Professional Documents
Culture Documents
Business of Banking (Volumul I)
Business of Banking (Volumul I)
Business of Banking (Volumul I)
Ligia GeorgescuGolooiu
March 2002
Presentation
The aim of Business of Banking is to equip the students of the Economic
Faculties with the ability to take an active part in banking activities in
English. The course is intended to be used by students at intermediate to
advanced economic levels and is planed to get them actively understanding
of economic and banking issues, not only during the classroom.
At the same time, Business of Banking is addressing not only the Romanian
students, but also the foreign students who are studying in Romania and are
interested in expanding their technical knowledge of the banking system.
The book consists of a variety of materials and is organized around
seventeen chapters, divided into two volumes. The first volume ranks from
The Banking System in Romania and England to Risk management and the
second volume ranks from the exchange rates to Guarantees or Bonds.
These seventeen are known to be frequently used by economists and
bankers in the banking field.
The material in each chapter contains a definition, descriptive passages or
extracts about the topic. This provides the student with some of the
structural items and vocabulary used when talking about the topic.
Finally, the readers will be acquired the ability to argue, to discuss, to hear
and say things they have not heard before, and to be aware of what reaction
is hoping to provoke. In short they get a flexible ability to communicate (not
only in Romanian, but in English too) in the give-and-take situation of real
conversation on economic, trade or banking issues.
For this reason we appreciate that the book represents a real support for all
those who are on their way to become economists or bankers, as well as for
people who intend to start a business in this period of transition.
THE BANKING
SYSTEM
IN ROMANIA
D Objectives:
banks increased to 215 in 1914, from 3 banks existing in 1880. If the setting
up of the National Bank of Romania and long-term credit institutions were
done only with domestic capital, in turn, foreign capital would be involved
substantially in the creation of the new private commercial banks.
Accordingly, in 1914, German, Austrian, French, Belgian and English
banking institutions held 40 percent of the Romanian commercial banks
capital.
On the eve of World War I, the Romanian banking industry was highly
concentrated, being dominated by 9 leading commercial banks, called the
big Romanian banks. In 1913, these banks held 70 percent of the total
commercial banks resources, while 188 small and middle-sized banks held
the remainder of the total resources. Taking into account the origin of the
capital, the composition of the group of the big Romanian banks was the
following: 4 banks with national capital (Banca Agricola, Banca Comertului
from Craiova, Banca Romana de Scont, Banca Romaneasca), 4 banks with
foreign capital (Banca Generala Romana, Banca de Credit Romanesc, Banca
Comerciala Romana, Banca Romaniei), and one bank with foreign and
domestic capital (Marmorosch Blank &Co. Bank).
After World War I, under national oriented policies promoted by the Liberal
governments, the weight of the foreign capital in the banking system
declined in relative terms. Despite this capital trend, the banks with foreign
interests maintained significant positions in the banking system and were
able to better identify profitable investments than their Romanian-controlled
competitors.
During 1931-1932, the banking sector felt the repercussions of the
economic crisis due to its close links with the industry. Banks supervision
was almost nonexistent. This state of affairs contributed to the collapse of
some large banks, but generally the banks with foreign interests withstood
the shocks.
In order to strengthen the banking system, the Romanian Parliament passed
the Law on the organization and regulation of the banking commerce, on
May 8, 1934. Under this law, The National Bank of Romania was deeply
involved in drafting measures for recovering the banking system by
liquidating non-viable credit institutions and merging institutions weakened
by the crisis. Consequently, the number of banks was diminished from 893
in 1933, to 523 in 1937 and 246 in 1944.
After 1934, the state intervention in regulating the banking sector forced the
foreign-controlled banks to comply with imposed requirements and to apply
a policy in line with Romanias general interests.
Soon, after the communists took the power in Romania according to the
Decree Law no. 197/1948, all the Romanian and foreign-controlled banks
were liquidated, except for the National Bank of Romania, the National
Company of Industrial Credit and the Savings Bank.
The 1934 banking law being abrogated, the remaining banks continued their
activity under the provisions of the Commercial Code and their specific
laws. In the years that followed, the Romanian banking system was
organized as a mono-bank system, typical to a centralised economy. It is
noteworthy that in the 70s, during a period of economic liberalization two
foreign banks were allowed to establish branches in Romania:
Manufacturers Hanover Trust (the branch being now part of the Chase
Manhattan Bank network), and Societe Generale.
1.2 The banking system in Romania after 1989
The issuing of the Law on banking activities (33/1991) and the Law
concerning the Statute of the National Bank of Romania (34/1991)
represented the beginning of the organization of the banking system in
accordance with the market economy principles.
The banking system structures and functions were different during the
former system. So, the National Bank, the agent of the State, had the
functions of a central bank and of a commercial bank at the same time.
There were three banks that were specialized in different fields of activity:
Banca de Investitii which granted credits for the investment projects, Banca
pentru Agricultura si Industrie Alimentara which granted credits for the
agricultural activities, and Banca Romana de Comert Exterior which was
specialized in foreign trade operations.
The single institution to receive the savings of the population was Casa de
Economii si Consemnatiuni. During that system, there were no financial
markets and no competition between banking institutions, as the Romanian
legal tender was not convertible and the interest rate had only a formal role.
The new banking system started its activity on December 1st, 1990. Its
structure has been organized in two tier levels: the National Bank of
Romania as the Central Bank of the state on one side, and the commercial
banks on the other side.
In accordance with the provisions of its Law, the National Bank of Romania
has become a real central bank. It formulates and conducts monetary and
credit policy within the framework of the countrys economic and financial
policies, with the goal of preserving the stability of the national currency.
The former commercial banks have changed themselves and have become
real commercial banks for the market economy. In 1990, the former
commercial banks have been established as follows: Banca Comerciala
Romana SA, Banca Romana de Comert Exterior SA, Banca Agricola SA,
Banca Romana pentru Dezvoltare SA and many other new commercial
banks have also been established, such as:
Until December 31st, 20001, the National Bank of Romania has authorized
33 banks, Romanian legal entities, to render banking services in the
national currency (Lei), as well as in foreign currency, and 8 branches of
the foreign banks (see Annex no. 1).
The structure of the capital of banks operating in Romania at the end of the
year 2000 was the following:
Number
1994 1995
1996
1997
1998
1999
2000
I. Romanian
banks, of which:
20
24
31
33
36
34
33
a) fully or majority
state-owned
capital, out of
which:
- fully state-owned
capital
b) fully or majority
private capital, out
of which:
13
17
24
26
29
30
29
- fully or majority
domestic capital
14
13
13
11
- fully or majority
foreign capital
10
13
16
19
21
10
Total (I+II)
27
31
40
43
45
41
41
Issuing money;
Bankers bank;
Acting as the states agent and keeping the evidence of the States
Treasury account;
The Romanian transition to the market economy had a strong impact on the
organization of The National Bank of Romania, its functions and role as a
central bank.
The National Bank of Romania is the only institution authorized to
issue banknotes and coins throughout the country.
Under its new law3, it establishes, implements, and is responsible for the
monetary, foreign exchange, credit, and payments policy, as well as the
banking licensing and prudential supervision in the framework of the
general policy of the State; for this it pursues the normal operation of
the banking system and the participation in the promotion of the
financial system to market economy. The National Bank of Romania
uses procedures and instruments specific to the monetary market,
lending to the banking companies, assures liquidity to the banking
system, and at the same time, it is responsible for licensing and
supervising all entities operating as bank entities in Romania.
Under the provisions of the law concerning the Statute of the National Bank
of Romania, it formulates and conducts the credit policy within the
2
3
framework of the countrys economic and financial policy with the goal of
preserving the stability of the national currency.
The main functions of the National Bank of Romania are in the monetary
and credit field, banking supervision, foreign exchange operations,
operations with the state treasury, foreign exchange control.
The National Bank of Romania alone has the right to determine the
nominal value, size, weight, design and other technical characteristics of
banknotes and coins. It elaborates the banknote and coin issue program
so that the countrys requirements for cash are met strictly according
to the real needs of money circulation.
The National Bank of Romania distributes the money issue and
manages the banknotes and cash reserves. It may decide to cancel or
withdraw any banknotes or coins it issued, and to replace them with others
of a different kind.
The National Bank of Romania uses procedures and instruments
specific to the monetary market, lending to banks and controlling their
liquidity through minimum compulsory reserves operations.
The National Bank of Romania may discount, acquire, accept as
collateral or sell bonds, securities or other claims to the state, banks, or
other legal entities.
The National Bank of Romania establishes the minimum compulsory
reserves that banks must keep in accounts opened with the National Bank
of Romania.
For the minimum compulsory reserves, the National Bank of Romania will
grant interests at least as high as the level of the average interest rate
granted for sight deposits by the banks.
As a part of its monetary, foreign exchange, lending and payments policies,
the National Bank of Romania may lend to banks on up to 90 days term
against securities that include:
Issuing rules and regulations for gold and foreign exchange operations
to protect the national currency;
Setting up and publishing the exchange rates at which the National Bank
of Romania and other legal persons are authorized to conduct gold and
other foreign exchange operations;
Setting up the ceiling value of gold and foreign exchange assets which
the authorized legal persons can hold in deposits;
Check and verify on the basis of reports and field inspections the books,
accounts and any other documents.
The National Bank of Romania takes part on behalf of the State in the
external issue. It may negotiate and conclude agreements concerning shortterm loans and swap operations with central banks and international
monetary institutions on the conditions those loans and operations are repaid
within the period of one year and are reported in the annual report of
National Bank of Romania.
The National Bank of Romania is vested by the Parliament with the
authority to participate in and become a member of international
organizations concerned with financial, banking and monetary matters.
Under the provisions of its law, the National Bank of Romania is entitled to
request all financial and credit institutions documents and information that
may be required in connection with conducting its functions.
The National Bank of Romania may undertake studies and analysis on
currency, credit and transactions of the banking system for its own needs
and those of public authorities. Once the studies and analyses are made, the
National Bank of Romania can establish the monetary survey in accordance
with the credits and monetary resources in the economy.
The National Bank of Romania together with the Ministry of Finance
pursues to keep the stock of international reserves at a level assessed as
appropriate for the foreign transactions of the State.
The National Bank of Romania is authorized to perform the following
operations:
Purchase, sell and otherwise trade in gold and other precious metals
ingots and coins;
Purchase, sell and perform other foreign exchange transactions;
Purchase, sell and otherwise trade in Treasury notes, bonds and other
securities issued or guaranteed by foreign governments or
intergovernmental financial organizations;
Purchase, sell and otherwise trade in securities issued or guaranteed by
central banks, international financial institutions, banking and nonbanking companies;
Open and keep accounts with central banks and monetary authorities,
banking companies and international financial institutions;
Open and keep accounts and make counterpart operations for
international financial institutions, foreign central banks and monetary
authorities, financial and banking companies, international financial
organizations abroad and for foreign governments and their agencies.
Seven members out of which two are also vice Governors of the
National Bank of Romania and five are not employed by the National
Bank of Romania.
The reserve fund of the National Bank of Romania is built up within the
limit of a 20 per cent share of gross profit until it equals the own capital,
when the share drops to 10 per cent until the reserve fund is twice the
National Bank of Romanias own capital at which point the share is set at
5 per cent.
The National Bank of Romanias internal organization has been changed
from one year to another according to the market economy conditions.
The National Bank of Romania internal organization on the 31st of
December 2000 is presented in the chart (see Annex no.2).
1.4 Banks - A Main Part of the Romanian Banking System
Under the provisions of the Romanian Banking Law, with subsequent
amendments, a bank represents a credit institution4 authorized to
perform mainly the activity of collecting funds from both legal and
natural persons through deposits or negotiable instruments payable on
demand or on maturity as well as that of granting credits.
The European Union countries utilize the concept credit institution in
order to define the above activity. The credit institution represents an
undertaking whose business is to receive deposits or other repayable
funds from public and to grant credits for its own account5.
No entity is allowed to perform any banking business within the Romanian
territory, without the National Bank of Romanias previous authorization.
Banks, Romanian legal entities, as well as branches of foreign banks may
perform, within the limit of the authorization granted, the following
operations6:
Including: banks (Romanian legal entities), branches of foreign institutions and credit
cooperatives.
Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000
relating to the taking up and pursuit of the business of credit institutions, published in the
Official Journal L 126, 26/05/2000;
Law no.58/1998 - Banking Law issued in Monitorul Oficial al Romaniei, Part I,
no. 121/1998.
Loan agreements (grant short, medium and long term loans and credit
lines in ROL and in foreign currency), factoring operations and
discounting of trade bills, including forfeiting;
Financial leasing;
Funds transfers;
Electronic banking.
Banks, as Romanian legal entities, are allowed to operate only based on the
authorization issued by the National Bank of Romania, in compliance with
the legal provisions in force.
The National Bank of Romania may withdraw the authorization granted to a
Romanian bank or a subsidiary, to a subsidiary or branch of a foreign bank:
upon the banks request, as a sanction, etc.
The tasks of every bank department and the relations among them;
The tasks of the branches and other secondary offices of the bank;
Headquarter;
Branches;
Subsidiaries;
The National Bank of Romanias Norms No.9/2000 regarding the minimum capital of
banks and of branches of foreign banks, published in Monitorul Oficial al Romniei,
Part I, No. 474/2000.
Agencies.
The branches, subsidiaries and agencies are operational units of the bank,
and there are in a direct connection with the customers (individuals or legal
entities).
The following bodies generally, manage the bank:
o The General Meeting of the Shareholders it decides the general
tasks concerning the banking activity;
o The Board of Directors it includes: the president, the vicepresidents, and the members elected by the General Meeting of the
Shareholders;
o A committee nominated by the Board of Directors; it realizes the
Operational Management of the bank. This committee accomplishes
all the decisions of the Board. The committee is made of the
president, the vice-president and members.
o The headquarter president; vice-presidents and the directors of the
directions/departments of the bank realize the Current Management
of the bank.
o The independent auditors commission.
The headquarters of a bank co-ordinates the activity of the branches,
subsidiaries and agencies and supervises the compliance with the banking
norms, rules and laws.
Some of the main departments of a bank (see Annex No.3a) may be the
following:
Treasury department;
Cash department;
Credit department;
International department;
General Secretariat;
Consulting department;
IT department;
Legal department;
Accounting department;
The Credits department. Taking into consideration the destination, the term
and the beneficiary of the loans, the loans department participates in:
Establishing the size of the monetary survey and of the credit on short,
medium and long term for the state and private field;
Analysing the evolution of the short, medium and long term loans;
The International department realizes, under the legal framework and the
Board of Directors decisions, the attributions in the external payments and
credits field, such as:
To negotiate the payments agreements drafts concluded with other
countries;
To contact the corresponding banks on the carrying out of the payments
agreements;
To administrate the foreign exchange portfolio of the bank;
To negotiate the external banking credit lines;
To analyse and, if the case, to modify the banking corresponding
network.
The branch of a bank has the organizational structure as that presented in
Annex No. 3b.
The operations of the banks are subject to the regulations and orders issued
by the National Bank of Romania (see the list in the Annex No. 4), in order
to implement the monetary, credit, foreign exchange, payment policies,
banking prudence and the banking supervision policies.
Banks have to organize all their operations according to the rules of a
prudent and healthy banking practice and the requirements of the law.
The whole share capital of a bank must be paid up in monetary form, when
it is subscribed.
Dividends from the net profit due to the shareholders after paying the
tax on dividends, according to the laws in force;
Foreign reserves left from the exchange rates influences related to the
appreciation of the reserves, which represent the share capital in foreign
currency, etc.
Banks will distribute 20% of their gross profit to set up a reserve fund until
this fund equals the share capital, then maximum 10%, until the moment
when the fund reaches twice the amount of the share capital. After reaching
this goal, the distribution of amounts to the reserve fund shall be done from
the net profit.
Banks have to distribute from their gross profit, the amounts designated to
build up the general reserves for the credit risk, within the limit of 2% from
the balance of granted loans.
Under the provisions of the Banking Law, banks operating in Romania
may not perform the following operations:
Other institutions that co-operate with the Romanian banking system are the
following:
The Bank Deposit Guarantee Fund. It ensures the reimbursement of the
deposits held by individuals in the case that a bank becomes insolvent.
Deposits are reimbursed within a ceiling, which is periodically modified in
line with the inflation rate published by the National Institute of Statistics
and Economic Studies.
The Bank Asset Recovery Agency. It was established in 1999, and is
specialized in taking over non-performing loans and off-balance sheet
items from majority state-owned banks, aiming at recouping them from
the debtors.
In the last 2-3 years, three state-owned banks were privatised (Banca
Romana pentru Dezvoltare, Banca Postei and Banca Agricola), while
Banca Comerciala Romana is now undergoing a privatisation process.
The total amount of the long term investments of the bank in the securities
issued by such companies will not exceed 50% of the banks own capital.
The total amount of a bank s investments in securities, performed in the
bank s name and account, will not exceed 100% of the banks own capital,
except for investments in government securities.
Any entity that intends to purchase a participation of at least 5% of a banks
share capital must get the prior approval of the National Bank of Romania.
The National Bank of Romania supervises the operations performed by
banks, Romanian legal entities and the branches of foreign banks, on the
basis of the prudential reports drawn up according the law and implemented
regulations of the National Bank of Romania, as well as through on-site and
off-site inspections:
At the headquarters of the banks, branches and other subsidiaries in the
country and abroad;
At the headquarters of the branches of foreign banks and their
subsidiaries.
The National Bank of Romania launched a bank-restructuring program
targeted at preventing systemic risk, with an immediate impact on the
soundness of the banking sector. The program focused on the following
issues:
-
The majority part of the total assets of the central bank is represented
by the foreign assets (see Annex No. 5), such as: SDR holdings with the
International Monetary Fund, monetary gold, foreign securities, foreign
investments etc.
The balance sheet of the National Bank of Romania shows the international
reserves, which consist of foreign exchange reserves (of which: at sight,
deposits, investments); gold reserves (of which: at sight, deposits), and total
reserves (of which: at sight, deposits, investments).
The structure of the liabilities of the National Bank of Romania is the
following: currency in circulation, foreign liabilities (bonds issued and
deposits taken by the National Bank of Romania), General Account of State
Treasury, banks current accounts, capital funds, reserves, etc.
The profit and loss account of the National Bank of Romania (see Annex
No.6) consists of: revenues (operating revenues, other revenues) and
expenses (operating revenues, overheads etc).
The operating revenues include the following items: interest on government
securities, interest on loans granted and revenues from commissions and
fees for inter-bank settlements, interest on foreign exchange deposits,
dividends on foreign investments and revenues from foreign exchange
securities operations, interest revenue in gold and silver and exchange rate
differences arising from operations with precious metals.
The main operating expenses include: interest paid/due to banks and the
Treasury, foreign exchange interest, commissions and fees for loans taken
from the International Monetary Fund, interest for inter-bank loans and
commissions in foreign exchange etc.
Overheads consist of the following: provisions, salaries and wages etc.
In comparison with the financial statements (the balance sheet and profit
and loss account) of the National Bank of Romania, a bank, Romanian legal
entity records differences in this field, as you can see in the Annexes No. 7
and 8.
The balance sheet of a bank, Romanian legal entity
A bank conducts its business in compliance with the regulations of the
central bank regarding the classification of loans, constitution of provisions,
solvency ratios, compulsory minimum reserves and foreign position.
The banks assets mainly consist of: cash, current accounts and ROL and
currency term deposits of individuals, and private or public enterprises,
loans etc.
The banks liabilities mainly consist of: deposits (demand and term
deposits) of individuals, and private or public enterprises, other borrowed
funds, share capital, reserves, etc.
The profit and loss account includes two big parts: incomes and expenses.
Incomes include: interest income on loans, interest on interest bearing
deposits, interest on trading securities, dividends, etc.
Expenses include: interest for demand and term deposits, salaries, social
insurance, operating expenses (amortization), advertising, etc.
1.7 Recent developments and perspectives
During the previous years, The National Bank of Romania had the
following objectives8:
Bank liquidity;
Independent auditors
At the same time, the National Bank of Romanias Governor, Mr. Mugur
Isarescu, mentioned10 what are the main problems that the National Bank of
Romania intends to solve in the next period of time, such as:
o to prepare the strategy concerning the privatisation of Banca
Comerciala Romana SA;
o to integrate the credit co-operatives in the banking field and issue
regulations in the appliance of the Emergency Ordinance
No. 97/2000;
o to harmonize the accounting regulations with the EU legislation, as
well as with the international accounting standards;
o To improve the early warning and banking system;
10
During the Romanian Government Meeting of January 18, 2001 source the NBR.
money market funds and other institutions fulfilling the Monetary Financial
Institutions definition.
3. The International Monetary Fund has a different classification14 of the
financial system. The main sectors and sub sectors are the following:
Financial corporations
Central bank;
Other depository corporations;
Other financial corporations
Insurance corporations and pension fund;
Other financial intermediaries
Financial auxiliaries
Non-financial corporations
Public non-financial corporations
Other non-financial corporations
General government
Central government
State government
Local government
Social security funds
Households
Non-profit institutions serving households
Central Bank
In the International Monetary Funds opinion the central bank represents
the national financial institution (or institutions) that exercises control over
key aspects of the financial system and carries out such activities as issuing
currency, managing international reserves, transacting with the
International Monetary Fund, and providing credit to other depository
corporations.
Central banks in some countries also accept deposits from non-financial
corporations or provide credit to non-financial corporations.
14
Commercial banks;
Merchant banks;
Savings banks, savings and loan associations, building societies, and
mortgage banks;
Credit unions and credit co-operatives;
Foreign exchange companies comprise units that buy and sell foreign
exchange in retail or wholesale markets.
Financial guarantee corporations insure customers against losses to
specified financial corporations or against financial loss on specific
contracts.
Insurance and pension auxiliaries include agents, adjusters, and salvage
administrators.
Other financial auxiliaries comprise all other auxiliaries not classified
elsewhere.
Progress Test
24. List the main assets and liabilities from the balance sheet of a bank.
25. List the main items from the profit and loss account of a bank.
26. List the operating revenues from the profit and loss account of the
National Bank of Romania.
27. List the operating expenses from the profit and loss account of the
National Bank of Romania.
28. What are the recent developments and perspectives of the National Bank
of Romania?
29. What are the main directions of the supervision program?
30. List the main problems that the National Bank of Romania intends to
solve in the future.
31 What is the National Bank of Romania responsible for:
a
b
c
d
e
a
b
c
d
e
b taking sight and term deposits from both the physical and juridical
persons;
c setting up the ceiling of gold and foreign exchange assets which the
authorized legal persons can hold in deposits;
d a + b;
e a + c;
34 As a part of its monetary, foreign exchange, lending and payments
policies the National Bank of Romania can:
a
b
c
d
e
ANNEX No 1
BANKS OPERATING IN ROMANIA
No
BANK
HEAD OFFICE
BANCA NAIONAL
A ROMNIEI
Bucureti,
Str. Lipscani nr.25,
sector 3
Central Bank
of Romania
LICENCING
DATE
state-owned
capital
Banca Comercial
Romn
Banca Agricol1
Casa de Economii i
Consemnaiuni (CEC)2
Banca Comercial
"Ion Tiriac"
BANC POST
Banca de Export-Import
a Romniei
(EXIMBANK)
10
Citibank Romnia
11
Bucureti,
Bd. Regina Elisabeta nr.5,
sector 3
Bucureti,
Bd. Mircea Vod nr.44,
bl. M17, tronson II,
sector 3
Bucureti,
Calea Victoriei nr.13,
sector 3
Bucureti,
Str. Doamnei nr.4,
sector 3
Bucureti,
Calea Victoriei
nr.15, sector 3
Bucureti,
Bd. Libertii nr.18,
bl.104, sector 5
Bucureti,
Str. Ion Cmpineanu nr.16,
sector 1
Bucureti,
Bd. Expoziiei nr.2,
World Trade Center,
unit.2.23, sector 1
Bucureti,
Spl. Independentei nr.15,
sector 5
Bucuresti,
Bd. Iancu de Hunedoara nr.8
sector 1
Bucureti,
Piaa Gh. Cantacuzino nr.6,
sector 2
Joint stock
company
Joint stock
company
Joint stock
company
Joint stock
company
Joint stock
company
Joint stock
company
Joint stock
company
1990
1990
1949
1990
1991
1991
1994
Joint stock
company
foreign private
capital
1995
Joint stock
company
1992
Joint stock
company
foreign private
capital
1996
Joint stock
company
foreign private
capital
1994
31 Decembrie 2000
Subject to operational and financial restructuring, administration regime ahead of
privatisation
2
Reorganised as joint stock banking company pursuant to Law No. 66/1996
3
Banned from participating in final settlement of securities operations
1
(continued)
BANK
HEAD OFFICE
12
Banca Transilvania
Cluj-Napoca,
Bd. Eroilor nr.36
Joint stock
company
foreign and
domestic private
capital
1994
13
FINANSBANK
(Romnia)
Bucureti,
Str. Doamnei nr.17-19,
sector 3
Joint stock
company
majority foreign
private capital
1993
14
Banca Comercial
"ROBANK"
Joint stock
company
foreign and
domestic private
capital
1995
15
Banca Daewoo
(Romnia)
Bucureti,
International Business
Center,
Bd. Carol I nr. 34-36, et.1,
sector 2
Joint stock
company
foreign and
domestic private
capital
1997
16
Bucureti,
Calea Grivitei nr.24,
sector 1
Joint stock
company
foreign and
domestic private
capital
1990
17
Banca Romneasc
Bucureti,
Bd. Unirii nr.35, bl. A3,
sector 3
Joint stock
company
18
Banca de Credit
i Dezvoltare
ROMEXTERRA
Trgu Mure,
Piata Trandafirilor nr. 21
Joint stock
company
19
PIRAEUS BANK
ROMNIA
Bucureti,
Bd. Carol I nr.34-36, et.VI,
sector 2
Joint stock
company
20
Banca Comercial
West Bank
Joint stock
company
21
Bucureti,
Bd. Aviatorilor nr.46,
sector 1
Joint stock
company
domestic private
capital
1996
Joint stock
company
domestic private
capital
1996
Joint stock
company
domestic private
capital
1996
Banca Comercial
"UNIREA"4
24
DEMIRBANK
(Romnia)
25
Commercial Bank
of Greece (Romnia)
26
Raiffeisenbank
(Romnia)
27
Bank-Austria
Creditanstalt
Romnia
Bucureti,
Str. Johann Strauss nr.1,
sector 2
Bucureti,
Splaiul Unirii nr.16,
sector 4
Bucureti,
Str. Berzei nr.19, sector 1
Bucureti,
Bd. Unirii nr. 74, bl. J3B,
aripa 2-3, sector 3
Bucureti,
Str. Grigore Mora nr.37,
sector 1
LICENCING
DATE
No
foreign and
domestic private
capital
majority domestic
private and stateowned capital
foreign and
domestic private
capital
foreign and
domestic private
capital
1993
1994
1995
1996
Joint stock
company
foreign and
domestic private
capital
foreign private
capital
Joint stock
company
foreign private
capital
1997
Joint stock
company
foreign private
capital
1998
Joint stock
company
1997
1996
BANK
HEAD OFFICE
28
ROMANIAN
INTERNATIONAL
BANK
29
Bucureti,
Str. Iuliu Teodori nr.1,
sector 5
Bucureti,
Str. C.A. Rosetti nr.36,
sector 2
30
Banca Comercial
"CARPATICA"
31
Sibiu,
Bd. Mihai Viteazu, bl. 42
BANCA DE
Bucureti,
INVESTITII I
Bd. Dimitrie Cantemir nr.2,
DEZVOLTARE (BID) bl. P3, tronson 2, sector 4
foreign private
capital
1998
Joint stock
company
foreign private
capital
1998
Joint stock
company
domestic and
foreign private
capital
1999
Joint stock
company
domestic private
capital
2000
foreign private
capital
foreign and
domestic private
capital
32
VOLKSBANK
(Romnia)
Bucureti,
Str. Coltei nr.8, sector 3
Joint stock
company
33
Cluj-Napoca,
Str.Memorandumului nr.28
Joint stock
company
II
1
3
4
5
6
LICENCING
DATE
2000
1991
Branch
1994
Branch
1990
Branch
1987
Branch
1979
Branch
1996
Branch
1996
Branch
1998
Branch
2000
ANNEX No 2
BO ARD O F D I REC TO RS
GOVERNOR
VICE - GOVERNOR
M o n e ta ry P o lic y C o m m itte e
MONETARY POLICY DEPARTMENT
VICE - GOVERNOR
S u p e rv is io n C o m m itte e
Research Division
Publications Division
Documentation and Library Division
Issuance Division
Settlements Division
ACCOUNTING DEPARTMENT
STATISTICS DEPARTMENT
Financial Division
Accounting Division
Internal Financial Audit Division
SECRETARIAT
IT DEPARTMENT
IT Systems Division
Network Administration Division
Settlements Division
Gross Settlement Division
Settlement Monitoring and Databases Bureau
Design, Informatics and Communications Division
Resources Management Division
Logistics Division
Synthesis Division
Inspection Division I
Inspection Division II
Inspection Division III
LOGISTICS DEPARTMENT
BRANCHES
ANNEX No 3a
RISK COMMITTEE
CREDIT COMMITTEE
Members
Members
BOARD OF DIRECTORS
FORFEITING COMMITTEE
President
Members
Members
Members
MANAGEMENT COMMITTEE
General Manager
Members
METHODOLOGY AND CONTROL
LEGAL DEPARTMENT
BANKING OPERATIONS
COUNSELORS
VICE-PRESIDENT
VICE-PRESIDENT
VICE-PRESIDENT
VICE-PRESIDENT
BANKING OPERATIONS
WITH COMMERCIAL
PAPERS
MARKETING DEPT.
PRIVATIZATION DEPT.
PERSONNEL TRAINING
AND DEVELOPMENT
IT DEPARTMENT
HUMAN RESOURCES
DEPT.
ECONOMIC
DEPARTMENT
PROJECTS EVALUATION
AND FINANCING
FOREIGN EXCHANGE
OPERATIONS
GENERAL ACCOUNTING
DEPT..
NON-PERFORMING
CREDITS RECOVERY
CAPITAL MARKETS
DEPT.
BANKING SERVICES
FOR THE POPULATION
CREDIT DEPARTMENT
GENERAL SECRETARY
OF THE BANK
OWN INVESTMENTS
DEPT.
INTERNATIONAL DEPT.
TREASURY DEPT.
SYNTHESIS DEPT.
FINANCIAL MANAGER
DEPUTY GENERAL MANAGER
ANNEX No 3b
IT DEPARTMENT
PAY OFFICE
DEPARTMENT
ACCOUNTING
DEPARTMENT
LEGAL DEPARTMENT
HUMAN RESOURCES
DEPARTMENT
CAPITAL MARKETS
OWN INVESTMENTS
EVALUATIONS AND
CONSULTANCY
ADMINISTRATIVE,
SECRETARY
FOREIGN EXCHANGE
OPERATIONS
SUBSIDIARIES
AGENCIES
ANNEX No 4
BANKING REGULATIONS
THE BANKING ACT
Law No. 58/5 March 1998 (modified by Emergency Ordinance No.24/25
March 1999)
(Published in Monitorul Oficial al Romniei, part I, No. 121/23 March
1998)
(modified by Emergency Ordinance No. 137 of 18 October 2001)
THE NATIONAL BANK OF ROMANIA ACT
Law No. 101/26 May 1998 (modified by Law No.156/12 October 1999)
(Published in Monitorul Oficial al Romniei part I, No.203/1 June 1998)
(modified by Emergency Ordinance No. 136 of 18 October 2001)
LAW ON BANKS' PRIVATISATION
Law No. 83/21 May 1997 on privatisation of banks in which the state is
shareholder
(Published in Monitorul Oficial al Romniei part I, No. 98/23 May 1997)
BANK INSOLVENCY ACT
Law No. 83/15 April 1998
(Published in Monitorul Oficial al Romniei part I, No.159/22 April
1998)
(modified by Emergency Ordinance No. 138 of 18 October 2001)
CURRENCY REGULATION (including the norms NRV1-NRV9)
Regulation No. 3/23 December 1997
(Published in Monitorul Oficial al Romniei part I, No.395/31 December
1997)
(modified by Circular No. 26 of 20 November 2001)
Balance Sheet of
The National Bank of Romania
as of December 31, 2000 and 1999
(Amounts in billions of ROL)
Dec 31, 1999 Dec 31, 2000
ASSETS
Cash & similar items
Precious metals and stones
Interest Receivable
Foreign Assets
Interest Receivable on Time Deposits
Interest Receivable on Securities
Securities
Interest Receivable
Government loans
Loans granted to banks
Interest Receivable
Specific provisions for credit losses
Specific provisions for interest losses
Other loans
Accrued interest
Interest Receivable - Total
Settlement from operations with the IMF
Other Assets
Provisions for other assets
42.2
1,066.7
16.1
71,330.1
324.1
556.0
16,838.9
1,472.8
2,181.6
647.5
383.7
305.5
32.1
32.9
2,743.9
908.6
3,596.3
-
45.0
1,371.3
4.0
115,994.1
709.0
919.1
16,176.1
1,151.0
6,952.7
197.6
802.6
60.7
25.5
39.1
2,959.1
3,835.9
152.2
2000/1999
%
106.6
128.6
24.8
162.6
218.8
165.3
96.0
78.1
x
318.7
30.5
209.2
19.8
79.4
118.8
107.8
x
106.7
X
Total Assets
98,740.4
147,359.7
149.2
18,676.4
5,365.8
68.3
34,731.6
28.2
96.7
2,846.7
30,963.4
17.5
11.7
210.7
337.5
5,596.6
28,108.8
6,771.3
76.8
44,236.6
90.4
134.7
20.1
1,015.6
48,921.6
153.9
22.7
475.9
380.6
17,426.6
150.5
126.2
112.5
127.4
320.6
139.3
X
35.6
158.0
879.4
194.0
225.9
112.8
311.4
Total Liabilities
98,780.4
147,359.7
149.2
LIABILITIES
2000/1999
10,915.6
1,308.9
719.9
6,427.4
1,185.3
1,192.4
81.7
136.1
11,051.7
14,804.4
709.4
881.2
9,176.1
1,115.9
2,315.6
49.1
557.1
134.3
14,938.7
35.6
-45.8
22.4
42.8
-5.9
94.2
-39.9
X
-1.3
35.2
8,314.6
4,599.6
439.8
11,993.8
7,203.2
658.7
44.2
56.6
49.8
EXPENSES
Operating expenses
Interests paid to the banks and State Treasury
Interests and commissions on IMF borrowing
Interests and commissions in foreign exchange for
NBR borrowings from other sources and other
expenses in foreign exchange
Expenses for operations with forex-denominated securities
Expenses for operations with ROL-denominated securities
Note printing and coin mintage-related expenses
Expenses for operations with precious metals
Losses from non-recoverable claims
Other
Overheads
Salaries and wages
Expenses for provisions
Other
TOTAL EXPENSES (1+2)
1,552.6
1,667.1
7.4
1,057.1
279.4
233.8
124.2
10.1
1,579.2
521.3
731.2
326.7
9,893.8
373.9
759.8
379.1
84.9
808.7
58.4
1,827.1
667.8
883.3
276.0
13,820.9
-65.2
171.9
62.1
-31.6
X
478.2
15.7
28.1
20.8
-15.5
39.7
1,157.9
4.4
956.0
197.5
1,117.8
46.5
892.9
178.4
-3.5
956.8
-6.6
-9.7
December 31,
2000
December 31,
1999
6
7
8
9
593,687
7,329,295
9,100,107
1,104,371
444,431
4,852,889
5,852,624
2,147,496
10
15,132,853
--297,669
(593,974)
14,836,548
15,055,379
256,863
60,800
(759,366)
14,613,676
Note
ASSETS
Cash & cash equivalents
Current accounts and deposits at banks
Reserves at the National Bank of Romania
Treasury securities
Loans, net
Loans
Club Loan to NBR
Government and public sector loans
Allowance for loan losses
Total loans, net
Interest receivable and other assets, net
Accrued interest receivable, net
Other assets, net
Total interest receivable and other assets, net
11
12
390,406
456,093
846,499
366,367
290,801
657,168
13
519,074
480,572
14
15
16
5,676,130
430,859
227,038
40,663.608
5,871,207
407,989
81,268
35,409.320
17
18
10,053,218
20,152,048
30,205,266
7,730,868
17,073,140
24,804,008
19
20
21
22
1,189,740
381,361
614,101
983,494
33,373,962
1,101,783
447,098
500,672
1,150,648
28,004,209
23
24
25
26
1,742,253
9,483,352
77,618
917,523
4,931,100
7,289,646
40,663,608
1,742,253
9,843,352
77,618
1,092,382
(4,990,494)
7,405,111
35,409,320
December 31,
2000
December 31,
1999
4,527,921
1,714,368
783,095
7,025,384
15,737,523
1,046,210
763,505
7,547,238
(4,216,092)
(144,540)
(4,360,632)
2,664,752
(371,716)
(4,597,969)
(105,648)
(4,703,617)
2,843,621
(782,809)
2,293,036
2,060,812
32
31
33
34
937,318
1,062,521
54,679
56,130
2,110,648
4,403,684
937,870
971,854
81,334
86,223
2,077,281
4,138,093
35
36
37
13
(1,167,826)
(734,092)
(761,028)
(20,653)
(2,683,599)
1,720,085
(415,711)
1,304,374
(253,480)
(258,279)
(511,759)
792,615
(1,060,524)
(401,116)
(649,264)
(2,110,904)
2,027,189
(935,441)
1,091,748
(445,383)
(160,119)
(605,502)
486,246
0.00227
0.00140
792,615
(752,173)
40,442
0.00798
486,246
(639,979)
(153,733)
Note
Interest income
Interest income on loans
Interest on interest bearing deposits
Interest on trading securities
Total interest income
Interest expense
Interest for deposits
Interest for funds borrowed
Total interest expense
Net interest income
Provisions for losses
Net results related to loans written-off
Net interest income after provisions for losses
Non-interest income
Foreign exchange income, net
Service charges and commissions, net
Income on investments
Other income
Total non-interest income
Income before non-interest expense
Non-interest expense
Salaries and related expenses
Operating expenses
Other expenses
Provision expenses for impairment of assets
Total non-interest expense
Net operating profit
Hyperinflation adjustment
Profit before income taxes
Current income tax expense
Deferred income tax expense
Income taxes
Net profit
Earnings per share (348,450,670 equivalent shares as
of December 31, 2000)
Earnings per share (60,929,768 equivalent shares as of
December 31, 1999)
Net profit
Distributed dividends *
Net retained profit (deficit)
28
29
30
27
38
21
46
46
39
* Dividends are distributed from statutory net profits (1,354,824 and 766,596 nominal as of December 31, 2000
and 1999 respectively).
THE BANKING
SYSTEM
IN ENGLAND
D Objectives:
After studying this chapter you should be able to understand:
2.1
2.2
Governments bank;
Bankers' bank;
2.3
2.4
Banking today
D.P. Whiting - Elements of banking, Macdonald & Evans Ltd., London 1985, p. 42
This meant that it could have a large number of shareholders and was not
restricted to being a partnership, as were the other banks.
From the beginning, the Bank of England accepted money on deposit,
issued its own notes and made loans in the same way that the other banks
did and was able to increase its business more rapidly than them.
Because many banks had to close their doors, confidence in the banking
system and in the system of credit creation was greatly affected, and
legislation was introduced, especially, to encourage the establishment of
larger banking units on the one hand and to control the note issue on the
other.
Its law2, had three provisions:
a) To divide the Bank of England into two separate departments, the
Banking Department and the Issue Department.
b) To permit the Bank to make a fiduciary issue of 14 million of notes to
be backed by Government securities.
c) Ultimately to centralise the note issue in the hands of the Bank of
England by gradually extinguishing private note issues as the private
banks became bankrupt or amalgamated with other banks.
Thus, the Bank of England gradually assumed responsibility for the
currency supply and as the holder of the countrys gold reserves, apart from
the relatively small fiduciary issue, it had to hold gold as backing for the
note issue.
The Bank of England started in 1694 as a commercial bank and then in the
second half of the nineteenth century gradually stopped competing with the
other banks and concentrated on its new role as the first central bank in the
world.
Nationalisation of the Bank of England
The Bank was nationalised in 1946, when the conduct of the Bank was
placed in the hands of a Court of Directors headed by the Governor of the
Bank of England. The Crown appoints the Directors and the Governor and
senior officers work in close liaison with the Treasury.
D.P. Whiting - Elements of banking, Macdonald & Evans Ltd., London, 1985, p.47
interest rates are reduced then borrowing becomes more worthwhile and
this stimulates the creation of new deposits.
B) Open Market operations. These amounts to the deliberate selling or
buying of Treasury bills and Government stocks in order to mop up
excess purchasing power on the one hand, or to increase purchasing
power on the other. By selling securities in the open market the
Government receives payment for them by cheques drawn by
individuals, firms and institutions in the private sector.
These cheques reduce the level of bank deposits and, as the deposits form
the major part of the money supply, the latter is reduced. Conversely, if the
Government buys securities cheques drawn on the Bank of England pay for
its purchases, and these are paid in as deposits with the commercial banking
system, thus increasing the money supply.
When the Government sells securities and bank deposits are reduced, so are
the cash holdings of the banks. They thus find it difficult to maintain their
cash and liquidity ratios and may have to reduce their lending by way of
loans and overdrafts, which will reduce bank deposits still further. Open
Market operations can therefore be very effective in reducing the
availability of credit to the community.
C) Special Deposits. Since 1960 the Bank of England has used the device
of Special Deposits in order to reduce the ability of the banks to lend by
way of loans and overdrafts. A call for Special Deposits takes the form
of a directive to the banks and some other financial institutions to pay
over a set proportion of their eligible liabilities in cash, to be frozen as
deposits with the Bank of England until such time as the bank decides to
repay them. A call for, say, 2 per cent Special Deposits may cause the
banks to reduce their less liquid assets in order to maintain their reserve
ratios. When Special Deposits are repaid they have the opposite effect
upon the liquidity of the banks, and upon their ability to create new
deposits.
D) Reserve ratios - Since the 70s, all banking institutions have had to keep,
day by day, a minimum of 12 per cent of eligible liabilities in the form
of eligible reserve assets. These assets are mainly those whose supply
can be regulated by the Authorities and comprise balances with the Bank
of England commercial bills, call money with the London Money
Market, Treasury bills, Government stocks with less than a year to
maturity, local authority bills and company tax certificates.
The Monetary Analysis divisions are responsible for providing the Bank
with the economic analysis it needs to discharge its monetary policy
responsibilities. Its economists conduct research and analysis of current and
prospective developments in the UK and international economies.
The Monetary and Financial Statistics Division compiles, publishes and
briefs on financial statistics; in particular the monetary aggregates and
banking statistics. Special studies directed at international harmonisation
and improvements to the statistics are also a feature of their work.
Financial Market Operations
This area is made up of the following Divisions:
Foreign Exchange
Banking Services
Market Services
Registrar's Department
the financial markets and for analysing the balance sheet implications of
those operations.
The Registrar's Department provides the principal stock registration service
for the Government and an execution-only postal brokerage service for
retail gilt investors.
Financial Stability
This area is made up of the following Divisions:
Domestic Finance
Financial Intermediaries
International Finance
Market Infrastructure
Regulatory Policy
ordinates the Bank's involvement in the main official and private sector
Euro for; and provides a body of expertise on the European Central Bank.
Working with the Agents, it also monitors the use of the Euro in the UK.
Central Services
This area is made up of the following Divisions:
Personnel
Secretary's Department
Legal Unit
Investment Unit
Management Services
Audit
Internal Audit is an independent function authorised by the Court of
Directors to review the adequacy of the internal control systems within the
Bank and to test compliance with agreed procedures. It aims to provide an
independent view for senior management, to assist in the effective discharge
of their responsibilities and to provide a service to the organisation as a
whole.
Centre for Central Banking Studies
The Bank of England's Centre for Central Banking Studies offers technical
assistance, courses, workshops, seminars and comparative research on and
for central banks throughout the world. Its primary aims are to foster
monetary and financial stability worldwide, to promote the Bank's core
activities, and to provide opportunities for Bank of England staff to obtain
broader perspectives on their own areas of expertise. Its goal is to be
recognised internationally as a leading centre of intellectual excellence for
the study of practical central banking.
Governance of the Bank
The Bank of England Act 1998 provides for the appointment by the Crown
of the Governor, two Deputy Governors and 16 Non-Executive Directors of
the Bank who collectively make up what is know as the Court of Directors.
The Governor and Deputy Governors are appointed for five years and the
Directors for three years.
Under the Act, the responsibilities of Court are to manage the Bank's affairs
other than the formulation of monetary policy, which is the responsibility of
the Monetary Policy Committee. This includes determining the Bank's
objectives and strategy, and aiming to ensure the effective discharge of the
Bank's functions and the most effective use of the Bank's resources.
The Monetary Policy Committee
The Act establishes the Monetary Policy Committee as a Committee of the
Bank sets a framework for its operations. The Act provides that the Bank's
objectives in relation to monetary policy shall be to maintain price stability
and, subject to that, to support the Government's economic policies,
including its objectives for growth and employment. At least once a year,
the Government specifies the price stability target and its growth and
employment objectives in conformity with the Act.
Audit Committee
Receive reports from, and review the work of, the internal and
external auditors.
Management structure
Under the Court of Directors, the Bank's senior policy-making body is the
Governor's Committee, comprising the Governors and Executive Directors.
The internal management of the Bank is the responsibility of the
Management Committee, comprising the Deputy Governor (Financial
Stability), the Deputy Directors, the Finance Director and the Director of
Personnel.
2.4 Banking today
The banking sector in the United Kingdom has traditionally been highly
segmented. In its February issue of the Bank of England Quarterly Bulletin
every year the Bank of England lists all those banking institutions to which
it has granted a licence to operate as a bank in the United Kingdom. The list
(of over 450) is divided into seven sections, distinguished sometimes by
function and sometimes by nationality of ownership. As regards functions,
the major distinctions are between retail banks, British merchant banks,
other British banks and discount houses.
The first group provides deposit and loan facilities to the household or
personal sector, together with small and un-incorporated businesses. The
retail banks own the various payment mechanisms, and money transfer is a
major part of retail bank operations. In recent years, they have offered an
increasing range of financial services, based on the marketing idea of onestop shopping so that it is now possible, within an individual branch, to
buy and sell foreign currency, buy an insurance policy, open a personal
pension fund, invest in units trusts, and buy executor and other services.
British merchant banks provide a complete range of corporate financial
services. These range from accepting deposits and making loans, to advising
Progress test
ANNEX No 1
BUILDING
SOCIETIES
Members of Building
Societies Association
Examples: Halifax,
Abbey National
Nationwide, Provincial
NATIONALIZED
BANKS
MERCHANT BANKS
Members of Accepting
Houses Committee
Examples: Rothschid's,
Hambros, Baring
Brothers.
COMMERCIAL
BANKS
Barclays, Lloyds,
Midland, National
Westminster
Wiliams and Glyn's
and Scottish banks
THE BANK OF
ENGLAND
Members of Finance
Houses Association.
Examples: Forward
Trust, UDT,
Mercantile Credit.
Grindlays Bank,
Standard and
Chartered Bank etc.
MUTUAL BANKS
BRITSH BASED
OVERSEAS
BANKS
FINANCE
COMPANIES
ANNEX No 2
General
management
team at
Head Office
Domestic
International
Bank branches
throughout
Britain including
any subsidiary
bank companies
Includes any
overseas branches
or subsidiary
foreign banks
owned by the
British clearing
bank
Merchant and
wholesale
banking
Specialized bank
companies
created to be able
to operate in this
highly specialized
area
Installment
credit services
Related financial
services
OTHER BANKING
SYSTEMS
IN THE WORLD
D Objectives:
Board of
Governors
7 Members
appointed by
the President
and confirmed
by the Senate
Appoint 3
Directors
12 Federal
Reserve
Banks
Each Bank with 9
Directors who
appoint
the President of
the F. R. Bank
Federal Open
Market Committee
Board of Governors
plus 5 Federal
Reserve Bank
Presidents
Set
(within
limits)
Review and
Determine
Reserve
Requirements
Elect 6
Directors
5,000 Member
Commercial
Banks
Select
Federal
Advisory
Council
12
Members
Direct
Open
Market
Operatio
Establish
Discount
Rate
As the above figure shows, the Board of Governors of the Federal Reserve
System consists of seven members, appointed by the President with the
advice and consent of the Senate. To prevent presidential board packing,
each member is appointed for a term of fourteen years, with one board
members term expiring at the end of January of each even-numbered year.
Furthermore, no two board members may come from the same Federal
Reserve district. The Chairman of the Board of Governors, chosen from
among the seven by the President, serves a four-year term. However, the
Chairmans term does not coincide with the presidential term, so an
incoming President is usually saddled with an already appointed Chairman
at the beginning of the new administration. The Board is independent of the
congressional appropriations process and partly exempt from audit by the
governments watchdog the General Accounting Office, because its
operating funds come from the earnings of the twelve regional Federal
Reserve Banks.
The regional Federal Reserve Banks, one in each Federal Reserve District,
are geographically dispersed throughout the country:
New York
Boston
St. Louis
San Francisco
Philadelphia
Atlanta
Chicago
Kansas City
Richmond
Dallas
Minneapolis
Cleveland
Technically, the member banks in its district privately own each Federal
Reserve Bank, every bank is charged with supervising and regulating. Each
member bank is required to buy stock in its district Federal Reserve Bank
equal to 6 percent of its own capital and surplus. Of this 6 percent, 3 percent
must be paid in and 3 percent is subject to call by the Board of Governors.
However, law to a 6 percent annual dividend on paid-in capital stock limits
the profits accruing to ownership. The member bank stockholders elect six
of the nine directors of their district Federal Reserve Bank and the
remaining three are appointed from Washington by the Board of Governors.
These nine directors, in turn, choose the president of their Federal Reserve
Bank, subject to the approval of the Board of Governors.
The directors of each Federal Reserve Bank also select a person, always a
commercial banker, to serve on the Federal Advisory Council, a statutory
body consisting of a member from each of the twelve Federal Reserve
Districts. The Federal Advisory Council consults quarterly with the Board
of Governors in Washington and makes recommendations regarding the
monetary policy.
Legal authority is similarly diffused with respect to the execution of
monetary policy, as Figure 1 indicates. The Board of Governors has the
power to set reserve requirements on bank time and demand deposits, for
example, but it cannot set them outside the bounds of the specific limits
imposed by the Congress.
A body known as the Federal Open Market Committee (FOMC), composed
of the seven-member Board of Governors plus five of the Reserve Bank
presidents directs open market operations. Although open market operations
are directed by the FOMC, a person who appears to be simultaneously an
employee of the FOMC and of the Federal Reserve Bank of New York
executes them at the trading desk of the Federal Reserve Bank of New
York.
Legal authority over discount rates is even more confusing. Discount rates
are established every two weeks by the directors of each regional Federal
Reserve Bank, but they are subject to review and determination by the
Board of Governors. The difference between establishing discount rates
and determining them is a fine line indeed, and it is not surprising that
confusion arises as to precisely where the final authority and responsibility
lie.
3.1.2 The realities of power
Actually, the facts of life are rather different, as the more realistic Figure 2
illustrates.
Chairman of the
Board of Governors
Other Members
Of the Board of
Governors
Set
(within
limits)
Board
Staff
President of FRB of
New York
Federal Open
Market
Committee
Other Federal
Reserve
Bank Presidents
Set
Advisory
Discount
Rate
Reserve
Requirements
Direct
Trading desk
At FRB of NY
Execute
Open
Market
Operations
The other six members of the Board of Governors also exercise a substantial
amount of authority, more so is indicated in the formal paper structure of the
system, because with the passage of time primary responsibility for
monetary policy has become more centralised and concentrated in
Washington. When the Federal Reserve Act was passed in 1913, it was
though that the Federal Reserve System would be mainly a passive service
agency, supplying currency when needed, clearing checks, and providing a
discount facility for the convenience of the private commercial member
banks. At that time there was no conceptual monetary policy as an active
counter cyclical force.
Since then, the central bank has shifted from passive accommodation to
active regulation, from the performance of regional service functions to the
implementation of national economic policy. This shift has been
accompanied, naturally enough, by the rise in the power of the centralised
Board of Governors in Washington and a corresponding decline in the role
of the regional Federal Reserve Banks and their owners, the commercial
banks.
It would not be unrealistic to describe the central bank today as
headquartered in Washington, with twelve field offices throughout the
nation. These field offices may be known by the rather imposing name of
Federal Reserve Banks, and they do indeed retain considerable authority in
expressing their views on the wisdom of various policies. But even so, they
essentially amount to little more than branches of the Washington
headquarters.
Aside from the Board of Governors, its Chairman, and its staff, the only
other body playing a major role in the Federal Reserve policy-making is the
FOMC, which meets about every five or six weeks in Washington. Of the
twelve members on the FOMC, a majority of seven is the Board of
Governors themselves. The other five are Reserve Bank presidents. The
President of the Federal Reserve Bank of New York is a permanent member
of the FOMC, and the other eleven Federal Reserve Bank presidents rotate
the remaining four seats among themselves.
In addition, lowering the required reserve ratio also increases the demand
deposit expansion multiplier for the entire banking system. The multiplier is
the reciprocal of the required reserve ratio; the smaller the ratio, the larger
its reciprocal. Thus a decrease in the required reserve ratio from 12 (or
about 1/8) to 10 percent (1/10) would raise the deposit expansion multiplier
from about eight to ten.
Raising the required reserve ratio for example, from 10 to 12 percent
would have the opposite effects. It would create reserve deficiencies, or at
least reduce excesses, and lower the potential for multiple expansion.
Putting banks into a deficit reserve position would force them to call in
loans and sell securities, bringing about a reduction in demand deposits,
while smaller excesses would at least restrain lending and deposit creation.
How crucial are reserve requirements for monetary policy? What would
happen if the Federal Reserve eliminated reserve requirements entirely in
order to increase bank profits?
Actually, even without formal reserve requirement the Fed would still be in
business. Financial institutions would still need both cash to meet customer
withdrawals and balances in the Fed to clear checks. As long as they have a
demand for claims against the central bank, and as long as the central bank
controls the supply of such claims, monetary policy can still work. While
the Fed would lose one tool of monetary policy if it could no longer change
reserve requirements, it could still influence the behaviour of financial
institutions.
3.1.3.2 Discounting and the discount rate
The Federal Reserve can also alter the excess reserves of banks and other
depository institutions by changing the actual amount of reserves that
financial institutions hold. One way this is accomplished is through the
discount mechanism, by which the Fed lends reserves, temporarily, to the
banks. The Fed charges an interest rate, called the discount rate, on such
loans. In other words, banks faced with reserve deficits can temporarily
borrow reserves from their regional Federal Reserve Bank at a price (the
discount rate).
The discount facilities instituted by the passage of the Federal Reserve Act
in 1913 were supposed to provide a vehicle through which the Federal
Reserve could quickly inject funds precisely where needed in order to stop a
panic from spreading. Banks threatened with cash drains could borrow what
they needed from the Fed the lender of the last resort. Thus they could get
more reserves without any other bank losing them and thereby prevent an
infection from becoming a plague.
In the ordinary course of events, however, bank use of the discount facility
is rather routine, not at all panic-oriented, with banks borrowing here and
there to make short-run adjustments in their reserves. The Fed has always
stresses that ordinary borrowing of this sort should not be used too often to
get banks out of reserve difficulties. Banks should run their affairs so they
do not have to rely on the Fed to bail them out every few weeks. Or, as the
Federal Reserve usually puts it, discounting is considered a privilege, not a
right, and privileges should not be abused. Federal Reserve surveillance
enforces the privilege, not a right concept by checking up on banks that
borrow too much or too frequently. A bank is supposed to borrow only
because of need, and not go out and make a profit on the deal.
One Fed method of preventing abuse of the discounting facility is to
tighten surveillance procedures: it checks up on why banks are borrowing
and what they are doing with the money. Another way is simply to raise the
price of borrowing which brings us to the discount rate itself.
3.1.3.3 Open Market Operations
The most important way the Federal Reserve alters the actual amount of
reserves the banks hold is not by discounting, but buying and selling
government securities technically known as open market operations.
Undertaken at the Feds own initiative, open market operations are the
mainstay of the Federal Reserve policy.
When the Federal Reserve buys $1,000 of government securities, much as
you might buy a stock or a bond on one of the stock exchanges, it pays with
a check drawn on itself. If the Fed buys the securities directly from a
commercial bank, that bank sends the Feds check to its regional Federal
Reserve Bank and has its deposit at the Fed its reserves increased by
$1,000. The bank excess reserves rise by the full amount of the transaction,
and with more excess reserves it can make more loans and increase its
demand deposits.
But what the central bank gives, the central bank can take away. When the
Federal Reserve sells government securities out of its portfolio, it gets paid
for them, and everything is reversed. The Fed takes payment by deducting
that sum from the buying banks deposit at the Federal Reserve, thus
diminishing its reserves.
Of course, when the Federal Reserve buys (or sells) government securities,
it has no assurance that a bank will be the other party of the transaction. But
it doesnt matter whether the securities someone else is selling by a bank or
the Fed buys. In either case, when the Fed buys, bank reserves go up, and
when the Fed sells, bank reserves go down.
Commercial banks are unable to do anything to offset these measures. If the
Fed wants to reduce bank reserves by open market sales, there is nothing
banks can do about it. By lowering its selling price, the Fed can always
unearth a buyer. Since it is not in business to make a profit, the Fed is free
to alter its selling price as it wishes.
And while any single commercial bank can replenish its own reserves by
selling securities to other banks or to individuals who keep their accounts
in other banks the reserves of the other banks will then decline. Another
loses reserves replenished by one bank. Total bank reserves must fall by the
value of the securities sold by the Federal Reserve.
There are three types of Interest Rates, as follows:
-
The prime rate, the discount rate, and the federal funds rate are referred
to in newspapers so often that they deserve special mention, particularly
since they are frequently confused with each other.
The prime rate is the interest rate that commercial banks charge on loans
to their most creditworthy business customers, most creditworthy
meaning financially strongest and therefor most likely to repay on time.
Banks charge higher rates then the prime for loans to corporations
without such strong credit ratings. The prime rate is an administered rate
in that banks set it and it stays there until they decide to raise or lower it;
thus the prime rate typically stays the same for weeks or even months at
a time.
The discount rate is the interest rate that the Federal Reserve, the
governments central bank, charges on loans to commercial banks. The
Federal Reserve makes short-terms loans to banks when the banks need
funds for relatively brief periods of time. Thus the prime rate involves a
payment commercial banks receive, while the discount rate is a cost,
something they pay out. Like the prime rate, the discount rate is also an
administered rate, set in this case by the Federal Reserve and often
staying unchanged for months.
Finally, the federal funds rate often called just the funds rate is
the interest rate that banks charge each other on very short-terms loans
among themselves. Usually the loans are overnight made on one
day and paid back the next. Unlike the prime rate and the discount rate,
the federal funds rate is not an administered rate; rather, it is a marketdetermined rate, fluctuating continuously depending on the relationship
between the demand for loans (by banks who need to borrow) and the
supply (from banks who want to lend).
deposits (checking accounts), but in the past few decades savings and time
deposits including certificates of deposits have become even more
important than demand deposits. With these funds, commercial banks buy a
wide variety of assets, ranging from short-term government securities to
long-term business loans and home mortgages.
Life insurance companies rank third in asset size. They insure people
against the financial consequences of death, receiving their funds in the
form of periodic payments (called premiums) that are based on mortality
statistics. They can predict with a high degree of actuarial probability how
much money they will have to pay out in benefits over the next years. They
invest accordingly, aiming for the highest yield consistent with safety over
the long run. Thus a high percentage of their assets are in the form of longterm corporate bonds and long-term mortgages, although the mortgages are
typically on commercial rather than residential properties.
Pension and retirement funds are similar to life insurance companies in that
they are mainly concerned with the long rather than the short run. Their
inflow of money comes from working people building a nest egg for their
retirement years. They are able to predict amounts they will have to pay out
in pensions (called annuities) for the next years. Since they face few shortterm uncertainties, they invest mainly in long-term corporate bonds and
high-grade stocks.
Mutual funds are frequently stock market related institutions but there are
also mutual funds specialising in bonds of all kinds and in mortgages as
well. Pooling the funds of many people of moderate means, the funds
management invests the money in a wide variety of stocks or bonds, thereby
obtaining diversification those individuals acting alone might not be able to
achieve. Buying shares in a mutual fund is more risky than buying a savings
deposit or a money market instrument such as a Treasury bill, butt it is less
risky than buying stocks or bonds on your own.
Money market mutual funds are like the old-fashioned kind of mutual fund.
However, the funds management does not invest the money in the stock
market or in corporate or municipal bonds. Instead, it purchases highly
liquid short-term money market instruments, such as large-size bank
negotiable CDs, Treasury bills, and high-grade commercial paper.
Savings and loan associations (S&Ls) have traditionally acquired almost all
their funds through savings deposits usually called shares instead of
deposits and used them to make home mortgage loans. This was their
original purpose to encourage family thrift and home ownership. The
Banking Act of 1980 granted them the power to issue checking accounts
(NOW negotiable order of withdrawal) and also to make consumer loans.
Sales and consumer finance companies specialise in leading money for
people to buy cars and take vacations and for business firms to finance their
inventories. Many of them are owned by a manufacturing firm and lend
money mainly to help retailers and customers buy that firms products. They
get their funds by selling their own short-term promissory notes (called
commercial paper) to business firms with funds to invest for a short while,
as well as by selling their own long-term bonds.
Property and casualty insurance companies insure homeowners against
burglary and fire, car owners against theft and collision, doctors against
malpractice suits, and business firms against negligence lawsuits, among
other things. The premiums they receive they buy high-grade municipal and
corporate bonds, high-grade stock and short-term money market instruments
such as Treasury bills (for liquidity).
Credit unions (about 13,000) are organised as co-operatives for people with
some sort of common interest, such as employees of a particular company or
members of a labour union. Credit union members buy shares, which are the
same as deposits, and thereby become eligible to borrow from the credit
union.
Mutual savings banks are practically identical with savings and loan
associations except that there are only about 500 of them. They are legally
structured as mutual or co-operatives, with the depositors or
shareholders owning the institution. Savings banks have traditionally
obtained most of their funds in the form of savings deposits and used the
money mainly to make home mortgages. The Banking Act of 1980 also
gave them the power to issue demand deposits (NOW accounts) and to
make consumer and some business loans.
bank failure. If people hear their bank is in trouble now, they hardly pay
attention. Theyre insured, so who cares?
Where does the FDIC get the money it uses to pay off depositors of failed
banks? It gets it from premiums it assesses on the banks it insures. Until
recently these were flat premiums, unadjusted for risk, but since 1993 this
has been changed: banks now pay annual premiums to the FDIC equal to 23
cents for every hundred dollars of insured deposits, with premiums rising to
as much as 31 cents per $100 of insured deposits for banks considered more
risky with respect to possible failure. The FDIC measures a banks risk of
failure by the amount of capital the bank has and by an assessment of the
quality of its loans and investments.
In 1989, the FDIC was given additional powers when the government
agency that insured deposits at savings and loan associations the Federal
Savings and Loan Insurance Corporation (FSLIC) was abolished after it
ran out of money. As a result, the FDIC now has two departments:
1.
2.
But in 1991 the Bank Insurance Fund part of the FDIC also ran out of
money. The FDIC had a working balance of over $18 billion in 1987, but
the flood of subsequent bank failures wiped that out in less than four years.
What happens now? If banks continue to fail at the peace of the late eighties
and early nineties, current insurance premiums that banks pay to the FDIC
will be insufficient to pay off all the insured depositors and the FDIC will
have no other choice but to borrow the remainder from the federal
government. This brings us to the heart of the matter: it is the governments
commitment to stand behind the FDIC that is important, not whether the
FDIC has actually got enough money on hand to cover all contingencies. So
long as that commitment is honoured, depositors need not worry about the
safety of their money.
No. of banks
% of total banks
% of total assets
3,330
3,145
2,782
2,461
253
374
27
25
23
20
2
3
2
3
6
14
5
70
TOTALS
12,345
100
100
Indeed, almost 6,500 of the banks in the country 52 percent of them are
that small (see lines 1 and 2 in the table). These 6,500 banks have only 5
percent of the aggregate assets in the banking system. Most of them are in
small, one-bank towns. At the other end of the scale, about 600 large banks
(the last two line of Table 2), only 5 percent of the total have 75 percent of
all bank assets.
If the large number of very small were the product of natural evolution, it
would indicate that the optimum (low-cost) size bank is probably a very
small size institution. Their large numbers would attest to their competitive
viability. In fact, the reason for so many very small banks in this country
does not have much to do with their successful adaptation to changing
economic needs or their innovative capabilities. It is that most of them are
sheltered from competition by state anti-branching statutes, to which the
federal banking authorities defer. Many very small banks would be unable
to remain in business if a large bank opened up a branch next door. The fact
that in many states the large bank is legally prohibited from doing so is what
permits many small banks to survive.
The McFadden Act of 1927 (a) prohibits banks from branching across state
lines and (b) permits national banks to branch within a state only to the state
extent as state-chartered banks. The result is that the McFadden Act and
state anti-branching statute not economic circumstances are the principal
determinants of the number of banks in the United States.
However, there are many straws in the wind indicating that the prohibition
against interstate branching is on its last legs: mergers between banks
located in different states, acquisitions by parent holding companies,
enacting of legislation permitting reciprocal interstate banking, establishing
by both national and state banks of bank-related subsidiaries and affiliates.
Everything considered, a number of steps toward nation-wide branch
banking appear to have been taken. Most observers believe that it will be
commonplace by the turn of the century.
3.1.5.5 Savings banks and savings and loan associations
Savings banks were the first thrift institutions in the country. The Provident
Institution for Saving in Boston and the Savings Fund Society in
Philadelphia was not organised until fifteen years later. Nowadays, though,
for all practical purposes savings banks and savings and loans are hard to
tell apart except by their names.
The 400 or so savings banks, mostly on the eastern seaboard, are almost all
state chartered; federal chartering of savings banks was not begun until
1978. Because most are state chartered, they are state regulate and state
supervised.
Savings and loan associations may be federally or state chartered. Of the
roughly 2,000 S&L in existence, slightly more than half is chartered by the
states in which they operate and the rest by the federal government. Prior to
1989, virtually all of them were members of a system that was to S&Ls
what that Federal Reserve System is to commercial banks: the Federal
Home Loan Bank System, like the Federal Reserve System, consisted of
twelve regional banks plus a supervisory board in Washington. The Federal
Home Loan Bank Board (FHLBB) regulated S&Ls by chartering them,
conducting examinations, and reviewing applications for branches and
mergers.
Under the Depository Institutions Deregulation and Monetary Control Act
of 1980, otherwise known as the Banking Act of 1980, both S&Ls and
savings banks must hold reserves against their checking accounts and
business time deposit liabilities, as specified by the Federal Reserve; as a
quid pro quo, they have full access to temporary borrowing from the Federal
Reserve when needed.
Most savings banks are insured by the Bank Insurance Fund of the FDIC, up
to the standard $100,000 per depositor, just likes commercial banks. S&Ls,
on the other hand, used to be insured by the Federal Savings and Loan
Insurance Corporation (FSLIC), also up to $100,000 per depositor. While
the FDIC is an independent agency, the FSLIC was a subsidiary of the
Federal Home Loan Banking System, and the Federal Home Loan Bank
Board determined its policies. Because of the large number of savings and
loan failures, the FSLIC ran out of money in the late eighties and was
abolished in 1989. Today, the Saving Association Insurance Fund (SAIF), a
branch of the FDIC, insures deposits in savings and loans.
3.1.5.6 Mortgage-related financial institutions
It should be noted that there are a number of government sponsored efforts
to support the activities of mortgage related financial institutions. Perhaps
the most popular is the Federal National Mortgage Association, also known
as Fannie Mae, established by Congress in 1938. It later became part of the
Department of Housing and Urban Development (HUD) and in 1968
became a privately owned corporation with certain ties to the government.
Fannie Mae buys mortgages from S&Ls and other institutions that no longer
wish to hold them as investments and finances these so-called secondarymarket operations primarily by issuing bonds to the public.
Fannie Maes performance in the mortgage market is complemented by the
work of Ginnie Mae, more properly called the Government National
Mortgage Association. A relative newcomer to the mortgage market scene,
Ginnie Mae has a name in connection with the pass-through program.
Instead of buying mortgages and financing these acquisitions by issuing her
own securities, Ginnie Mae guarantees the timely payment of interest and
principal on packages of pools of mortgages that are insured by the Federal
Housing Administration (FHA) or the Veterans Administration (VA).
Private mortgage originators such as savings and loan associations or
mortgage bankers put these pools of mortgage together. GNMA passthrough securities are attractive to such investors as pension funds and
insurance companies because of their government guarantee and liquidity.
The pass-through program has made mortgages look very mush like bonds
to some investors, thereby broadening the source of mortgage funds.
In 1970, Congress established the Federal Home Loan Mortgage
Corporation (FHLMC). Dubbed Freddie Mac by the investment community,
this latest creation does just about what Ginnie Mae does, except that
instead of FHA-VA mortgage-backed securities, Freddie Mac creates
participation certificates in conventional mortgages and sells them to
ultimate investors. As with Ginnie Mae, the objective is to attract nontraditional funds into the mortgage market by packaging individual
mortgage loans into a bond like instrument.
All these government and government-sponsored agencies are very active,
especially during periods of tight money, in helping to finance mortgage
activity. They have, in fact, let to concern in the capital market over the
federalisation of the mortgage market.
3.1.5.7 Credit unions
The first credit union in the country was established in Manchester, New
Hampshire in 1909. Credit unions now number 14,000, making the most
numerous of the thrift institutions. They have not been subject to the same
problems as S&Ls and mutual savings banks, because the bulk of their
lending has historically taken the form of relatively short-term consumers
loans. They may encounter similar problems if they dont watch out,
though, because credit unions now engage in mortgage lending as one of
their activities.
Credit unions may be federally or state chartered, but the majority has
federal charters. State-chartered institutions are regulated and supervised by
the states in which they operate and the federally chartered ones by the
National Credit Union Administration in Washington. The National Credit
Union Share Insurance Fund, run by the National Credit Union
Administration, provides deposit insurance (up to $100,000 per depositor)
for both state and federally chartered credit unions.
The Current Federal Regulatory Structure In Brief
Federal Reserves (Fed). Established as an independent agency in 1913,
supervises and examines state-chartered banks that are members of the
FR System and regulates all bank holding companies, regardless of
charter.
Comptroller of the currency. Established in 1863 as an office within the
US Treasury Department. Charters, regulates, examines, and supervises
nationally chartered banks.
Office of thrift Supervision (OTS). Established in 1989 and, like the
Comptroller of the Currency, a department within the US Treasury.
Charters, regulates, examines, and supervises savings and loan
associations. (Until 1989 these functions were performed by the Federal
Home Loan Bank Board.)
Federal Deposit Insurance Corporation (FDIC). Established as an
independent agency by the Banking Act of 1933. Has historically
insured deposits at virtually all commercial banks and most savings
banks. Examines and supervises state-chartered banks that are not
members of the Federal Reserve System. Given additional Insurance
powers in 1989, it now administers:
(a) the Bank Insurance Fund (BIF), which insures deposits at
commercial and most savings banks, and
(b) the Savings Association Insurance Fund (SAIF), which insures
deposits at savings and loan associations.
(In 1689, the SAIF replaced the FSLIC, the Federal Savings and Loan
Insurance Corporation.)
The Executive Board comprises the President, the Vice-President and four
other members; all chosen from among persons of recognised standing and
professional experience in monetary or banking matters. They are appointed
by common accord of the governments of the Member States at the level of
the Heads of State or Government, on a recommendation from the European
Council after it has consulted the European Parliament and the Governing
Council of the ECB (i.e. the Council of the European Monetary Institute for
the first appointments).
The main responsibilities of the Executive Board are:
to implement monetary policy in accordance with the guidelines and
decisions laid down by the Governing Council of the ECB and, in doing
so, to give the necessary instructions to the NCBs; and
to execute those powers which have been delegated to it by the
Governing Council of the ECB.
The General Council comprises the President and the Vice-President and
the governors of all the NCBs, i.e. of both those Member States with as well
as those without a derogation. The General Council performs the tasks,
which the ECB took over from the European Monetary Institute (EMI) and
which, owing to the derogation of one or more Member States, still have to
be performed in the third stage.
The General Council also contributes to:
the ESCBs advisory functions (see above);
the collection of statistical information;
the preparation of the ECBs quarterly and annual reports and weekly
consolidated financial statements;
the establishment of the necessary rules for standardising the accounting
and reporting of operations undertaken by the NCBs;
the taking of measures relating to the establishment of the key for the
ECBs capital subscription other than those already laid down in the
Treaty;
the laying-down of the conditions of employment of the ECBs staff; and
the necessary preparations for irrevocably fixing the exchange rates of
the currencies of the Member States with a derogation against the Euro.
Minimum reserves
Preparatory work has been carried out with a view of enabling the ESCB to
impose minimum reserves as from the start of Stage Three. It will be up to
the Governing Council of the ECB to decide whether minimum reserves
will actually be applied. Any minimum reserves system would be intended
to pursue the aims of stabilising money market interest rates, creating (or
enlarging) a structural liquidity shortage and possibly contributing to the
control of monetary expansion. The reserve requirement of each institution
would be determined in relation to elements of its balance sheet. In order to
pursue the aim of stabilising interest rates, the ESCBs minimum reserves
system would enable institutions to make use of averaging provisions. This
implies that compliance with the reserve requirement would be determined
on the basis of the institutions average daily reserve holdings over a onemonth maintenance period.
Counterparts
The ESCB monetary policy framework is formulated with a view of
ensuring the participation of a broad range of counterparts. If minimum
reserves are applied, only institutions subject to minimum reserves may
access the standing facilities and participate in open market operations
based on standard tenders. If no minimum reserves are applied, the range of
counterparts will broadly correspond to credit institutions in the Euro area.
The ESCB may select a limited number of counterparts to participate in
fine-tuning operations. For outright transactions, no restrictions will be
placed a priori on the range of counterparts. Active players in the foreign
exchange market will be used for foreign exchange swaps conducted for
monetary policy purposes.
Underlying assets
Pursuant to Article 18.1 of the ESCB Statute, all ESCB credit operations
have to be based on adequate collateral. The ESCB will allow a wide range
of assets to underlie its operations. A distinction is made, essentially for
purposes internal to the ESCB, between two categories of eligible assets:
tier one and tier two respectively. Tier one consists of marketable debt
instruments, which fulfil uniform Monetary Union-wide eligibility criteria
specified by the ECB. Tier two consists of additional assets, marketable and
non-marketable, which are of particular importance for national financial
markets and banking systems and for which eligibility criteria are
established by the national central banks, subject to ECB approval. No
distinction will be made between the two tiers with regard to the quality of
the assets and their eligibility for the various types of ESCB monetary
policy operations (except for the fact that tier two assets are normally not
used in outright transactions). The eligibility criteria for underlying assets to
ESCB monetary policy operations are the same as those applied by the
ESCB for underlying assets to intra-day credit. Furthermore, ESCB
counterparts may use eligible assets on a cross-border basis, i.e. they may
borrow from the central bank of the Member State in which they are
established by making use of assets located in another Member State.
Key for the ECBs capital
1 December 1999
Following the notification issued by the Commission of the European
Communities of revised GDP statistical data, it was decided to adjust the
shares of the national central banks in the key for the capital of the
European Central Bank (ECB) to the following percentage rates:
Nationale Bank van Belgie/Banque Nationale de Belgique
Danmarks Nationalbank
Deutsche Bundesbank
Bank of Greece
Banco de Espaa
Banque de France
Central Bank of Ireland
Banca dItalia
Banque centrale du Luxembourg
De Nederlandsche Bank
Oesterreichische Nationalbank
Banco de Portugal
Suomen Pankki
Sveriges Riksbank
Bank of England
2.8658%
1.6709%
24.4935%
2.0564%
8.8935%
16.8337%
0.8496%
14.8950%
0.1492%
4.2780%
2.3594%
1.9232%
1.3970%
2.6537%
14.6811%
Central Bank and the European System of Central Banks is the Treaty
establishing the European-Community.
In May 1998 the European Council invited the large majority of countries
(11) which were able to meet the Maastricht convergence conditions to join
the European Monetary Union (EMU). The four non-members were the
United Kingdom, Denmark, Sweden, which all opted out, and Greece,
which alone failed to meet the convergence conditions.
The European Central Bankor Eurofed ensures a common monetary policy,
and governments had to follow precise targets on public debt and the way in
which public deficits were financed. Ceding financial power to a new
central financial body was seen to be more effective and efficient than
continuing weakly co-ordinated policies by existing National Central Banks.
The European System of Central Banks involves the National Central Banks
(NCBs) and the European Central Bank. The European Central Bank is
dominant in policy-making and has exclusive authorisation and control of
currency issue. Most monetary operations are decentralised to the National
Central Banks. The ESCBs main instrument of control is open-market
operations plus other instruments undertaken at the initiative of the
European Central Bank.
The European Central Bank has in its statutes the goal of price stability,
whereas the US Federal Reserve Bank also has to consider output and
employment as well as inflation. For inflation, no numerical target is set,
whereas the European Central Bank had set a tight limit at less than 2 per
cent per annum. There are also concerns about the undemocratic nature of
the European Central Bank in setting the targets and implementing them. In
the United Kingdom, for example, the Chancellor of the Exchequer sets the
inflation targets, leaving the implementation to the Bank of England the
latter is also more in publishing its minutes.
The legal basis for the ECB and the European System of Central Banks
(ESCB) is the Treaty establishing the European Community. According to
this Treaty, the ESCB is composed of the ECB and the national central
banks of all 15 EU Member States. The Statute of the European System of
Central Banks and of the European Central Bank was attached to the Treaty
as a protocol.
Progress test
1.
2.
3.
4.
5.
6.
7.
8.
9.
10. What are the main tasks carried out by the ESCB?
11. What are the main responsibilities of the Governing Council?
12. What are the main responsibilities of the General Council?
13. What are the main monetary policy instruments of the ESCB?
14. What is the ECB?
15. Describe the ESCBs structure and its main tasks.
ANNEX No 1
ECBS
General Council
(responsible for ERM II)
ECB
Central banks:
England
Denmark
Sweden
Greece
Gouverners
of the central
banks in the
EMU
(Euro Area)
President
Gouverning Council
President
President
ANNEX No 2
TASKS OF THE ECB:
IMPLEMENT THE MONETARY POLICY
-
Price stability
Money Services
MONEY SERVICES
D Objectives
After studying this chapter you should be able to understand:
4.1 Cash and cash instruments
4.2 Cheque definition, parties involved, endorsement, types of
endorsement
4.3 Remittance by post:
4.3.1 Cheque
4.3.2 Bankers draft
4.3.3 International Money Order
4.3.4 International Payment Order
4.4 Remittance telegraphically / electronically
4.4.1 Telegraphic transfer
4.4.2 Girobank/post office
4.4.3 Standing orders
4.5 Electronic Banking Services
4.6 SWIFT
4.7 The process of the Romanian cheque under the Law no. 59/1934
concerning the cheque, with the subsequent amendments
4.7.1 Introduction
4.7.2 The transmission of the cheque
4.7.3 The payment of the cheque
4.7.4 Types of cheques
4.7.5 The circulation of a cheque
Money Services
Banknotes;
Coins;
In modern banking practice, the name of the customer and his computer
account number are pre-printed in the pay-in books to eliminate any error
and to speed up transactions at the counter.
Procedure1 used by the Romanian banks:
The cashier has to make sure that the name and account number of the
customer are clearly indicated;
The cashier must count the currency notes presented and sort them into
different denominations;
The cashier ticks against each item on the pay-in slip with a coloured
pen or pencil and places the notes in his till.
Money Services
Payee (beneficiary):
When the cheque is crossed A/C payee or crossed to a particular
account, such instructions must be implemented.
Money Services
Endorsement3:
The endorsement of an instrument is the placing of a signature thereon
by a person who thereby becomes a party to the instrument.
There are two types of endorsement:
1. Blank endorsement: no endorsee is indicated. Such blank
endorsement converts the order cheque into a bearer cheque;
2. Special endorsement: the endorser specifies the person to whom the
cheque is endorsed.
Palfreman David Banking: the legal environment, Pitman Publishing, London, 1994,
p.242
Money Services
Now lets try to be in the position of the payee who suffers the following:
The cheque will often be drawn in the drawers currency, thereby
imposing an exchange risk on the payee;
The payees bank may insist on collecting the proceeds of the cheque
before crediting the bank account, thereby delaying the receipt of the
funds by as much as a month. This delay, of course, favours the drawer;
The payee will also incur some, if not all, of the expenses of the
collection process;
The cheque may not be paid.
The process of a cheque is represented in the Annex no 1.
In order to avoid some of these problems, beneficiaries can insist that:
Cheques are drawn in their own currency. This transfers the exchange
risk back to the drawer but does not really solve any of the other
problems highlighted;
Davies Audrey & Kearns Martin Banking Operations, Pitman Publishing, London
1994, p. 35
Money Services
banks with the North Bank, whose correspondent bank is the Left Bank in
Paris. The developer banks with the Perpignan branch of the Bastille Bank.
1. Mrs. Roberts gives instructions to the North Bank and requests the issue
of a draft.
2. North Bank draws a draft for FF 100,000 on the Left Bank in Paris.
3. North Bank debits Mrs. Roberts account with the sterling equivalent of
FF 100,000 plus charges, accounts to Left Bank for FF 100,000, and
hands the draft to Mrs. Roberts.
4. Mrs. Roberts sends the draft to the developers who pay it into their
account with the Bastille Bank.
5. Bastille Bank collects the proceeds by remitting the draft to the Left
Bank for payment.
This process is represented in the Annex no. 2.
Despite the obvious benefits, drafts are relatively expensive and can be
delayed or lost in the post, causing considerable inconveniences and
additional costs to all concerned, particularly as the customer will be
required to give an indemnity to the bank. It is because of such
problems that quicker, more efficient and less costly ways of
transferring funds internationally have been developed.
Analysing the process of the bank drafts, we consider that there are major
disadvantages in using the drafts for large transfers, such as the following:
The remitter is debited at the time the draft is issued, but there is a delay
before the beneficiary can pay the draft into his bank account and obtain
cleared funds.
If the beneficiary does not bank at the bank on which the draft is drawn,
the funds will be treated as unclear.
The draft could be lost or stolen, and banks are reluctant to stop a
bank draft because it amounts to dishonour of the banks own paper.
Money Services
Davies Audrey & Kearns Martin Banking Operations, Pitman Publishing, London
1994, p.25
Money Services
Money Services
Pay on application
Money Services
Money Services
ADVANTAGES
Cash
Cheque
Bankers draft
DISADVANTAGES
Money Services
METHOD
ADVANTAGES
DISADVANTAGES
International
Money Order
International
Payment
Order
Telegraphic
Transfer
Giro cheque
Relatively inexpensive.
Issue process is straightforward.
Remittance is quick and
simple.
Giro transfer
Postal order
Money Services
Money Services
connection. The performances of such a solution are far away better also for
the bank and for the end user (the client).
The costs are calculated to a number of 100 banks from the United States of
America which are using all the channels, but the costs are represented at a
world wide level because they are common to all the banks that promote the
electronic payments.
World tendencies
63 % from the great banks6 are offering Internet banking services and 59 %
are offering electronic banking services. Not all Internet banking
institutions are charging the services, but most of those, which do, are
starting to use a monthly subscription for the base services an
supplementary charges for some services. 61 % from the firsts 150-th banks
from the United States of America are offering on-line banking services, 15
% dont have included in their strategies for the future the offer of on-line
banking service and 19 % already announced their intention to provide such
services until the end of 2001.
In May 2000, Forrester Research estimated that by the end of the year 2003
will exist over 20 million of home users in the United States of America
which will use the I-banking services, that means around 30 % from the
profits obtained from retail.
At the end of 2000, the specialists from Data monitor estimated that at the
end of the year 2005, around 20% from the world population would be
connected at the Internet.
Regarding Europe, since March 19, 2001 the British group Vodafone has
announced that the first transaction pilot project that will use the digital
signature using the mobile phone will start in April 2001 together with the
Radio Communications Agency. That announcement was made at a short
period of time after the British Government announced that it intended to
allow all physical persons to pay their taxes throw an electronic
environment, using digital signatures.
On July 19, 2001, expired the cut-off time until which all the member states
of the European Union had to implement the Directive regarding digital
signature. The ending of that period will lead inevitably to a new beginning
6
Money Services
Money Services
Money Services
the BIC, when used for addressing purposes, are called the destination; it is
made up as follows:
Bank (Financial Institution) Code
4 characters
Country Code
2 characters
Location Code
2 characters
The bank code, country code and location code are mandatory components
of a BIC. In addition, an optional branch code of 3 characters can be used to
identify any branch of a user institution. If no branch code is defined, the
default of XXX is used for addressing purposes.
There are three main types of SWIFT message8:
8
9
Customer transfers
Cheques
Financial institution transfers
Treasury markets & Derivatives
Foreign exchange, Forward rate agreement etc
Money Services
Category 4
Collections
Cash letters
Category 5
Securities
Category 6
Category 7
Documentary credits
Guarantees
Category 8
Travellers cheques
Category 9
Money Services
4.7 The process of the Romanian cheque under the Law no. 59/1934
concerning the cheque, with the subsequent amendments
4.7.1 Introduction
The cheque is an instrument of payment used by the banking accounts
holder with available funds into these accounts. The available funds are a
result of a bank deposit, collecting proceeds or a credit.
The cheque is an instrument of payment, which connects three persons:
-
the drawer; It is the person who makes out the instrument, being the
holder of the banking account.
the drawee; It is always the bank where the drawer has an account
opened with. It will pay the presented cheque only if the drawer has
enough availability in his account.
the beneficiary (payee). It is the person who will receive the money.
This person can be a third person or the drawer himself.
the name of the drawee, respectively the bank where the drawer has an
account opened with;
10
Money Services
the place of the payment, respectively the locality and the address of the
bank where the payment is made;
the date and the place of the issue of the instrument, respectively the
day, month, year, as well as the name of the locality;
8 days, for the cheque payable in the same place it was issued;
These terms are calculated from de subsequent day of the issuing date of the
cheque.
The presentation of the cheque after the expiring of the legal term will cause
the loss of the right for a legal action against the previous endorsers if the
cheque wouldnt be paid.
Money Services
All the persons who obliged themselves in any way by the cheque
(drawer, endorsers) are jointly and severally responsible for paying
that cheque, although the obligations had been assumed at different
moments.
4.7.4 Types of cheques
The main types of cheques used in Romania are:
a) the cheque payable to bearer. It is the instrument, which has in the text
the special mention to bearer or payable to bearer or is has no
mentions.
b) the crossed cheque - the drawer or the owner of a cheque can make a
cross by drawing two horizontal or crossed parallel lines on the side of
the cheque; meaning that the beneficiary has to ask for a banks services
in order to cash the sum written on the cheque.
The cross can be:
special - between the two lines is specified the name of the bank.
d) Travellers cheque in this case, the drawer can condition the payment
of this cheque upon the identity between the signature of the person who
got the cheque (the possessor) and the signature of the person who cashes
it at submitting. In fact, the possessor puts his first signature on the
cheque in the moment he buys it; the second time, he signs it in the
moment of cashing the cheque, in the presence of the banking clerk, or in
the moment of the payment in the presence of the beneficiary. This kind
of cheque is an easy and safe mean of payment.
Money Services
Money Services
Progress test
cheque.
18. List and define the main types of cheques under the Romanian law of
the cheque.
19. A customer wishes to send a birthday present of 50 pounds to her
daughter in Canada. Her birthday is not for two months. Which payment
method would you suggest?
20. A retiring customer has decided to spend 6 months of the year in Spain
ANNEX No 1
THE PROCESS OF A CHEQUE
Drawer
Takes the
cheque to
the bank
(2)
Debits
Account (4)
Drawee
Bank
Beneficiary
Pays Credit
in Account
(6)
Collecting
Bank
ANNEX No 2
THE PROCESS OF THE BANKERS DRAFT
Sends draft
(4)
Mrs. Roberts
Property
Developer
Account
Debited
(3)
Orders
Draft
(1)
North
Bank
Account
credited
(6)
Issues
Draft
(2)
Credits
(5)
Left
Bank
Remits
draft and
collects
proceeds(7)
Bastille
Bank
ANNEX No 3
THE PROCESS OF AN INTERNATIONAL MONEY ORDER
Customer
Orders
IMO
(1)
Issuing
Bank
Sends IMO
(3)
Beneficiary
Pays in
Account
credited
(4)
Issues
IMO
(2)
Collecting
Bank
ANNEX No 4
THE PROCESS OF AN INTERNATIONAL PAYMENT ORDER
Beneficiary
Customer
Issues
Instructions
(1)
Remitting
Bank
Debits
Customer
(2)
Overseas
Bank
ANNEX No 5
THE COMPULSORY MENTIONS OF THE CHEQUES
Money Services
Money Services
Money Services
Money Services
Money Services
Money Services
ANNEX No 6
TYPES OF CHEQUES
Romanian crossed cheque:
Money Services
Money Services
ANNEX No 7
2
4
8
The X Bank
-drawee-
6
7
The Y Bank
-beneficiarys bank-
Explanation:
1. The issuance of the cheque book;
2. The sales contract is concluded;
3. The Atlas Inc. draws a cheque against the X
Bank;
4. It remits the cheque drawn against the X Bank;
5. It submits the cheque to the Y Bank;
6. It submits the cheque for paying;
7. The debt is liquidated;
8. It pays the cheque.
ELECTRONIC
BANKING
SERVICES
D Objectives
After studying this chapter you should be able to understand:
5.1 Introduction into e banking services
5.2 Concepts definition regarding e-banking
5.2.1 Development of electronic money in the Euro area;
electronic money oversight, supervision and the Community
regulatory framework
5.2.2 Services of e banking in Romania
5.3 The legal framework in the e-services field
5.3.1 The EU s on-line Financial Services legal framework
5.3.2 The E regulating provisions in Romania
5.4 The risk management for e-banking activities and e-money
5.4.1 Risk identification and risks analysis
5.5 Advantages and disadvantages of Internet banking
following
characteristics
facilitated
the
The diversity of the solutions adopted by bank to solve these problems and
facilitate the communications is shown in the following table:
The offer
Lloyds
Bank of
Scotland
TSB
Automatic
answer
(human
voice)
through the
phone and
using a
recognition
tone
Automatic
answer
(human
voice)
through a
phone and a
special
terminal
Automatic
teletext
through the
phone
(keypad,
home
computer)
The access
to the
system
PIN using a
special card
Password and
account
Special PIN
number
and account
Password and number
special PIN
Costs
(besides
the phone
circuit)
Fixed tariffs
are
established
monthly
according to
its use
Fixed
monthly and
additional
tariffs
according to
its use
The type
Quarterly
subscription
of L2.50 for
each account
Nationwide
England
BS Royal
Bank of
Scotland
Automatic
answer
(human
voice)
through the
phone and
using a
recognition
tone
Password
Special PIN
Free
Source: Basno C., Dardac N.- Moneda. Credit. Banci, Ed. Didactic i
Pedagogica RA, Bucureti. 1999
The table shows that many banks use video equipment in order to give the
customer access to a larger range of services.
Technological characteristics
The Videotext system is based on video, a telecommunication procedure that
enables the visualisation of alphanumerical images on a screen.
The Videotext system is a video system with telephone transmission, hence
it is a videography where the transmission is done through a
telecommunication network (the phone line).
There are three entities that take part in this system: the user, the
transmission network and the service performer (that is a database and a
processor of information in the same time).
The user will be equipped with a terminal and a phone line. He will be
connected to the network through a phone call, after he was identified and
recognised (through the above-mentioned procedures).
The transmission network initially implies the phone contact through the
telephone and after the identification it enables the connection with the
performer through the video access point (WAP).
The functional characteristics of the Videotext System
The system has several functional characteristics that reveal its superior
qualities:
- It ensures the fast transmission of information;
- It allows a continuous updating of data;
- It has an unlimited stocking capacity, so all the specific elements may be
included in the database;
- It has a permanent availability. Hence, it may be accessed from different
places and without any time restrictions;
- The system presents a specific accessibility through:
- The use of a communication mean, a simplified language;
- The easy orientation in the system, within a tree structure;
- The multi-criteria access, that enables the information to be selected
based on more criteria and hence the use of the same information on
more objectives (a simple example is that the operations recorded in an
account may be structured as credit operations, debit operations, balances
at different dates, etc.)
- The system implies the interaction between two parts.
If not, the bank notifies the holder that the operation is not possible.
Usually, this operation is used for the treasury management of the holder.
He operates for the transfer of funds to special accounts: savings accounts,
term deposits, etc.
Payments regarding electronic bills
The user of the Videotext System establishes with the bank a regime of
automatic payments for the bills that have specific payment terms (usually
the monthly bills).
Based on these agreements, the payments are automatically made at the
established dates. The user has the right to cheque if the payments to be
made are right. When he thinks he is entitled he may cancel the payment by
addressing a special order to the bank, also by using the Videotext system.
The teleconsultancy
This denomination refers to the dialogue between the holder of the payment
card and the bank. It concerns the situation of the holder s account and is
done through the system.
The most frequent questions refer to:
- the balance of the account at the bank or the balance of the purchasing
power (the credit);
- the last operations recorded in the account;
- the interest amounts to be received or paid.
The request of a cheque card
The cheques are used on a large scale, sometimes in parallel with the credit
card. Th request for a new cheque card usually requires the holder to go to
the bank.
But the user of the Videotext system has the advantage to request this by
means of a Videotext message. The operation is quite simple. The bank will
honour the customer request and will mail him a new cheque card.
The local consultancy
The local consultancy is a very natural and sometimes useful service. It
consists of reading of the credit card memory.
The expenses ordered according to their succession, the suppliers etc. will
appear on the screen and they may be retained. This ensures the
clarifications asked by the holder.
The offer of e-banking services of the well known types- m-banking, ITV
and PC based on Internet - will permit the bank, in the first place to attract
sophisticated clients, that are using many platforms for effecting
transactions, managing, in the same time to access a larger base of potential
customers.
ITV-Banking represents a channel that implies small costs; in the same
time, data confidentiality during transactions effected using the
infrastructure of cable TV is reduced.
M-Banking offers the clients the possibility to effect transactions
everywhere in the world and at any time; the size of the phone terminal, as
well as the fact that the mobile phone is a personal object gives maximum
confidentiality assurance to this e-banking service.
M-banking services2 will attract an increasing number of active users on the
near future and the volume of the transactions for m-banking users will be
bigger than the volume of transactions through ITV and even through PCbased e-banking.
Nowadays, the PC-based Internet Banking users represent the most
important category of e-banking users, the situation will change; a bank
should develop strategies for new banking services offered on a different
platform, by adding a new presentation form in a shorter period of time and
at small costs.
5.2 Conceptsdefinition regarding e-banking
The Banking Supervision Committee from Basle defines the e-banking
activity as the retail banking services and products distribution of different
values through electronic channels.
(ii)
BANK
INDIVIDUAL
CLIENT
INSTITUTIONA
L CLIENT
generally requires fewer data exchanges and there is usually no need for any
online authorisation of electronic money transactions.
The development of electronic money will depend on the decisions made by
customers and merchants as to whether or not to use electronic money as a
payment instrument.
From the point of view of the merchant, it is useful to distinguish between
the fixed costs and the marginal costs of using payment instruments at a
particular point of sale. In the case of electronic money, fixed costs include
the costs associated with the purchase and maintenance of electronic money
cards and software or dedicated merchant terminals. By contrast, the
marginal costs are those relating to the processing of a single transaction,
including in particular the costs incurred for telecommunications. To the
extent that electronic money systems need to rely on new technologies or
new standards, which may remain relatively expensive in the early stages of
their development, fixed costs are likely to be relatively high, at least during
an initial phase. However, the marginal costs of using electronic money may
be lower than those of using alternative payment instruments.
Electronic money and monetary policy
The impact of electronic money on the monetary policy has been a widely
debated issue since the developments in technology made the widespread
use of electronic money a feasible scenario. The primary objective of the
monetary policy is to maintain price stability. With regard to this objective,
the development of electronic money raises three different issues:
First, there is need to safeguard the role of money as the unit of account
for economic transactions. Society reaps substantial benefits from using
a single well-defined and stable unit of account, for conducting
transactions, irrespective of the issuer or the form in which money is
issued.
(ii)
electronic money schemes must supply the central bank with whatever
information may be required for the purpose of monetary policy;
ii)
ii)
iii)
iv)
Initial capital and ongoing own funds requirements - the initial capital
and minimum ongoing capital requirements for ELMIs is Euro
1,000,000, while capital requirements are also set on an ongoing basis.
v)
10
Source: www.europa.eu.int.
11
12
The author of the project of law regarding the electronic signature is Varujan V.
Pambuccian, the president of the IT Commission from the Romanian Parliament.
Source: www.pambuccian.ro/RlegSign.htm
It is much stronger than the hand written form one (and given this reason it
can have its juridical regime). It is clear that the law on the electronic
signature is at the basis of any regulation referring to an electronic data
needing juridical regime.
The regulating institution should be a recently created one, namely, the
Information and Communication National Agency, having the role of
regulating the certification and e-commerce service providers. The Agency
is under the control of the Romanian Government.
The project of regarding e-commerce
The project of law13 regarding the e-commerce states the juridical aspects
related to business to business operations (with the typical application:
virtual factory) and to those of business to customer type.
The law form proposed by the Romanian Information Communication
National Agency collects all the common regulations from the existent
legislation. The challenged questions are those related to taxes that could be
perceived on e-commerce.
The only way in which these activities can be taxed is the one proposed by
the law project, would be the establishment of an Internet Police
Department having the duty of monitoring every transaction in the network.
For the on-line documents transacted the aspects related to the hour and the
place of the signing of the document and the ways of proving that the
addressed really got the document, these, together with the electronic
signature.
The law defines the electronic exchange of data as a data electronic transfer
from one system to another using a stated standard for information structure.
In the sense of the same law, the informational system is a system used for
generating, transmitting, receiving, stocking or any other similar processing.
The information used under the form of an electronic message, is considered
valid of producing juridical effects, regarding the conditions provided by
law.
13
14
people s trust in the bank s ability to fulfil its critical functions in order to
continue its activity. Reputation risk is important not only for a single bank,
but also for the entire banking system.
Legal risk appears by violation or non-observance of laws, rules,
regulations or prescribed practices, or when the legal rights and obligations
of the participating parties to a transaction are not correctly established.
Banks engaged in e banking and e-money activities can confront juridical
risks referring to the release of information regarding clients and protection
of banking secrecy.
Other risks. Traditional banking risks like credit risk, liquidity
risk, interest rate risk and market risk are risks that can appear also in the
electronic banking activity. Credit risk represents the risk that appears due
to a partial payment of a credit obligation, at the established term or in any
other established moment after that. Banks that perform e-banking activities
can extend credit by untraditional channels and extend their market beyond
traditional geographical boundaries. Inadequate procedures, by which
debtors credibility asking credit through electronic channels is determined,
can influence credit risks for the respective banks. Liquidity risk represents
the risk that appears due to banks incapacity to fulfil its obligations at
maturity term. Interest rates risk refers to the bank financial situation
exposure to undesired movements of interest rates. Market risk is the risk of
registered losses in the positions from inside the balance sheet, as well as in
those from outside, losses that appear due to price movements on the
market, including the exchange rates.
Examples of risks:
Credit Risk
Lack of payment of the debtors that have solicited credits through electronic
channels.
Lack of payment from e-money issuers.
Liquidity Risk
Payment incapacity of an e-money issuer
Interest Rate Risk
Sudden changes of the interest rates of the instruments in which an e-money
issuer invests
Market Risk
Foreign Exchange risks coming from the acceptance of foreign coins as a
payment for e-money.
Country Risk
Transfer risk coming from a Foreign Service provider or foreign participants
to an electronic banking project.
Management risk. A process of risks administration that includes
the three basic elements of risk: evaluation, exposure control risk and
monitoring the risks will help banks and supervisors to fulfil these
objectives. It is essential that banks have a transparent risk administration.
And when there are identified new risks in these activities, the Board of
Administration and the executive management must be informed.
For successfully maximising, the bank of the future will have to develop the
essential competencies related to distribution or product specialisation. An
institution can not be successful in both directions. A core competence is
essential when directly affecting the competitive advantage of that particular
institution in a market field. Core competitive advantages goal is to create a
bigger differentiation and assign the best resources for it.
E-Business and, in the first place e-commerce became a well-known and
generally accepted phenomenon. The evolution from a few innovative firms
(especially from B2C type of commerce) to commerce on a large scale (of
B2B type) was rapid. The motivation would be the accelerated transactions,
reduced costs and an interaction with the client through personalised
solutions. E-business is no longer a tendency, it is an important changes
generator in the value added.
Vital to this field is the field of electronic banking, which is vital for on-line
transactions.
Ian Greenspan, president of Federal Reserve Board, a key decision maker in
the economic policies establishment, states15 that the prolonged economic
increase and recession stop in the United States of America have at their
basis the increase in productivity due to information technology and ebusiness. The phenomenon became global and had implications in the
entire world.
It is said that the necessary step for entering the 3rd millennium should be
on-line banking16for all the transactions effected in Romania. The new
payment way could revitalise the existent payment mechanism.
The financial services will be on-line or will not be at all. This is the
opinion of the most important players in the financial service field. In
Romania, the Internet represents one of the solutions for making the
financial services field more competitive.
The traditional solutions will not be able to satisfy the modern clients
demands. No matter how many working points will be opened, the client
will always be at a certain distance from that; no matter for how many hours
the offices will be opened, the client will always work later than the closing
15
16
hour. It is sure that a service to which a client can have access 24 hours out
of 24 a day, will be closer to the clients wishes. From the banks point of
view many branches opened represent high costs with the buildings,
employees salaries. On the other hand, E-Banking implies investing in
technology, applications that will provide the support for the development
of such activities, assuring the security of transactions, well functioning.
A short overview of the requirements and advantages will include:
In Romania, the analysis of the financial-banking market lead to the
following statements:
the technological endowment is old and isolated;
the economic climate needs a serious investment;
the legislative context continues to be rigid, but steps have been
made the projects of law regarding the e domain are waiting for
the approval of the Romanian Parliament;
major banks offering e-banking services proved to be successfully in
Romania.
For the establishment of electronic banking service platforms, the basic
requests are:
the rapid access, a simple connection to a variety of channels,
respecting the security business rules;
assure secure and rapid transactions;
the programming of the electronic applications must be simple;
to contain efficient administration utility programs;
Clients Benefits:
mobility;
comfort and cost savings;
24 hours per day, every day accessibility;
security that meets the very highest European standards;
people can focus their attention on achieving their every day
objectives;
time saved;
account management.
In Romania, the electronic payments could be a factor of revitalisation of
the monetary field. But there are still many things to be done.
Although the electronic payments are more efficient and cheaper than a
paper- based payment system, there are certain facts related to the
environment that are not favourable to the passing to the digital economy:
It appears that, even if steps have been made in order to gradually
adopt the electronic system, even if e-business continues to develop in
Romania and the IT market is increasing, Romania in not entirely
ready to accept the new era of digital economy; this is due to the fiscal
evasion manifested on the market, to the economic agents that are not
acting disciplinary, to the existence of a financial blockage, on one
hand. On the other hand, our monetary unit is not convertible and the
legislation is restrictive in the sense that it imposes a partial foreign
exchange control of the capital transactions, with implications over
the Romanian balance of payments.
In Romania, the infrastructure is not corresponding for the
development of e-business; the legislative framework has many gaps.
Recently, the Law of electronic signature was promulgated and this
represents a clear step toward e era of digital transactions; other
projects of law with the aim of regulating the electronic domain are in
a project phase: the law of e-commerce, the law regarding the
payment effecting through Internet, the law on the software parks, the
laws regarding e-banking and e-finance, the regulations regarding the
encryption.
The electronic payments are still in an incipient phase; in order for an
efficient electronic payment to be made, institutions like the National
Bank of Romania and other public institutions adopt electronic
systems, offer in-time and modern services. The clearing system
should be automatically be designed and effected.
The Romanian system, as a whole, is reticent to changes.
The electronic system does not benefit of trust.
In Romania there is no encouragement from authorities to use the
electronic system, there is no project sustaining the electronic system.
Romanians mentality, the conservatory regime is present also in the
field of electronic transactions.
5.5 Advantages and disadvantages of Internet banking
Cynics would say banking is being driven towards the Internet by fear and
greed: fear because everyone is afraid of being left behind and greed
remember that they have no divine right to rule the financial transactions
industry and can no longer afford to be complacent. Luckily, the U.S.
government denied Microsoft the opportunity to acquire Intuit due to
antitrust and monopoly restrictions; however, financial institutions should
still continue to take notice, as the spectre of Bill Gates still looms
ominously over the financial services industry.
Internet banking isnt just restricted to the countrys largest financial
institutions. Some of the more regional players, such as credit unions, are
also making their mark. The smaller size of these institutions has allowed
them to out-manoeuvre some of their larger competitors. One effect of the
trend towards Internet banking is to level the playing field so that even
smaller financial institutions can offer the type of sophisticated service
customers would normally expect only from a large bank. The increased
competition can benefit both the financial institution and the consumer. The
financial institutions will benefit from the drive to utilise the best
technology available (increased efficiencies, lower incremental transaction
costs). The consumer benefits from greater choices and lower costs. In
addition, Internet banking can be especially appealing to financial
institutions whose "members" are not located near branches (again
benefiting both the institution and consumer). In addition to providing
existing customers with access to banking services, Web sites operated by
financial institutions may also be used to solicit new customers.
For the user, the advantages are more obvious. The ability to pay bills
electronically, check balances, transfer money and do other banking tasks
from the office or a home P.C, saves time and increases efficiency. It also
simplifies account tracking and record-keeping.
Disadvantages
Security issues have always plagued the Internet. Although the Internet will
never be completely secure, the fact is that current fears are in many ways
irrational, fuelled by horror stories rather than fact. Recent advances in
security technology have lead to "more" secure systems. An example is the
development of SET by Microsoft and Visa. Another example is the
development of CSEPS and CSETS by Clay Pigeon Technologies. Perhaps
it is an indication of the power of the message provided by the media that
we worry about internet security but continue to use other insecure
Low cost. Internet banking operate at an expense much lower than a branch.
Banks can be able to provide services at lower prices.
The possible negative factors may include:
Lack of person-to -person interaction. Since all transactions are executed
via computers, Internet banking is impersonal.
Computer overload. If the system goes down at the same time when you
want to do banking, you may have to fall back on traditional banking
methods.
Growing pains. Some Internet banking services are coming to market
before they are ready. Stories have surfaced about not working PIN numbers
or incompatible modems.
Service limits. You can not deposit online and you can not withdraw cash
from a PC. ("The ABCs of Banking Online", Black Enterprise. 26(8): 45-46.
1996 March).
Disadvantages of Internet banking compared to other systems
What are Internet Backings weaknesses compared to other alternative
delivery systems? A discussion of the weaknesses follows:
New developing technology - Internet Banking is the latest form of
technology for banks. Internet Banking is a developing technology
supporting self-service delivery channel. It is extremely customer driven
and responsive to the customers needs. Developing technologies such as
Internet Banking, though, run the risk of getting too far of ahead of the
banks; therefore, the banking industry will not be able to sell to the
customer. In reverse, the banking industry can get too far ahead of
technology, and banks will be able to deliver to the customer.
Unknown strategy- the dilemma of the "nervous banker" refers to the
banking industrys wait and sees approach. Banks are now struggling to
play catch-up. Banks have missed chances to strengthen customer
relationships by not taking full advantage of the Internets interactive
capabilities. They have viewed the Internet as a means of providing static
consumer sales at $14.9 billion for 1998. The IDC forecast for 1999 is $31
billion. Other IDC predictions are $50.7 billion for 2000, $78 billion for
2001, $116.5 billion for 2002, and $177.7 billion for 2003. (See figure
below).
17
- Internet - http://www.usic.org/papers/stateoftheinternet99.htm
Progress test
1.
2.
3.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
ANNEX No 1
Extract from the European Parliament and European Council
Directive 2000/31, concerning data confidentiality
Directive 2000/31/EC of the European Parliament and of the Council of
June 2000 on concern legal aspects of information society services, in
particular electronic commerce, in the Internal Market. (Directive on
electronic commerce)/ quotation regarding the confidentiality of data and
the definition of the information societies as stated by the Community Law.
(15) The confidentiality of communications is guaranteed by Article 5
Directive 97/66/EC; in accordance with that Directive, Member States
must prohibit any kind of interception or surveillance of such
communications by others than the senders and receivers, except when
legally authorised.
(17) The definition of information society services already exists in
Community law in Directive 98/34/EC of the European Parliament and of
the Council of 22 June 1998 laying down a procedure for the provision of
information in the field of technical standards and regulations and of rules
on information society services (21) and in Directive 98/84/EC of the
European Parliament and of the Council of 20 November 1998 on the legal
protection of services based on, or consisting of, conditional access(22);
this definition covers any service normally provided for remuneration, at a
distance, by means of electronic equipment for the processing (including
digital compression) and storage of data, and at the individual request of a
recipient of a service; those services referred to in the indicative list in
Annex V to Directive 98/34/EC which do not imply data processing and
storage are not covered by this definition.
(18) Information society services span a wide range of economic activities
which take place on-line; these activities can, in particular, consist of
selling goods on-line; activities such as the delivery of goods as such or
the provision of services off-line are not covered; information society
services are not solely restricted to services giving rise to on-line
contracting but also, in so far as they represent an economic activity,
extend to services which are not remunerated by those who receive them,
such as those offering on-line information or commercial communications,
or those providing tools allowing for search, access and retrieval of data;
ANNEX No 2
Extract from the European Directive concerning electronic signature
Directory 1999/93/EC of the European Parliament and of the European
Council of 13 December on Community for electronic signatures gives the
definitions for the notions operating with when speaking about this subject
as follows:
Article 2
Definitions
For the purpose of this Directive:
1. "electronic signature" means data in electronic form which are attached to
or logically associated with other electronic data and which serve as a
method of authentication;
2. "advanced electronic signature" means an electronic signature, which
meets the following requirements:
(a) it is uniquely linked to the signatory;
(b) it is capable of identifying the signatory;
(c) it is created using means that the signatory can maintain under his
sole control; and (d) it is linked to the data to which it relates in such
a manner that any subsequent change of the data is detectable;
3. "signatory" means a person who holds a signature-creation device and
acts either on his own behalf or on behalf of the natural or legal person or
entity he represents;
4. "signature-creation data" means unique data, such as codes or private
cryptographic keys, which are used by the signatory to create an
electronic signature;
5. "signature-creation device" means configured software or hardware used
to implement the signature-creation data;
ANNEX No 3
Article 2
Definitions
For the purpose of this recommendation, the following definitions apply:
(a)electronic payment instrument` means an instrument enabling its holder
to effect transactions of the kind specified in Article 1 (1). This covers both
remote access payment instruments and electronic money instruments;
(b) remote access payment instrument` means an instrument enabling a
holder to access funds held on his/her account at an institution, whereby
payment is allowed to be made to a payee and usually requiring a personal
identification code and/or any other similar proof of identity. This includes
in particular payment cards (whether credit, debit, deferred debit or charge
cards) and phone- and home-banking applications; (c)electronic money
instrument` means a reloadable payment instrument other than a remote
access payment instrument, whether a stored-value card or a computer
memory, on which value units are stored electronically, enabling its holder
to effect transactions of the kind specified in Article 1 (1); (d) financial
institution` means an institution as defined in Article 4(1) of Council
Regulation (EC) No 3604/93 (5); (e) issuer` means a person who, in the
course of his business, makes available to another person a payment
instrument pursuant to a contract concluded with him/her; (f)holder` means
a person who, pursuant to a contract concluded between him/her and an
issuer, holds a payment instrument.
SECTION II TRANSPARENCY OF CONDITIONS
FOR TRANSACTIONS
Article 3
Minimum information contained in the terms and conditions governing the
issuing and use of an electronic payment instrument
1. Upon signature of the contract or in any event in good time prior to
delivering an electronic payment instrument, the issuer communicates to
the holder the contractual terms and conditions (hereinafter referred to as
the terms`) governing the issue and use of that electronic payment
instrument. The terms indicate the law applicable to the contract.
2. The terms are set out in writing, including where appropriate by
electronic means, in easily understandable words and in a readily
comprehensive form, and are available at least in the official language or
languages of the Member State in which the electronic payment
instrument is offered.
provides the holder with the exchange rate used for converting foreign
currency transactions. 2. The issuer of an electronic money instrument
provides the holder with the possibility of verifying the last five transactions
executed with the instrument and the outstanding value stored thereon.
SECTION III OBLIGATIONS AND LIABILITIES OF THE PARTIES
TO A CONTRACT
Article 5 Obligations of the holder
The holder: (a) uses the electronic payment instrument in accordance with
the terms governing the issuing and use of a payment instrument; in
particular, the holder takes all reasonable steps to keep safe the electronic
payment instrument and the means (such as a personal identification number
or other code) which enable it to be used; (b) notifies the issuer (or the
entity specified by the latter) without delay after becoming aware of: -the
loss or theft of the electronic payment instrument or of the means which
enable it to be used, -the recording on his/her account of any unauthorised
transaction, -any error or other irregularity in the maintaining of that
account by the issuer; (c)does not record his personal identification number
or other code in any easily recognisable form, in particular on the electronic
payment instrument or on any item which he/she keeps or carries with the
electronic payment instrument; (d)does not countermand an order which
he/she has given by means of his/her electronic payment instrument, except
if the amount was not determined when the order was given.
Article 6 Liabilities of the holder
1. Up to the time of notification, the holder bears the loss sustained in
consequence of the loss or theft of the electronic payment instrument up
to a limit, which may not exceed ECU 150, except where he/she acted
with extreme negligence, in contravention of relevant provisions under
Article 5 (a), (b) or (c), or fraudulently, in which case such a limit does
not apply.
2. As soon as the holder has notified the issuer (or the entity specified by the
latter) as required by Article 5 (b), except where he/she acted
fraudulently, he/she is not thereafter liable for the loss arising in
consequence of the loss or theft of his/her electronic payment
instrument.3. By derogation from paragraphs 1 and 2, the holder is not
liable if the payment instrument has been used, without physical
issuer; (b) for transactions not authorised by the holder, as well as for any
error or irregularity attributable to the issuer in the maintaining of the
holder's account.
2. Without prejudice to paragraph 3, the amount of the liability indicated in
paragraph 1 consists of: (a) the amount of the unexcited or defectively
executed transaction and, if any, interest thereon; (b) the sum required to
restore the holder to the position he/she was in before the unauthorised
transaction took place.
3. Any further financial consequences, and, in particular, those concerning
the extent of the damage for which compensation is to be paid, are borne
by the issuer in accordance with the law applicable to the contract
concluded between the issuer and the holder.
4. The issuer is liable to the holder of an electronic money instrument for
the lost amount of value stored on the instrument and for the defective
execution of the holder's transactions, where the loss or defective
execution is attributable to a malfunction of the instrument, of the
device/terminal or any other equipment authorised for use, provided that
the malfunction was not caused by the holder knowingly or in breach of
Article 3 (3) (a).
OTHER ELECTRONIC
BANKING SERVICES
D Objectives
After studying this chapter you should be able to understand:
6.1
6.2
General aspects
8.2.2
8.2.3
The fraud
6.3
6.4
Paper money substitute redeemable at face value at participating merchant outlets for
merchandise purchased.
credit card;
debit card;
cheque guarantee card;
ATM card;
multifunctional card;
point-of-sale card.
The purpose of a credit card is to enable the cardholder to purchase goods
or services at a shop, petrol station, restaurant or other establishment, which
operates the scheme, without paying immediately. The holder presents his
card and signs the bill, which is sent by the supplier to the bank or credit
company, concerned for settlement. The credit cardholder receives a
monthly statement listing all the transactions for that period and he settles
for all of them with one payment, or he is possibly allowed to run an
overdraft up to a set limit with agreed terms for repayment and the charges
he will incur.
The main steps of the process are:
- The customer hands over his credit card to the supplier of the goods or
services;
- The supplier then enters details of the sale on the sales voucher (e.g.
date, description of goods or services, total cost, etc);
- The customer checks if the above details are correct and that the total
has been filled in and if so signs the sales voucher.
- The supplier checks that the customers signature matches the specimen
on the customers credit card, and also the expiry date of the card.
- The supplier hands one copy of the sales voucher to the customer
(together with a receipt for the sale) and returns to the customer the
credit card.
- The supplier keeps a copy of the sales voucher; this is paid into the
suppliers own bank account. The credit card company pays the
suppliers bank the amount due for the purchase.
After all these steps:
- the suppliers bank sends the third copy to the credit card company. It
is then recorded as a transaction in the customers computer file.
- at a date fixed for each of its customers credit card companies send out
to that customer a monthly statement of what is owed.
A bank or other financial institution issues the debit card and it permits
access to a customers checking or savings account. The debit cards can be
used in place of a paper check and the transaction will be automatically
guaranteed because funds transfer immediately from the purchasers account
to the sellers.
Debit is, of course, a financial term. Its use in connection with the card
implies access to a deposit account, as opposed to the line of credit accessed
by the bank credit card.
As noted before, the term debit refers to accessing a deposit account
typically a personal checking account, although the card can access a
savings or money market account. When used to make a purchase at a store,
the debit card takes the place of a personal cheque. The record of the
transaction appears on the customers checking account statement. To
validate the sale, the merchant follows authorisation procedures much like
those followed for credit card purchases.
In spite of immense attention paid to debit cards in the 1970s and early
1980s, widespread use in the market place was just the beginning. The
growth of proprietary debit cards4 is accelerating because many
supermarkets and other high-volume-cheque-cashing merchants are
beginning to accept them. Properly banks participating in regional point-ofsale networks frequently issue debit cards. Transactions are handled outside
the national networks, and the cost of interchange, as applied to bank credit
cards transactions, is avoided.
One factor that limits the appeal of the debit card involves the consumers
choice to use either personal or bank funds to pay for a purchase. Not only
does a debit card access personal funds it also effects immediate transfer of
funds from the account, and so the period of processing and collection
known as float is eliminated.
Merchants that accept bank credit cards should also be willing to accept
debit cards. A merchant that follows routine authorisation procedures for the
card validates the sale and guarantees its payment. In addition, the forms
and procedures used for handling debit cards are similar to those used for
credit cards. Therefore, merchants are already familiar with the routine.
However, not all things are equal.
First, some merchants view the cost of interchange as more expensive than
the cost of handling a personal cheque. Research studies have indicated that
handling personal cheques is more expensive than the cost of interchange,
but this research typically comes from banks.
This card identifies a specific bank or group of banks in a regionally shared point-of-sale
network.
go into the bank. Consequently, the ATM card is called sometimes Access
card. This means, for example, that a customer can use the ATM to get
money without searching for somewhere to cash a cheque. Deposits and
loan payments can be made at night or on weekends, and the customer can
get his or her account balanced even when the bank is closed.
The cheque guarantee card enables merchants to accept personal cheques,
without the risk of recourse, provided the merchant follows accepted
authorisation and documentation procedures. Because the cheque guarantee
card is frequently attached to a line of credit associated with a personal
checking account, it is sometimes not considered a bankcard. However, the
cheque guarantee card is plastic, issued by a bank, and presented to a
merchant to validate a purchase.
To the consumer, this type of card offers another form of banking
convenience. Cheques can be cashed at merchants stores more easily.
These cards offer the merchants some guarantee that the cheque being
presented is valid.
The distinctive features of a true cheque guarantee card is that it does
guarantee the cheque. If a bad cheque is returned, the merchant may collect
the amount of the cheque from the bank that issued the card. However, most
cheque guarantee cards may only be used to guarantee fist-party personal
cheques and not pay roll cheques or cheques made payable to the person
holding the card.
The terms of guarantee are generally simple:
- the cheque must be a personal cheque, presented by the cheque
guarantee card holder;
- the amount of the cheque cannot exceed a specified amount;
- the expiration date on the card must not have passed;
- the signature on the card must be reasonably similar to the one on the
cheque.
Banks typically do not charge a fee for the card or cheque guarantee service.
If credit is used, the customer pays interest and fees associated with the
personal line of credit. The most customers view the cheque guarantee card
as a free service that makes cheque cashing easier.
The point-of-sale card (POs) refers to any card presented at the point of
sale, the merchants store or other location away from the bank. The POs
system uses communication lines and is designed to authorise, record, and
forward electronically each sale that occurs.
The POs debit card is really a combination of the cheque guarantee card
and an ATM card. If a checking account transaction can be performed at an
ATM, why not have the same functions performed at a merchant location
(provided the merchant has the necessary equipment to accommodate the
card)?
The multifunctional card has mix functions and facilities that derive from
the above mentioned types of cards.
From the issuers point of view, the cards may be divided in:
cards issued by banks (bankcards);
cards issued by merchants (private cards);
cards issued by other institutions or organisations (the letter of credit
international cards, the cards issued by credit institutions).
1. The bankcards
After the 1980s the holders of bankcards as well as the number of the
transactions performed through bankcards have strongly increased. In the
developed countries, efforts have been made to unify the offer and eliminate
banking competition (we must take into account the fact that some banks
issue bankcards for free). The inter-banking5 phenomenon appeared as a
consequence. This offers to each cardholder the possibility to use it at all
cash dispensers and with all the merchants, no matter the issuer.
A classification of the bankcard according to their possibilities of utilisation
may be:
Cards for cash withdrawal;
National cards;
International cards;
Prestigious international cards.
In France, six networks have regrouped in 1983 in two economic groups: GIE Carte Blue
and GIE Carte Vert, that have merged on 1 November 1985 and constituted GIE Carte
Bancaires.
The cards for cash withdrawal usually have two levels of utilisation:
- Level zero that allows the card to be used only for the services offered
by the issuer. They are issued for free.
- Level one that gives the possibility to use these cards at the interbanking network of cash dispensers. They are issued for a fee.
The national cards, called level two cards have the same characteristics
as the level one cards. Supplementary, they allow the payment regulation
when the purchase is made at affiliated merchants. The card may be
personal or professional and offers two options: rapid debit and ulterior
debit6.
The international cards are defined through the third level of the interbanking agreements and have a similar importance to those of level two
(national cards), but their utilisation is extended to international payments.
They are grouped in two networks: VISA and EUROCARDMASTERCARD7. Both networks offer common services and guarantees,
being more advantageous than the national ones: insurance against loss or
theft, insurance in case of travels accidents, invalidity and death.
The prestigious international cards are defined through the fourth level of
the inter-banking agreement and offer various services: cash withdrawal
from the country or abroad, the automated insurance of travels, reservation
services assured, car renting without guarantees, juridical protection, a wide
range of guarantees and insurance accompanied by higher amounts.
Each of the two networks offers its prestigious card: PREMIER for VISA
and GOLD for MasterCard.
2. The private cards
Their issuers are usually large distribution networks (supermarkets, the
leaders of correspondence sales) that are well known by the customers and
have a large market share.
Some cards are used only for some specific markets of products or services,
while others are multi-usable.
6
For an ulterior debit, the holders account is debited monthly, with fixed date, with a term
that may be up to 4-5 weeks.
7
Besides, MasterCard offers medical assistance and a reservation guarantee in the larges
hotel chains based on a simple phone call.
Counterfeit cards;
Employee fraud in which employees steal cards from inside the card
centre (bank or third-party processor), give out valid account number
to criminals, or set up bogus cardholder or merchant accounts.
Security experts in the bankcard industry continue to evaluate existing and
potential security features for the cards to improve the deterrence of credit
card fraud. Banks and card manufacturers may use any combination of the
following security features in their cards to help deter fraudulent use:
Embedded ink, visible only under ultraviolet light, helps detect
counterfeit cards for use selectively with merchants that have a high
exposure to fraud;
Fineline printing, like that which appears on currency, makes
counterfeit more difficult because of the precision of printing;
Micro printing of bank identification codes on the cards makes
counterfeiting more difficult;
Trademarks visible only under ultraviolet light reveal counterfeit
cards;
Embossed security symbols facilitate the identification of the bank
issuing the card (often another banks customer account number will
appear on an altered card) and make the tracking of drafts possible
through easier identification.
9
Fraudulent transactions that are mixed with legitimate transactions for bank deposits in an
effort to hide the fraudulent activity.
The owner introduces his card in the special hole of the machine;
Than, the user must type on the keyboard his personal identification
number (PIN). The correct PIN allows him to access the information
stored in the card.
The user types the amount of money wanted, but the amount must not
exceed the maximum amount negotiated with the bank.
The dispenser provides the money in coins and banknotes.
After the transaction, the device gives back the card.
Whiting D.P. Elements of banking, Macdonald & Evans Ltd., London, 1985
b) The Town Clearing. The work of the Clearing House is divided into
two parts, the Town Clearing and the General Clearing. The Town
Clearing handles cheques of 5,000 sterling pounds or more drawn on
offices within the City of London, i.e. within walking distance of the
Clearing House which is located in Lombard Street. All other cheques
have to go through the General Clearing. The Town Clearing is meant
to serve the needs of the institutions with the London Money Market,
and large companies such as those concerned with insurance and
shipping. These institutions deal in very large amounts and must have a
speedy system for clearance. There is an understanding that any cheque
dealt with through the Town Clearing is cleared the same day. The total
value of the Town Clearing usually exceeds 90 % of the total daily
clearing but the number of items involved is quite small in comparison
with the volume of work handled by the General Clearing.
c) The General Clearing. Branch banks sort into bank order all the
cheques drawn on other banks that are paid in by their customers and
sent them up to their own Clearing Department in London. Each bundle
is accompanied by a list giving the total as well as the value of each
individual cheque. A Clearing Department of one of the Clearing Banks
will receive from each of its branches a bundle of cheques drawn on
each of the Clearing Banks. The Clearing Department having checked
the totals of the bundles will amalgamate them so as to produce a large
parcel of cheques on each of the banks. The listing slips will
accompany each of these large parcels for all of the bundles and a
summary of them. The Clearing Department then delivers the parcels of
cheques to the representatives of the other banks at the Clearing House.
These are then taken from the Clearing House to the respective Clearing
Departments of the banks where the totals are agreed with the listings.
After this the cheques are sorted into branch order and dispatched to the
branches on which the cheques are drawn. Settlement between the banks
for the General Clearing takes place the day after the cheques has
actually been exchanged. This is because the cheques do not reach the
branches on which they are drawn until that day and they are then either
paid or returned unpaid. Unpaid cheques are returned direct to the bank
branch where cheques were paid in.
d) Credit Clearing. Since 1960 the Bankers Clearing House has operated
a credit clearing system which works in a rather similar fashion to the
General Clearing but the vouchers that are used represent payments due
to, and not payments received from other banks. They are the credit
transfers under the Bank Giro system. Each day branches remit bundles
of credit transfers to their Clearing Departments in London and these are
handed over to the representatives of the other banks to be dealt with in
a similar fashion to cheques.
e) Computer Clearing. The Clearing and Scottish banks recently
established the Bankers Automated Clearing Services Ltd., which is a
company that operates a clearing system based on the use of computers.
Instead of preparing transfer vouchers in order to debit the account of
one person and credit the account of another, such as the standing
orders, direct debits and salary payments, the items are put on the
magnetic tapes. They then pass through Bankers Automated Clearing
Services and in effect pass from the paying banks computer to the
receiving banks computer. Now that the banks have computerised their
customers accounts it is possible for transfers to be made in this fashion
and there is obvious room for rapid developments in the use of the
technique. An ultimate possibility is for the larger shopkeepers to be
able to debit a customers bank account directly by a computer link.
f) Daily Settlement. At the end of each working day it is necessary for
each of the banks to summarise all of the transactions with each of the
other banks that have resulted from the Town Clearing, the General
Clearing and the Credit Clearing and the Bankers Automated Clearing
Services. On the daily statement all the balances due from the other
banks are listed on the debit side and on the credit side all payments due
to other banks are listed. These statements are totalled and the difference
between the two sides represents the net balance due from or to all the
other banks collectively. All that is then necessary is for the banks
account at the Bank of England to be debited or credited with this sum.
Obviously the overall position must be that the total of the debits to
clearing bank accounts at the Bank of England must be equal to the
credits, and at the end of the day after these transactions have been dealt
with nothing is owed by one bank to another in respect of the days
clearing transactions.
g) Local Clearings. In addition to the Town Clearing, the General
Clearing, the Credit Clearing and the B.A.C.S. Clearing, there are local
clearing arrangements and a banks own settlements between branches.
Banks located within a short distance of each other, in the same High
Street maybe, will clear cheques drawn upon one another. A batch of
cheques will be handed over in exchange for a single claim form, which
Progress test
Business of Banking
BANKER - CUSTOMER
RELATIONSHIP
D Objectives:
After studying this chapter you should be able to understand:
7.1 Introduction
7.2 Deposits and bank accounts general overview
7.3 Banks duties and rights in the United Kingdom
7.4 Customers obligations to his bank in the United Kingdom
7.5 Banking procedures of opening an account in the United
Kingdom and Romania
7.6 Procedures for the opening of adults as individual customers
in a Romanian bank
7.7 Customer due diligence for banks
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7.1 Introduction
Banking deals with people and their money. The people who use banks are
called customers, a term which is different from client, the noun used
by accountants and solicitors to describe persons who employ them. The
term customer emphasises the need for services.
Who is a customer?
A person becomes a customer of a bank when he/she goes to the bank with
money or cheques and asks to have an account opened in his/her name and
the bank accepts the money or cheque and is prepared to open an account in
the name of that person, after which he/she is entitled to be called a
customer of the bank. So, a customer is clearly someone who uses the
services of a bank.
The Banker
There is no clear descriptive definition of a bank in either the statute or case
law, although the use of the word bank or banker in various pieces of
legislation is of some help. For example, the Bill of Exchange Act 18821
says that a banker is: any person whether corporate or not who carries on
the business of banking The Agricultural Credits Act 1928 states: A bank
can be any firm, incorporated company caring forward banking business
which is approved by the Ministry of Finance
Under the Banking Act 1979, the supervision of the deposit taking
institutions is exercised by the Bank of England, and there are three classes
of such institutions2: recognised banks, licensed deposit taking institutions
and exempt bodies. In this later category come the Bank of England itself,
the National Savings Bank, the Trustee Savings Bank, the building
societies, the insurance companies etc.
Recognised Banks
To be granted recognition, a bank must satisfy the Bank of England as to its
standing and reputation in the financial community, with special reference
to the ability and competence of its management. It must also have capital
issued and reserves of at least 5 million and adequate level of solvency for
1
2
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the extent of its operations. The Bank of England will also take into account
the extent of the banking service offered and the degree of specialisation.
Among the basic services required are the acceptance of deposits, lending,
foreign exchange transactions, and bill finance, investment management and
corporate financial services, although the Bank of England has discretion of
not insisting upon the provision of all of the last named.
The first two, however, are essential. Such a body is authorised to use the
words bank, banker in describing itself.
Licensed deposit taking institutions
There are smaller undertakings and in order to obtain a license, a deposit
taking institution must satisfy the Bank of England that its business is being
conducted in a manner that the directors and management are fit to and
proper persons. Such a body must have an issued capital and reserves of at
least 250,000 coupled with a good trading record. In deciding whether to
grant a license or not, the Bank of England will take account of balance
sheet ratios, liquidity, and the matching of liabilities and assets. Upon
obtaining its license, the institution may trade and accept deposits from the
public for whose protection this legislation was enacted, following the
secondary-banking crisis in the United Kingdom in mid 1970s.
As a conclusion
What is a banker?
A banker is someone who works in a bank.
What is the banking business?
The banking business means the business of receiving money, on current
savings deposit or other similar account, money which is repayable on
demand by order, cheque, or draft, and money which will be invested by
way of advances to customers or otherwise.
Banker Customer Relationships
The relationship of a bank with its customers gives rise to important legal
rights and duties quite apart from any commercial considerations.
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The basic and perhaps most common relationship between a banker and his
customer is that of debtor and creditor. The bank has duties and rights3 and
the customer has, at the same time, obligations to his bank.
7.2 Deposits and bank accounts general overview
The basic functions of banks are to accept deposits, transfer funds and
facilitate transactions between different parties. Therefore, banks may offer
a large variety of services including deposit accounts, credit card, lending
facilities, funds transfer, foreign currency sales, travelers cheque, payments
and government project funding, taxes and fines collection, executor of
wills, safe custody, investment transactions, discounting of bills, trust,
advice on investments and business, clearing systems, indemnities, opinions
and replies to status enquiries etc.
Sale Custodian
Sale custody or bailment is the oldest service the banks can offer. It means
that a property is preserved and returned upon demand in the same
condition as it was deposited, the customer being the bailor and the banker
the bailee. Moreover, all clearing banks can offer night safe facilities
through selected branches for the safe keeping of money overnight.
Indemnities
There are instances when even a clearing bank may give guarantees or
indemnities to third parties in respect of its customer's liabilities, especially
for good customers having sound financial positions.
Status Enquiries
Banks are obliged to keep their customers' affairs secret and disclosures are
possible only with customer's consent. As a rule, opinions are not given
directly to an individual but to other bankers or certain recognized trade
protection organizations.
As banks strongly tend to increase their business they are highly interested
in drawing in more and more deposits so as to be able to fund lending and
investment activities. For the purpose of attracting funds from individuals
and companies, banks offer a large variety of personal and business
3
Palfreman David Banking: The legal environment, Pitman Publishing, London, 1994,
p.102
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In the United Kingdom, it is a right to retain possession of the property of another in lieu
of payment due from that person.
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- a bank has no obligations to third parties, arising out of the duty to pay
its customers cheques;
- to collect cheques and other normal banking instruments for its customer
and to credit the amounts collected to his account;
- To exercise proper care and skill in carrying out any business it has
agreed to transact for its customer.
7.4 Customers obligations to his bank in the United Kingdom
The main customers obligations to his bank are:
- the customer is under the duty to exercise reasonable care when drawing
his cheques, to help prevent fraud or forgery;
- the customer must go to his bank when he requires payment; it is not the
incumbent on the banker to seek out the customer;
- before drawing the cheques, the customer must ensure his account is put
in funds to meet it;
- A customer must pay reasonable interest and commission and other
charges for banking services and this is implied when he/she opens an
account.
7.5 Banking procedures of opening an account in the United Kingdom
and Romania
a)
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Palfreman David Banking: The legal environment, Pitman Publishing, London, 1994,
p.102
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reduce the costs of opening a new account and will be less inhibiting to
prospective customers.
Except for regulated agreements under the Customer Credit Act 1974 (in
United Kingdom), where the duty is a statutory one, it is part of the implied
contract between the banker and his customer that the banker will provide a
statement of the account from time to time, or when asked to do so, by his
customer.
The modern practice is to issue computerised statements and past books are
seldom used. When a customer wishes to authorise another person to sign
on his account without becoming a party into it, it will be necessary a
special written authorisation of the customer to the bank.
The authorisation becomes void upon death, bankruptcy or mental
incapacity of the customer, and any cheques drawn by any third party
should then be returned unpaid by the bank with the answer Account
holder deceased or refer to drawer as appropriate. A customer can close
his account when he wants to, by withdrawing the funds and paying his
bank charges to date.
b) In Romania, there is usually a contract (see Annexes No. 1, and 2)
between the bank and its customer. It appears upon consideration to
include the following provisions:
the bank undertakes to receive money and to collect bills for its
customers account;
the proceeds so received are not to be held in trust for the customer, but
the bank borrows the proceeds and undertakes to repay them;
the promise to repay is to repay at the branch of the bank where the
account is kept, and during the banking hours;
It is a term of the contract that the bank will not cease to do business with
the customer except upon reasonable notice. The customer, on his part,
undertakes to exercise reasonable care in executing his written orders so as
not to mislead the bank or to facilitate forgery.
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Categories of customers:
A - Natural Persons/Physical Persons (individuals)
B - Legal Persons/Legal Entities (companies)
In Romania, the commercial banks have the following procedures, in order
to open an account.
7.6 Procedures for the opening of adults as individual customers
in a Romanian bank
When a member of the public applies (in Annex No. 3 you can seen models
of application for opening different types of accounts with a bank,
Romanain legal entity) to a bank to open an account, the bank has a primary
duty to satisfy itself on the following points:
1. Verification check the prospective customers identity :
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(i)
(ii)
Progress Test
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ANNEX No 1
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3.2. Receive the money as a deposit and to hand the proving acts of the
deposit.
3.3. Keep the secret about the deposit and not to provide proving
information about this only if the depositor agrees with that and only in
special cases provided by law.
3.4. Release the deposit if the depositor asks for that and to guarantee the
deposit.
3.5. Pay the interest specified at Art. 1 to the depositor.
B. The depositor commits himself to:
3.1. Respect the level and the period of the deposit, provided at Art. 1 and
Art. 2
3.2. Ask for the extend or the liquidation of the deposit at the expiring date
of the deposit, or else the deposit is considered a new deposit, on the same
period and under the same conditions provided in this agreement.
Art. 4 Special Clauses
4.1. The interest of the deposit is calculated monthly (a month being
considered as 30 days).
4.2. If the depositor asks for reimbursement of sums from the deposit before
the expiry of the period for which it was made, the trustee is authorised to
recalculate the interest at the level of the sight interest.
4.3. The depositor vests Mr./Ms._________, the son/daughter of
Mr._________ and Ms. ___________, born on the ____________, in
_______________, to withdraw the hole amount, or a partial amount from
this deposit, including the relevant interest.
Art. 5 Final provisions
5.1. This contract can be modified only if both parties agree.
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5.2. The contract may be terminated by any partys wish, if that party
communicates this in writing to the other party, without any other formality.
The present agreement was completed in two original patterns, every party
having one of it.
TRUSTEE, DEPOSITOR,
MANAGER,
CHIEF ACCOUNTANT,
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ANNEX No 2
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account is closed, the client should return the remaining cheques without
using them.
5. All the different account opened at the Bank (Head Office and
Branches) in the clients name are considered as indivisible units. Also
all the property of the client at the Bank such as cash, bills, securities,
goods etc. are considered as mortgaged in favour or Misr Romanian
Bank and a guarantee for the disbursement of all his liabilities.
6. The client has to authenticate the statement of his account sent him by
the bank within fifteen days from the date of sending the statement (with
the exception of the normal period of travel) or send a complaint
including reasons, during the same period, otherwise, the statement of
account will be considered correct and agreed upon.
7. The bank is entitled to amend the rate of the creditor or debtor interest at
any time upon an ordinary notice.
8. The client draws his properties from the bank by means of cheques
which he demands from the bank, and the client alone is responsible for
the loss, theft or illegal use of cheques given to him by the bank or
drawn to its bearer. Consequently, the client states that he will encase
his deposits at the bank by means of the above mentioned cheques
bearing his own signature or by banking receipts which he personally
signs before the concerned employee. If he chooses to authorise one
person or more in all or some of his rights with the bank, he should
undertake that this authorisation should be one of the banks
authorisations, its kind, the number and the place of its authentication
and the name of the deputy, his address, profession and grade of his
relationship if it exists. If he cancelled the authorisation he must notify
the bank thereof by a registered letter. If is well understood that the bank
will not authenticate the authorisation in any of its shapes in changing
the address or the correspondence of the client for it is agreed upon from
now on that changed in the address of the correspondence should be
done according to an application personally signed by the client. It is
also agreed upon that the bank will not authenticate any authorisation of
the client presented to it if the bank does not receive a notice from the
client of its enforcement according to what is mentioned above. The
bank will also continue using the authorisation unless they receive a
notice from the client of its cancellation in line with the preceding
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Kind of account................................................................................................
Rate of interest (creditor)% year 360 days provided that.................................
Rate of interest (debtor)% year 360 days provided that...................................
Remarks............................................................................................................
Information.......................................................................................................
Name of the recommended...............................................................................
His address.......................................................................................................
Recommenders signature................................................................................
The clients signature.......................................................................................
The concerned employee signature..................................................................
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ANNEX No 3
APPLICATION FOR OPENING A CURRENT ACCOUNT
FOR A ROMANIAN LEGAL ENTITY
CERERE PENTRU DESCHIDERE DE CONT
PENTRU PERSOAN JURIDIC ROMN
Date/Data:___/____/_______
day month year
zi luna
an
Name/ ___________________________________________
Denumire
_________________________________________________
Address/
___________________________________________
Sediul___________________________________________
Established as Romanian Legal Entity Organizat ca persoan juridic romn
commecial companies
societi comerciale
regie autonome
regii autonome
associations and foundations
asociaii i fundaii
We kindly request and authorize you to open a social cpital account on our name in/
V rugm i v autorizm s deschidei un cont curent n numele nostru n:
ROL / Lei
For this purpose we attach hereto the company
incorporation documents as they are specified on
the reverse side.
Date/Data: ____/____/_____
zi luna an
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Name/
Denumire
Date/Data:___/____/_______
day month year
zi luna an
___________________________________________
_________________________________________________
Address/
Sediul
___________________________________________
___________________________________________
ROL / Lei
Forreign Currency / Valut _____________________________________
Signature/Semntura: _______
Stamp/tampila
To be filled by the bank / se completeaz de ctre banc
Date/Data: ____/____/_____
zi luna an
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Other ___________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
___________________________________________________________
Altele _______________________________________________________
__________________________________________________________________
______________________________________________________
______________________________________________________
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Other
_______________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
Altele
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
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________________________________________
________________________________________
Address/Adresa
________________________________________
________________________________________
CNP: ________________________
Tel.: ________________________
For this purpose I attach hereto a copy n acest scop anexez o copie dup actul
of my ID
de identitate.
I hereby mutually agree that my account
is governed by the banks General
Business Conditions of which I know
and which I accept unreservedly
I kindly request and authorize you to open a current account on our name in/
V rog i v autorizez s deschidei un cont curent n numele meu n:
ROL / Lei
Forreign Currency / Valut _____________________________________
Signature/Semntura: _____________
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To be filled by the bank / se completeaz de ctre banc
Date/Data: ____/____/________
day month year
zi
luna
an
Bucureti, ________________
MPUTERNICIRE
SC__________________________________________________________
nregistrat la R.C. sub nr. ___________ avnd cod fiscal _____________ ,
reprezentat legal de ____________________________________________
n calitate de __________________________________________________
mputernicesc pe d-na/d-nul ______________________________________
BI/paaport cu seria nr. ______eliberat de _______la data de____________
s reprezinte valabil societatea, avnd drept de semntur, fr limit de sum,
pentru urmtoarele operaiuni bancare :
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Name/
Denumire
Date/Data:___/____/_______
day month year
zi luna an
___________________________________________
_________________________________________________
Address/
Sediul
___________________________________________
___________________________________________
Signature/
Semntura
Date/Data: ____/____/________
day month year
zi
luna
an
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Other _______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
Anexm urmtoarele documente:
Actul constitutiv al societii n original i 1 copie
Documentul care atest sediul social n original i 1 copie
mputernicire pentru persoana autorizat s deschid cont de
capital social
Altele _______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
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Date/Data:
___/____/_______
day month year
zi luna an
V
solicitm
i
autorizm,
contrar
instruciunilor iniiale, referitoare la depozitul
la termen
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Date/Data:
___/____/_______
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day month year
zi luna an
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RISKS
MANAGEMENT
D Objectives:
After studying this chapter you should be able to understand:
8.1
8.2
Managing risks
8.3
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Credit risk may also arise from off balance sheet transactions. A bank may
guarantee a clients performance under a contract in return for a fee - giving
rise to the risk that the bank may be called upon to fulfil its guarantee at
some later date because its client has failed to meet its contractual
obligations. This gives rise to a counterclaim against the guaranteed party
for the money paid out under the guarantee.
Credit risk may take the form of delivery or settlement risk. Where a bank
buys securities from a third party or transfers securities under a repurchase
agreement, it faces a risk that the counterpart will be unable to deliver the
securities on the due date leaving the bank exposed to the possibility that it
will not be able to replace the securities at the same price.
Interest rate risk
A fundamental banking objective is to borrow funds at one rate and to lend
them at higher rate. Interest rate risk, sometimes called funding risk,
involves the effect in the bank profitability of changes on the market interest
rates.
Interest rate risk refers to the financial risks caused by the interest rate
fluctuations that affect both the profit obtained by the client and the
indebtedness degree to the bank. A major increase of the interest rate may
determine a financial pressure for the clients activity, which will not be
able to repay the amounts due.
The main factors that increase the interest rate risk are: volatility of interest
rates;, and mismatches between the interest reset dates on assets and
liabilities.
The main factors that mitigate interest rate risk are: established limits on
mismatch position; hedging with financial futures or other instruments;
management monitoring exposure.
Liquidity risk
It is the risk that ocurs when the bank will not be able to meet its cash or
payment obligations as they fall due. The risk arises because cash flows on
assets and liabilities do not match. Due to the size and spread of the
resources, the bank is often called to borrow short and lend long. This
gives rise to the risk that depositors may seek to withdraw their funds and
the bank may not be able to effect repayment except by raising additional
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operation, that affects the situation of the clients who obtain a credit in
foreign currency and do not perform exports, or those revenues from exports
do not cover the debt contracted. Transactions affected include both onbalance sheet (e.g. loans, deposits), and off-balance sheet (e.g. forward
currency contracts) items. Foreign exchange risk is also called currency risk.
The main factors that increase currency risk is volatility of exchange rates;
significant open currency position.
The main factors that mitigate currency risk are: position limits;
management monitoring of exposure; use of hedging techniques.
In Romania, the supervision of the foreign exchange risk2 is accomplished:
a) by banks;
b) by the National Bank of Romania, on the basis of the foreign exchange
position indicators reported by banks.
With a view to limiting the foreign exchange risk the banks have the
following obligations:
a) to have a record system which permits permanently both the immediate
registration of the operations in foreign exchange and the calculation of
their results, as well as the determination of the adjusted individual
foreign exchange positions and the total foreign exchange position;
b) to have a supervision and administration system of the foreign exchange
risk on the basis of norms and internal procedures approved of by the
banks board of directors;
c) to have a permanent control system for checking the observation of the
internal procedures, necessary with a view to accomplishing the
precedent orders;
d) to designate a manager who ensures the permanent co-ordination of the
banks foreign exchange activity.
Delivery risks3 include the following risks: operational, technological, newproduct, and strategic risk.
2
National Bank of Romania Norm No. 4/2001 concerning the supervision of banks
foreign exchange positions, published in Monitorul Oficial al Romniei, Part I,
No. 631/2001
Hempel, G.H. Coleman A.B. Bank Management, New York, 1990
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Operational risk, sometimes called burden risk, is the ability of the bank to
deliver its financial services in a profitable manner. Both the ability to
deliver such services and to control the overhead associated with them are
important elements.
Technological risk refers to the risk that a delivery system may become
inefficient because of new delivery systems.
New-product risk is the danger associated with the introduction of new
products and services. Lower than anticipated demand, higher than
anticipated cost, the lack of management talents in new markets can lead to
severe problems with new products.
Strategic risk refers to the ability of the bank to select geographic and
product areas that will be profitable for the bank in a complex future
environment4.
The environmental risks include the following risks: defalcation,
economic, competitive, regulatory risk.
Defalcation risk is the risk of theft or fraud by bank officers or employees.
It must be carefully guarded against to avoid substantial losses.
Economic risks are associated with national and regional economic factors
that can affect the bank performance.
Competitive risk arises because more and more financial and non-financial
firms can offer most bank products and services.
Regulatory risk involves living with some rules that place a bank at
competitive disadvantage and ever-present danger that legislators and
regulators will change the rules in an unfavourable manner to the bank.
Other British authors divide the main risks in two big categories of risks,
such as: product market risks, and capital market risk (see Figure No.1, and
Figure No.2).
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Credit risk
Strategy risk
Bank settlement
risk
Operating risk
Product market
risk
Merchandise
risk
Human
resource risk
Legal risk
Product risk
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Merchandise Risk
The merchandise prices may affect banks, as well as other creditors,
unforeseen sometimes, having general impact over the savings and debtors.
For example, the rising of the energy price may influence the inflation,
contributing to the increase of the financial rates based on a fixed interest
rate. Also the increase of the oil price may lead to different results in some
companies.
Human Resources Risk
This represents the subtlest type of risk, very difficult to be measured,
resulting from the personnel policy: recruitment, training, motivation and
maintenance of specialists.
If one specialist leaves, the whole activity or only one working system is
compromised. The protection against this risk implies the payment of more
employees in order to insure the knowledge and experience of the leaving
employee.
A similar risk is the wrong motivation of the employees. Under certain
circumstances it may have significant results. It refers to the lack of
stimulants or their wrong application.
Legal Risk
We encounter two sides of such risks:
a) the creditors responsibility in case the debtors claim that the bankruptcy
was caused by the fact that the bank had promised it would not
withdraw the credit or that it would grant supplementary credits;
b) Litigation related to toxic materials deposited on the dispossessed field.
These are unforeseen measures difficult to be estimated, which must be
taken into consideration by the financial institutions, as they can reach
high values.
Generally speaking, the capital markets and their risks affect all the
companies, especially the financial institutions, where it is hard to make a
clear differentiation between the product market and the capital market.
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For example, the interest rate risk for fixed rate credits is a capital market
risk; at the same time the fixed rate credit risk may determine the
bankruptcy of a poor debtor, and thus, the interest rate risk becomes a credit
risk, that is actually a product market risk.
The banks supply financial products and services to industry and
consumers. The financial services involve their own risks, specific to the
capital market on which they function. From the capital market point of
view there exist the following types of risk:
Figure No. 2 Capital Market Risk
Interest rate
risk
Liquidity risk
Capital Market
Risk
Currency risk
Discount risk
Basic risk
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Discount Risk
This is a particular type of error risk, which involves the banks competitors.
It refers to the money transfer between national and international banks.
This risk is carefully handled by using sophisticated technology for payment
pursuit. Thus, only one payment is performed at the end of the day, instead
of numerous payments from individual transactions.
Basic Risk
It is a currency risk variation. In order to protect against the interest rate
transactions with various basic assets can be used, being pursued mainly the
existing and predictable relationship between them. The FUTURES
contracts may be used as hedging instruments.
Obviously, the financial institutions, the commercial banks, in their
financial service rendering activity, administrate their own risks, but they
may also transfer the risk through the hedging transactions. If the bank can
not avoid the risk, its burden, and respectively, its costs are both
administrated and transferred.
A rapid growth of the risk is noticed both on the product market and on the
capital market in the financial services, and at the same time the increase in
the preoccupation for protection against the risk. The derivatives represent
thus, ways to avoid the risks on the capital market. The swaps, options and
futures contracts are instruments used for risk transfer.
Other types of risks are:
The fraud risk is defined as a deception or an act either by stating what is
false or by suppression of the truth in order to deceive another, gain an
advantage over another. The fraud does not represent a risk only for a bank,
but also for its depositors that have entrusted their capital.
The country risk is defined as the non-reimbursement act generated by an
insolvency determined by the debtors financial position and not by the
deterioration of his financial situation. It does not represent a credit risk
because the debtors insolvency does not appear.
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The market risk refers to the unfavourable variations of the market value
of the positions during the minimum period of time needed to the settlement
of the positions.
The market risk appears due to the fact that the prices of these financial
values are determined on the market, and they are modified.
8.2 Managing risks
At the present time, there is no generally accepted system for risk
management. By their nature, commercial banks often obtain their profit by
performing their activity in certain segments of the market. Banks capacity
to ensure against excessive risk depends on:
capital size;
its bank management quality;
its technical expertise;
Personnel experience in the corresponding market segment.
The banks must have their own system to monitor and control the risk.
Generally, banks prudential measures against risk may be the following:
Bank management must be aware of the risks resulting from the banks
activity, and must be able to measure, monitor and control these types of
risks;
Bank must have clear policies, as well as risk measurement and control
procedures;
Bank management must establish the internal limits of risk;
Periodical reports must be concluded, analysed and controlled by the
banks internal control and its censors.
After the uncertainties caused by the 1975 crisis, the necessity to elaborate
some rules for the bank administration and the consolidation of the clients
security appeared. These rules are expressed through the Cooke Ratios.
They refer to the banks liquidity and solvency. For example:
Risk coverage index =
Own funds
Total commitments
x 100
= 8%
x 100
=
40%
x 100
Liquidity index =
= 60%
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substandard;
doubtful;
loss.
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National Bank of Romania - Norms no. 9/2000 concerning the minimum capital of the
banks and branches of foreign banks, issued in Monitorul Oficial al Romniei, Part I,
No. 474/2000.
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d) in the case of an asset element guaranteed with two or more of the types
of guarantees provided in Annex No 5, this shall be taken into
consideration starting with those which allow the framing of the
respective asset in the lowest risk grade categories;
e) in the case of securities granted as a loan, the risk entity, as well as the
risk grade related to those shall be established taking into consideration
the highest of the credit risk grade related to the issuer and the credit risk
grade related to debtor, and, in the situation in which the securities
granted as loan to be secured with one of the types of guarantees
provided in Annex No 5;
f) for the rectifiable liabilities elements the risk entity shall be the same as
that of the asset elements which corrects, and the framing in credit risk
categories shall be made in the credit risk categories corresponding to
asset elements which they are correcting, starting with the highest
category of risk;
g) off-balance sheet elements shall be grouped on risk entities, as well as on
credit risk categories for transformation in credit, in accordance with the
criteria of framing presented in Annex No 6, after which shall be
considered balance sheet elements, and shall be included in credit risk
categories, in accordance with the criterias presented in Annex No 5.
The minimum limit of the solvency indicator8, calculated as a ratio between
the level of own funds and net exposure shall be 12 % and the minimum
limit of the solvency indicator, calculated as a ratio between the level of
own capital and the net exposure shall be 8%.
Banks shall report to the National Bank of Romania the General
Department for Licensing, Regulation and Prudential Supervision of the
Banking Companies the level of the solvency indicators by the form
Solvency of banks, whose model is provided in Annex No 2.
5. Under the norms9 issued by the National Bank of Romania the bank can
grant loans to the persons with whom it has special relations with, only
under conditions provided by the norms.
NBR Norm 8/1999 concerning the limit of the credit risk of the banks, published in
Monitorul Oficial al Romniei, Part I, No. 245/1999.
NBR Norm 8/1999 concerning the limit of the credit risk of the banks, published in
Monitorul Oficial al Romniei, Part I, No. 245/1999.
Business of Banking
b)
the banks administrators and the censors, natural persons of the bank,
the managers, the directors and the internal auditors of the bank;
c)
the censors, legal entities, of the bank and the independent audit of the
bank;
d)
e)
any legal entity which exerts effective control of the bank, the main
shareholders and its managers;
f)
g)
the NBRs staff that makes control and supervises the bank;
h)
i)
j)
any main shareholder and any commercial company being under his
effective control, directly or indirectly;
k)
Business of Banking
10
NBR Norm No.7/1999 concerning own funds of banks, published in Monitorul Oficial al
Romniei, Part I, No. 206/1999.
Business of Banking
j) the funds set up by banks, indicating in the reporting form of the symbol
and the name of the account, as well as the legal provisions based on
which it is constituted;
k) statutory reserves;
l) the reporting result representing undistributed profit;
m) the net result of the current financial year representing profit;
n) the funds with permanent features being at the disposal of their own units
from abroad.
For the establishment of the own capital level the following elements shall
be deducted:
a) the amounts representing the value of their own redeemed shares having
in view the reduction of the social capital in the conditions provided at
Art. 53 letter b) of Law no. 58/1998;
b) the not amortised value of the establishment expenses;
c) the net value of the commercial fund;
d) the amounts of the net profit of the current financial year representing
dividends (in the case of banks which are not under the incidence of the
Art. 47 of Law no. 58/1998), the personal participation at profit and the
participation share of the manager at the profit. This amounts shall be
calculated off balance sheet (outside of accountant), by using for the net
profit recorded at the end of each month of the weighted elements in
accordance with the distribution of the net profit of this destinations,
performed based on the accountant balance sheet of the previous year;
e) the amounts representing expenses to be distributed and expenses to be
recorded in advance, which must be supported in a deferred manner on
expenses during futures periods or financial years;
f) the carried forward result representing unsupported loss;
g) the net result of the present financial year representing loss;
h) distribution of the profit;
Business of Banking
Business of Banking
Business of Banking
Progress test
1.
2.
3.
4.
5.
6.
7.
8.
9.
Business of Banking
ANNEX No 1
Table No 1 Criteria of inclusion in the categories of classification of
credits, for non-banking sector
INITIATION OF
JUDICIAL
PROCEDURES
DEBT SERVICE
Maximum of 15 days
16 30 days
31 60 days
61 90 days
minimum of 91 days
JUDICIAL
PROCEDURES
HAVE BEEN
INITIATED
JUDICIAL
PROCEDURES
HAVE NOT BEEN
INITIATED
loss
loss
loss
loss
loss
standard
watch
substandard
doubtful
loss
HAVE
INITIATED
JUDICIAL
PROCEDURES
HAVE NOT
INITIATED
JUDICIAL
PROCEDURES
loss
loss
loss
loss
standard
substandard
doubtful
loss
CO-EFFICIENT
0
0.05
0.2
0.5
1
Business of Banking
ANNEX No 2
THE SITUATION
regarding big exposures
Banks denomination ..............................................
Date of reference: [ / / ]
- thousands lei Own funds
(OF)
One debtor
Gross exposure
Net exposure
from
from the
the
from
the
praised
Total
from
the
praised
Total
No
balance
off
col.
3
=
balance
off
col.
6=
crt. Code Denomination
sheet balance col.1 + sheet balance col. 4 +
assets
sheet col. 2 assets sheet
col.5
elements
element
s
A B
C
1
2
3
4
5
6
TOTAL:
Bank Manager,
....................................................
(name, surname and signature)
Manager of the financial-accounting department,
.....................................................................................
(name, surname and signature)
Made by:
Name and surname: ......................................................
Telephone number / line:.................................................
% from
the own
funds
col. 7 =
col. 6 *
100/OF
7
Business of Banking
ANNEX No 3
THE STRUCTURE
of groups which represent one debtor, towards which the bank
registers big exposures
Banks denomination ....................................................
Date of reference: [ / / ]
Code
1
Denomination
2
Bank Manager,
....................................................
(name, surname and signature)
Manager of the financial-accounting department,
........................................................................................
(name, surname and signature)
Made by:
Name and surname: ........................................................
Telephone number / line:.................................................
Business of Banking
ANNEX No 4
THE SITUATION
regarding the net loans granted to the persons, which are in special
relations with the bank, own personnel, as well as to its families
Banks denomination ...................................................
Date of reference: [ / / ]
Own funds (OP)
No.
The group
crt.
A
B
1. Persons
which are in
special
relations,
provided by
article 1
paragraph 2
letter n)
items 5-12
2. Own
personnel
and its
families
Gross exposure
Net exposure
from the
from the Total
Total
from the praised
from the praised
col. 6
col. 3 =
balance
off
balance
off
=
col.1
sheet
balance
sheet balance col. 4
+
assets
sheet
assets
sheet
+
col. 2
elements
elements col. 5
1
2
3
4
5
6
Bank Manager,
....................................................
(name, surname and signature)
Manager of the financial-accounting department,
.....................................................................................
(name, surname and signature)
Made by:
Name and surname: ......................................................
Telephone number / line:.................................................
% from
the own
funds
col. 7 =
col. 6 *
100/OF
Business of Banking
ANNEX No 5
CRITERION
of framing the assets in credit risk categories
Credit
Elements taken into account
risk rate
0%
1. hard cash and values from gold, metals and jewels
0%
2. assets representing claims about or guaranteed in a deliberate
way, irrevocably and unconditionally by or guaranteed with
securities issued by the special central public administration of
the Romanian state or by the National Bank of Romania
0%
3. assets representing claims about or guaranteed in a deliberate
way, irrevocably and unconditionally by or guaranteed with
securities issued by the central administrations, central banks of
A category countries or European Communities
0%
4. assets representing claims about the central administrations or
central banks of B category countries, expressed and financed in
the national currency of the debtors
0%
5. assets representing claims guaranteed in a deliberate way,
irrevocably and unconditionally by the central administrations or
central banks of B category countries, expressed and financed in
the national currency common to the guarantor and to the debtors
0%
6. assets guaranteed with collateral deposits sold to the bank
itself or with deposit certificates or similar instruments issued by
the bank itself and entrusted to this
0%
7. assets inferred from its own funds
20%
8. assets representing claims about or guaranteed in a deliberate
way, irrevocably and unconditionally by or guaranteed with
securities issued by banks with multilateral development or by
the European Bank of Investments
20%
9. assets representing claims about or guaranteed in a deliberate
way, irrevocably and unconditionally by the territorial
administrations from Romania
20%
10. assets representing claims about or guaranteed in a deliberate
Business of Banking
20%
20%
20%
20%
50%
50%
100%
100%
100%
100%
100%
100%
Business of Banking
ANNEX No 6
CRITERION
of framing the off - balance sheet elements in risk categories
transformation into credit
Credit risk
transformation
into credit
100%
100%
100%
100%
4. doubtful pledges
100%
50%
50%
50%
0%
Business of Banking
ANNEX No 7
BANKS SOLVENCY
I. The structure of the assets from the balance sheet
Banks denomination................................
Date of reference: [ / / ]
- thousand lei Credit risk rate 0%
ASSETS
A
TREASURY
OPERATIONS
AND
INTERBANKING
OPERATIONS
- Cash and other
values
- Current account at
the central banks
- Accounts of banks
correspondent
- Deposits at banks
- Credits granted to
the banks
- Values received
- Values to be
recovered
Amounts
due to
the credit
Position risk rate
0%,
code
registere
d in the
accounts
balances
assets
A01
A10
A20
A25
A101
A30
A40
A50
Amounts
due to the
Amounts
credit risk
due to the
rate 0%,
Net
credit risk
registered amount
rate 20%,
in the
s
registered
accounts col.3=
in the
balances
col.1accounts
of the
col. 2
balances
rectified
assets
liabilities
accounts
Amounts
due to the
credit risk
rate 20%,
Net
registered amount
in the
s
accounts col. 6 =
balances col.4of the
col. 5
rectified
liabilities
accounts
Business of Banking
A
- Outstanding debts
- Doubtful debts
- Attached debts
B
A102
A70
A90
CLIENTELE
OPERATION'S
B01
- Credits granted to
the clientele
- Credits granted to
the financial
clientele
- Values received
- Debtor current
accounts
- Values to be
recovered
- Outstanding debts
- Doubtful debts
- Attached debts
SECURITY
OPERATIONS
AND OTHER
OPERATIONS
- Securities received
- Transaction
securities
- Investment
securities
- Investment
securities
- Discount accounts
regarding security
operations
- Intra- banking
discounts
- Debtors
- Supply accounts
- Regulation
accounts
- Outstanding debts
- Doubtful debts
- Attached debts
B03
B80
B85
B99
B9J
B102
B9K
B9V
C0A
C1A
C2A
C3A
C4A
E6A
E7A
E123
E70
E8A
E104
E90
E97
Business of Banking
A
FIXED ASSETS
VALUES
- Subordinated
credits
- Interest within the
legal banking
companies,
participation
securities and
securities of the
portfolio activity
- Endowment for the
own units from
abroad
- Fixed assets under
way, fixed assets of
the operations
activity, fixed assets
besides operation
activity
- Leasing and
assimilated
operations
- Simple tenancy
- Outstanding debts
- Doubtful debts
- Attached debts
B
F01
F02
F10
F50
F6A
F7A
F80
F102
F9A
F97
SHAREHOLDERS
OR SOCIETIES
LOC
TOTAL:
L98
Business of Banking
TABLE - SEQUEL
Credit risk rate 50%
ASSETS
Amounts
due to the
credit risk
Position rate 50%,
code registered
in the
accounts
balances
assets
TREASURY
OPERATIONS
AND
INTERBANKIN
G OPERATIONS
A01
A10
- Current account
at the central banks
A20
- Accounts of
banks
correspondent
A25
- Deposits at banks
A101
- Credits granted to
the banks
A30
- Values
received.........
A40
- Values to be
recovered
A50
A70
- Attached debts
A90
thousands lei
Amounts
Amounts
Amounts due to the
due to the
due to
credit
credit risk
the
risk rate
rate 50%,
Net
Net
credit
100%,
registered amounts
risk rate registered amounts
in the
col.9=
100%,
in the
col. 3 =
accounts
col.8- registere accounts col.1balances of
d in the balances
col. 7
col. 2
the
accounts of the
rectified
balances rectified
liabilities
assets liabilities
accounts
accounts
10
11
12
Business of Banking
A
CLIENTELE
OPERATION'S
B01
- Credits granted to
the clientele
B03
- Credits granted to
the financial
clientele
B80
- Values received
B85
- Debtor current
accounts
B99
- Values to be
recovered
B9J
B9K
- Attached debts
B9V
SECURITY
OPERATIONS
AND OTHER
OPERATIONS
C0A
- Securities
received
C1A
- Transaction
securities
C2A
- Investment
securities
C3A
- Investment
securities
C4A
- Discount
accounts regarding
security operations
E6A
- Intra- banking
discounts
E7A
- Debtors
E123
- Supply accounts
E70
- Regulation
accounts
E8A
- Outstanding debts
E104
- Doubtful debts
E90
- Attached debts
E97
10
11
12
Business of Banking
A
FIXED ASSETS
VALUES
F01
- Subordinated
credits
F02
F10
- Endowment for
the own units from
abroad
F50
- Fixed assets
under way, fixed
assets of the
operations activity,
fixed assets besides
operation activity
F6A
- Leasing and
assimilated
operations
F7A
- Simple tenancy
F80
- Outstanding debts
F102
- Doubtful debts
F9A
- Attached debts
F97
SHAREHOLDERS
OR SOCIETIES
LOC
TOTAL:
L98
10
11
12
Business of Banking
Table sequel
- thousands lei ASSETS
Position code
A
TREASURY
OPERATIONS AND
INTERBANKING
OPERATIONS
- Cash and other values
- Current account at the
central banks
- Accounts of banks
correspondent
- Deposits at banks
- Credits granted to the
banks
- Values received
- Values to be recovered
- Outstanding debts
- Doubtful debts
- Attached debts
CLIENTELE
OPERATION'S
- Credits granted to the
clientele
- Credits granted to the
financial clientele
- Values received
- Debtor current accounts
- Values to be recovered
- Outstanding debts
- Doubtful debts
- Attached debts
A
1
Net
presentation
from the
balance assets
col.131
13
A01
A10
A20
A25
A101
A30
A40
A50
A102
A70
A90
B01
B03
B80
B85
B99
B9J
B102
B9K
B9V
B
13
Business of Banking
SECURITY
OPERATIONS AND
OTHER OPERATIONS
- Securities received
- Transaction securities
- Investment securities
- Investment securities
- Discount accounts
regarding security
operations
- Intra- banking discounts
- Debtors
- Supply accounts
- Regulation accounts
- Outstanding debts
- Doubtful debts
- Attached debts
FIXED ASSETS
VALUES
-Subordinated credits
- Interest within the legal
banking companies,
participation securities
and securities of the
portfolio activity
- Endowment for the own
units from abroad
- Fixed assets under way,
fixed assets of the
operations activity, fixed
assets besides operation
activity
- Leasing and assimilated
operations
- Simple tenancy
- Outstanding debts
- Doubtful debts
- Attached debts
SHAREHOLDERS OR
SOCIETIES
TOTAL:
C0A
C1A
C2A
C3A
C4A
E6A
E7A
E123
E70
E8A
E104
E90
E97
F01
F02
F10
F50
F6A
F7A
F80
F102
F9A
F97
LOC
L98
Business of Banking
Position
code
- Pledges in
other banks
advantage
N1B
- Pledges in
the clientele
favour
N1R
- Surety,
guarantees
and other
gradations
given to other
banks
N3B
- Gradations
given to
clientele
N5A
- Receiving
securities
N8B2
- Given
pledges
P120
- Doubtful
pledges
Q80
TOTAL
Amounts
due to the
credit
risk rate
0%
Amounts
due to the
credit risk
rate 20%
Amounts
due to the
credit
risk rate
50%
Amounts
due to the
credit risk
rate 100%
At this position the balance of the account 9219 Other receivable securities shall not be
taken into consideration.
Business of Banking
Position
code
- Pledges in
other banks
advantage
N1B
- Pledges in
the clientele
favour
N1R
- Surety,
guarantees
and other
gradations
given to other
banks
N3B
- Gradations
given to
clientele
N5A
- Receiving
securities
N8B2
- Given
pledges
P120
- Doubtful
pledges
Q80
TOTAL
Amounts
due to the
credit
risk rate
0%
Amounts
due to the
credit risk
rate 20%
Amounts
due to
the credit
risk rate
50%
Amounts
due to the
credit risk
rate 100%
Business of Banking
Net
exposure
Amounts from the
Amounts Amounts Amounts
off
Off balance
due to the
Position due to the due to the due to the
sheet
credit risk balance
code credit risk credit risk credit risk
sheet
elements
rate
rate 0% rate 20% rate 50%
100% elements
col.131
A
B
9
10
11
12
13
- Pledges in
other banks
advantage
- Pledges in
the clientele
favour
- Surety,
guarantees
and other
gradations
given to
other banks
Gradations
given to
clientele
- Receiving
securities
- Given
pledges
- Doubtful
pledges
TOTAL
N1B
N1R
N3B
N5A
N8B2
P120
Q80
X
Business of Banking
Bank Manager,
....................................................
(name, surname and signature)
Made by:
Name and surname: ........................................................
Telephone number / line:.................................................
Business of Banking
ANNEX No. 8
THE CALCULATION OF THE OWN FUNDS
Name of the bank ...........................................
Date of reporting: [ / / ]
Elements taking into account
A
Business of Banking
A
Amounts recorded in the account
Other reserves, analytical distinct
Reserves
from
favourable
differences from the revaluation of
the patrimony (balance of the
account 519, analytical distinct), of
which:
- ...........................................
- ...........................................
- ...........................................
Amounts recorded in the account
Tangible assets fund (balance of
account 5281)
Amounts recorded in the account
Other funds, analytical Fund for
increasing their own financing
sources (balance of account 528,
analytical distinct)
Amounts legally recorded in the
account Other funds, others than
those included at line 9 and 10
(balance of account 528, analytical
distinct), of which:
- ...........................................
- ...........................................
- ...........................................
Statutory reserves (balance of
account 513)
The reported result representing the
undistributed profit (balance of
account 581)
Net result of the current financial
exercise representing profit (current
balance of account 591)
Elements assimilated to the
capital
Total (line 1 to 15)
10
11
12
13
14
15
16
Business of Banking
A
Amounts recorded in the account
Own shares representing the
value of the own shares redeemed
in the view of social capital
reduction, in the conditions
provided under the Article 53 letter
b) of the Law no. 58/1998 (balance
of account 30214)
Expenses for constitution (balance
of account 4412)
The amortisation of the expenses
for constitution (balance of account
46112)
Not amortised value of the
established expenses (line 18 - line
19)
Commercial fund (balance of the
account 4411 + balance of account
451)
Amortisation of the commercial
fund (balance of the account 46111
+ balance of the account 4621)
Provisions for depreciation of the
commercial fund (extract balance
of the account: 49221, 49231)
Net value of the commercial fund
(line 21 - line 22 -line 23)
Dividends *)
The participation at the profit of the
personnel
The participation quota of the
manager in profit
*
17
18
19
20
21
22
23
24
25
26
27
Shall be completed in accordance with the provisions of Art. 2 paragraph 2 letter d) of the
presents norms, mentioning that for the date of 31 December shall not be recorded in the
remake reporting form and resented by the banks in accordance with the Art. 7 of the
present norms.
Business of Banking
A
Distribution from net profit to
funds
Expenses to be distributed and
expenses recorded in advance
(balance of account: 374,375)
The reported result representing the
unsupported loss (debtor balance of
account 581)
Net result of the current exercise
representing loss (debtor balance of
account 591)
Distribution of the profit (balance
of account 592)
Endowment for the own units from
abroad (balance of account 421)
Total deductible elements (line 17+
line 20+line 24 to 33)
Total own capital (line 16 - line 34)
Amounts recorded in the account
Other reserve, others than those
included at line 5, 6, 7 and 8
(balance of account 519)
Amounts recorded in the accounts
Subordinated debts on term and
Subordinated debts with unlimited
term (balance of accounts: 531,
532)
Amounts recorded in the account
Subvention
for
investment
(balance of account 541)
Amounts recorded in the account
Revaluation differences (balance
of account 516, analytical distinct),
of which:
-.........................................
-.........................................
-.........................................
28
29
30
31
32
33
34
35
36
37
Maximum
50% of
line 35
38
39
Business of Banking
A
Total additional capital col. 1 =
col.1, line 36-39; col.3 = col.3,
rd.36 to 39 (in the limit of max.
100% of col. 3, line 35)
Amounts representing participation
in legally commercial companies,
participation
securities
and
portfolio securities, hold with banks
and companies with financial
activities (balance of accounts:
4111, 4112, 4121, 4122, 413 +/balance of the acc. 414 balance of
the acc: 418, 491
Amounts recorded in the accounts
Subordinated credits on term
and Subordinated credits on
unlimited term, granted to other
banks and companies with financial
activities (Balance of accounts 401,
401, 481, 482 - balance of acc.499)
Total deductible elements
(line 41 + line 42)
Total own funds
40
Maximum
100% of
line 35
41
42
43
44
D Objectives:
9.1
Introduction
9.2
9.3
Lending money
9.4
Credit analysis
9.5
9.1 Introduction
Lending money is one of the basic functions of a bank. It is the interest
earned from banks that brings in most of the revenue to pay the expenses,
including staff salaries of the bank and give a sufficient surplus to pay
shareholders a dividend and retain funds in reserves accounts for expansion
of the bank.
For the Romanian banks, there are the following sources of funds:
structural credit;
auction credit;
special credit;
Lombard credit;
National Bank of Romania Regulation no. 1/2000 concerning the transactions on the
monetary market realised by the NBR, issued in Monitorul Oficial al Romniei
no. 142/2000.
National Bank of Romania Norms no. 7/1999 concerning the own funds of banks,
issued in Monitorul Oficial al Romniei no. 206/1999,
It should be remembered that the funds that are put out on loans belong to
customers. It is their money that is put at risk, so that if a bank is continually
making bad or unprofitable loans, this will sooner or later be reflected in the
deposits.
Before giving an advance, it is necessary for the manager to know the
purpose of the loan.
The lending officer may wonder whether the loan is for a legal purpose, or
not.
A loan means immediate possession of resources in exchange of a future
payment promise involving also an interest payment that rewards the
lender.3
Types of credit or loan
Generally, banks have their specific lending policies, which may change
from time to time due to the market conditions or government regulations.
Their policies are essentially based on the evaluation of the related risks
such as the credit risk, interest rate risk and concentrated risk. The lending
may be also authorised at a branch level if the branch portfolio allows that.
In order to make proper lending decisions, banks purposely observe a set of
general lending principles such as age and state of health, stability, integrity
and honesty, sources of income, regular expenditure, existing connections,
ability to manage financial affairs as well as margin, purpose, amount,
repayment capability and security.
As corporations, companies, individuals or the government represent the
category of bank customers; the types of loans vary accordingly and can be
generally divided into country loans, business loans and personal loans.
Country loans
So, as to be able to achieve national political, social and economic goals,
governments may need finance and, in this respect, the international
financial institutions are expected to grant them a large variety of loans
including apex, distressed, economic recovery, emergency reconstruction,
3
Basno Cezar, Dardac Nicolae, Floricel C.- Moned, Credit, Bnci Ed. Didactic i
Pedagogic, Bucureti, 1994
sovereign, standby loans as well as balloon, call, carryover, equity, hard and
soft loans, colons, indexed, outstanding, jeopardy, jumbo, non-accruing or
non-performing loans, overage, participation and package loans, pipeline,
pooled, premature, programme, project and sector loans, secured, quality,
quick disbursing loans, senior, subsidiary, syndicated, time-slice, top-rated,
revolving, working capital loans, sub-loans etc.
Corporate lending
As corporations and companies represent the major category of clients, for
the corporate lending banks do analyse a set of basic and additional criteria
such as the ability of continuing business, the expected future cash flows,
security and collateral, the rate of return to the bank as well as the level of
the whole business which the bank has done with them.
The usual procedures which banks apply in the loan granting to corporate
borrowers specifically include submission of the application and required
information, evaluation of the information, initial evaluation of the
proposed security, negotiation, approval, legal examination of the security,
signing of the contract, disbursement of the amount and recovery of the
capital and interest.
The credit granted to companies, whether public or private, generally
comprises loans for working capital and for fixed assets, financing such as
overdrafts, term loans, syndicated loans, and revolving credit and working
capital loans.
Loans for Working Capital:
Overdrafts
Overdrafts are usually granted to those companies desirous to use the credit
amount not as a whole but rather in accordance with their needs and for a
certain period without having to pay interest on the entire amount but on the
term agreed for interest calculation. In such cases, whenever the company
gets excess of capital it can repay parts of the credit and, consequently,
decrease the amount outstanding.
Export Financing
As most major companies deal with exports, banks can offer short time
credit to exporters until they recoup the money from importers, upon a
collectibles guarantee for the lending bank.
Personal Loans
They are of a fixed amount, for a fixed period of time and at fixed interest
rates and they are usually spent on the purchase of personal items, travels,
holidays etc.
These are rather similar to loan accounts, with regular payments,
mentioning that the interest on the total loan is calculated before the
advance is given, then once it has been accepted, the principal and interest
are debited to the loan account and the customer repays the total sum by
regular instalments. No security is required for a personal loan as most
banks will incorporate some form of insurance, so that in the event of the
customers death, there will be no charge to his dependants.
Overdrafts
Banks can grant overdrafts to individual customers at an agreed interest rate.
Under such a facility, the borrower can take the needed amount for a
particular desired period and does not have to pay interest on the entire
amount. Thus, an overdraft occurs when a customer is permitted by the bank
to have a debit balance on the current account, up to an agreed amount.
Interest is charged at a given percentage above the base rate.
Loan accounts
Loans are another way of lending money. For this method a loan account is
opened with a credit to the current account and a debit to the loan account.
Repayments are usually by regular monthly debits to the current account
and credit to the loan account. Interest is charged either quarterly or half
yearly to current account or loan account at the option of the customer.
This method is particularly useful where the customer wishes to make
regular payments on the amount borrowed, while from the banks point of
view the monitoring of a loan account is easier than an overdraft. Loans are
often given to businesses for the purchase of fixed assets or to an individual
for the purchase of customer durable goods.
Credit Cards
The facility of the credit card enables the customer to borrow up to certain
limited amounts either at lending places or at points of sale and to withdraw
cash from cash dispensers whenever he wants.
Budget accounts
This account is for those persons who find it difficult to monitor their
expenditure. It is a form of borrowing and the interest is incorporated in the
banks overall charges.
Revolving Credit
Under such an arrangement, customers disposing of such types of accounts
are given the option of borrowing amounts up to a certain multiple of their
deposit.
Some banks offer the customer an arrangement in which he or she places a
regular amount of money into this account and then has the facility to
withdraw, without further authority, up to thirty times the regular credit.
The House Financing
Specifically, the amounts lent by banks for house financing represent a
certain percentage of the house total value and the repayment period vary
from 15 to 50 years. The interest rate is also variable and essentially is
based on short-term and long-term rates determined as rollover mortgages.
The repayment patterns of such loans include the following types: annuity
mortgages with constant monthly instalments, endowment mortgages
repaid at maturity upon a life assurance contract, only-interest mortgages
for a certain period, gradually increasing payments and linear mortgages
with equal capital repayments and decreasing interest.
Credits actually represent the relation between two entities in which one
entity has the money (creditor) and gives to the other entity (debtor) a
certain sum of money that the latter has to return in an agreed time period
and under certain conditions. Based on this, the credits in the Romanian
business banking system are classified by the following characteristics4:
1) Depending on the maturity date:
- short-term credits;
- medium-term credits;
- long-term credits.
2) Depending on the type of insurance:
- non-insured credits;
- insured credits.
4
agricultural credits;
industrial credits;
real estate credits;
personal credits.
purpose/destination;
amount;
repayment;
terms;
security/insurance.
Bankers lending techniques issued by the Chartered Institute of Bankers, London 1994.
the purpose of the loan (legal, moral and within the policy of the
government and the bank, National Bank of Romania);
side. The bright side is that a large loan portfolio might increase bank
earnings. The dark side is that an aggressive policy might lead to lower
credit standards, marginal loans, and an unacceptable amount of risk.
Most borrowers are exposed to risks that threaten their ability to repay their
bank loans. Key-man life insurance is especially important to protect against
loss if death or disability strikes the borrower or one of the borrowers
indispensable employees. A catastrophic fire or flood may interrupt the
borrowers business or destroy the loans collateral.
The loan policy should indicate the types of borrowers who must be insured.
The policy must designate the bank as the loss payee, or when the cash
value of a life insurance policy is offered as protection, it must be properly
assigned to the bank. An increasingly common form of protection is the
credit life policy written by the bank. It is simply term life insurance written
on consumer loan customers. It pays off outstanding balances due to the
bank in the event of the customers death. A somewhat different form of
protection is obtained through reinsurance. If the borrower defaults,
reinsurance pays out and the insurance company pursues collection on its
behalf on the banks defaulted note. Reinsurance premiums are rather
costly, and policy should indicate what classes of borrowers, if any, should
be under reinsurance programs.
Most banks conduct loan reviews to reduce losses and monitor loan quality.
Loan reviews consist of a periodic audit of the on-going performance of
some or all of the active loans in a banks loan portfolio. Its essence is credit
analysis, although, unlike the credit analysis conducted by the credit
department as part of the loan approval process, credit analysis in loan
review occurs after the loan is in the books. Other than its basic objective of
reducing loan losses, some intermediate objectives of loan review are as
follows:
- to detect actual or potential problem loans as early as possible;
- to provide incentive for loan officers to monitor loans and report
deterioration in their own loans;
- to enforce uniform documentation;
- to ensure that loan policies, banking laws, and regulations are
followed;
- to inform management and the board about the overall condition of
the loan portfolio;
- to aid in establishing loan loss reserves.
Whatever means are used to conduct loan reviews, the following points
should be covered:
- financial condition and repayment ability of borrower;
- completeness of documentation;
- consistency with loan policy;
- perfection of security interest on collateral;
- legal and regulatory compliance;
- apparent profitability.
When a problem loan is detected, the responsible officer should take
immediate corrective action to prevent future deterioration and minimise
potential loss.
9.4 Credit analysis
Credit analysis is the process of assessing the risk of lending to a business or
individual*. The so-called credit risk must be evaluated against the benefits
that the bank expects to derive from making the loan. The direct benefits are
simply the interest and fees earned on the loan and possibly, the deposit
balances required as a condition of the loan. Indirect benefits consist of the
initiation or maintenance of a relationship with the borrower that may
provide the bank with increased deposits and demand for a variety of bank
services.
Credit risk assessment has both qualitative and quantitative dimensions; the
former are generally the more difficult to assess. The steps in qualitative
risk assessment are primarily gathering information on the borrowers
record of financial responsibility, determining his or her true purpose for
wanting to borrow funds, identifying the risks confronting the borrowers
business under future industry and economic conditions, and estimating the
degree of commitment the borrower will have regarding repayment. The
quantitative dimension of credit risk assessment consists of the analysis of
historical financial data and the projection of future financial results to
evaluate the borrowers capacity for timely repayment of the loan and,
Regulation No. 2/2000 concerning the classification of credits and placements, issued in
Monitorul Oficial al Romniei No. 316/2000
Total liabilities
total assets
x 100
Immediate Liquidity
Current asset
short term liabilities
x 100
Solvency Ratio
Owners equity
x 100
owners equity + liabilities
Profit margin
net profit
turnover
x 100
Total revenues
total expenses
x 100
- The credits have a destination precise and mandatory which can not be
changed by the borrowers;
- Credits are granted under guarantees that are written the credit
contract. The guarantees must cover the maximum amount of credit,
amount consisting in the principal and interest.
- The bank shall reserve the right to verify to its customers (borrowers)
the permanent existence and the integrity of the ensured guarantees
during the whole period of the credit. In the case in which the bank
shall establish the non-observance of the contractual terms, it shall
withdraw the credits before the maturity date;
- During the validity of the credit, the beneficiaries of the credits have
the obligation to deposit to the bank their balance sheet and the
financial statement;
- Under the provisions of the banking law, the loans granted to a single
debtor, shall not exceed 20% of the capital and reserves of the bank.
In order to receive the credit, the economic agents should accomplish
the following conditions:
credit sales. The repayment of such loans is largely independent of longterm profitability and long-term cash flows.
The measure known as net working capital, defined as current assets minus
current liabilities, indicates the amount of a firms working capital that is
financed by long-term or so-called permanent sources of funds. Net working
capital is a good indicator of a firms liquidity because it identifies the part
of a firms most liquid assets that is supported by reliable (long-term) funds;
that is, it is the amount of current assets that is not subject to claims by
holders of current liabilities.
A corollary measure of liquidity is net liquid assets, which is a rough
indication of the absolute currency amount of liquidity in the firm.
Subtracting from current assets the amount invested in inventory and all
current liabilities derives it. Inventory is subtracted because its liquidity is
often suspected.
Sources and uses of funds analysis decreases in assets and increase in
liabilities constitute sources of funds, whereas increases in assets and
decreases in liabilities are uses o funds. It can be used to make simple
financial projections.
More detailed projections are probably warranted in the form of cash
budgets. The preparation of cash budgets requires projecting specific
cash inflows and cash disbursements on a monthly or even more
frequent basis. The cash budget more closely identifies the amounts and
timing of specific draws against a credit line extended by a bank, or,
alternatively, it identifies periods of excess cash in which short-term
money market investments can be considered.
In the final analysis of a loan, lenders must rely upon cash flow to repay
loans. Cash flow from a firms operations, although not directly available,
can be derived through adjustments to the firms balance sheet and income
statement.
Thus, it should be mentioned that the borrowers ability to repay a loan is
mostly a matter of financial analysis. Historical financial analysis is twodimensional. Time series analysis is used to spot evolving financial
strengths and weaknesses with the perspective of the passage of time. Crosssectional analysis permits the analyst to determine how effectively the
Description of the guarantees for the entire payment of the debt, and if
necessary an analysis of the goods representing the guarantee;
Specimen of signature for each person that authorised the credit and the
name of the bank;
Annual Balance Sheet and Profit and Loss Account for the last three
years of operation (plus annexes);
Companys Overview;
Specimen of signature of each person that authorised the credit and the
name of the bank.
Progress Test
ANNEX No 1
CREDIT REQUEST
Company: X SRL
Represented by: Mr. X (authorised to sign)
from 31/08/00
to 30/11/00
Reimbursement:
at the end of the validity period
Several instalments
Securities proposed:
Cash collateral
Letter of guarantee
_______________________________
_______________________________
_______________________________
Please find attached the necessary documents for each type of security. The bank has the right to
choose the securities for the credit facility.
ANNEX No 2
Computed interests that could not be cashed by the end of the month (on the
last working day of the month) are to be recorded in the account
Uncollected interest till 30 days. In case that these amounts cannot be
cashed due to lack of cash of the borrower, they are to be transferred from
the above-mentioned account to Uncollected interest longer than 30 days
account. These amounts will be adjusted with a rate of 0.4 for every day of
delay taking care that penalties will not amount more than the initial amount
due.
7. Dates and amounts to be collected:
PRINCIPAL
INTEREST
TOTAL
AMOUNT
45,000
1,068.75
46,068,75
45,000
712.5
45,712.5
45,000
356.25
45,356.25
TOTAL
135,000
2,137.5
137,137.5
DATE
pay the principal, interest and fees on their agreed upon maturities;
13. The bank is entitled to cancel the loan in case the borrower submits
unreal data, beginning collection 5 days after notifying the borrower in
writing.
14. The bank does not take political or natural disaster risks and is not
responsible of the legal value (authenticity) of submitted documents.
15. Mutual bonds that are not specified in the present contract must observe
credit rules as well as all banks regulation in force at the moment.
16. The borrower must declare other loan agreements with other banks, in
force at present, together with the collateral backing up these loans.
17. Any litigation between the hereby-stated parts is to be solved in the
Court.
18. The present contract has legal force and power of executor title.
19. The contract is concluded, today, July 31, 2000, in 4 copies, 3 remaining
with the bank and one with the borrower.
Glossary
Glossary
Glossary
Glossary
Glossary
Glossary
Glossary
Glossary
Glossary
Glossary
Glossary
Glossary
Glossary
MONEY SERVICES
advise = sfat, informaie; (aici) aviz;
Airmail Transfer = transfer prin pota aerian;
application form = formular de cerere;
at sight/at presentation = la vedere/la prezentare;
available funds = fonduri disponibile;
Bankers draft = polia bancherului;
banking clerk = funcionar bancar;
banknotes = bancnote;
bearer = purttor;
Glossary
Glossary
Glossary
Glossary
Glossary
Glossary
Glossary
sealed = sigilat;
sight interest = dobnda la vedere;
solicitor = avocat;
theft = furt;
be entitled to (to) = a fi mputernicit (s);
be supplied with (to) = a fi alimentat cu;
complete/conclude a contract (to) = a ncheia un contract;
finish/terminate/cancell a contract (to) = a rezilia un contract;
mortgage (to) = a ipoteca;
open an account with (to) = a deschide un cont;
pass on (to) = a statua;
vest somebody to do something (to) = a investi pe cineva s fac ceva;
Trustee Savings Bank = bnci de ncredere specializate n deinerea
economiilor (un fel de CEC);
RISKS MANAGEMENT
credit institution = instituie de credit;
risks management = administrarea riscurilor;
financial risks = riscuri financiare;
foreign exchange risk = risc valutar;
liquidity risk = risc de lichiditate;
Glossary
Glossary
Glossary
Glossary
Bibliography
BIBLIOGRAPHY
ABRAHAM FROIS, Gilbert Economia politic, Editura Humanitas,
1994.
BASNO, Cezar,
DARDAC, Nicolae,
FLORICEL, C.
BASNO, Cezar,
DARDAC, Nicolae,
FLORICEL, C.
BRANCH, E. Alan
BUTTER W.,
CORSETTI, G.,
PESENTI, P.
GAFTONIUC, Simona
GAFTONIUC, Simona
Practici
bancare
internaionale,
Editura Economic, Bucureti, 1995.
Editura
ASE,
Management
bancar,
Editura
Independena economic, Brila 1999.
Bibliography
HARROP, Jeffey
HOWELLS, P. &
BAIN, K.
IONESCU, C. Lucian,
coordonator
IONESCU, M. Gh.,
SILBERSTEIN, I.
JACOB, Brian
KIRIESCU, Costin
MACOVEI, Ioan
KLEIN, G &
LAMBERT, J.
MISHKIN, S. Frederic
NEGRU, Mariana
NEGRU, Mariana
Pli
i
garanii
internaionale,
Editura All, Bucureti, 1996.
Bibliography
PALFREMAN, David
POPA, Ioan
RUHL, C.,
DIANU, D.
TWELLS, Harry
Exporters
checklist
National
Westminster Bank Lloyds of London
Press Ltd., 1992.
VALDEZ, Stephen
VAN HORNE, J.
WHITING, D. P.
Bussiness
and
Bibliography
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Customer due
October 2001.
OECD Proceedings
diligence
for
banks,
Bibliography
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w.w.w.bis.org
w.w.w.europa.eu.int
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