks is for working capital which is selfliquidating in nature. However, due to an easing in SBP's policy, credit extension has exceeded deposit mobilization. This is reflected in advances growing at 12.3 per cent in year 1999 and 14 per cent in year 2000.
Group-wise performance of banks in credit extension reveals three distinct features.1) Foreign banks curtailed their lending,2) continued dominance by NCBs and3) aggressive approach being followed by private banks. Private banks were the only group that not only maintained their growth in double-digit but also pushed it to over 31 per cent in year 2000. With this high growth, they have surpassed foreign banks, in terms of their share in total advances in year 2000. Banking spreads
Over the years there has been a declining trend both in lending and deposit rates. Downward trend in lending rates was due to SBP policy. The realized trend in lending rates was in line with monetary objectives of SBP, though achieved with lags following the sharp reduction in T-Bill yields in year 1999, needed to induce required change in investment portfolio of banks.
Downward trend in deposit rates was almost inevitable. One can argue that banks should have maintained, if not increased, their deposit rates to arrest declining growth in total deposits. However, this was not possible at times of eroding balance sheet, steady earnings were of prime importance. Consequently banks tried to find creative ways of mobilizing deposits at low rates. However, due to inefficiencies of the large banks, the spread has remained high. Asset composition
Assets of banking sector, as per cent of GDP, have been on the decline. Slowdown in asset growth was also accompanied by changing share of different groups. Negative growth in the assets of foreign banks during 1998 and 1999 was the prime reason behind declining growth in overall assets of the banking sector. Share of NCBs have been decreasing since private banks were allowed to operate in 1992. In terms of asset share, private banks are now as large as foreign banks. Problem bank management COMMERCIAL BANKS
In the post September 11 era. These were Indus Bank and Prudential Commercial Bank. the higher profit made in the past was only because of the inefficiency of local banks? To explore this one has to look at the shift in paradigm in Pakistan's commercial banking . On the basis of detailed investigations. Outlook Commercial banks have been going through the process of restructuring. The SBP has been successful in implementing its policies. a temporary decline in repayment ability of borrowers may increase provisioning for the year 2001. It is also responsible to safeguard the interest of depositors and shareholders of these institutions. After successful negotiations. However. SBP took actions against two private banks which became a threat to viability of the financial system in the country. Unless efforts are made by banks to shrink spread. The proposed increase in capital base will provide further impetus to financial system in the country.The central bank is the sole authority to supervise. The situation is expected to improve in year 2002. Lately. management and control of Prudential Bank handed over to Saudi-Pak group. it is an opportunity for the banks to further clean their slat banks for operating in Pakistan? Or. 2000. Most of the banks have been able to adjust to new working environment. the license of Indus Bank was cancelled on September 11. depositors will not be able to get return which corresponds with the rate of inflation in the country. the GoP borrowing from SBP and commercial banks is expected to come down substantially and private sector borrowing to increase. monitor and regulate financial institutions. There are efforts to reduce lending rates. Privatization of NCBs is expected to be delayed due to external factors. However.
there was restriction on withdrawal of money in foreign exchange. Have the foreign banks lost the zeal to compete or do they find themselves inadequate to compete with the local banks? Foreign banks operating in Pakistan have thrived in the past mainly due to selective clientele. They also found mobilizing local currency deposit difficult due to limited branch network. initially. Efforts are also being made to restructure NCBs for their ultimate privatization. Their biggest strength was the ability to mobilize foreign currency deposits and to swap these deposits. . large erosion in deposits.sector. The local banks have been asked to: raise their paid-up capital to one billion rupee. The local banks have emerged strong competitor of foreign banks. All these measures have changed the working environment. Though. follow maximum disclosure requirement and make full provisions against non-performing loans (NPLs). Then came freezing of foreign currency accounts (FCAs) in May 1998. The process was initiated in early nineties with the privatization of Muslim Commercial Bank (MCB) and Allied Bank of Pakistan (ABL) and establishment of a dozen banks in the private sector. they were also considered blue-eyed kids of the Government of Pakistan (GoP). better standard of services and virtually no burden of NPLs. Now the consultations with banks is going on to initiate the second phase . foreign banks experienced. As they were mobilizing dollar deposits. This was followed by the first phase of financial sector reforms.
Foreign banks were. A foreign investors' group acquired Habib Credit & Exchange Banks (previously branch network of BCCI) and renamed it. and still. foreign banks are making huge investment in technology. Opening more branches was not only an expensive proposal but also not enough to compete with the five big banks and to face the ambitious branch expansion plan of the private banks. the feeling of inadequacy among the foreign banks further intensified.e. mostly. into their niche market. Bank Alfalah. With the gradual increase in the paid-up capital of private banks and depositors' confidence in them. competing mainly with the five big banks. Earlier. ATMs. To overcome this limitation. in the local banks. The private banks have intruded. i. credit cards. The two banks which have already taken an exit are Bank of America and Societe Generale of France (SG). etc. on-line banking. to a large extent. Faysal Bank of Bahrain was the first to convert its Pakistan operations into a locally incorporated bank— Faysal Bank. branch rationalization programme followed by the NCBs and privatized banks. They also realized the fact that they could not put up effective resistance against the local banks due to their limited number of branches. these services could only be used in urban areas. Some of the foreign banks have either already sold their Pakistan operations to local banks or are actively involved in the negotiations. particularly from the Middle East. a very important feature was conversion of Pakistan branch network of foreign banks into locally incorporated banks followed by acquiring of large equity stakes by foreign groups. However. Schon Bank was bought by .
recently acquired commercial banking licence and the name was changed to Meezan Bank. now the two banks are operating under Standard Chartered banner.some foreign investors from the Middle East and given the name. It has also acquired Pakistan operations of Emirates Bank International of UAE. Gulf Commercial Bank. This was subsequently takenover by Pakistan Industrial Credit and Investment Corporation (PICIC) and became PICIC Commercial Bank. but first the SG deal. The majority shares of Union Bank were acquired by another group from the Middle East. The new bank also acquired Pakistan operations of SG. It is very important to explore the motives behind the above mentioned transactions. As a result of merger ANZ Grindlays Bank of Australia and Standard Chartered Bank of UK. An interesting point is that SG sold its Pakistan's operations to Meezan Bank but also acquired substantial stake in the bank. Al-Meezan Investment Bank. . established by Pakistan Kuwait Investment Company. The point which makes it further interesting is the declaration of Meezan Bank to undertake commercial banking activities on the basis of Riba free transactions only. It is rather unusual that a European bank has become a partner in a bank which promises Riba free banking. Union Bank has also acquired Pakistan operations of Bank of America and some business of American Express in Pakistan.
it seems that MCB will ultimately takeover UBL. However. It has already sold its operations in the UK and India and it was expected they would also pull out of Pakistan. the sources in banking sector say that the deal has been concluded at a substantial cost and formal approval from the shareholders of Union Bank was acquired at a recently held extraordinary general meeting. Muslim Commercial Bank (MCB) submitted the highest bid. which has been going strong in Pakistan. However. makes such a decision. banking sector experts say that Emirates Bank's decision is due to the shift in its policy which envisages making the bank a strong domestic bank. almost double the amount offered by other participants. A question was raised. It is also important to look at the recently held bidding for the sale of 51 per cent shares alongwith transfer of management of United Bank Limited (UBL). It may look a bit strange that Emirates Bank.There has been no official announcement about the takeover of Emirates Bank's Pakistan operations by Union Bank. State Bank of Pakistan (SBP) has suggested to the Privatization Commission to ask the bidders to raise the bids further. Though. "MCB has most probably submitted such a bid to make it difficult for others to match the price." . why did MCB offered such a high price? The sector experts say.
Lately it has invested heavily in technology to improve quality and range of its services which include on-line banking. American Express and Emirates Bank. "The biggest attraction for MCB. MCB has already attained the status of the largest private sector bank in Pakistan and now intends to make its presence felt in the global market. MCB has a long history of operations and successful restructuring after its privatization. in UBL." It must be kept in mind that UBL's ultimate handing over to any bidder is largely dependent on the formal clearance of the buyer by the Bank of England. Whereas Union Bank should be keen in consolidating its operations after the takeover of Pakistan operations of Bank of America. It also enjoys extensive and intensive branch network. It may be of some interest to compare MCB with Union Bank in slightly more detail. The new management. is its overseas operations. Therefore. ATMs and MNET. Compared to MCB. the transfer of ownership and management of UBL to MCB seems most likely. have yet to make a . Saigol Group. The initial sponsors. Under the new management efforts were made to recover NPLs and full provisioning against such loans. mostly comprising of zealous and ambitious bankers. Union Bank has a rather bumpy track record. relinquished their stake in the bank under a distressed sale.Why should MCB be so keen in taking over UBL? The sector experts say.
bulk or almost total income was eaten up by operating expenses and the bank posted a meager profit of around Rs 10 million for the year. to June 30. Ensuring decent return to depositors and shareholders should always be the key objective of the management of any bank. the court has ordered for determination afresh in the light of contentions of the parties and the observations. While the intellectual deliberations continued. However. the deadline was extended for one more year. It is true that the bank is making a lot of investment to become the preferred bank but has little control on expenditures. taking into consideration the quantum of work. the battle in the court of law became more focused. the critics are often not able to differentiate between orthodox and prudent approach in banking. Now. It is often said that most of the banks listed in Pakistan follow orthodox or conservative approach and they must come out of this syndrome. However. ELIMINATION OFRIBA According to an order by the Supreme Court of Pakistan local financial institutions were required to eliminateRiba from the system by June 30.mark. It is still the better to be a little conservative and make stable profit rather than being adventurous and posting marginal profit or incurring loss. According to the annual report for year 2001. 2001. The financial institutions may no longer . 2002.
PRIVATIZATION The present government is making efforts to ensure swift and smooth privatization of NCBs. according to the market appetite. religious scholars and economists.face the pressure to re-engineer the system. This is an academic discussion of the highest importance — it deals with the basic teaching of Islam. There was plan to list the NCBs on stock exchanges first and then offload part of GoP holding. at least for the time being. one may raise a question. Is the court order more important or the Islamic injunctions demanding elimination ofRiba ? The future deliberations must address key issues like: 1) what is the real definition of Riba ? 2) Does the prevailing system provides assurance against exploitation of borrowers by the lenders? 3) Are the borrowers paying market-based rates? 4) Are the fixed lending and borrowing rates only notional? There are host of other issues which have to be dealt with. This includes two tier strategy.Rizzaq-e. sale of remaining shares of GoP in already privatized banks and sale of majority shares alongwith transfer of management of remaining NCBs. must not enter into due diligence with rigid stands. However. Following this policy. However. National Bank of Pakistan was listed on local stock exchanges and 5 per cent shares were .Halal. both the sides.
The next major transaction on agenda is sale of majority shares of Habib Bank Limited (HBL) alongwith transfer of management. 24 per cent increase in advances. As the issue was heavily over-subscribed. However. the plan has been changed. The bidding was held and MCB submitted the highest bid of Rs 8.5 billion. Bank Alfalah may rightly term year 2001. Initially the GoP had the plan to first enlist HBL on local stock exchanges and sell part of its holding to general public. 'another year of remarkable performance and another year of consistent growth'. This is evident from a 47 per cent growth in deposits. As regards UBL. 31 per cent growth in profit before tax and 44 per cent hike in profit after tax as compared to the previous year. the GoP decided to exercise 'green-shoe option' and off-loaded its 10 per cent shares. KEY PLAYERS Askari Commercial Bank posted over one billion rupee profit before tax and improved its payout for the year 2001 compared to dividend paid for the previous year.offered to general public. The Board of Directors approved payment of 20 per cent dividend and issue of 5 per cent bonus shares. The GoP has also offered to sell its holding in Bank Alfalah. the GoP decided to sell 51 per cent shares alongwith transfer of management. At the end . Now the GoP wishes to make outright sale of the bank.
almost double the amount posted for the previous year.82. Habib Bank posted Rs 2.9 . Profit after tax of Rs 1. There was also improvement in basic earning per share — from Rs 1. The management was able to control expenses.7 million profit before tax as compared to Rs 567. a growth of 51 per cent over the previous year. Faysal Bank was able to wipe out its accumulated losses. There was improvement in mark-up as well as non-mark up income. There was improvement in overseas operations which contributed towards higher profit.1 billion was more than double the amount posted for the previous year. Metropolitan Bank posted Rs 742. Over the last couple of years the bank not only managed to clean its slate but to also pay 10 per cent dividend. This was despite the fact that the bank made provisions amounting to Rs 2. The bank has increased lending to SMEs. though there was slight increase in administrative expenses.of the year equity of the bank also stood at Rs 1. There was a reduction in nonperforming loans.361 billion. The bank managed to curtail administrative expenses.53 to Rs 1.2 billion profit before tax for the year.6 billion as compared to Rs 1. Another improvement was the increase in number of ATMS — 61 of its own and over 100 machines through sharing with other banks.2 for the year 2000.
Out of Rs 338 million profit after tax. The bank posted over Rs 2. Prime Commercial Bank was able to improve its earnings per share due to higher income. though there was also increase in expenses.6 million for the previous year.million profit for the year 2000. Rs 200 million were appropriated for issue of bonus shares. Some of the indicators of improvement were. . The year 2001 was yet another year of achievements.6 million profit after tax Rs 122 million were transferred to revenue reserve and the Board of Directors preferred to skip dividend payment. yielded positive results. Out of Rs 152. Rs 175 million bonus shares were also issued in year 2000.1 billion profit before tax and total dividend payout for the year 2001 was 25 per cent. The Board of Directors approved issue of 25 per cent bonus shares and 40 per cent right shares to further improve the balance sheet footing. The various structural and financial changes introduced. Muslim Commercial Bank is the largest private sector bank and the third largest bank of Pakistan. The bank posted Rs 241 million profit before tax as compared to a profit of Rs 158. a hefty 153 per cent growth in profit before tax and 79 per cent increase in deposits. PICIC Commercial Bank (formally Gulf Commercial Bank) completed the first successful year of operations since the acquisition of the bank by Pakistan Industrial Credit and Investment Corporation (PICIC).
By making such a provision the bank has cleaned its slate and the step would augur well in the future performance. non-interest income amounted to over one billion rupee. However. The financial results of commercial banks for the year 2001 seem good despite economic slow down.064. While interest income amounted to Rs 597.6 million.482 Bank Al Habib .207 20. analysts say that the earnings for the year 2002 may ommercial Bank Bank Alfalah 30.The Bank of Khyber posted Rs 231 million profit after tax for the year 2001 as compared to a loss of Rs 157 million for the previous year.6 million for the year. One of the reasons for +++ on against NPLs.5 million. An interesting observation was that as against a total income of Rs 1. administrative expenses were as high as Rs 1. provision against non-performing loans and advances amounted to Rs 197. A closer look at the financial results reveals that out of an interest income of Rs 597. barring a few.5 million.95 million profit before tax for the year 2001.040 million. Union Bank posted a meager Rs 9.
416 Prime Commercial Bank 10.823 Metropolitan Bank 17.991 6.902 13.367 8.136 Platinum Commercial Bank 3.030 Union Bank 20.264 PICIC Commercial Bank 9.697 17.171 ADVANCES (Rs in million) Name 2001 2000 Askari Commercial Bank .371 Soneri Bank 16.054 14.24.619 5.721 17.
931 Union Bank 13.722 Metropolitan Bank 12.23.746 Soneri Bank 10.869 13.147 6.131 15.988 11.199 10.291 17.902 14.853 6.330 4.242 Bank Al Habib 15.355 Prime Commercial Bank 6.367 Platinum Commercial Bank 2.794 PICIC Commercial Bank 6.893 Bank Alfalah 19.346 .
Mashriq Bank. While further reduction in lending rates seems improbable. The analysts forecast for slow and gradual increase in interest rates during October-December quarter this year. Analysts hint towards more foreign banks leaving Pakistan. State Bank of Pakistan has been consistently reducing T-Bill yields and discounting rates which have reduced the spread.OUTLOOK Most of the banks have been able to make full provisions against NPLs. Citibank and ABN AMRO are expected to get further strength mainly because of the diversified range of their products and services. if local buyers do not come forward. The impact of September 11 incident did not appear in first quarter reports. ADB's Support to the Government of Pakistan's Efforts for Creating an Enabling Environment for MSMEs1 Introduction . The three foreign banks. Therefore. namely Standard Chartered. profits of banks are expected to remain under pressure despite reduction in corporate tax rate. IFIC and Rupali Bank. That is the time when fun+ s are needed the most by textile and sugar industries. The demand for funds by the private sector has not increased despite reduction in lending rates. The real impact can only be quantified after half-year results are announced. Operations of some of these banks may be taken over by local financial institutions and closure of a couple of banks seems certain. These include Doha Bank.
and reducing poverty. emphasizes the importance of the private sector and enhanced investment as core elements of the strategy for high growth and employment generation. approved in 2000 for $150 million. At the request of the Government. and medium enterprises (SMEs). the so-called Foreign Currency Export Finance Facility (FCEF).The Government of Pakistan. under its I-PRSP. Because of its under-utilized potential for generating employment. or SMETEF. SMETEF has four components including: • A $150 million revolving facility. the Government accords high priority to the development of micro. increasing incomes.000 technical assistance to support the reform of the Export Promotion Bureau as a facilitator for exports. • An equity investment of up to $2 million in the Pakistan Export Finance Guarantee Agency (PEFG) to provide an alternative to traditional collateral instruments3. • A Partial Risk Guarantee facility up to a maximum exposure of $150 million for import/letter of credit confirmation2. • An $800. ADB is currently preparing a second major . ADB has been assisting the Government in the development of the SME Sector through facilitating SME access to Trade Finance under the SME Trade Enhancement Finance Program. small.
the SMEs' growth potential for employment. and poverty reduction remains largely untapped. To assist the Government to prepare the SDP. The SDP is part of ADB's 2003 lending assistance package to Pakistan. Most SMEs prefer to remain in the informal economy. untapped growth potential. which in turn precludes them from improving their competitiveness by accessing business support and financial services.000 in February 2002. The diagnostic phase of the TA has been completed. the ADB approved a grant technical assistance of $800. the implementation of which is currently in progress. • . Pakistan's SMEs contribute more than 30% to GDP and absorb more than 80% of nonfarm employment. Because of an unfavorable business environment. income generation. coupled with low investments and rent seeking behavior. In addition. and development of service institutions for SMEs. the SDP will also support market based financial and business services. which is the topic of today's workshop.operation. on the basis of which the following opportunities and issues in Pakistan's SME sector have been identified: • Large. the SME Sector Development Program (SDP). • The lack of SME-friendly tax regulations imposes high barriers for entry into the documented economy. which intends to specifically address the policy environment.
This constitutes a common source for the reported abuse of power by officials. • SME lack of access to finance is a major impediment to investment. industry. labor.g. • In the absence of effective market-based support to the SMEs. • Industry associations and chambers of commerce and industry often fail to act collectively. provide business support services and represent SME . and tax inspectors and adds to the costs of doing business. which undermines their lobbying power and potential to assist the SMEs at improving their competitiveness. • Banks have yet to realize the full potential of SME market from a commercial perspective. and implementation procedures are complex and written in language.Labor. business growth and innovation. enterprises have a negative attitude toward such legislation. This results in lending policies and processes of banks. and industry legislation. As a result. which is not understood by a large part of the population. which effectively preclude the SMEs' access to finance. and lack the skills to develop profitable financial services for the SMEs. the Government has established and maintains institutions to support the SMEs access to finance. tax. e. The existing prudential regulations of the State Bank of Pakistan (SPB) require financial information and physical collateral for lending.
These include: • Key policy reforms to enhance competitiveness • Access to finance • Access to Business Support Services • Restructuring and capacity building of key institutions supporting the SMEs • Investments supporting the reform process Given the focus of this workshop. On the legal side. I will elaborate further on key policy. However. The Government has already taken . regulatory. under the ongoing technical assistance. which will be finalized in consultation with the Government.interests within the Government. the Government recognizes that direct government intervention is not an effective approach and that a market-based mechanism and private ownership will ultimately need to replace these institutions. we have reviewed a number of laws affecting the operations of enterprises and have identified several areas for improvement and proposed modifications of legislation and regulations. Against the background of these issues and opportunities in the SME sector. and institutional reforms ADB is considering to support under the SDP. five key areas have been identified for support and assistance under ADB's SDP.
which undermine the purpose of laws in practice. which is the main reference for enterprise legislation. for a higher impact of reforms on the SMEs. Also taxation at entry. a focus on law reforms alone will not be effective to improve the business environment in a tangible way. While continued law reforms and simplification of procedures are essential. ADB proposes support to address a number of key crosscutting concerns.the following initiatives on the legal side: • Establishment of a deregulation commission under the chairmanship of the Minister for Commerce top review existing labor. and registration fees are perceived to be high for enterprises. with World Bank support. • The Government issued in September 2002 a new Industrial Relations Ordinance. to revise the Factories Act of 1934. • Major effort being undertaken. To this end. industry. Registration processes are . and taxation laws and regulations. These include the following: • Establishing simple business registration and financial incentives to facilitate SMEs entry into the formal economy Complicated and poorly drafted laws and regulations pose a severe barrier for SMEs to enter the formal sector. which is the first of a set of six laws amalgamating more than 50 labor related laws.
cumbersome. awareness building for very small SMEs. and easy registration processes and business friendly one-stop-shop arrangements to improve the coverage of registration. effective SME friendly arrangements for entry under the formal tax net will be identified and considered. Also. cheap. entrepreneurs are reluctant to enter the formal sector. and pilot testing in a number of locations. which would cover a majority of SMEs. Against this background. First. Meeting international product quality standards will be a gradual but significant benefit . ADB would encourage the Government to limit inspection visits to a single inspector and by adopting a selective risk-based inspection approach. and even if they are understood. Third. selfinspection by the private sector trade bodies or alternatively inspection by the private companies assigned by the Government. ADB proposes to assist the Government in undertaking measures of awareness building and support the development of simple. The risk-based approach adopts measures through three tiers of intervention. the benefits of formalization such as the access to services are poorly understood. which are prone to particular risks at the work place or those known for non-compliance. • Improving quality standards for industry and labor and reduce the abuse of power by inspectors To reduce the widespread abuse of power by inspectors. As a result. individual. ADB also proposes to focus on the improvement of the labor and industry inspection function through the preparation of an appropriate inspection policy and implementation process. Second. selective inspection of enterprises.
to the SMEs. effective collaboration of institutions such as SMEDA. ADB will support the State Bank of Pakistan's initiative in preparing prudential regulations. the EPB. ADB proposes the development of a policy and action plan to enhance export readiness of SMEs. To this end. • Restructuring the SME Bank The SME Bank has the mandate to serve the SMEs through providing access . In the design phase of the ongoing technical assistance. The current operations of SMEDA. ADB would like to propose the preparation of the Final draft regulations by mid-March 2003. Business plans for SMEDA and EPB need to accommodate this. and PSQCA need to be reviewed and modified to foster export readiness and export performance. • Supporting SME-Neutral prudential regulations Prudential regulations based on lending processes to corporate customers pose an unnecessary barrier to effective. EPB. • Enhancing export readiness of SMEs It has been recognized that enterprises need to meet minimum quality standards and practices to be ready for competitive export markets. and the image of Pakistan. and the Pakistan Standard and Quality Control Authority (PSQCA) is required. Especially collateral and documentation requirements limit access severely. prudent approaches that would enhance SME access to finance.
However. staff and related liabilities outside the Bank. To this end. awareness-building activities. • Organizational Review of Export Promotion Bureau Although the Export Promotion Bureau (EPB) is neutral to firm size in . Against this backdrop. fulfilling its mandate has been severely constrained. including portfolio. and prepared a number of important sector strategies. To assist SMEDA in achieving a significant outreach to the SMEs and fulfill its mandate more effectively. ADB is proposing assistance for the restructuring and ultimate privatization of the SME Bank for it to play an important and effective role in serving SMEs. publications and feasibility studies for SMEs. This plan will entail the focus of SME facilitator function and well-defined performance benchmarks. ADB is proposing support in the preparation of SMEDA's new strategy and business plan. for example to a dedicated company with a limited lifetime. the SME Bank needs to focus on commercial banking services to the SMEs. So far it has undertaken significant advocacy work. the Bank should now concentrate on new business and transfer recovery operations. While recovery operations over the last three years proved very successful. due to its creation through the amalgamation of two insolvent and inappropriately staffed financial institutions. • Supporting SMEDA SMEDA was established in October 1998 and obtained legal status in August 2002 through an Ordinance.to finance and related services.
1781-1830 Posted Mon. let me reiterate that ADB considers the creation of a conducive policy environment through following the broad policy and institutional reform agenda I have just highlighted as indispensable to promote SME development in Pakistan. and organizational set up will need to be adjusted taking into account the needs of the SMEs as well as larger enterprises. We look forward to working together with all stakeholders to promote a dynamic and vibrant SME sector in the country that lives up to its full potential. regulatory and institutional level beyond the 'project' aspects that would directly benefit SMEs. staffing.principle. In this regard. and require reform at the policy. Origins of Commercial Banking in the United States. Under the ongoing ADB supported SME Trade Enhancement Facility. an organizational review of EPB is currently being carried out to enhance the effectiveness of trade promotion. In conclusion. To support a global and commercially driven approach EPB's functions. larger firms in the traditional sectors have historically been the main beneficiaries of EPB's trade promotion. This will be of immediate relevance to the SME SDP. 2010-02-01 18:21 by Anonymous . we would be happy to provide the necessary support and assistance requested of us by the Government to further the reform agenda. ADB will be processing a $100 million nationwide SME Sector Development Program in 2003 which will be a hybrid of program and project activities.
savings banks. The best way to understand how early commercial banks functioned is to examine a typical bank balance sheet. mortgages. not "simple" loans. i. where the interest and principal fall due when the loan matures. Many. but by no means all.e.e. usually structured as joint-stock companies.2 Banks essentially borrowed wealth from their liability holders and re-lent that wealth to the issuers of their assets. played a key role in early U. Most bank assets. bills of exchange and promissory notes "discounted" at the bank by borrowers. economic growth. the borrower receives $100 today and must repay the lender $106 in one year.34 today. With a discount loan. a discount requires only the repayment of the principal on the due date. commercial banks were for-profit business firms. gold and silver (usually minted into coins but sometimes in the form of bars or bullion). For example. Investment in real estate was minimal.S. public securities. however.3 Commercial Bank Liabilities . the borrower repays $100 at the end of the year but receives only $94. Sometimes they owned a small sum of mortgages. were discount loans collateralized by commercial paper. insurance companies and other financial intermediaries helped to fuel growth by channeling wealth from savers to entrepreneurs. not the full principal sum. commercial banks. commercial banks pooled the wealth of a large number of savers and lent fractions of that pool to a diverse group of enterprising business firms. Although politically controversial.S. with a simple loan of $100 at 6 percent interest. University of Virginia Early U. usually simply to provide the bank with an office in which to conduct business. Description of the Early Commercial Banking Business As financial intermediaries. They also owned public securities like government bonds and corporate equities. commercial bank in the late eighteenth and early nineteenth centuries owned assets such as specie. Wright. of exactly one year's duration. long-term loans collateralized by real property. Discount Loans Described Most bank loans were "discount" loans. Those entrepreneurs used the loans to increase the profitability of their businesses and hence the efficiency of the overall economy. commercial paper. Unlike a simple loan. Assets of a Typical Commercial Bank A typical U. the number and assets of which grew quickly after 1800. obtained corporate charters from their respective state legislatures. That is because the borrower receives only the discounted present value of the principal at the time of the loan. the notes and deposits of other banks.S.1 Commercial banks. and real estate. i. Banks profited from the difference between the cost of their liabilities and the net return from their assets. and their claims on other banks (notes and/or deposits) to pay their creditors (liability holders). Commercial banks used specie.Robert E.
Because specie paid no interest. etc. Or. A holder of a banknote. If the bank's condition precluded further extension of the loan. bankers had to be careful not to accumulate too much of the precious metals lest they sacrifice the bank's profitability to its safety. Stockholders who wished to recoup their investments could do so only by selling their shares to other investors in the secondary "stock" market. like U. Reduction of Information Asymmetry .Commercial banks acquired wealth to purchase assets by issuing several types of liabilities. effectively extending the term of the loan. in specie. at the holder's option. Those common shares were not redeemable. When bankers found that their reserves were declining too precipitously they slowed or stopped discounting until reserve levels returned to safe levels. A holder of a deposit liability could "cash out" by physically withdrawing funds (in banknotes or specie) or by writing a check to a third party against his or her deposit balance. usually from a few days to six months. Monday through Saturday. If the bank's condition allowed. Most early banks were joint-stock companies. In that way. deposits. had to keep ample amounts of gold and silver in their banks' vaults in order to remain in business. including banknotes and checking deposits. and specie traveled from person to person to make purchases and remittances. Balance Sheet Management Early banks had to manage their balance sheets carefully. Successful applicants would receive the loan as a credit in their checking accounts. if necessary. borrowers had to pay up or face a lawsuit. to make retail purchases.e. Because its common shares were irredeemable. bankers could. the notes and deposits returned to the bank of issue for payment. if necessary. Holders of other types of bank liabilities. therefore. in banknotes. and perhaps attracting some deposits.5 Bankers therefore made discounts for short terms only. Six Percent bonds. a bank's "capital stock" was its most certain source of funds. so they issued equities ("stock") in an initial public offering (IPO). Interest-bearing public securities.4 could physically visit the issuing bank to redeem the sum printed on the note in specie or other current funds. repay debts. which were typically four to six hours a day. if they could not meet the demands of liability holders with prompt specie payment. however. or in some combination thereof. however. stockholders could not demand that the bank exchange their shares for cash. Discount loans were not callable. Those banknotes. became legally insolvent. Eventually. They "failed" or "broke. a banknote holder could simply use the notes as currency. quickly reduce the outstanding volume of discounts by denying renewals. Bankers quickly learned to stagger loan due dates so that a steady stream of discounts was constantly coming up for renewal. early banks would begin to accept discount loan applications. After selling its shares to investors. Bankers. could redeem their claims during the issuing bank's open hours of operation." i. In other words. often served as "secondary reserves" that generated income but that bankers could quickly sell to raise cash. an engraved promissory note payable to the bearer very similar to today's Federal Reserve notes.S. borrowers could negotiate a new discount to repay one coming due. make loans.
they will renege on contracts by engaging in risky activities with. An owner of a peach naturally scoffs at the average offer. lenders must create information about borrowers. "who will give for the use of money no more than a part of what they are likely to make by the use of it. especially at high interest rates." "Sober people. For instance.the seller knows the true value but the buyer does not.6 They kept defaults at an acceptably low level by reducing what financial theorists call "information asymmetry. So information about the car is asymmetrical -. a borrower might decide to use a loan to try his luck at the blackjack table in Atlantic City rather than to purchase a computer or other efficiency-increasing tool for his business. sellers know more about their goods and services than buyers do." from breakdown-prone cars." Adverse selection is also known as the "lemons problem" because a classic example of it occurs in the unintermediated market for used cars.) Bankers. model. the adverse selection problem in financial markets should be clear. Lenders that do not reduce information asymmetry will purchase only lemon-like loans because their offer of a loan at average interest will appear too dear to good borrowers but will look quite appealing to risky "prodigals and projectors. must create information about loan applicants and borrowers so that they can assess the risk of default and make a rational decision about whether to make or to continue a loan. Screening procedures included probing the applicant's credit history and current financial condition. In order to reduce the risk of default due to information asymmetry." Sellers naturally know whether their cars are peaches or lemons." he continued. Another borrower might have the means to repay the loan but default on it anyway so that she can use the resources to take a vacation to Aruba. than safe borrowers.Early bankers maintained profitability by keeping losses from defaults less than the gains from interest revenues. would not venture into the competition. which occurs after contract completion. Potential buyers have difficulty discerning good cars. Early banks created information by screening discount applicants to reduce adverse selection and by monitoring loan recipients and requiring collateral to reduce moral hazard. As Adam Smith put it. If we recall that borrowers are essentially sellers of securities called loans. The information is asymmetrical or unequal because loan applicants and borrowers naturally know more about their creditworthiness than lenders do. If given the opportunity. in other words. who alone would be willing to give this high interest. and mileage. (More generally. the "peaches. lenders' wealth. which occurs before a contract is made. Monitoring procedures included the evaluation of the flow of funds through the borrower's checking account and the negotiation of restrictive covenants specifying the uses . and moral hazard. interest rates "so high as eight or ten per cent" attract only "prodigals and projectors. on the other hand. A lemon owner. Adverse Selection Adverse selection arises from the fact that risky borrowers are more eager for loans. the "lemons. will jump at the opportunity to unload his heap for more than its real value. Potential buyers quite rationally offer the average market price for cars of a particular make. or even outright stealing." The two major types of information asymmetry are adverse selection." Moral Hazard Moral hazard arises from the fact that people are basically self-interested.
Willing. had granted a significant volume of loans to both the public and private sectors. property they could seize in case of default. Commercial Banks. had to await the Revolution. (See Table 1. Commercial Banks The development of America's commercial banking sector. By the end of the eighteenth century. ran afoul of English laws and had to be abandoned.000 The Massachusetts Boston.000 in 1787) The Bank of New York Manhattan. New Yorkers. The First U. New York (1784) 1791 $1. Real estate. No longer blocked by English law.000 States Pennsylvania Location . that discounted short-term commercial paper. A Short History of Early American Commercial Banks Colonial Experiments Colonial America witnessed the formation of several dozen "banks.000 Bank The Bank of Maryland Baltimore. were small and short-lived. a request that Congress and several state legislatures soon accepted. i. were fraudulent. Additionally. All of the handful of colonial banks that could rightly be called commercial banks. 1781-1799 Name Year of Charter (Year Authorized Capital (in of Establishment) U. 1781*/1782/1786** $400. 1791* $10.S.) Table 1: Names. and Bostonians.e.S. led by William Phillips. Most of the colonial banks were "land banks" that made mortgage loans.000 The Bank of the United Philadelphia.000. The young republic's shaky war finances added urgency to the bankers' request to charter a bank. Morris. and Authorized Capitals of the First U. dollars) Bank of North Philadelphia. slaves. Locations. that new bank. the Bank of North America. Maryland 1790 $300. therefore. co-signers. mercantile leaders in over a dozen other cities had also formed commercial banks. Some. and other prominent Philadelphia merchants moved to establish a joint-stock commercial bank. and financial securities were common forms of collateral. By 1782.e. Others. led by Alexander Hamilton. many of them were government agencies and not businesses. Banks could also require borrowers to post collateral.to which a particular loan would be put. Charter or Establishment Dates. Massachusetts 1784 $300. like that of Philadelphia merchants Robert Morris and Thomas Willing. i. like that of Alexander Cummings. were not to be outdone and by early 1784 had created their own commercial banks." only a few of which were commercial banks.000.000 (increased to America Pennsylvania $2.S.000.
New York Source: Fenstermaker (1964). Rhode Island Bank of Delaware Wilmington. Connecticut Union Bank Boston. ** = The Bank of North America gained a second charter in 1786 after its original Pennsylvania state charter was revoked.000. South Carolina Hudson.000 in 1795) $100. Pennsylvania Bank of Columbia Washington. Rhode Providence Island New Hampshire Bank Portsmouth.000 $100.000 $400. Connecticut Portland Bank Portland.000-400.000.000 $2.000-800.000-200.000 (increased to $500.000 (increased to $400.The Bank of Providence. Massachusetts Merrimack Bank Newburyport.000 $3. D. Connecticut Bank of Alexandria Alexandria. New Hampshire The Bank of Albany Albany.200.000-100. Nantucket Bank Nantucket. Pennsylvania.000 $200. Massachusetts Middletown Bank Middletown.000 $500. Maine Manhattan Company New York.000 * = National charter. Delaware Norwich Bank Norwich.C.000 $100.000-100.000 $260. Connecticut Bank of Baltimore Baltimore.000.000 $70. Virginia Charleston.000 $50.000 $40. Massachusetts. Davis (1917) 1791 1792 1792 1792 1792 1792 1792 1792 (1792) 1799 (1792) (1792) 1801 1793 1793 1793 1795 1795 1795 1795 1795 1796 1796 1799 1799# $500.000 $500. Virginia Essex Bank Bank of Richmond Bank of South Carolina Bank of Columbia Bank of Pennsylvania Salem. Massachusetts New Haven Bank New Haven. and New York chartered the bank in . Massachusetts Richmond.000 $100. Connecticut Union Bank New London.000 n/a $200. New York Hartford Bank Hartford.000 $300.000 $1.000 $1.000-150.000 $75.000-400. New York Philadelphia. Maryland Bank of Rhode Island Newport.000 $160.000 in 1795) $150.
69 67. # = This firm was chartered as a water utility company but began banking operations almost immediately. authorized capital.1782. banks and other financial intermediaries helped to spread the notion that wealth and power should be allocated to the most able members of post-Revolutionary society. as a means of social control. the assets of U." a classic postwar liquidity crisis caused by a shortage of cash. Early U.90 41.87 Estimated Assets (in millions $U.66 50. and other modern financial institutions.S.) As early as 1820.39 1800 1801 1802 1803 1804 1805 29 33 36 54 65 72 . Table 2: Numbers.S. Banks helped to condition individuals and firms to the new. Many Revolutionary elites saw banks.17 30. (See Table 2.42 29. Banks Authorized Capital (in millions $U. a figure that the commercial banking sectors of most of the world's nations had not achieved by 1990.S.74 52. By providing loans to entrepreneurs based on the merits of their businesses. commercial banks equaled about 50 percent of U.) 27.00 58.07 82." Many colonists had been content to allow debts to remain unsettled for years and even decades. 1800-1830 Year No.S. The power vacuum left after the withdrawal of British troops and leading Loyalist families had to be filled. aggregate output. Banking and Politics The first U. Commercial Banks.S. Authorized Capitals. commercial banks had political roots as well. and Estimated Assets of Incorporated U. After experiencing the devastating inflation of the Revolution.17 48. Growth of the Commercial Banking Sector After 1800. and assets of commercial banks grew rapidly.S.S. and an increased emphasis on the notion that "time is money. however.) 49. the number. not to the oldest or best groomed families. and not their genealogies. commercial banks helped early national businessmen to overcome a "crisis of liquidity. and many members of the commercial elite wished to fill it and to justify their control with an ideology of meritocracy. stricter business procedures.03 34. many Americans came to see prompt payment of debts and strict performance of contracts as virtues.
economy.41 201.31 195.30 316.98 194.93 307.53 197.41 349.1806 1807 1808 1809 1810 1811 1812 1813 1814 1815 1816 1817 1818 1819 1820 1821 1822 1823 1824 1825 1826 1827 1828 1829 1830 79 84 87 93 103 118 143 147 202 212 233 263 339 342 328 274 268 275 301 331 332 334 356 370 382 51.60 181. for-profit business firms. however. Overly stringent laws. Early bank critics.23 177.65 349.87 142.49 55.34 53.53 173.19 76.S. banks took the brunt of reactionary "agrarian" rhetoric designed to thwart. critics argued that the lending decisions of early banks were politically-motivated and skewed in favor of rich merchants.98 172.08 190.04 100. usually .19 66.03 344. I estimated assets by multiplying the total authorized capital by the average ratio of actual capital to assets from a large sample of balance sheet data.66 341.40 94.89 187. Such was indeed the case.49 87.23 108.47 331.29 84. As the first large. For instance.65 161.S. see Fenstermaker (1965).47 92.72 403. I added the Bank of the United States and the Second Bank of the United States to his figures.23 158. usually corporate. Commercial banks caused considerable political controversy in the U.86 283. the post-Revolution modernization of the U.45 Sources: For total banks and authorized bank capital.16 270. failed to see that their own reactionary policies caused or exacerbated the supposed evils of the banking system.75 191.06 205.84 195.16 347. or at least slow down.10 328.98 192.51 197.60 379.11 90.67 185.56 349.43 51.00 110.42 345.23 233.02 115.
At first glance. intermediation may seem a rather innocuous process -. the discussion of banks' role in economic growth has been much muddied by monetary issues. therefore.championed by the agrarian critics themselves. Most scholars. however." thereby causing inflation.000.e. Unfortunately. as they almost always were. Politicians soon discovered that they could extract overt bonuses. often substantially more. In fact. Commercial Banks Despite the efforts of a few critics.000 for operating expenses. usually 6 percent per year. and even illegal bribes from bank charter applicants.000 equity capital to have an average of $2. they made the money supply expand rapidly during business cycle "booms. that commercial banks helped to increase per capita aggregate output. The economic importance of early banks. etc. They naturally lent to the safest borrowers. Again. In general.000 on loan. lies not in their monetary role but in their capacity as financial intermediaries. thereby causing ruinous price deflation. Because early banks were lucrative. Critics claimed that bank dividends greater than six percent were prima facie evidence that banks routinely made discounts at illegally high rates. i. Many early bank charters forbade banks to raise additional equity capital or to increase interest rates above a low ceiling or usury cap. forced bankers into that lending pattern. than their capital base. most Americans rejected anti-bank rhetoric and supported the controlled growth of the commercial banking sector. Banknotes circulated as cash. They did so because they understood what some modern economists do not. like those of colonial America. a dividend of ten percent. When market interest rates were above the usury cap.lenders are matched to borrowers. for example. Early banks were extremely profitable and therefore aroused considerable envy. have concentrated on early banks' role in the monetary system. Upon further inspection. politicians and opposing interest groups fought each other bitterly over charters. banks with higher asset to capital ratios. The Economic Importance of Early U. taxes. Rival commercial factions sought to establish the first bank in emerging commercial centers while rival political parties struggled to gain credit for establishing new banking facilities. those most known to the bank and those with the highest wealth levels. It was not unusual. therefore. namely. a special act of legislation that granted corporate privileges such as limited stockholder liability.000 of gross revenue. minus say $20. could earn even more. banks were forced to ration credit. The six percent interest on that sum would generate $120. banks were naturally swamped with discount applications. Early banks also caused considerable political controversy when they attempted to gain a charter. and they made the money supply contract sharply during recessions.000. just as today's Federal Reserve notes do.000 to be divided among stockholders. In other words. More highly leveraged banks. grow slowly because firms with profitable ideas find it difficult to . the ability to sue in courts of law in the name of the bank. critics unfairly blamed banks for problems over which bankers had little control. for a bank with $1. leaving $100. it is clear that intermediation is a crucial economic process. Economies devoid of financial intermediation. Forbidden by law to increase interest rates or to raise additional equity capital. banks earned more than they charged on discounts because they lent out more.S. early banks caused the money supply to be procyclical.
1700-1815. New York: Cambridge University Press. The Wealth of Nations Rediscovered: Integration and Expansion in American Financial Markets. to increase labor specialization. and Economic Development in Industrial New England. Profitable ideas cannot be implemented and the economy stagnates. less-specialized lenders. for instance. Origins of Commercial Banking in America. commercial banks increased the volume of loans made and hence the number of profitable ideas that entrepreneurs brought to fruition. Sylla. Additionally.e. Robert.e. By lowering the total cost of borrowing. Robert E. New York: Cambridge University Press. a major reduction in search costs. Personal Connection. Louis Review 80 (1998): 83-104. Securities Markets and the Banking System. Insider Lending: Banks. Important recent overviews of the wider early U. and to take advantage of economies of scale and scope. Edwin J. 2001. 1994. were able to reduce information asymmetry more efficiently than smaller. for instance. 2000. driving economic growth. "U. 1780-1850. the costs of reducing information asymmetry (adverse selection and moral hazard). both savers and entrepreneurs needed only to find the local bank. are so high that few loans are made. Additional Reading Important recent books about early U. banks. 2002. Intermediaries reduce both search and information costs. A History of Banking in Antebellum America: Financial Markets and Economic Development in an Era of Nation-Building. Wright.S. allowed firms to implement new technologies.S.locate financial backers. David J. specialized lenders. . MD: Rowman & Littlefield. they created new wealth. Without intermediaries. Richard. American Public Finance and Financial Services. 2000. Naomi. 1750-1800.S. The Origins and Economic Impact of the First Bank of the United States. Commercial banks. Columbus: Ohio State University Press. 1790-1840. 17911797. search costs. New York: Garland Publishing. As those firms grew more profitable. Lamoreaux. commercial banking include: Bodenhorn." Federal Reserve Bank of St. Lanham. i. as large. Wright. i. financial sector are: Perkins. Rather than hunt blindly for counterparties. 1994. New York: Cambridge University Press. and information creation costs. the costs of finding a counterparty. like private individuals. Cowen. Howard.
Princeton: Princeton University Press. Finance and Economic Development in the Old South: Louisiana Banking. "Impact of the First and Second Banks of the United States and the Suffolk System on New England Bank Money: 1791-1837. "The Rise of Commercial Banking Institutions in the United States. Gregory. Van. Davis. et al. Gras. Larry. N. 1901. 1917. New York: Garland Publishing. 1938. 1985." Ph. Kent. 1937. Cambridge: Harvard University Press. Baltimore: Johns Hopkins Press. Bray. Banks and Politics in America. Thomas Huertas. New York.Ohio: Kent State University. Stanford: Stanford University Press. The Development of American Commercial Banking: 1782-1837. 1972.S. S. Baton Rouge: Louisiana State University Press. Philadelphia: Philadelphia National Bank. George. Essays in the Earlier History of American Corporations. Banking in the American South from the Age of Jackson to Reconstruction. 1965. Filer. Eliason. 1953. 1953. Hedges. . 1799-1842. Johnson Reprint Corporation.. Van and John E. Commercial Banking and the Stock Market Before 1863.Classic histories of early U. Fenstermaker. 1804-1861. from the Revolution until the Civil War. Economic Aspects of the Second Bank of the United States. Adolph O. Wainwright. The Massachusetts First National Bank of Boston. J. Schweikart. 1957. Joseph Edward. Fritz. The Molding of American Banking: Men and Ideas. banks and banking include: Cleveland. 1784-1934. Citibank. Harold van B. Walter Buckingham. Joseph S. Cambridge: Harvard University Press. Credit and Banking 18 (1986): 28-40. Hunter. History of the Philadelphia National Bank: A Century and a Half of Philadelphia Banking. Smith. B. Hammond. 1989. Fenstermaker. Nicholas B. Redlich. Green. New York: Russell & Russell. diss. 1812-1970. 1987. J." Journal of Money. Cambridge: Harvard University Press. 1968. The Manhattan Company: Managing a Multi-Unit Corporation in New York.D.. 1803-1953. University of Minnesota.
the two most widely used of which are Gross National Product (GNP) and Gross Domestic Product (GDP). if the banker determines that the borrower represents. Early bankers. to take some risks and therefore to suffer some defaults. nominal aggregate output might increase simply because of price inflation. Aggregate output may increase simply because of additional people. It can be measured in different ways. not too few.06 = 94. banks could not demand early repayment from borrowers. and because banks were constrained by usury law from raising their interest rates higher than certain low levels. bankers are willing. . rarely faced such risk-return tradeoffs. Because the supply of bank loans was inadequate to meet the huge demand for bank loans. 6 In order to maintain bank revenues. banks. bankers could afford to lend to only the safest risks. Aggregate output is the total dollar value of goods and services produced in a year. usually faced the problem of too many good borrowers. i = annual interest rate." adjusting for changes in population and prices. which in this example is one.1 Which is to say that they increased real per capita aggregate output. Real per capita aggregate output. in other words. 3 Early bankers used the formula for present value familiar to us today: PV = FV/(1+i)n where PV = present value (sum received today).S.3396 or $94. 4 5 In other words.34. therefore. Real aggregate output means output adjusted to account for price changes (inflation or deflation). So. usually around 6 to 7 percent. however. Similarly. FV = future value (principal sum). measures the economy's "size. and n = the number of compounding periods. so economists must take population growth into consideration. 2 A balance sheet is simply a summary financial statement that lists what a firm owns (its assets) as well as what it owes (its liabilities). under competitive conditions. only a 5 percent chance of default. say. making a simple year-long loan for $100 at 10 percent per annum. Early U. For example. PV = 100/1. The term per capita refers to the total population. is clearly superior to not lending at all and foregoing the $10 interest revenue.
1781-1830".commercial. URL http://eh.net/encyclopedia/article/wright. EH. March 26. 2008. edited by Robert Whaples. Robert.origins .banking.Net Encyclopedia. "Origins of Commercial Banking in the United States.Citation: Wright.
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