Professional Documents
Culture Documents
Business of Banking (Volumul I) PDF
Business of Banking (Volumul I) PDF
At the same time, the book intends to be a support for the future economists
in the banking field, as well as for the bankers, the foundation upon which
they can expand their technical knowledge of the Romanian banking system;
money services; foreign exchange operations; international trade; payment
methods and means of payment or settlement; lending, and risks.
It is underlined the fact that the book is a very important work, especially
for the beginners, for those which are studying for the first time the subject
explained in the book.
Various people must be thanked for the help given: my students and my
sponsor the Commercial Bank of Greece.
Ligia Georgescu–Goloşoiu
March 2002
Presentation
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.
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.
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 Romania’s 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.
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 Banking System in Romania
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 country’s 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:
1
Source: the National Bank of Romania – Annual Report per 2000
The Banking System in Romania
1.3 The National Bank of Romania and its Role in the Banking System
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.
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
Sometimes these responsibilities are shared with other governmental bodies.
3
Law no.101/1998 concerning the Statute of the National Bank of Romania, issued in
Monitorul Oficial al Romaniei, Part I, no. 203//June 1998
The Banking System in Romania
framework of the country’s 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 country’s requirements for cash are met strictly according
to the real needs of money circulation.
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.
• Issuing rules and regulations for gold and foreign exchange operations
to protect the national currency;
• Setting up the balance of payments and foreign assets and liabilities
position of the country;
• 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;
• Licensing and working licenses as well as regulating and supervising the
legal persons who are authorized to conduct foreign exchange
transactions;
• Setting up the ceiling value of gold and foreign exchange assets which
the authorized legal persons can hold in deposits;
• Maintaining and managing the state’s international foreign reserves;
• Setting up limits on the net foreign position of the banking companies.
• 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 short-
term 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.
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 non-
banking 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 auditing commission comprises five auditors, out of which one is the
chairman. The auditors’ committee verifies the compliance with the legal
provisions concerning valuation of the National Bank of Romania’s assets,
the elaboration of the balance sheet and the profit and loss account,
according to the books, vault cash, and securities owned or received in bail,
or in custody, as well as of the revenue and expenditure budget. Annually,
the auditors’ committee prepares a report on the balance sheet and profit and
loss account of the National Bank of Romania.
The National Bank of Romania’s own capital is ROL 100 billion and
belongs entirely to the State. The bank’s own capital may be increased using
part of the annual net profit up to the equivalent of five per cent of the
aggregate monetary liabilities in the balance sheet as at the end of every
fiscal year.
The ROL 100 billion own capital is made up of the ROL 5 billion own
capital as of December 31, 1996 plus ROL 95 billion allocated from the
reserve fund of the National Bank of Romania.
The Banking System in 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 Romania’s own capital at which point the share is set at
5 per cent.
4
Including: banks (Romanian legal entities), branches of foreign institutions and credit
cooperatives.
5
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;
6
Law no.58/1998 - Banking Law issued in Monitorul Oficial al Romaniei, Part I,
no. 121/1998.
The Banking System in Romania
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.
In all its official documents, the bank must identify itself clearly through a
minimum of data: the company under whose name the bank is registered in
the Trade Register, its share capital, the address of its headquarters
premises, number and date of incorporation in the Trade Register, number
and date of incorporation in the Bank Registry.
Every bank must have its own operating regulations, approved by the
statutory bodies through which they have to establish at least:
• The organizational structure of the bank;
• The tasks of every bank department and the relations among them;
• The tasks of the branches and other secondary offices of the bank;
• The tasks of the risk committee, of the credit committee;
• The competence and responsibility of the bank managers, executive
managers, heads of branches other subsidiaries of the banks as well as
other employees who are engaged in financial and banking operations
on behalf and account of the bank;
• The internal audit of the bank.
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 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 credits application that surpass the competencies of the
units in the country;
Establishing the loans documentation/file;
Proposing the issue of the letter of guarantee;
Analysing the evolution of the short, medium and long term loans;
Analysing the banking indicators, etc.
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:
¾ To negotiate the payments agreements drafts concluded with other
countries;
¾ To contact the corresponding banks on the carrying out of the payments
agreements;
¾ To administrate the foreign exchange portfolio of the bank;
¾ To negotiate the external banking credit lines;
¾ To analyse and, if the case, to modify the banking corresponding
network.
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.
*
* *
Other institutions that co-operate with the Romanian banking system are the
following:
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 Banking System in Romania
1.6 The balance sheet of the National Bank of Romania and of a bank,
Romanian legal entity
The annual balance sheet of the National Bank of Romania was prepared
in accordance with the provisions of: Law no.101/1998 – the National
Bank of Romania Act, the Accounting Law no.82/1991, with subsequent
amendments and additions, the Chart of Accounts and the Methodological
Norms specifying the use of the National Bank of Romania’s accounts,
and the guidelines of the Ministry of Finance on actions for closing the
fiscal year.
Since January 1st, 1999, the National Bank of Romania adopted a new Chart
of Accounts and the Methodological Norms for its implementation,
prepared in accordance with the provisions of the Law no. 101/1998, and
with the national accounting standards.
The changes that the new Chart of Accounts brought about consisted mainly
in the distinct classification of monetary assets and liabilities depending on
their maturity. For taxation purposes, the deductibility of certain expenses
(e.g. protocol-related and social expenses) is limited by law to the share in
the profits.
The balance sheet of the National Bank of Romania was drawn up
consistent with the accounting assumptions, such as: prudence, consistency,
the going concern, the matching principle, periodicity, and non-set-off
assets against liabilities.
The Banking System in Romania
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 bank’s assets mainly consist of: cash, current accounts and ROL and
currency term deposits of individuals, and private or public enterprises,
loans etc.
The Banking System in Romania
The bank’s 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.
During the previous years, The National Bank of Romania had the
following objectives8:
8
The National Bank of Romania – Annual Report per 1998-2000
The Banking System in Romania
In the next years, the National Bank of Romania will focus its efforts on
carrying out a stable policy and a macroeconomic stability, as well as on
correlating the macroeconomic policies with measures taken in the
privatisation and structural adjustment areas.
The orientation of the National Bank of Romania reflects also important
performance concerning:
a) Guiding the monetary policy towards price stability;
The Banking System in Romania
9
Source: The National Bank of Romania
The Banking System in Romania
11
Official Journal L356, 30.12.1998.
12
Official Journal L356, 30.12.1998.
13
”Monetary Financial Institutions” comprises resident Credit institutions as defined in
Community Law, and all other resident Financial Institutions whose business is to
receive deposits and/or close substitutes for deposits from entities other than Monetary
Financial Institutions, and, for their own account (at least in economic terms), to grant
credits and/or to make investments in securities.
The Banking System in Romania
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 Fund’s 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
IMF – Money and Financial Statistics Manual, Washington, 2000
The Banking System in Romania
The pension funds included in this sub-sector are those that are constituted
as separate from the units that have created them. They are established for
purposes of providing retirement benefits for specific groups of employees.
They have their own assets and liabilities, and they engage in financial
transactions on their own account. These funds are organized, and directed,
by individual private or government employers, or jointly by individual
employers and their employees, and the employees and/or employers make
regular contributions.
Foreign exchange companies comprise units that buy and sell foreign
exchange in retail or wholesale markets.
Progress Test
2. When did the new Romanian banking system start its activity?
4. List five banks, Romanian legal entities authorized by the National Bank
of Romania to render banking services.
7. How was the new banking system organized after December 1990?
The Banking System in Romania
10. What are the National Bank of Romania’s responsibilities in the foreign
exchange field?
13. List the securities that the National Bank of Romania requires as
guarantees for the loans granted to banks.
15. Define the concept “bank” under the provisions of the Law No. 58/1998
– the Banking Law.
16. What operations can a bank perform within the authorization granted by
the National Bank of Romania?
17. In what ways can the banks increase their share capital?
21. Enumerate the main departments of a bank, and detail their attributions.
22. List the main foreign assets of the National Bank of Romania.
23. What are the main items included in the liabilities of the National Bank
of Romania?
The Banking System in Romania
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?
30. List the main problems that the National Bank of Romania intends to
solve in the future.
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;
ANNEX No 1
LICENCING
No BANK HEAD OFFICE LEGAL STATUS CAPITAL TYPE
DATE
Bucureşti,
BANCA NAŢIONALĂ Central Bank state-owned
Str. Lipscani nr.25,
A ROMÂNIEI of Romania capital
sector 3
I BANKS - ROMANIAN LEGAL ENTITIES
majority state-
Bucureşti,
Banca Comercială Joint stock owned and
1 Bd. Regina Elisabeta nr.5, 1990
Română company domestic private
sector 3
capital
Bucureşti, majority state-
Bd. Mircea Vodă nr.44, Joint stock owned and
2 Banca Agricolă1 1990
bl. M17, tronson II, company domestic private
sector 3 capital
Bucureşti,
Casa de Economii şi Joint stock state-owned
3 Calea Victoriei nr.13, 1949
Consemnaţiuni (CEC)2 company capital
sector 3
majority foreign
Bucureşti,
Banca Română pentru Joint stock and domestic
4 Str. Doamnei nr.4, 1990
Dezvoltare (BRD) company private and state-
sector 3
owned capital
Bucureşti, foreign and
Banca Comercială Joint stock
5 Calea Victoriei domestic private 1991
"Ion Tiriac" company
nr.15, sector 3 capital
Bucureşti, state-owned and
Joint stock
6 BANC POST Bd. Libertăţii nr.18, majority foreign 1991
company
bl.104, sector 5 private capital
Bucureşti, state-owned and
Joint stock
7 Banca Turco - Română3 Str. Ion Câmpineanu nr.16, foreign private 1994
company
sector 1 capital
Bucureşti,
ABN AMRO Bank Bd. Expoziţiei nr.2, Joint stock foreign private
8 1995
(România) World Trade Center, company capital
unit.2.23, sector 1
majority state-
Banca de Export-Import Bucureşti,
Joint stock owned and
9 a României Spl. Independentei nr.15, 1992
company domestic private
(EXIMBANK) sector 5
capital
Bucuresti,
Joint stock foreign private
10 Citibank România Bd. Iancu de Hunedoara nr.8 1996
company capital
sector 1
Bucureşti,
Joint stock foreign private
11 Alpha Bank România Piaţa Gh. Cantacuzino nr.6, 1994
company capital
sector 2
∗
31 Decembrie 2000
1
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
The Banking System in Romania
(continued)
LICENCING
No BANK HEAD OFFICE LEGAL STATUS CAPITAL TYPE
DATE
foreign and
Cluj-Napoca, Joint stock
12 Banca Transilvania domestic private 1994
Bd. Eroilor nr.36 company
capital
Bucureşti,
FINANSBANK Joint stock majority foreign
13 Str. Doamnei nr.17-19, 1993
(România) company private capital
sector 3
foreign and
Banca Comercială Bucureşti, Bd. Unirii nr.59, Joint stock
14 domestic private 1995
"ROBANK" sector 3 company
capital
Bucureşti,
International Business foreign and
Banca Daewoo Joint stock
15 Center, domestic private 1997
(România) company
Bd. Carol I nr. 34-36, et.1, capital
sector 2
Banca pentru Mică
Bucureşti, foreign and
Industrie şi Joint stock
16 Calea Grivitei nr.24, domestic private 1990
Liberă Iniţiativă company
sector 1 capital
MINDBANK
Bucureşti, foreign and
Joint stock
17 Banca Românească Bd. Unirii nr.35, bl. A3, domestic private 1993
company
sector 3 capital
Banca de Credit majority domestic
Târgu Mureş, Joint stock
18 şi Dezvoltare private and state- 1994
Piata Trandafirilor nr. 21 company
ROMEXTERRA owned capital
Bucureşti, foreign and
PIRAEUS BANK Joint stock
19 Bd. Carol I nr.34-36, et.VI, domestic private 1995
ROMÂNIA company
sector 2 capital
foreign and
Banca Comercială Joint stock
20 Arad, Str. Revoluţiei nr.88 domestic private 1996
West Bank company
capital
Banca Română pentru Bucureşti,
Joint stock domestic private
21 Relansare Economică Bd. Aviatorilor nr.46, 1996
company capital
LIBRA BANK sector 1
Joint stock domestic private
22 Banca Română de Scont Brasov, Str. Turnului nr.5 1996
company capital
Bucureşti,
Banca Comercială Joint stock domestic private
23 Str. Johann Strauss nr.1, 1996
"UNIREA"4 company capital
sector 2
Bucureşti, foreign and
DEMIRBANK Joint stock
24 Splaiul Unirii nr.16, domestic private 1997
(România) company
sector 4 capital
Commercial Bank Bucureşti, Joint stock foreign private
25 1996
of Greece (România) Str. Berzei nr.19, sector 1 company capital
Bucureşti,
Raiffeisenbank Joint stock foreign private
26 Bd. Unirii nr. 74, bl. J3B, 1997
(România) company capital
aripa 2-3, sector 3
Bank-Austria Bucureşti,
Joint stock foreign private
27 Creditanstalt Str. Grigore Mora nr.37, 1998
company capital
România sector 1
4
Subject to special settlement regime of interbank operations
The Banking System in Romania
(continued)
LICENCING
No BANK HEAD OFFICE LEGAL STATUS CAPITAL TYPE
DATE
ROMANIAN Bucureşti,
Joint stock foreign private
28 INTERNATIONAL Str. Iuliu Teodori nr.1, 1998
company capital
BANK sector 5
Bucureşti,
BNP - Dresdner Bank Joint stock foreign private
29 Str. C.A. Rosetti nr.36, 1998
(România) company capital
sector 2
domestic and
Banca Comercială Sibiu, Joint stock
30 foreign private 1999
"CARPATICA" Bd. Mihai Viteazu, bl. 42 company
capital
BANCA DE Bucureşti,
Joint stock domestic private
31 INVESTITII ŞI Bd. Dimitrie Cantemir nr.2, 2000
company capital
DEZVOLTARE (BID) bl. P3, tronson 2, sector 4
VOLKSBANK Bucureşti, Joint stock foreign private
32 2000
(România) Str. Coltei nr.8, sector 3 company capital
foreign and
Cluj-Napoca, Joint stock
33 Banca "Dacia Felix" domestic private 1991
Str.Memorandumului nr.28 company
capital
II BANKS - FOREIGN LEGAL ENTITIES
Bucureşti,
ING Bank NV
1 Sos. Kiseleffnr.11-13, Branch 1994
- Bucharest Branch -
sector 1
Banque Franco - Bucureşti,
2 Roumaine P-ta Charles de Gaulle nr.3- Branch 1990
- Bucharest Branch - 5, sector 1
Bucureşti,
MISR Romanian Bank
3 Bd. Unirii nr.66, bl.K3, Branch 1987
- Bucharest Branch -
sector 3
Frankfurt Bukarest Bank Bucureşti,
4 AG Bd. Carol I nr.34-36, Branch 1979
- Bucharest Branch - sector 2
National Bank of Bucureşti,
5 Greece Splaiul Unirii nr.4 Branch 1996
- Bucharest Branch - bl. B3, tronson 3, sector 4
Banca Italo - Bucureşti,
6 Romena SpA Bd. Carol I nr.34-36, Branch 1996
- Bucharest Branch - sector 2
United Garanti Bank
International N.V., Bucureşti,
7 Branch 1998
Amsterdam Str. Paris nr.30, sector 1
- Bucharest Branch -
Banca di Roma SpA Bucureşti,
8 Italia Str. Dr. Staicovici nr.75, Branch 2000
- Bucharest Branch - sector 5
BO ARD O F D I REC TO RS
GOVERNOR
LEGAL DEPARTMENT
Monetary Analysis Division Monetary Policy Operations Division Analysis and Strategy Division
Monetary Forecasting Division State Treasury Operations Division Banking Regulation Division
International Relations and EU Integration Division Foreign Reserve Management Division Licensing Division
Banking Risk Division Legal Documentation and Advisory Division
RESEARCH AND PUBLICATIONS DEPARTMENT BANK OPERATIONS DEPARTMENT Contract Assistance and Disputed Claims Division
SUPERVISION DEPARTMENT
INTERNAL AUDIT AND CONTROL DEPARTMENT
Research Division Issuance Division
Publications Division Settlements Division Synthesis Division
Documentation and Library Division Inspection Division I Internal Audit Division
ACCOUNTING DEPARTMENT Inspection Division II Internal Control Division
STATISTICS DEPARTMENT Inspection Division III
BRANCHES
Financial Division LOGISTICS DEPARTMENT
Statistical Reporting Division Accounting Division
Data Processing Division Internal Financial Audit Division
Statistical Analysis and Information Division Investment and Procurement Division
SECRETARIAT Transport Division
IT DEPARTMENT General Administration Division
Technical Services and Maintenance Division
Board Secretariat Division Bank Security Division
IT Systems Division Bank Correspondence Division Social Services Division
Network Administration Division Public Relations and Protocol Division
Archives and Museum Division
Settlements Division
Gross Settlement Division
Settlement Monitoring and Databases Bureau
Design, Informatics and Communications Division
Resources Management Division
Logistics Division
Organizational Chart of a Bank ANNEX No 3a
COUNSELORS
PROJECTS’ EVALUATION
GENERAL ACCOUNTING
GENERAL SECRETARY
PERSONNEL TRAINING
OWN INVESTMENTS
FOREIGN EXCHANGE
BANKING SERVICES
CREDITS RECOVERY
AND DEVELOPMENT
CAPITAL MARKETS
HUMAN RESOURCES
TREASURY DEPT.
SYNTHESIS DEPT.
NON-PERFORMING
BANKING OPERATIONS
PRIVATIZATION DEPT.
IT DEPARTMENT
AND FINANCING
OF THE BANK
WITH COMMERCIAL
MARKETING DEPT.
DEPARTMENT
OPERATIONS
ECONOMIC
DEPT.
DEPT.
DEPT..
DEPT.
PAPERS
FINANCIAL MANAGER
IT DEPARTMENT
ANNEX No 3b
PAY OFFICE
DEPARTMENT
ACCOUNTING
DEPARTMENT
SUBSIDIARIES
AGENCIES
ORGANIZATIONAL CHART OF A BRANCH OF A BANK
FOREIGN EXCHANGE
DEPUTY GENERAL MANAGER
GENERAL MANAGER
OPERATIONS
ADMINISTRATIVE,
SECRETARY
EVALUATIONS AND
CONSULTANCY
OWN INVESTMENTS
CREDITS, BANKING SERV.
CREDIT COMMITTEE
FOR POP.
RISK COMMITTEE
CAPITAL MARKETS
RECOVERING NON-
PERFORMANT CREDITS
HUMAN RESOURCES
DEPARTMENT
INCOMES & EXPENDITURE
BUDGET
LEGAL DEPARTMENT
The Banking System in Romania
ANNEX No 4
BANKING REGULATIONS
ANNEX No 5
Balance Sheet of
The National Bank of Romania
as of December 31, 2000 and 1999
LIABILITIES
ANNEX No 6
EXPENSES
Operating expenses 8,314.6 11,993.8 44.2
Interests paid to the banks and State Treasury 4,599.6 7,203.2 56.6
Interests and commissions on IMF borrowing 439.8 658.7 49.8
Interests and commissions in foreign exchange for
NBR borrowings from other sources and other 1,552.6 1,667.1 7.4
expenses in foreign exchange
Expenses for operations with forex-denominated securities 1,057.1 373.9 -65.2
Expenses for operations with ROL-denominated securities 279.4 759.8 171.9
Note printing and coin mintage-related expenses 233.8 379.1 62.1
Expenses for operations with precious metals 124.2 84.9 -31.6
Losses from non-recoverable claims - 808.7 X
Other 10.1 58.4 478.2
Overheads 1,579.2 1,827.1 15.7
Salaries and wages 521.3 667.8 28.1
Expenses for provisions 731.2 883.3 20.8
Other 326.7 276.0 -15.5
TOTAL EXPENSES (1+2) 9,893.8 13,820.9 39.7
ANNEX No 7
Balance Sheet for the years ended
December 31, 2000 and 1999
B.R.D.
(Amounts in millions of ROL in terms of purchasing power as of December 31, 2000 unless otherwise
indicated)
ANNEX No 8
Profit and Loss Account for the Year Ended
December 31, 2000 and 1999
(Amounts in millions of ROL in terms of purchasing power as of December 31, 2000 unless otherwise
indicated)
THE BANKING
SYSTEM
IN ENGLAND
D Objectives:
After studying this chapter you should be able to understand:
2.1 The evolution of the Bank of England
The hub of the banking system;
The establishment of the bank;
The nationalisation of the bank;
2.2 Functions of the Bank of England
Government’s bank;
Bankers' bank;
Lender of last resort;
Carrying out the government’s monetary policy;
Control of the currency issue;
2.3 Present - day role of the Bank of England
2.4 Banking today
The Banking System in England
In the United Kingdom, the central bank is the Bank of England, which was
established in 1694.
Most of the central bank’s functions are quite different from those of the
commercial and other banks’ and, being the Government’s bank and the
bankers’ bank, it has a controlling influence over all the other banks as a
whole.
The history of the Bank is naturally one of interest, but also of continuing
relevance to the Bank today. Events and circumstances over the past three
hundred or so years have shaped and influenced the role and responsibilities
of the Bank. They have moulded the culture and traditions, as well as the
expertise, of the Bank, which are relevant to its reputation and effectiveness
as a central bank in the early years of the 21st century. At the same time,
much of the history of the Bank runs parallel to the economic and financial
history, and often the political history in a broader sense, of the United
Kingdom.
In the 19th Century the Bank took on the role of lender of last resort,
providing stability during several financial crises.
World War I: 1914 - 1918 - During World War I the National Debt jumped
to £7 billion. The Bank helped manage Government borrowings and resist
inflationary pressures.
Gold - In 1931 the United Kingdom left the gold standard; its gold and
foreign exchange reserves were transferred to the Treasury. But their
management was still handled by the Bank and this remains the case today.
1
D.P. Whiting - Elements of banking, Macdonald & Evans Ltd., London 1985, p. 42
The Banking System in England
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 country’s 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 officer’s work in close liaison with the Treasury.
2
The Bank Charter Act 1844
The Banking System in England
3
D.P. Whiting - Elements of banking, Macdonald & Evans Ltd., London, 1985, p.47
The Banking System in England
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 Banking System in England
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:
Gilt-Edged and Money Markets
Foreign Exchange
Banking Services
Market Services
Risk Analysis and Monitoring
Registrar's Department
The Market Operations divisions - Gilt-Edged and Money Markets and
Foreign Exchange - plan and conduct the Bank's operations in the core
financial markets, in particular the money market in order to establish short-
term interest rates at the level required by monetary policy. They also
manage the UK's foreign exchange and gold reserves as agent for HM
Treasury and they conduct the current programme of Government gold
auctions. They contribute market analysis and intelligence to the Monetary
Policy Committee and the Financial Stability Committee from their
operational presence in the markets and, in line with the Bank's core
purpose; they seek to promote efficient structures in these markets.
The Banking and Market Services divisions provide banking services to the
Government and other customers, principally banks and other central banks.
They manage the note issue. They also play a key role in the provision of
safe and efficient payment and settlement services for the UK markets and
for the country as a whole.
The Risk Analysis and Monitoring division is responsible for integrating
management information on the risks arising from the Bank's operation in
The Banking System in England
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
The Financial Stability divisions have the main responsibility for
discharging the Banks remittal to maintain the stability of the financial
system as a whole. The Financial Stability Committee acts as a focus for the
Bank's work in this area. The Governor chairs the Committee.
The work of the Financial Stability divisions covers both UK and overseas
financial systems and markets, and the functioning of the international
financial system. The divisions identify, analyse and carry out research into
developments relevant to the structure and functioning of the financial
system domestically and internationally, make policy proposals and
encourage changes designed to increase its safety and effectiveness.
The divisions also contribute to the monetary policy process, for example
through the Bank's Deputy Governor for Financial Stability as a member of
the Monetary Policy Committee. The divisions' analysis is used to promote
public understanding of issues in financial stability through, for instance, the
regular Financial Stability Review.
Co-ordination Unit for Europe
The Co-ordination Unit for Europe is responsible for co-ordinating the
Bank's work on Europe, specifically in relation to the Euro. It monitors the
evolution of the Euro financial markets and supporting infrastructure; and
provides information on this (and other Euro-related matters) in the biannual
Practical Issues report. It leads the Bank's involvement in HMT's National
Changeover Plan work, focusing on the financial sector preparations. It co-
The Banking System in England
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
Finance and Resource Planning
Investment Unit
Management Services
Property Services and Security
The Central Services divisions encompass a range of support functions that
underpin the Bank's activities and help to ensure that the Bank's reputation
is maintained. These include finance, IT, personnel, the Governors' private
offices, and media and public relations, legal and information services.
Printing Works
The Bank of England Printing Works is located on a purposely-built high
security site in Debden, Essex. It employs over 450 people and is
responsible for the printing of over 1 billion notes annually, together with
the manufacture of its own inks, printing plates and threads. In addition the
Printing Works provides technical and specialised security advice to a
number of central banks worldwide.
The notes are produced in a highly developed printing process which
combines high technology and quality craftsmanship, making the Bank one
of the most cost effective note producers world-wide.
The Printing Work's expertise has led to commercial sales in overseas
markets through Debden Security Printing Limited, the Bank's wholly
owned commercial subsidiary.
The Banking System in England
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
The Banking System in England
Progress test
BUILDING COMMERCIAL
MERCHANT BANKS
SOCIETIES BANKS
Members of Building Members of Accepting Barclays, Lloyds,
Societies Association Houses Committee Midland, National
Examples: Halifax, Examples: Rothschid's, Westminster
Abbey National Hambros, Baring Wiliams and Glyn's
Nationwide, Provincial Brothers. and Scottish banks
Members of Finance
Houses Association.
NATIONALIZED National Savings Bank THE BANK OF FINANCE
Examples: Forward
BANKS and National Girobank ENGLAND COMPANIES
Trust, UDT,
Mercantile Credit.
General
management
team at
Head Office
Merchant and
Installment Related financial
Domestic International wholesale
credit services services
banking
Bank branches Includes any Specialized bank Most banks now Banks are now active
throughout overseas branches companies own a finance in such areas as:
Britain including or subsidiary created to be able company which insurance services
any subsidiary foreign banks to operate in this will offer both unit trust sales
bank companies owned by the highly specialized personal and computer services
British clearing area company finance executor & trustee
bank arrangements appointments
OTHER BANKING
SYSTEMS
IN THE WORLD
D Objectives:
After studying this chapter you should understand:
3.1 The United States of America banking system
3.1.1 Formal structure of the Federal Reserve System
3.1.2 The realities of power
3.1.3 The instruments of Central Banking
3.1.3.1 Reserve requirements
3.1.3.2 Discounting and the discount rate
3.1.3.3 Open Market operations
3.1.4 Financial institutions
3.1.5 The regulation and structure of depository institutions
3.1.5.1 The dual banking system
3.1.5.2 Multiple federal authorities
3.1.5.3 Deposit insurance and the FDIC
3.1.5.4 Bank size distribution and the McFadden Act
3.1.5.5 Savings banks and savings and loan associations
3.1.5.6 Mortgage-related financial institutions
3.1.6.7 Credit unions
3.2 The European System of Central Banks
3.2.1 Organisation of the European System of Central Banks
(ESCB)
3.2.2 Objectives and tasks of the European System of Central Banks
3.2.3 The European Central Bank (ECB)
Other Banking Systems in the World
12 Federal
Board of Appoint 3 Reserve
Governors Directors 5,000 Member
Banks Elect 6
7 Members Directors
Commercial
Each Bank with 9
appointed by Banks
Directors who
the President
appoint
and confirmed
the President of
by the Senate
the F. R. Bank Select
Federal Open
Market Committee
Board of Governors Federal
plus 5 Federal Advisory
Reserve Bank Council
Presidents 12
Members
Direct
Set
(within
limits)
Open
Review and Establish
Market
Determine
Operatio
Reserve Discount
Requirements 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
member’s 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
Chairman’s 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
government’s 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:
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.
Other Banking Systems in the World
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 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.
Actually, the facts of life are rather different, as the more realistic Figure 2
illustrates.
Other Banking Systems in the World
Chairman of the
Board of Governors President of FRB of
New York
Other Members Federal Open
Other Federal
Of the Board of Board Market
Reserve
Governors Staff Committee
Bank Presidents
Set Set
(within Advisory Direct
limits)
Discount
Rate Trading desk
At FRB of NY
Execute
Reserve
Requirements
Open
Market
Operations
By all odds, the dominant figure in the formation and execution of monetary
policy is the Chairman of the Board of Governors of the Federal Reserve
System. The Chairman is the most prominent member of the Board itself
and the most influential member of the FOMC and is generally recognised
by both Congress and the public at large as the voice of the Federal Reserve
System. Although the Federal Reserve act appears to put all seven members
of the Board of Governors on more or less equal footing, over the past fifty
years strong personalities, outstanding abilities, and determined devotion to
purpose have made the chairmen rather more equal than others. As adviser
to the President, negotiator with Congress, and final authority on
appointments throughout the system, with influence over all aspects of
monetary policy as Chairman of both the Board of Governors and the
FOMC, the Chairman for all practical purposes is the embodiment of the
central bank in the United States.
Other Banking Systems in the World
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.
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.
Other Banking Systems in the World
The Federal Reserve exercises control over the bank lending and the money
supply by altering the reserves of commercial banks and of other deposit-
type institutions and by influencing the deposit creation multiplier. The Fed
accomplishes these objectives by changing reserve requirements relative to
deposits and by changing the actual amount of reserves that financial
institutions hold. The Fed varies the actual amount of reserves through the
discount rate and open market operations.
Within limits established by the Congress, the Federal Reserve can specify
the reserve requirements that banks and other deposit-type institutions must
hold against deposits. Congressional limits for bank reserves were first
established in the Federal Reserve Act of 1913 and have been reset a
number of times since, most recently in the Banking Act of 1980 and the
Garn-St. German Depository Institutions Act of 1982. This most recent
legislation provides that all depository institutions – savings banks, savings
and loans, and credit unions, as well as all commercial banks, whether
members of the Federal Reserve System or not – are subject to the Fed’s
reserve requirements. As of 1993 each depository institution had to hold
reserves (in the form of vault cash or deposits in a regional Federal Reserve
Bank) as follows:
Lowering the required reserve ratio for demand deposits – e.g. from 12 to 10
percent – does two things. First, it instantly and automatically increases
banks’ excess reserves, sine fewer reserves are now required against any
given volume of demand deposits. More excess reserves, of course, enable
banks to make more loans, buy more securities, and expand demand
deposits.
Other Banking Systems in the World
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
it’s 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.
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.
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).
Other Banking Systems in the World
It has been recognised for a long time that discount policy has two
dimensions: the first is price, the discount rate, the rate of interest the
Federal Reserve charges financial institutions when they borrow from the
Fed. The second dimension has to do with the quantity of the Federal
Reserve lending, including Fed surveillance over the amount that each
institution borrows and the reasons why it borrows. Let us examine quantity
first and price second.
Historically, the primary function of a central bank has been to stand ready
to supply funds –promptly and in abundance – whenever the economy is in
danger of coming apart because of cash storage. While that is no longer its
sole function, it is still one of its most important. The central bank is the
ultimate source of liquidity in the economy, because with its power over
bank reserves it can increase (or decrease) the ability of the banking system
to create money. Since no one else can do the job, it is the central bank that
must be responsible for supplying funds promptly on those rare but crucial
occasions when liquidity shortages threaten economic stability: “financial
panic”, the history books call them. Because of this responsibility, the
central bank has traditionally been called the “lender of last resort”.
Other Banking Systems in the World
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.
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 Fed’s own initiative, open market operations are the
mainstay of the Federal Reserve policy.
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 bank’s 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 doesn’t 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.
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.
- The discount rate is the interest rate that the Federal Reserve, the
government’s 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 market-
determined 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).
Commercial banks are the most prominent of all financial institutions. There
are about 12,000 of them, ranking from Citibank, with hundreds of billions
of dollars in assets, to thousands of small banks scattered throughout the
country, many of which have less that a hundred million dollars.
Commercial banks are also the most widely diversified in terms of both
liabilities and assets. Their major source of funds used to be demand
Other Banking Systems in the World
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 long-
term 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 short-
term 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 fund’s
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 fund’s 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.
Other Banking Systems in the World
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.
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.
Other Banking Systems in the World
Thus today the USA has a dual banking system: federally chartered banks,
under the aegis of the Comptroller of the currency, and state-chartered
banks, under the supervision of each of the various states.
A unique feature of the system is that the regulated can choose their
regulator: state banks can shift to national charters and vice versa, state
member banks can shift to non-member status and vice versa.
The justification for the dual banking system – side-by-side federal and state
bank regulation – is that it is supposed to foster change and innovation by
providing alternative routes through which banks can seek charters and do
business. It is claimed that a dual banking system is more responsive to the
evolving banking need of the economy than a single system would be. The
validity of these arguments is difficult to assess, but whatever their merits
no one has been marching in the streets demanding change in the status quo.
The dual banking system seems to be working tolerably well, regardless of
its logic.
The dual banking system has aroused considerably less controversy than the
existence of multiple and sometimes opposing supervisory authorities at the
federal level. In 1960s the Federal Reserve and the Comptroller clashed
frequently over the interpretation of certain laws. Relations between the
FDIC and the Comptroller were also strained, although the Comptroller is
one of the three members of the FDIC’s Board of Directors.
Other Banking Systems in the World
The present system is defended by some on the grounds that divided federal
authority, like the dual banking system, provides an element of flexibility,
fostering innovation and change that would be lacking if all federal banking
powers were concentrated in one agency. On the other hand, if there is to be
federal supervision of banking at all, it would appear axiomatic and
operated at minimum cost – which implies that one supervisory body is
preferable to disagree fairly often among themselves.
During the 1920s bank failures averaged about 600 a year, and during the
years 1930-1933 over 2,000 a year! At the end of 1933 there were fewer
than 15,000 commercial banks remaining out of 30,000 that had been in
existence in 1920. It is not surprising, therefore, that the Congress
established the Federal Deposit Insurance Corporation (FDIC) in response
to this historic debacle.
Alternatively, the FDIC may succeed in merging the failed bank with a
healthy one, the so-called assumption method. The deposits of the failed
bank are assumed by another bank into which the distressed one is merged
and are made available in full to the depositors. The FDIC usually assists in
this procedure, either by making payments to the bank taking over and/or by
relieving it of some of the weaker assets of the failed bank. The assumption
method has been the one most often used in the recent years; in such cases
the FDIC has in effect completely insured all depositors to the full amount
of their deposits, regardless of the technical insurance coverage limit. In
addition, in a few cases the FDIC has extended loans to a bank in difficulty
and allowed it to continue in business.
The explanation for the success of the FIDC does not involve calculations of
actuarial probability, but rather rests on the premise that the very existence
of federal deposit insurance eliminated the possibility large-scale bank
failure. By insuring deposits under the auspices of the federal government,
backed by the implied support of the United States Treasury to whatever
extent necessary, the FDIC has successfully eliminated the old-fashioned
“run on the bank” by frightened depositors that formerly heralded another
Other Banking Systems in the World
bank failure. If people hear their bank is “in trouble” now, they hardly pay
attention. They’re 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 bank’s 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. The Savings Association Insurance Fund (SAIF), which took over
responsibility from the defunct FSLIC for the insurance of deposits at
savings and loans, and
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 government’s
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.
Other Banking Systems in the World
With so many commercial banks in the United States, there would appear to
be, on the face of it, a high degree of robust competition in banking.
However, as Table 2 indicates, a large percentage of banks are very small
institutions, with less that $50 million of assets per bank.
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
Other Banking Systems in the World
(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.
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
Other Banking Systems in the World
1978. Because most are state chartered, they are state regulate and state
supervised.
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.
Fannie Mae buys mortgages from S&Ls and other institutions that no longer
wish to hold them as investments and finances these so-called secondary-
market operations primarily by issuing bonds to the public.
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 consumer’s
Other Banking Systems in the World
loans. They may encounter similar problems if they don’t 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 ESCB is composed of the European Central Bank (ECB) and the EU
national central banks (NCBs). The NCBs of the Member States which do
not participate in the Euro area, however, are members of the ESCB with a
special status: while they are allowed to conduct their respective national
monetary policies, they do not take part in the decision-making regarding
the single monetary policy for the Euro area and the implementation of such
decisions.
The decision-making bodies of the ECB govern the ESCB: the Governing
Council, the Executive Board and the General Council.
The Governing Council comprises all the members of the Executive Board
and the governors of the Member States without derogation, i.e. those
NCBs, which fully participate in the Monetary Union.
• to adopt the guidelines and make the decisions necessary to ensure the
performance of the tasks entrusted to the ESCB; and
• to formulate the monetary policy of the Community, including, as
appropriate, decisions relating to intermediate monetary objectives, key
interest rates and the supply of reserves in the ESCB, and to establish the
necessary guidelines for their implementation.
Other Banking Systems in the World
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 ESCB’s advisory functions (see above);
• the collection of statistical information;
• the preparation of the ECB’s 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
ECB’s capital subscription other than those already laid down in the
Treaty;
• the laying-down of the conditions of employment of the ECB’s staff; and
• the necessary preparations for irrevocably fixing the exchange rates of
the currencies of the Member States with a derogation against the Euro.
Other Banking Systems in the World
The basic tasks to be carried out by the ESCB are defined in Article 3 of the
ESCB Statute. These tasks include:
• to define and implement the monetary policy of the Community;
• to conduct foreign exchange operations;
• to hold and manage the official foreign reserves of the participating
Member States;
• to promote the smooth operation of payment systems; and
• to contribute to the smooth conduct of policies pursued by the competent
authorities relating to the prudential supervision of credit institutions and
the stability of the financial system.
The ESCB Statute (Articles 17 to 24) specifies the monetary functions and
operations of the ESCB. On the basis of these provisions, the European
Monetary Institute (EMI) prepared an operational framework for the
ESCB’s monetary policy. The Governing Council of the European Central
Bank (ECB) will take the final decision on the operational framework. The
Governing Council of the ECB may decide not to use all the available
options or may change certain features of the instruments and procedures
presented below. Further detailed information on these issues can be found
in the EMI publications entitled “The single monetary policy in Stage
Three - Specification of the operational framework” (January 1997) and
“The single monetary policy in Stage Three - General documentation on
ESCB monetary policy instruments and procedures” (September 1997).
Monetary policy instruments
Other Banking Systems in the World
Open market operations will play an important role in the monetary policy
of the ESCB for the purpose of steering interest rates, managing the
liquidity situation in the market and signalling the stance of monetary
policy. Five types of instruments will be available to the ESCB for the
conduct of open market operations. The most important instrument will be
reverse transactions (applicable on the basis of repurchase agreements or
collateralised loans). The ESCB may also use outright transactions, the
issuance of debt certificates, foreign exchange swaps and the collection of
fixed-term deposits. Open market operations will be initiated by the ECB,
which will also decide on the instrument to be used and the terms and
conditions for the execution of such operations. It will be possible to
execute open market operations on the basis of standard tenders, quick
tenders or bilateral procedures. With regard to their aim, regularity and
procedures, the ESCB open market operations can be divided into the
following four categories:
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 ESCB’s 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 one-
month maintenance period.
Counterparts
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 ECB’s 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 2.8658%
Danmarks Nationalbank 1.6709%
Deutsche Bundesbank 24.4935%
Bank of Greece 2.0564%
Banco de España 8.8935%
Banque de France 16.8337%
Central Bank of Ireland 0.8496%
Banca d’Italia 14.8950%
Banque centrale du Luxembourg 0.1492%
De Nederlandsche Bank 4.2780%
Oesterreichische Nationalbank 2.3594%
Banco de Portugal 1.9232%
Suomen Pankki 1.3970%
Sveriges Riksbank 2.6537%
Bank of England 14.6811%
The European Central Bank was established in June 1st, 1998. Thus, this is
one of the world’s youngest central banks. The legal basis for the European
Other Banking Systems in the World
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 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 ESCB’s 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.
Other Banking Systems in the World
The key task of the Governing Council is to formulate the monetary policy
of the Euro area. Specifically, it has the power to determine the interest rates
at which commercial banks may obtain liquidity from the central bank. Thus
the Governing Council indirectly influences interest rates throughout the
Euro area economy, including the rates that commercial banks charged their
customers for loans and those that savers earn on their deposits.
The Executive Board of the ECB consists of the President, the Vice-
President and four other members. All are appointed by common accord of
the Heads of State or Government of the 11 countries, which form the Euro
area.
Progress test
President
Central banks: Gouverners
England of the central
Denmark banks in the Gouverning Council President
Sweden EMU
Greece (Euro Area) President
Other Banking Systems in the World
ANNEX No 2
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 Banker’s 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
1
Internal norms of each Romanian bank
Money Services
2
Kiriţescu Costin - Relaţii valutar-financiare internaţionale, Ed. Ştiinţifică şi
Enciclopedică, Bucureşti, 1978, p. 237
Money Services
Endorsement3:
4.3.1 Cheque
The simplest and most obvious method is merely to send a cheque to the
beneficiary in the other country. This has advantages for the drawer of the
cheque who only incurs the postage costs and bank charges when the
cheque is debited.
However, if the cheque is used in payment for goods, their delivery may be
delayed while the payee of the cheque waits for it to be cleared. It is
possible to issue a cheque in the relevant currency if the drawer maintains
an account in that currency.
3
Palfreman David – Banking: the legal environment, Pitman Publishing, London, 1994,
p.242
Money Services
Now let’s try to be in the position of the payee who suffers the following:
The payee’s 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;
• 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;
4
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.
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 bank’s own paper.
Money Services
One of the most popular alternatives to the cheque or banker’s draft is the
International Money Order (IMO). It has the advantage of being
immediately available once the customer has completed the application
form and is often the cheapest method of sending money abroad. The bank
draws the International Money Order on itself and the payment is,
therefore, guaranteed.
In the United Kingdom, International money orders are usually issued either
in sterling pounds or US dollar and are used for relatively small amounts
e.g. GBP 1,000 or USD 2,500, but can be used for as much as GBP
5,000/USD 7,500. As they can be encased throughout the world they
represent a simple and effective way of remitting funds abroad, particularly
as the beneficiaries can obtain the funds immediately on presentation to
their own bankers.
You can see in the Annex no. 3, the process for an International Money
Order.
If the remitter wishes to meet a commitment for an amount greater than the
limit imposed by the bank for an International Money Order, then more
than one International Money Order can be purchased, although it is likely
to become impractical to use more than two. For the larger amounts it may
be better to use an alternative method and particularly an international
payment order.
Banks recommend its use for non-urgent transfers where the amount that
requires remitting is above the limit of I International Payment Orders or
the currency required is one other than sterling pounds or US dollars. For
example, if a customer wishes to send to Spain the equivalent of GBP
5
Davies Audrey & Kearns Martin – Banking Operations, Pitman Publishing, London
1994, p.25
Money Services
The way the funds are transferred between the banks will depend upon
which currency the payment is in.
You can see in the Annex no.4, the process of an International Payment
Order.
There are several ways in which the beneficiary can receive payment.
Instructions can be given as follows:
(a) Notify and pay – used if the beneficiary’s bankers are not known. The
beneficiary, once advised, will have to call the bank to collect the
money.
(b) Advise and credit the beneficiary’s account.
(c) Pay the beneficiary upon application – used when the beneficiary
wishes to collect the funds personally from a specified branch of a bank
abroad.
(d) Place to the credit of a new account to be opened in the beneficiary’s
name – used when the beneficiary wishes to have a new account opened.
In this case references and a specimen signature may be required by the
bank abroad.
Whether the remitter or the beneficiary pays the costs involved will depend
on the agreement between them. If the beneficiary pays some or all of the
costs, then they will be normally deducted from the amount received.
Money Services
It normally takes two working days for the processing of TTs from receipt
of instructions to payment to the beneficiary, unless payment is being sent
to a remote part of the world, in which case it may take a little longer. The
speed of payment is achieved by using cable or telex to transmit the
payment instructions rather than sending them by airmail as with
International Payment Orders. The disadvantage is that this method makes
the TT more expensive.
Girobank offers several ways of sending money abroad, some of which are
similar to those, described already. Not all the services are available to all
countries, but if you wish to send money to a country not on the Girobank
Money Services
1) Payment by cheque;
2) Payment in cash;
There is a fixed charge for each method, but if the remitter has a Girobank
account and the beneficiary overseas has a Giro account, then a transfer can
be made between the two, free of charge.
This means that the customer only has to arrange essential regular payment
once. The customer has to inform the bank the necessary details concerning
who the payment is to, the amount of money to be paid out –when and how
often the payment is to be made.
After that, the bank will take on the responsibility of ensuring that the
payments are made:
Out of the customer’s account;
Into the account of the person/organisation named.
Because standing order payments are made automatically through the
banking system, the customer is saved the bother and potential cost of
writing and sending off cheques.
Money Services
Relatively inexpensive.
Issue process is straight- Possible collection costs.
Giro cheque forward.
Can be lost or stolen.
Remittance is quick and
simple.
Telephone Banking
Such a service represents a competitive area and it may be either voice-
activated (i.e. the computer is expected to react to customer's voice and
comply with his or her instructions accordingly), or electronically activated
(i.e. the client speaks over the microphone of their telephone and dials
certain numbers meaning a certain transaction). The telephone banking can
offer transfers of funds, payments of regular bills, applications for loans and
overdrafts etc.
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
% don’t 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
Booz Allen & Hamilton – April 2001
Money Services
4.6 SWIFT
These initials stand for the Society for Worldwide Interbank Financial
Telecommunication, which is an international organisation whose members
consist of several hundred of the largest international banks. The society,
which was created under Belgian Law and located in Brussels, was formed
to accelerate the transfer of funds and other messages between the member
banks.
Messages are seen from the point of view of the SWIFT system. All
messages introduced into the system by a user are referred to as input
messages; all messages, which the system delivers, to a user are referred to
as output messages. A three-digit number, e.g. MT 100 represents messages,
where the first digit defines the message category, indicating the general
usage of the message. There are nine categories of user-to-user messages,
identified as categories 1-9, and a separate category for messages exchanged
between a user and the system, identified as category 0.
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:
• System Messages (MT category 0) – which may relate to either the
sending and receiving of messages (e.g. User-to-SWIFT message,
Delivery Notification, Retrievals), or to some aspect of an user’s logical
terminal (LT) or destination;
• User-to-User Messages (MT categories 1-9) – which enable users to
perform financial transactions;
• Service Messages (or Control Messages) –,,which relate either to
system commands or to acknowledgements”.
The SWIFT system normally processes user-to-user messages on a First-In-
First-Out basis.
User-to-user messages fall into distinct categories to be used for different
types of financial transactions. A 3-digit number identifies individual types
of messages (MTs). The first digit identifies the category of the message.
There are 9 categories9 of financial messages. Each category referring to a
different general usage:
8
SWIFT User Handbook Network Acces Guide, August 1998
9
SWIFT User Handbook Network Acces Guide, August 1998
Money Services
Category 4 Collections
Cash letters
Category 5 Securities
Category 6 Precious metals & Syndication’s
Category 7 Documentary credits
Guarantees
Category 8 Traveller’s cheques
Category 9 Statements, Reports etc.
Only block 1 is mandatory for all messages. Block 2-5 are optional and
depend upon the nature of the message and on the application in which the
message is being sent or received. All user-to-user messages contain blocks
2, 4, and 5.
SWIFT offers round the world, round the clock expert support to its
customers, covering administrative, operational and technical matters.
Support is available 24 hours a day, seven days a week and in many
languages.
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 instrument is made out by the drawer, who by virtue of a deposit in a
bank, gives an unconditionally order to that bank (the drawee) to pay a
determined sum of money to a third party (or to the drawer himself), who is
the beneficiary.
In the process of the cheque the drawer issues the cheque, the legal owner
cashes it and the drawee pays the cheque.
In order for the drawer to issue cheques, the bank must deliver to its client a
blank passbook.
The owner of the cheques fills in the blank cheque, signs and delivers it to
the beneficiary, who will present it to his bank for cashing it.
In order to be valid, the cheque has to contain the following compulsory
mentions10 (see Annex No 5):
the name “Cheque” written in the text of the instrument;
the unconditional order to pay a certain amount of money;
the name of the drawee, respectively the bank where the drawer has an
account opened with;
10
Cheque Act, 1934, with the subsequent amendments
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;
b) by ordinary transfer of debts; it is the case when the cheque is issued for
a specified person and it has the mention “not to order”; only the
authorised person can enact the cheque.
In Romania, the cheques are issued and payable at the following terms:
- 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 wouldn’t 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.
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 bank’s services
in order to cash the sum written on the cheque.
• special - between the two lines is specified the name of the bank.
d) Traveller’s 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
The Company “Atlas” Inc. purchases from the store of The Company “Star”
Inc. electronics, amounting to ROL 5,000,000.
The Company “Atlas” Inc. has a current account opened with The Bank
“X”, and The Company “Star” Inc. has a current account opened with the
Bank “Y”.
Under the available funds in the current account, The Bank “X” gives a
passbook to the Company “Atlas” Inc.
When the representative of the Company “Atlas” Inc. purchases the goods,
he fills in a file of the pass book with the necessary dates and the sum which
represents the equivalent value of the electronics bought, he signs that file
and hands it to the representative of the store.
Since that moment, the Company “Atlas” Inc. has become the drawer, the
Bank “X” the drawee, and the Company “Star” Inc. the beneficiary.
The Company “Star” Inc. submits the cheque to the Bank “Y”, and sends it
to The Bank “X” in order to cash it.
The beneficiary bank has the obligation to collect the cheques from its own
clients for encasement. The bank will remit the cheques to payment.
Money Services
Progress test
Remits
North draft and Bastille
Credits Left collects
Bank (5) proceeds(7) Bank
Bank
ANNEX No 3
Orders
IMO Pays in
(1) Account
Issues credited
IMO (4)
(2)
Customer Beneficiary
Issues
Instructions (4) Notifies and pays
(1) or advises and credits
Debits or pays on application
Customer or opens new account
(2)
Remitting Overseas
Sends Instructions (3)
Bank 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
ANNEX No 7
1 3 5
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
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
Electronic Banking Services
The evolution into the Internet and electronic banking era is set to be the
most fundamental transformation that the industry would have ever had to
undergo. Yet, when we arrive on the ‘other side’ we should not envisage
being greeted by an era dictated by geeks and impersonal switches, but by
the level of human interaction and use of information that kept eluding us
all through the industrial revolution.
This kind of service was firstly accepted by the small savings bank in the
United States of America, where in a small town the customers are well
known and the relationships between the banking clerks and the customers
are close and stable. In this environment, the operations solicited by phone
have appeared.
The sphere of asked services was also restricted and the bank initially
agreed to pay only some usual phone bills, with small values. The ‘bank by
phone’ was called like this due to the fact that the operations were solicited
based on human voice, by telephone.
1
Source: ‘Piaţa Financiară’ magazine, November, 2000
Electronic Banking Services
For an increased safety, some banks have installed a small card reader at the
customer location.
So, based on some precise orders and some key words, the computer may
receive the customers’ orders and may give some significant answers to
him.
Electronic Banking Services
The diversity of the solutions adopted by bank to solve these problems and
facilitate the communications is shown in the following table:
Nation-
wide
Bank of England
The offer Lloyds TSB
Scotland BS Royal
Bank of
Scotland
Automatic Automatic
Automatic
Automatic answer answer
answer
teletext (human (human
(human
through the voice) voice)
voice)
The type phone through the through the
through a
(keypad, phone and phone and
phone and a
home using a using a
special
computer) recognition recognition
terminal
tone tone
Password and
The access account Special PIN
PIN using a Password
to the number and account
special card Special PIN
system Password and number
special PIN
Fixed tariffs Fixed
Costs are monthly and Quarterly
(besides established additional subscription
Free
the phone monthly tariffs of L2.50 for
circuit) according to according to each account
its use its use
Source: Basno C., Dardac N.- ‘Moneda. Credit. Banci’, Ed. Didactică şi
Pedagogica RA, Bucureşti. 1999
The table shows that many banks use video equipment in order to give the
customer access to a larger range of services.
Electronic Banking 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.
Electronic Banking Services
The payment from distance is possible only when the bank gives the holder
of the payment card a purchase power. In this case, the memory of the card
records this ability that may be interpreted as a credit limit.
On the other hand, the payment card keeps in its memory all data regarding
the payments made (the day, the amount, and the beneficiary). So, we may
say that this memory acts as an archive. The credit limit may be renewed
monthly.
The Teletransfer
The holder of the payment card may use this system to make payments on
behalf of some natural or legal persons. These operations are recorded in the
card memory, but do not affect the purchasing power. Consequently, this
operation does not have the same execution guarantee, meaning that it may
be performed only if the holder has enough money in his account.
Electronic Banking Services
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.
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 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 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.
2
Source: ‘E-Finance’, supplement of ‘Piaţa Financiară’ magazine, December, 2000
Electronic Banking Services
From the banks’ point of view, clients segments to which these services
address are: individual clients market (it is estimated that till the end of the
year 2003, there will exist in the United States of America about
18.5 million home users); institutional clients market (corporate clients).
It is estimated that by the end of 2003, there will be over 18.5 million
Internet banking home users, in the USA. These clients’ segment will
probably represent 30% of banks’ retail activity profits. It is estimated that
Internet banking will be the leader of the Home Banking American market.
3
According to ‘E-Finance’, supplement of ‘Piaţa Financiară’ magazine, March, 2001
Electronic Banking Services
The banks can participate in the electronic money circuit in the quality of
issuer, but can fulfil also other functions like: distribution of electronic
money issued by other entities, processing and transaction discount made
with the help of electronic money, as well as the registration in accounting
of the corresponding transactions.
The legal definition set out in Directive 2000/46/EC introduces the concept
of a claim on the electronic money issuer. This clarifies the concept of the
issuer, i.e. the undertaking that has ultimate financial responsibility towards
the holders of electronic money. This distinction is necessary because in
some electronic schemes the tasks of issuing and administering electronic
money are the responsibility of different entities.
Technological features
Hardware-based products have the potential to be used not only for face-to-
face payments, but also for payments via telecommunications networks, for
example by means of a card-reading machine and a personal computer
connected to the Internet. Whenever electronic money is transferred via
telecommunications networks, the term “network money” is used,
regardless of whether the electronic money is hardware-based or software-
based.
2. ‘Stored-value card’ – they are cards similar to the debit and credit
cards, but they distinguish by the fact that they contain a fix amount of
‘digital cash’. A sophisticated stored-value card is represented by the
‘smart card’.
4. ‘Electronic cheque’ – these permit the users of the Internet to pay the
bills directly through Internet without transmitting the check paper. The
user of the computer writes the equivalent value of the check, after
which he transmits the electronic check to the other party, which, in its
turn, transmits it to his bank.
5
Source: ‘Net Report’ magazine, February, 2001
6
According to Piaţa Financiară, September, 2000
Electronic Banking Services
The role of electronic money in the economy derives from its function as a
retail payment instrument. In this regard, electronic money is analogous to
banknotes and coins, cheques, bank transfers or credit and debit cards. Each
of the existing retail payment instruments offers certain specific services
which make that payment instrument particularly attractive to certain
customers or for certain types of transactions. Nonetheless, there is scope
for competition between them. For example, following their introduction,
credit and debit cards competed with cheques. Apart from the range of
services offered by retail payment systems, the key factor in determining
competitive outcomes is the cost associated with the use of each retail
payment instrument. For banknotes and coins, as well as for cheques,
handling costs are sizeable. For credit and debit cards, the main costs arise
from the bookkeeping in relation to bank accounts, including the
verification of accounts and transfers between accounts.
With electronic money, transaction costs can be lower than with banknotes
and coins. For example, when payments at vending machines are made with
electronic money, there is no need for the merchant to handle banknotes and
coins stored in the machine and to spend resources on the physical safety of
the vending machine. Furthermore, with electronic money, transaction costs
may also be lower than with debit cards, because the settlement process
Electronic Banking Services
generally requires fewer data exchanges and there is usually no need for any
online authorisation of electronic money transactions.
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.
Second, the effectiveness of monetary policy instruments might be
affected by a widespread adoption of electronic money. This relates
mainly to effects on central bank balance sheets and the ability of central
banks to steer short-term interest rates.
Electronic Banking Services
7
European Central Bank
8
ECB Monthly Bulletin – November 2000
Electronic Banking Services
The legal and regulatory regime for electronic money in place in the
countries of the European Union (EU) has, until recently been characterised
by a low degree of harmonisation. The recently adopted Community
legislation on electronic money provides a comprehensive and harmonised
regulatory framework for electronic money schemes.
Offering some modern and secure solutions, of high quality coming and
receiving the client, will be the success of BA/CA Romania.
Electronic Banking Services
♦ Alpha Bank
Alpha Web Banking was introduced in 1998; it permits clients to effect on-
line elementary banking transactions. In October 2000, share transaction
was introduced. Alpha Bank was one of the first banks that introduced
mobile banking through WAP technology. Alpha Bank was in Romania the
first bank that implemented on-line connection, and executed operations in
real time, it also implemented a multibranch/ multicurrency accounting type.
Electronic Banking Services
♦ Piraeus Bank
In March 2001, Piraeus Bank launched EXPRESSBank services package.
This comprises four remote banking services: TeleBank, MobilBank,
InfoBank, and DirectBank.
9
Source: ‘Piaţa Financiară’ magazine, September, 2000
Electronic Banking Services
The lack in the consumer’s trust is the main thing that stops e-commerce
development, a juridical problem spokesperson from the commission,
declared.
The EU, in order to regulate and uniform the controversial field of the
electronic signature, recently published a series of directives to be
implemented, for the Member States. Two important objectives are outlined:
firstly, it is provided the fact that from the time of the directive entering into
force, in the EU’ states; the electronic signature10, has the same value as the
written signature, starting from the premise that the electronic signature,
will be able to be certified by a institution specialised in this field. Secondly,
there is the archivation of those documents problem. The question: ‘for how
long the signatures must remain in the computer’ s memory?’ represents an
important aspect of the problem.
10
Source: www.europa.eu.int.
Electronic Banking Services
In Romania, the trust in ‘e’ sector activities could come only from law. It is
necessary that laws regarding ’e’ world be concluded and adopted by the
Romanian Parliament.
The Law Regarding the Electronic Authentication
The main actors of ‘e’ market can be, for the moment, public institutions
and physical persons. The law of electronic authentication is necessary, and
it should oblige the public institutions to enter the ‘game’.
A good legislation in this field should focus on the participants to the
economic game protection, and non-intervention as long as the participants
have nothing to reproach one to the other.
The Law Regarding the Electronic Signature11
11
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.
12
Source: www.pambuccian.ro/RlegSign.htm
Electronic Banking Services
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 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 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.
13
Source: www.pambuccian.ro/ R-LegEcom.htm
Electronic Banking Services
14
According to Piaţa Financiară, July,2000
Electronic Banking Services
After establishing the risks and tolerances, the management must administer
and control them. This stage of risk administration includes such activities
as: internal communication co-ordination, supplementing protection
measurements against external risks, clients’ instruction as to services’ use,
a.s.o. Banks increase the ability in the inherent risk control and
administration in any activity when all these are established through
procedures and they are accessible to the whole staff. The risk’ management
and control process include:
Having as objective the enumerated risks’ reduction, the regulation of all ‘e’
activities, the establishment of an adequate infrastructure are necessary
things to be done, as well as providing those entitled to authorise and
supervise these activities.
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.
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
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.
In the financial sector rapid changes are happening, and institutions do not
have the opportunity to offer the best services in each category. Pioneers
have the potential to invent and bring on the market new products that the
customers find attractive. For this reason, the banks, being unable to rapidly
adapt the changes, will have to become product distributors or producers of
some of them. In both cases, Internet will be delegated to perform
unimportant functions for the financial institution.
Virtual distribution (on the Internet) has the advantage of lower costs, on the
decreasing costs of electronic data processing and communication expenses.
Banks, insurance societies, and real estate societies will have to work with
the specialised producers of a certain service type and effect cross selling.
Furthermore, there are new opportunities of establishing closer relationships
with the clients, beyond the traditional boundaries.
Electronic Banking Services
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.
Vital to this field is the field of electronic banking, which is vital for on-line
transactions.
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 client’s
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
Source: ‘E-Finance’ supplement of ‘Piaţa Financiară’, February, 2001
16
Source: ‘‘Piaţa Financiară’, December, 2000
Electronic Banking Services
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 client’s 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.
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.
Electronic Banking Services
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
Electronic Banking Services
"There is no doubt that the Internet will become a fully fledged delivery
channel in a very short period of time," said Michael Berger, a member
of the Booz-Allen & Hamilton financial services team. "Ultimately, all
banks will have a Web presence and most would have advanced Web
sites capable of conducting most traditional banking transactions
within three years." Internet banking: What is it?
Online systems allow customers to plug into a host of banking services from
a personal computer by connecting with the bank's computers over
telephone wires. The convenience can be compelling. Not only is travel
time reduced, but also ATM machines; telephones banking or banking by
mail is often unnecessary. And, technology continues to make online
Electronic Banking Services
Future
Many experts agree that Internet Banking will revolutionise the World Wide
Web and completely change our perceptions and attitudes of an increasingly
digital society. Others suggest that Internet Banking and electronic
commerce will usher in a new and sinister digital era in which the US
Government will have access to all our PC’s. We must, however, remember
our ancestor’s experience with the introduction of televisions. Many
believed that "Big Brother", otherwise known as the US government, would
be watching us through the television we purchased for our homes. Perhaps
a more realistic concern is the current state of security. With advances in
secure transmission technology, these concerns will be relieved.
Advantages
Channel - Cost/Transaction
1. Branch Full Service: $ 1.07
2. Telephone Average: $ 0.54
3. ATM-full service: $ 0.27
4. PC banking (3rd party): $ 0.015
5. Internet Banking: $ 0.010
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.
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
Electronic Banking Services
Low cost. Internet banking operate at an expense much lower than a branch.
Banks can be able to provide services at lower prices.
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.
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).
CONCLUSION
Because the world directions in any field are drowned by the most
developed nation into the world we will report our conclusions to their
statistics. So, first will examine the Internet services situation generally and
after that we will conclude and about the Internet Banking situation. All
that, because this segment of market is already prepared to use the Internet
Banking solutions.
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
Electronic Banking Services
Progress test
ANNEX No 1
ANNEX No 2
Article 2
Definitions
(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;
13. "voluntary accreditation" means any permission, setting out rights and
obligations specific to the provision of certification services, to be
granted upon request by the certification-service-provider concerned, by
the public or private body charged with the elaboration of, and
supervision of compliance with, such rights and obligations, where the
certification-service-provider is not entitled to exercise the rights
stemming from the permission until it has received the decision by the
body.
Electronic Banking Services
ANNEX No 3
Text:
COMMISSION RECOMMENDATION of 30 July 1997 concerning
transactions by electronic payment instruments and in particular the
relationship between issuer and holder (Text with EEA relevance)
(97/489/EC)
Article 1
Scope
1. This Recommendation applies to the following transactions: (a) transfers
of funds, other than those ordered and executed by financial institutions,
effected by means of an electronic payment instrument; (b) cash
withdrawals by means of an electronic payment instrument and the
loading (and unloading) of an electronic money instrument, at devices
such as cash dispensing machines and automated teller machines and at
the premises of the issuer or an institution who is under contract to accept
the payment instrument.
2. By way of derogation from paragraph 1, Article 4 (1), the second and third
indents of Article 5 (b), Article 6, Article 7 (2) (c), (d) and the first indent
of (e), Article 8 (1), (2) and (3) and Article 9 (2) do not apply to
transactions effected by means of an electronic money instrument.
However, where the electronic money instrument is used to load (and
unload) value through remote access to the holder’s account, this
Recommendation is applicable in its entirety.
3. This recommendation does not apply to (a) payments by cheques; (b) the
guarantee function of certain cards in relation to payments by cheques.
Electronic Banking Services
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.
Article 4
Information subsequent to a transaction 1. The issuer supplies the holder
with information relating to the transactions effected by means of an
electronic payment instrument. This information, set out in writing,
including where appropriate by electronic means, and in a readily
comprehensible form, includes at least: (a) a reference enabling the holder
to identify the transaction, including, where appropriate, the information
relating to the acceptor at/with which the transaction took place; (b) the
amount of the transaction debited to the holder in billing currency and,
where applicable, the amount in foreign currency; (c) the amount of any fees
and charges applied for particular types of transactions. The issuer also
Electronic Banking Services
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.
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.
1. The issuer may alter the terms, provided that sufficient notice of the
change is given individually to the holder to enable him/her to withdraw
if he/she so chooses. A period of not less than one month is specified
after which time the holder is deemed to have accepted the terms if
he/she has not withdrawn. However, any significant change to the actual
interest rate is not subject to the provisions of the first subparagraph and
comes into effect upon the date specified in the publication of such a
change. In this event, and without prejudice to the right of the holder to
withdraw from the contract, the issuer informs the holder individually
thereof as soon as possible. 2. The issuer: (a) does not disclose the
holder's personal identification number or other code, except to the
holder; (b) does not dispatch an unsolicited electronic payment
instrument, except where it is a replacement for an electronic payment
instrument already held by the holder; (c) keeps for a sufficient period of
time, internal records to enable the transactions referred to in Article 1
(1) to be traced and errors to be rectified; (d) ensures that appropriate
means are available to enable the holder to make the notification required
under Article 5 (b). Where notification is made by telephone, the issuer
(or the entity specified by the latter) provides the holder with the means
of proof that he/she has made such a notification; (e) proves, in any
dispute with the holder concerning a transaction referred to in Article 1
(1), and without prejudice to any proof to the contrary that may be
produced by the holder, that the transaction: -was accurately recorded
and entered into accounts, -was not affected by technical breakdown or
other deficiency.
1. The issuer is liable, subject to Article 5, Article 6 and Article 7 (2) (a) and
(e): (a) for the non-execution or defective execution of the holder's
transactions referred to in Article 1 (1), even if a transaction is initiated at
devices/terminals or through equipment which are not under the issuer's
direct or exclusive control, provided that the transaction is not initiated at
devices/terminals or through equipment unauthorised for use by the
Electronic Banking Services
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.
OTHER ELECTRONIC
BANKING SERVICES
D Objectives
After studying this chapter you should be able to understand:
6.1 Introduction in the Electronic Funds Transfer - EFT
6.2 The banking cards
8.2.1 General aspects
8.2.2 The typology of bankcards
8.2.3 The fraud
6.3 Card market infrastructure
6.4 Bank Clearing System in the United Kingdom
Other Electronic Banking Services
The “key” to operating any EFT-POS transaction is a plastic card, such as:
- Credit cards;
- Store cards;
- Debit cards;
- Charge cards.
Speed
Using EFT-POS to make payments quicker than any other non-cash method
of payment.
Other Electronic Banking Services
1
Davies Audrey&Kearns Martin – Banking Operations, Pitman Publishing, London, 1994
Other Electronic Banking Services
The customer has a card on which there is a magnetic stripe, which holds
the details of their account:
Account number
Bank/branch number
Cash limit (weekly/daily) – this is decided by the bank manager
Security
Any other relevant information.
The PIN (Personal Identification Number) which the customer uses is held
on the stripe in coded form rather than in the same form as that known to the
customer for security reasons.
The use of cards through Automated Teller Machine – ATM has the
following steps:
Customer inserts the card into the ATM;
ATM reads the stripe and confirms that the card is genuine and
accepted by the bank;
Customer punches in their PIN and this is verified as compatible
with the one stored on the card;
Customer chooses the service he/she requires;
Other Electronic Banking Services
The major reasons behind rapid growth must be considered from the
perspective of the consumer, the merchant and the bank. For the consumer,
the bankcard made purchases of products and services more convenient,
especially when credit was desired to fund these purchases. Bank customers
could obtain credit for a variety of purchases without repeatedly going to the
bank for a loan. The amount owed could be paid in full each month or
extended through monthly instalments.
The merchant found the bankcard attractive because sales transactions could
be validated easily and payment guaranteed. Heavy promotion of the card
by banks and the national associations increased the sales opportunities for
merchants who accepted the cards. The associations likewise relieved the
merchants of the risk and cost of in-house credit plans.
2
Paper money substitute redeemable at face value at participating merchant outlets for
merchandise purchased.
Other Electronic Banking Services
Rapid growth in credit brought new level of credit losses. In many cases,
approval criteria were inadequate for numerous lines of unsecured revolving
credit. Early authorisation systems were slow and use of the card was
difficult to curtail. Nevertheless, these programs survived.
The magnetic bankcards are manufactured from plastic and have the same
size standardised by ISO3. On the front side they have the issuer symbol and
denomination and a tri-dimensional hologram, while on the backside they
have a magnetic band and a signature panel.
B. From the point of view of the specific functions they have, the bankcards
may be classified in:
credit card;
debit card;
cheque guarantee card;
ATM card;
3
International Standards Organization
Other Electronic Banking Services
multifunctional card;
point-of-sale card.
A bank or other financial institution issues the debit card and it permits
access to a customer’s 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 purchaser’s account
to the seller’s.
Other Electronic Banking Services
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 customer’s 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-of-
sale 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 consumer’s
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.
4
This card identifies a specific bank or group of banks in a regionally shared point-of-sale
network.
Other Electronic Banking Services
From the bank’s point of view, the debit cards offer convenience to
customers and provide a less expensive way to process deposit-related
transactions. A bank’s identity is also enhanced when cards are presented to
merchants. However, most customers enjoy the delayed payment schedule
credit cards have to offer. As a result, bankers will have to improve their
sales techniques if they want to persuade customers to access personal
deposits for their purchases.
The ATM card extends banking convenience to the customer. because ATM
machines are typically on the exterior of the bank or in some cases, at a
location away from the bank, they usually operate around the clock, seven
days a week. Therefore, the customer can access accounts without having to
Other Electronic Banking Services
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 point-of-sale card (POs) refers to any card presented at the point of
sale, the merchant’s 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 issuer’s 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.
5
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.
Other Electronic Banking Services
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 inter-
banking 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 inter-
banking 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 EUROCARD-
MASTERCARD7. 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.
The cards may be issued not only by banks or merchants, but also by other
partners: credit institutions, transport and telecommunications companies,
car renting companies, oil companies, insurance companies, tourism
agencies, clubs, professional services performers.
Bankcard fraud has been described as a two-man war game between the
“good guy” and the “bad guy”. The good guys are the issuing and acquiring
institutions, the national associations and law enforcement agencies. The
bad guys are dishonest individuals or groups who are always on the lookout
for ways to beat the system8.
The amounts of dollars lost to fraud in the bankcard industry across the
world have drawn significantly since the beginning of 1980s. The American
Bankers Association (ABA), MasterCard International and Visa
International, and other interested parties in the bankcard business have
undertaken many efforts to help financial institutions find more effective
ways to prevent bank credit card fraud. These parties work to stop fraud in
instances where preventive measures fail. New technologies help in the
effort and procedures are continuously being refined.
A great deal of time and money are devoted to deterring criminals from
altering or counterfeiting cards in an attempt to stop the dishonest user
before he or she uses the card.
The fraud losses come directly out of the bank earnings, a concern that
reaches the highest level of bank management. Approximately 60% of fraud
losses occur before the bank personnel know that customer’s card is
8
Michael J Auriemma, Robert S Coley – “Bankcard Business”, American Bankers
Association, 1998.
Other Electronic Banking Services
The banks have adopted their own security measures in order to reduce the
fraudulently use of bankcards. These include:
Limits for the value and number of cash withdrawals;
Limits for the trials allowed to the users that wrong introduce the
PIN;
Observance of the use of the TEF systems in order to detect the
fraud;
24 hours phone line that may be used by the customers to announce
the loss or theft of the bankcard.
The Cash Dispenser (CD) is a device that allows the authorised user to
withdraw cash-coins or banknotes.
The visible part contains:
A keyboard that allows the user to communicate his demands;
A small screen where the instructions and answers can be seen;
Other Electronic Banking Services
The Imprinter.
A less rapid way to pay using a card involves the telephone connection with
the authorisation centre and the use of an imprinter. In this case, the
merchandiser formally checks the card; the cashier calls the authorisation
centre and sends the identification elements of the card, and the value of the
transaction. The processing centre, using the satellite telecommunication
system, allows the performing of the transaction. When the authorisation
comes, the cashier makes the bill in three copies using the imprinter. The
buyer must sign the bill. After comparing the signatures, the seller gives the
shopping’s and the receipt to the client.
At the end of the day, the seller gathers all the bills, he registers them, and
he gives one copy to the bank. The bank has to pay the bills within a period
of time established by the contract.
Other Electronic Banking Services
Every single working day all banks receive cheques payable to their
customers either across the counter or by post for the credit of their various
accounts. The banks as agents for collection have the duty of presenting all
of these cheques for payment and having credited the customer’s account,
then receiving reimbursement themselves.
The clearing system began over 200 years ago, when the clerks of the
various banks in London used to take the cheques paid in by their
customers, sort them into bank order then walk round each bank, presenting
these cheques for payment and taking back to their own bank sums of
money given in settlement. Like any other commercial activity, the business
of banking increased, not only with the number of cheques in circulation but
also the number of banks that opened in the City of London and the West
End. Thus, the clerks decided to short-circuit the system and unofficially
agreed to meet at some convenient place to exchange the cheques drawn on
their own banks: any differences in the amounts due could then quickly and
easily be settled. The banks, anxious to improve the system, hired a room
for the purpose of exchanging cheques. The system expanded and in 1833,
in 10 Lombard Street, the first clearing house was established.
This system continued10, but until 1854 the membership of the clearing
house was restricted to the private banks only.
10
Whiting D.P. – Elements of banking, Macdonald & Evans Ltd., London, 1985
Other Electronic Banking Services
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
Other Electronic Banking Services
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 bank’s computer to the
receiving bank’s 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 customer’s 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 bank’s
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 day’s
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 bank’s 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
Other Electronic Banking Services
Progress test
BANKER - CUSTOMER
RELATIONSHIP
D Objectives:
7.1 Introduction
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
1
In the United Kingdom.
2
Jacob Brian – An introduction to banking, Mackays of Chatham, Kent, London, 1990,
p. 185
Business of Banking
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.
As a conclusion
What is a banker?
The relationship of a bank with its customers gives rise to important legal
rights and duties quite apart from any commercial considerations.
Business of Banking
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.
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, traveler’s 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
Business of Banking
Current Accounts
The current accounts are also known as cheque accounts and offer a low
interest rate or no interest at all. As a result, they represent a low-cost fund
for banks. Both individuals and corporations open them.
Budget Accounts
These accounts are separate nominated cheque ones and are specifically
used for paying bills such as for household expenses, telephone, gas,
electricity, taxes, insurance etc., by monthly transfers or cheque drawing.
Credit cards
They are convenient for both banks and customers as they are easy to bear
and use. Banks receive interest on the amounts advanced to customers as
well as commission from the shopkeepers accepting credit cards in the
payment for goods and services.
Savings Accounts
They are sight accounts similar to the current ones but as they represent
medium or long-term deposits the rate of return is higher. In the corporate
banking, this type of accounts can be also used for night deposits or payroll
payments.
Term Accounts
This category of deposits has the advantage of a higher interest rate for
customers and can be used as a guarantee for loans as well. As the term
accounts are not payable at any time, they offer higher return for depositors
and represent an adequate medium or long-term financing source for banks.
Certificates of Deposit
Specifically, they require a small amount of money, can be changed into
cash at any moment and their ownership can be transferred by consequently
losing part of interest.
Restricted-Close Accounts
Within such an arrangement, the depositor is not allowed to raise the money
until a certain term elapses.
Business of Banking
Sweep Accounts
They are particular types of accounts where balances exceeding a certain
level can be transferred into money-market funds; they are mainly offered
to major customers.
Office Accounts
Banks usually open such accounts for professionals such as solicitors,
accountants, architects, doctors etc. who need them for their daily
accounting practice.
Joint Accounts
They represent accounts opened by two or more parties and the most
common ones are run by husbands and their wives; withdrawals can be
made upon a clear authority given to the person intending to take out the
money.
Company Accounts
Public limited or private limited companies constitute the most important
customers of banks as they need banking services for their trade activities
and business operations such as payments to suppliers, guarantees to
international partners, safe custody of excess cash as well as funds for
performance in accordance with the company objects. In this respect, they
run various deposit accounts available to corporations, namely current and
savings accounts, certificates of deposit, repurchase agreements, credit
accounts, foreign exchange accounts as well as all new types of deposit
accounts such as sweep and cash management accounts.
In order to open an account, companies are obliged to lodge with the bank a
resolution passed by directors, a company mandate, the Certificate of
Incorporation, the Memorandum and the Articles of Association.
- provided that the customer’s cheques are properly drawn, the bank must
honour the cheques to the amount of the balance or if the account is
overdrawn, to the agreed limit;
- to exercise a lien4 over any of its customers’ securities that are in its
possession, other than those deposited for safe custody, for any money
owing to it;
- a bank must maintain strict secrecy about its customers’ affairs, both
while the account is open and even after it had been closed;
- the bank must give reasonable notice to its customer, before closing an
account, which is maintained in credit;
4
In the United Kingdom, it is a right to retain possession of the property of another in lieu
of payment due from that person.
Business of Banking
- a bank has no obligations to third parties, arising out of the duty to pay
its customer’s 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.
- 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;
4. A cheque guarantee card should only be issued after the bank has
established that the account will be run in a regular and responsible
manner, or where there is no doubt about the person’s integrity and
responsibility as an account holder.
While all banks are anxious to increase their business and draw in deposits,
it is necessary to exercise a degree of caution before opening an account and
affording full “banking facilities”. No prudent banker would open an
account5 immediately on the mere request of a stranger, as there would be
many risks in conducting an account for a rogue.
For common sense reasons therefore, the most important requirement upon
opening an account is that the banker should have a satisfactory introduction
to his new customer, and this is commonly called a “reference”. Recently,
however, some banks have surprisingly decided to dispense with the taking
of references and are prepared to open accounts for new customers provided
that the stranger “proves” satisfactorily the identity and provided that upon
carrying out a credit reference bureau search an negative reply is not
received.
Presumably, those banks which have reduced their standard of care this
way, have been prepared to do so on reasoning that the new procedures will
5
Palfreman David – Banking: The legal environment, Pitman Publishing, London, 1994,
p.102
Business of Banking
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.
¾ the bank undertakes to receive money and to collect bills for its
customer’s account;
¾ 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;
¾ 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.
Business of Banking
Categories of customers:
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 customer’s identity :
Step one:
3. The bank signs its “acceptance” when it is satisfied with the references
given and when it notifies the customer that the account had been
opened in his name.
Many branch customers inquire about the status of the account under the
following circumstances:
b. They may wish to certify the credit/debit balance on their account for
reconciliation purposes;
c. They may wish to confirm that a particular payment has been made into
their account (or that a certain withdrawal has been effected) before
presenting a cheque for payment.
d. They may ask for a statement of their account with the branch for
personal reasons.
Business of Banking
Progress Test
9. Describe the contain of a contract concluded between the bank and its
customer.
Business of Banking
ANNEX No 1
By virtue of the provisions of the art. 1591 and of the Civil Code, this bank
deposit agreement was completed under following conditions:
1.1. The object of this agreement is the depositor to form a bank deposit for
the trustee in amount of lei________, with an interest rate of ____% annual.
2.1. The deposit is made for a period of_____ days, starting with the date
of____.
3.1. Open for the depositor a separate account for every deposit that he
makes.
Business of Banking
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.
3.1. 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.
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.
5.2. The contract may be terminated by any party’s 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,
Business of Banking
ANNEX No 2
Dear Sir,
Please open a .................. account in the name of .... with you and I accept to
deal with you according to the general conditions of the account mentioned
hereunder which are considered a complementary part of our dealings with
the Bank. They are as follows:
2. The debtor statements of accounts are sent monthly to the client and the
creditor once every six months till the end of June and the end of
December every year.
3. The debtor interests are charged and passed monthly to the account
considering the year as having 360 days and the creditor interests every
six months till the end of the year considering it as having 365 days
besides the commission and expenses such as mail, cables, telephones,
stamp duty etc.
4. The Bank has the right to close the client’s account at any time without
giving any reasons. In this case, the client should either withdraw his
money from the Bank during the fixed time or the Bank will have the
right to deposit what the client owns at the safe of the court. If the
Business of Banking
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 client’s 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 bank’s
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
Business of Banking
9. The number of the client’s current account is the same number of the file
in which his securities are deposited, and the bank is entitled to charge
the deposit costs on them as from the date depositing according to the
existing tariff.
10. It is agreed upon that the client is not entitled to use his account in
advanced maturity credit operations (i.e. issuance of cheques payable at
an advanced date), or repeatedly issuing cheques when the account is
overdrawn, otherwise the bank is entitled to close the account
automatically without previous notice.
11. I thereby authorise Misr Romanian Bank to collect the value of all
coupons cheques and bills, and I guarantee its correctness and the
authenticity of the signatures shown on them. I also authorise Misr
Romanian Bank to purchase or sell the securities, bonds and goods, to
open credits and other banking operations and credit then to my current
account held with them. Orders issued by me to the bank concerning
these banking operations and others are to be considered as an execution
of this authorisation.
12. I hereby authorise Misr Romanian Bank to carry out the clearing among
our various debtor obligations (whether we are debtors or guarantors)
and our creditor balances, if any, held with them, and this is to be
effected at whatever time suitable to the bank even before the date of
maturity with full authority to the bank, needless of any notice, excuse
or approval.
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.......................................................................................................
Recommender’s signature................................................................................
The client’s signature.......................................................................................
The concerned employee signature..................................................................
Business of Banking
ANNEX No 3
Denumire _________________________________________________
♦ Address/ ___________________________________________
Sediul___________________________________________
We hereby mutually agree that our account is Sunt de acord cu faptul cã acest cont
governed by the bank’s General Business funcţioneazã sub incidenţa Condiţiilor Generale
Conditions of which we know and which we de Afaceri ale bãncii pe care le cunoaştem şi pe
accept unreservedly. care le acceptãm fãrã rezerve.
Signature/Semnătura: _______
Stamp/Ştampila
To be filled by the bank / se completează de către bancă
Denumire _________________________________________________
♦ Address/ ___________________________________________
Sediul ___________________________________________
♦ Established as Foreign Legal Entity ♦ Organizată ca persoană juridică
română
associations and foundations societăţi comerciale
corporations regii autonome
commercial reprezentations and reprezentanţe sau organizaţii
organizations comerciale
We kindly request and authorize you to open a social cpital account on our name
in/
Vã rugăm şi vă autorizăm să deschideţi un cont curent în numele nostru în:
For this purpose we attach hereto the company In acest scop anexãm documentele de constituire
incorporation documents as they are specified on a societãţii menţionate pe verso.
the reverse side.
We hereby mutually agree that our account is Sunt de acord cu faptul cã acest cont
governed by the bank’s General Business funcţioneazã sub incidenţa Condiţiilor Generale
Conditions of which we know and which we de Afaceri ale bãncii pe care le cunoaştem şi pe
accept unreservedly. care le acceptãm fãrã rezerve.
ROL / Lei
Forreign Currency / Valută _____________________________________
Signature/Semnătura: _______
Stamp/Ştampila
To be filled by the bank / se completează de către bancă
Other ___________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
___________________________________________________________
Altele _______________________________________________________
__________________________________________________________________
______________________________________________________
______________________________________________________
Business of Banking
Recognition Decision of the Romanian Court (in case there is no reciprocity clause with the
respectively state)
Fiscal code
All legal documents related to the identity, head office, type of society place of registration,
power of attorney for the representatives translation into Romanian of the authenticated
documents and certified by a notary
Other _______________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
Codul fiscal
Toate documentele legale referitoare la identitatea firmei, sediu, tipul societãţii, locul
înmatriculãrii, împuternicire pentru reprezentanţii societãţii, traducere în limba românã
autentificatã de notar
In cazul filialei este necesarã prezentarea documentelor constitutive ale filialei, în condiţiile
prevãzute la punctul anterior
In cazul deschiderii unei filiale in România, este necesarã prezentarea documentelor impuse
de legea unde s-a înfiinţat societatea mamã
Altele _______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
Business of Banking
Date/Data: ____/____/________
day month year
zi luna an
♦ Name/Nume ________________________________________
________________________________________
♦ Address/Adresa ________________________________________
________________________________________
For this purpose I attach hereto a copy În acest scop anexez o copie după actul
of my ID de identitate.
I hereby mutually agree that my account Sunt de acord cu faptul că acest cont
is governed by the bank’s General funcţionează sub incidenţa Condiţiilor
Business Conditions of which I know Generale de Afaceri ale băncii, pe care
and which I accept unreservedly le cunosc şi pe care le accept fără
rezerve.
I kindly request and authorize you to open a current account on our name in/
Vă rog şi vă autorizez să deschideţi un cont curent în numele meu în:
ROL / Lei
Forreign Currency / Valută _____________________________________
Signature/Semnătura: _____________
Business of Banking
Signature/
Semnătura Date/Data: ____/____/________
day month year
zi luna an
Bucureşti, ________________
ÎMPUTERNICIRE
SC__________________________________________________________
înregistrată la R.C. sub nr. ___________ având cod fiscal _____________ ,
reprezentată legal de ____________________________________________
în calitate de __________________________________________________
împuternicesc pe d-na/d-nul ______________________________________
BI/paşaport cu seria nr. ______eliberat de _______la data de____________
să reprezinte valabil societatea, având drept de semnătură, fără limită de sumă,
pentru următoarele operaţiuni bancare :
Semnătura autorizată,
Business of Banking
Date/Data:___/____/_______
day month year
zi luna an
♦Name/ ___________________________________________
Denumire _________________________________________________
♦ Address/ ___________________________________________
Sediul ___________________________________________
♦ Established as Romanian Legal Entity ♦ Organizată ca persoană juridică română
commercial companies societăţi comerciale
regie autonome regii autonome
associations and foundations asociaţii şi fundaţii
We kindly request and authorize you to open a social cpital account on our name
in/
Vã rugăm şi vă autorizăm să deschideţi un cont curent în numele nostru în:
ROL / Lei
For this purpose we attach hereto the În acest scop anexãm documentele de
company incorporation documents as they constituire a societãţii menţionate pe verso.
are specified on the reverse side.
We hereby mutually agree that our social Sunt de acord cu faptul că acest cont nu
capital account bears no interest. este purtător de dobândă
Signature/Semnătura: _____________
Stamp/Ştampila
To be filled by the bank / se completează de către bancă
Other _______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
Altele _______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
Business of Banking
Dl./Dna. ______________________________________________________
în calitate de titular de continue împuternicesc pe d-na/d-nul ____________
____________BI/pasaport cu seria nr. ________ eliberat de ____________
la data de___________________ să mă reprezinte valabil având drept de
semnătură, fără limită de sumă, pentru următoarele operaţiuni bancare :
Semnătura titular
Business of Banking
Date/Data: ___/____/_______
day month year
zi luna an
B.I.
ID (passport)
Reprezentant al
Representative
Date/Data: ___/____/_______
Business of Banking
Subsemnatul
The undersigned
B.I.
ID (passport)
Reprezentant al
Representative
Cont nr.:
Account nr.:
Business of Banking
RISKS
MANAGEMENT
D Objectives:
Most definitions of the risk and risk management are focused on the
classical function of money, that of intermediary in the field of financial
risks through their division. From this point of view it is usually regarded
the problem of unexpected losses in bank assets, losses caused by market,
credit or liquidity risks.
The risk may have a considerable impact over the bank or financial
institution, both an impact consisting in the incurred direct losses, and an
impact consisting in the effects over the customers, personnel, business
partners and even over the bank authority.
Banking risks are those risks the banks are confronted with in their current
operations, and not only the risks specific to the classic banking activity.
Banks are also subject to all the risks that their customers face, risks as
diverse as crop failure, environmental damage claims or the failure of a new
product developed at a high cost.
The most significant and persistent risk faced by banks is credit risk - the
risk that counterparts will be unable to meet their obligations. Credit risk
arises from lending to individuals, companies, banks and governments, from
entering into market transactions which give rise to a receipt on maturity,
from stock lending and from transactions with supplies.
The main types of risks1 involved in the banking activity are: financial risks,
delivery risks, and environmental risks.
The most obvious example of a credit risk is the risk that a customer will
fail to repay a loan. However, it is important to appreciate that credit
exposure extends to a large variety of bank’s activities including the
extensions of commitments and guarantees, acceptances, trade finance
transactions, placements and the range of capital markets instruments
activity such as foreign exchange, futures, swaps, bonds, options, equities
and bullion.
1
Hempel, G.H. Coleman A.B. – Bank Management, New York, 1990
Business of Banking
Credit risk may also arise from off balance sheet transactions. A bank may
guarantee a client’s 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 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 client’s 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
Business of Banking
The main factors that increase the interest rate risk are: erosion of
confidence in the bank, in the market place because of earnings difficulties
or other reasons; dependence on one market or a few counterparties for
deposits; unstable financial markets; extensive “short” borrowing or “long”
lending.
This is why it is necessary to forecast exactly the changes that may occur in
the level and structure of the interest rate, this being correlated with the
evolution of macroeconomic indicators. For the current period and for the
near future, mainly the banks’ clients undertake the interest rate risk related
to national currency activities. This is caused by the fact that the credit and
deposit interest rate modifies continuously because of the fluctuations of the
market; the exception is given by the deposit certificates that have a fixed
interest. We must always take into consideration the analysis of the structure
of the deposits and investments, as well as their evolution.
The main factors that mitigate interest rate risk are: maintenance of a high
level of liquid assets (e.g. cash, money at call, marketable securities);
standby credit facilities with other institutions; availability of related party
funding; a lender at last resort to reassure depositors (e.g. Government
deposit insurance); maintenance of a closely matched maturity structure
between assets and liabilities.
Foreign exchange risk is related to interest rate risk and liquidity risk. It
arises from a mismatch: this time of currency and assets and liabilities.
Thus, the currency may fluctuate in an unexpected direction or higher than
it has been anticipated. This type of risk is determined by the exchange
Business of Banking
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 on-
balance 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.
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
bank’s 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
bank’s foreign exchange activity.
2
National Bank of Romania’ Norm No. 4/2001 concerning the supervision of banks’
foreign exchange positions, published in Monitorul Oficial al României, Part I,
No. 631/2001
3
Hempel, G.H. Coleman A.B. – Bank Management, New York, 1990
Business of Banking
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.
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.
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).
4
Hempel, G. H. Coleman A.B. – Bank Management, New York, 1990
Business of Banking
Credit risk
Strategy risk
Bank settlement
risk
Operating risk
Human
resource risk
Legal risk
Product risk
It is the risk that all the business line will succumb because of the
competition or obsolescence. One such example may be represented by the
relative disappearance of the traditional market with high credits with low
risk for companies, these being replaced by commercial papers.
Another example of strategy risk is that in which a bank is not ready or not
able to become competitive in a new activity. For example, in the activity of
cards issuance, some banks postponed this process and they could not earn a
competitive advantage in this field. This conservatory attitude of waiting for
the market itself to develop represents a risk.
The settlement risk can be met when a bank specialised in one field
becomes a universal bank, and thus it is going to compete with the other
banks that act in the same domains.
In this category there can be found an additional risk that is the possibility
of the regulatory authority to change the operating policies. One example
here, is the Romanian Stock Exchange modification of the calculation of the
mutual funds assets, regulation that led to the collapse of some institutions.
Regulatory authorities may decide who should stay and who should leave
the financial market, through the capital adequacy requirements. Thus the
National Bank of Romania, by increasing the level of the subscribed social
capital from 100 million lei to 250 billion lei, makes many of them lack the
possibility to attract supplementary capital and thus, under such
circumstances, they may be withdrawn the functioning license.
Business of Banking
Merchandise Risk
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.
Legal Risk
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.
Business of Banking
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.
Interest rate
risk
Liquidity risk
Discount risk
Basic risk
Discount Risk
This is a particular type of error risk, which involves the bank’s 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
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.
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. Bank’s 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, bank’s prudential measures against risk may be the following:
• Bank management must be aware of the risks resulting from the bank’s
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
bank’s 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:
Own funds
Risk coverage index = x 100 = 8%
Total commitments
The major role of the supervision authority is that to prevent the systemic
risk by promoting efficient bank supervision which may ensure the
accomplishment of the stability and viability of the banking system.
5
Regulation 2/2000 concerning the classification of credits and placements, published in
Monitorul Oficial al României, Part I, No.316/2000
Business of Banking
Banks shall proceed to remove to off-balance sheet all of the sums related to
a credit or investment in the following cases:
1 – no less than those sums registering a debt service of more than 360
days;
2 – those in which the executor formula has been invested:
credit contract, as well as contracts of guarantee as the case may
be;
a definitive legal decision which orders against the credit contract
as well as against the contract of guarantee as the case may be, or
against the contract of investment;
3 – where the procedure of executor style of patrimony in the case of
individuals has been initiated;
4 – where the procedure of judicial reorganisation or the bankruptcy
procedure against the debtor has been initiated.
In Romania the loans are granted by banks under their own norms and
regulations issued in accordance with the directives of the National Bank of
Romania.
The main prudential measures issued by the National Bank of Romania are:
1. The classification of credits and investments, as well as the establishment,
adjustment, and use of the specific credit risk provisions;
2. Large loans;
3. The minimum capital of the banks;
4. The solvency ratio;
5. Loans granted to the debtors in special relations with a bank;
6. Liquidity.
Business of Banking
2. The level of a large exposure shall not exceed 20 % of the own funds of
the bank, and the total amount of large exposures shall not exceed 8 times
the level of the own funds of the bank.
6
Regulation 2/2000 concerning the classification of credits and placements, published in
Monitorul Oficial al României, Part I, No.316/2000
Business of Banking
The total amount of net loans granted by the bank to its own staff, including
their families, may not exceed 5 % of the own funds of the bank.
7
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 României, Part I,
No. 474/2000.
Business of Banking
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 criteria’s 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.
8
NBR Norm 8/1999 concerning the limit of the credit risk of the banks, published in
Monitorul Oficial al României, Part I, No. 245/1999.
9
NBR Norm 8/1999 concerning the limit of the credit risk of the banks, published in
Monitorul Oficial al României, Part I, No. 245/1999.
Business of Banking
- own capital;
- additional capital.
c) legal reserves;
e) reserves from the influences of the exchange rate related to the liquidity
in hard currency representing the social capital in hard currency, in
accordance with the Government Decision no. 252/1996 regarding the
regime of the foreign exchange differences related to the social capital in
hard currency and other applicable operations, starting with the balance
sheet with the submission deadline of 15 April 1996, modified by
Government Ordinance no. 23/1996 and by Government Decision no.
213/1999;
10
NBR Norm No.7/1999 concerning own funds of banks, published in Monitorul Oficial al
României, 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;
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;
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;
Progress test
11. What are the main prudential measures used by the National Bank of
Romania?
ANNEX No 1
CLASSIFICATION CO-EFFICIENT
CATEGORY
Standard 0
Watch 0.05
Substandard 0.2
Doubtful 0.5
Loss 1
Business of Banking
ANNEX No 2
THE SITUATION
regarding big exposures
- thousands lei -
Own funds 10% from own funds 20% from own funds 800% from own
(OF) funds
TOTAL:
Bank Manager,
....................................................
(name, surname and signature)
Made by:
Name and surname: ......................................................
Telephone number / line:.................................................
Business of Banking
ANNEX No 3
THE STRUCTURE
of groups which represent “one debtor”, towards which the bank
registers big exposures
Bank Manager,
....................................................
(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
Bank’s denomination ...................................................
Date of reference: [ / / ]
- thousands lei -
Own funds (OP) 5% from own funds 20% from own funds
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 5
CRITERION
of framing the assets in credit risk categories
ANNEX No 6
CRITERION
Credit risk
transformation Off - balance sheet elements
into credit
100% 1. pledges in other banks advantage
100% 2. pledges in clientele advantage
100% 3. securities sold with the possibility to repurchase,
for which the option of redemption was firmly
expressed
100% 4. doubtful pledges
ANNEX No 7
BANKS SOLVENCY
I. The structure of the assets from the balance sheet
Bank’s denomination................................
Date of reference: [ / / ]
- thousand lei -
Credit risk rate 0% Credit risk rate 20%
Amounts Amounts
Amounts due to the due to the
Amounts
due to credit risk credit risk
due to the
the credit rate 0%, Net rate 20%, Net
credit risk
Position risk rate registered amount
rate 20%,
registered amount
ASSETS 0%, in the s in the s
code registered
registere accounts col.3= accounts col. 6 =
in the
d in the balances col.1- balances col.4-
accounts
accounts of the col. 2 of the col. 5
balances
balances rectified rectified
assets
assets liabilities liabilities
accounts accounts
A B 1 2 3 4 5 6
TREASURY
OPERATIONS
AND A01
INTERBANKING
OPERATIONS
- Cash and other
A10
values
- Current account at
A20
the central banks
- Accounts of banks
A25
correspondent
- Deposits at banks A101
- Credits granted to
A30
the banks
- Values received A40
- Values to be
A50
recovered
Business of Banking
A B 1 2 3 4 5 6
- Outstanding debts A102
- Doubtful debts A70
- Attached debts A90
CLIENTELE
B01
OPERATION'S
- Credits granted to
B03
the clientele
- Credits granted to
the financial B80
clientele
- Values received B85
- Debtor current
B99
accounts
- Values to be
B9J
recovered
- Outstanding debts B102
- Doubtful debts B9K
- Attached debts B9V
SECURITY
OPERATIONS
C0A
AND OTHER
OPERATIONS
- Securities received C1A
- Transaction
C2A
securities
- Investment
C3A
securities
- Investment
C4A
securities
- Discount accounts
regarding security E6A
operations
- Intra- banking
E7A
discounts
- Debtors E123
- Supply accounts E70
- Regulation
E8A
accounts
- Outstanding debts E104
- Doubtful debts E90
- Attached debts E97
Business of Banking
A B 1 2 3 4 5 6
FIXED ASSETS
F01
VALUES
- Subordinated
F02
credits
- Interest within the
legal banking
companies,
participation F10
securities and
securities of the
portfolio activity
- Endowment for the
own units from F50
abroad
- Fixed assets under
way, fixed assets of
the operations
F6A
activity, fixed assets
besides operation
activity
- Leasing and
assimilated F7A
operations
- Simple tenancy F80
- Outstanding debts F102
- Doubtful debts F9A
- Attached debts F97
SHAREHOLDERS
LOC
OR SOCIETIES
TOTAL: L98
Business of Banking
TABLE - SEQUEL
- thousands lei –
A B 7 8 9 10 11 12
CLIENTELE
B01
OPERATION'S
- Credits granted to
B03
the clientele
- Credits granted to
the financial B80
clientele
- Values received B85
- Debtor current
B99
accounts
- Values to be
B9J
recovered
- Outstanding debts B102
- Doubtful debts B9K
- Attached debts B9V
SECURITY
OPERATIONS
C0A
AND OTHER
OPERATIONS
- Securities
C1A
received
- Transaction
C2A
securities
- Investment
C3A
securities
- Investment
C4A
securities
- Discount
accounts regarding E6A
security operations
- Intra- banking
E7A
discounts
- Debtors E123
- Supply accounts E70
- Regulation
E8A
accounts
- Outstanding debts E104
- Doubtful debts E90
- Attached debts E97
Business of Banking
A B 7 8 9 10 11 12
FIXED ASSETS
F01
VALUES
- Subordinated
F02
credits
- Interest within the
legal banking
companies,
participation F10
securities and
securities of the
portfolio activity
- Endowment for
the own units from F50
abroad
- Fixed assets
under way, fixed
assets of the
F6A
operations activity,
fixed assets besides
operation activity
- Leasing and
assimilated F7A
operations
- Simple tenancy F80
- Outstanding debts F102
- Doubtful debts F9A
- Attached debts F97
SHAREHOLDERS
LOC
OR SOCIETIES
TOTAL: L98
Business of Banking
Table sequel
- thousands lei -
Net
presentation
ASSETS Position code from the
balance assets
col.131
A B 13
TREASURY
OPERATIONS AND
A01
INTERBANKING
OPERATIONS
- Cash and other values A10
- Current account at the
A20
central banks
- Accounts of banks
A25
correspondent
- Deposits at banks A101
- Credits granted to the
A30
banks
- Values received A40
- Values to be recovered A50
- Outstanding debts A102
- Doubtful debts A70
- Attached debts A90
CLIENTELE
B01
OPERATION'S
- Credits granted to the
B03
clientele
- Credits granted to the
B80
financial clientele
- Values received B85
- Debtor current accounts B99
- Values to be recovered B9J
- Outstanding debts B102
- Doubtful debts B9K
- Attached debts B9V
A B 13
1
col. 13 = col. 3 * 0% + col. 6 * 20% + col. 9 * 50% + col. 12 * 100%
Business of Banking
SECURITY
OPERATIONS AND C0A
OTHER OPERATIONS
- Securities received C1A
- Transaction securities C2A
- Investment securities C3A
- Investment securities C4A
- Discount accounts
regarding security E6A
operations
- Intra- banking discounts E7A
- Debtors E123
- Supply accounts E70
- Regulation accounts E8A
- Outstanding debts E104
- Doubtful debts E90
- Attached debts E97
FIXED ASSETS
F01
VALUES
-Subordinated credits F02
- Interest within the legal
banking companies,
participation securities F10
and securities of the
portfolio activity
- Endowment for the own
F50
units from abroad
- Fixed assets under way,
fixed assets of the
operations activity, fixed F6A
assets besides operation
activity
- Leasing and assimilated
F7A
operations
- Simple tenancy F80
- Outstanding debts F102
- Doubtful debts F9A
- Attached debts F97
SHAREHOLDERS OR
LOC
SOCIETIES
TOTAL: L98
Business of Banking
Equivalent credit 0%
Amounts Amounts
Off balance Position Amounts Amounts
due to the due to the
sheet elements code due to the due to the
credit credit
credit risk credit risk
risk rate risk rate
rate 20% rate 100%
0% 50%
A B 1 2 3 4
- Pledges in
other banks N1B
advantage
- Pledges in
the clientele N1R
favour
- Surety,
guarantees
and other
N3B
gradations
given to other
banks
- Gradations
given to N5A
clientele
- Receiving
N8B2
securities
- Given
P120
pledges
- Doubtful
Q80
pledges
TOTAL X
2
At this position the balance of the account 9219 “Other receivable securities” shall not be
taken into consideration.
Business of Banking
1
col. 13 = 0% * (col. 1 * 0% + col. 2 * 20% + col. 3 * 50% + col. 4 * 100%) + 50% *
(col.5 * 0% + col. 6 * 20% + col. 7 * 50% + col. 8 * 100%) + 100% * (col. 9 * 0% + col.
10 * 20% + col. 11 * 50% + col. 12 * 100%)
2
At this position the balance of the account 9219 “Other receivable securities” shall not be
taken into consideration.
Business of Banking
Own capital total (form “Calculation of own funds”, rd. 35, col. 3) 1
Own funds calculation (form “Calculation of own funds”, rd. 44, 2
col. 3)
Total of net exposure from balance assets (form I, rd. “TOTAL”, 3
col. 13)
Total from the net exposure from the off balance sheet elements 4
(form II, rd. “TOTAL”, col. 13)
SOLVENCY INDICATORS (minimum 8%) 5
rd. 5 = rd. 1 * 100 / (rd. 3 + rd. 4)
SOLVENCY INDICATORS (minimum 12%) 6
rd. 6 = rd. 2 * 100 / (rd. 3 + rd. 4)
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: [ / / ]
A B 1 2 3
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 8 x
which:
- ...........................................
- ...........................................
- ...........................................
Amounts recorded in the account“
Tangible assets fund” (balance of 9 x
account 5281)
Amounts recorded in the account
“Other funds”, analytical “Fund for
increasing their own financing 10 x
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: 11 x
- ...........................................
- ...........................................
- ...........................................
Statutory reserves (balance of
12 x
account 513)
The reported result representing the
undistributed profit (balance of 13 x
account 581)
Net result of the current financial
exercise representing profit (current 14 x
balance of account 591)
Elements assimilated to the
15 x
capital
Total (line 1 to 15) 16 x
Business of Banking
A B 1 2 3
Amounts recorded in the account
“Own shares” representing the
value of the own shares redeemed
in the view of social capital
17 x
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
18 x
of account 4412)
The amortisation of the expenses
for constitution (balance of account 19 x
46112)
Not amortised value of the
established expenses (line 18 - line 20 x
19)
Commercial fund (balance of the
account 4411 + balance of account 21 x
451)
Amortisation of the commercial
fund (balance of the account 46111 22 x
+ balance of the account 4621)
Provisions for depreciation of the
commercial fund (extract balance 23 x
of the account: 49221, 49231)
Net value of the commercial fund
24 x
(line 21 - line 22 -line 23)
Dividends *) 25 x
The participation at the profit of the
26 x
personnel
The participation quota of the
27 x
manager in profit
*
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 B 1 2 3
Distribution from net profit to
28 x
funds
Expenses to be distributed and
expenses recorded in advance 29 x
(balance of account: 374,375)
The reported result representing the
unsupported loss (debtor balance of 30 x
account 581)
Net result of the current exercise
representing loss (debtor balance of 31 x
account 591)
Distribution of the profit (balance
32 x
of account 592)
Endowment for the own units from
33 x
abroad (balance of account 421)
Total deductible elements (line 17+
34 x
line 20+line 24 to 33)
Total own capital (line 16 - line 34) 35 x
Amounts recorded in the account
“Other reserve”, others than those
36 x
included at line 5, 6, 7 and 8
(balance of account 519)
Amounts recorded in the accounts
“Subordinated debts on term” and Maximum
“Subordinated debts with unlimited 37 50% of
term” (balance of accounts: 531, line 35
532)
Amounts recorded in the account
“Subvention for investment” 38 x
(balance of account 541)
Amounts recorded in the account
“Revaluation differences” (balance
of account 516, analytical distinct),
of which: 39 x
-.........................................
-.........................................
-.........................................
Business of Banking
A B 1 2 3
Total additional capital col. 1 =
Maximum
col.1, line 36-39; col.3 = col.3,
40 100% of
rd.36 to 39 (in the limit of max. line 35
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 41 x
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 42 x
banks and companies with financial
activities (Balance of accounts 401,
401, 481, 482 - balance of acc.499)
Total deductible elements
43 x
(line 41 + line 42)
Total own funds 44 x
Banks and Lending
D Objectives:
9.1 Introduction
9.1 Introduction
1
National Bank of Romania – Regulation no. 1/2000 concerning the transactions on the
monetary market realised by the NBR, issued in Monitorul Oficial al României
no. 142/2000.
2
National Bank of Romania – Norms no. 7/1999 concerning the own funds of banks,
issued in Monitorul Oficial al României no. 206/1999,
Banks and Lending
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.
The lending officer may wonder whether the loan is for a legal purpose, or
not.
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.
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.- Monedă, Credit, Bănci Ed. Didactică şi
Pedagogică, Bucureşti, 1994
Banks and Lending
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.
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.
Banks and Lending
Syndicated Loans
Unlike the participation loans, the syndicated ones consist of an agreement
specifying that two or more banks accept to directly lend to the same
borrower or borrowers. In such a case, one of the banks plays the role of the
agent bank while the others participate by own portions in the syndicate, the
risks being shared by all of them.
Retail Lending
Besides the corporate lending, the personal lending is also an important
activity of banks. Before credit is granted to individuals, the bank
thoroughly analyses the income status of the applicant, the stability, the
permanency of his or her cash inflows, guarantees by third parties as well as
the existing collateral.
The usual procedures in the lending to individuals include the receipt of the
applications and required information, evaluation of the collectibles and
collateral, decision on the loan amount, approval from the proper
committee, legal evaluation and examination of the collateral, signing the
contract and disbursement of the amount. Specifically, the retail lending
includes the categories of consumer credit and house financing.
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.
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.
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.
Banks and Lending
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
bank’s 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.
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
Dr. Cirovic M.: Theory on Credits, Skoplje 1996
Banks and Lending
5
Bankers’ lending techniques issued by the Chartered Institute of Bankers, London 1994.
Banks and Lending
Purpose - The lender will want to verify that the purpose is acceptable
(legal, moral etc.).
Amount - Is the customer asking for either too much or too little? There are
dangers in both and it is important therefore to establish that the amount
requested is correct. The amount requested should be in proportion to the
customer’s own reasons and contribution.
the purpose of the loan (legal, moral and within the policy of the
government and the bank, National Bank of Romania);
Banks have as one of their basic functions lending money to both physical
and juridical persons. The banks charge a certain interest rate on these
loans, that represents the earnings used to pay expenses, such as salaries and
wages of the workers, rents, other administrative expenses, give interest
payments to those holding their money in deposits at the bank, pay
shareholders dividends and also retain funds as reserves for the own
expansion of the banks.
Bank loans finance different groups in the economy. Manufacturers,
distributors, service firms, farmers, builders, homebuyers, commercial
real estate developers, consumers, and others all depend on bank credit.
The ways in which banks allocate their funds can strongly influence the
economic development of the community and nation. Every bank bears
a degree of risk in its granting of credit, and, without exception, every
bank experiences some loan losses when certain borrowers fail to repay
their loans. Whatever the degree of risk taken, loan losses can be
minimised through highly professional organisation and management
of the lending function.
The composition and quality of a bank’s loans should be reflected in its loan
policy. The policy sets out the bank’s lending philosophy and specifies
procedures and means of monitoring lending activity. A written loan policy
should serve to obtain three results:
- produce sound and collectible loans;
- provide profitable investment of bank funds;
- encourage extensions of credit that meet the legitimate needs of the
bank’s market.
A meaningful loan policy will express strategies in concrete terms. The
desired loan mix should be quantified. The loan mix expresses the
diversification sought by the bank in its loan placements. Diversification
reduces the level of default risk that is associated with large concentrations
of loans in a single category.
The bank’s liquidity strategy should be indicated, because it acts as a
constraint on lending activity and because liquidity is partly determined by
the maturity structure of the loan portfolio. The desired size of the loan
portfolio expresses the bank’s intended aggressiveness in expanding its loan
portfolio. A highly aggressive loan policy has both a bright side and a dark
Banks and Lending
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 borrower’s
indispensable employees. A catastrophic fire or flood may interrupt the
borrower’s business or destroy the loan’s 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 customer’s 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 bank’s 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 bank’s 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.
Banks and Lending
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.
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 borrower’s
record of financial responsibility, determining his or her true purpose for
wanting to borrow funds, identifying the risks confronting the borrower’s
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 borrower’s capacity for timely repayment of the loan and,
*
Source: Murray, Andrew – Credit Analysis, Eastern Publishing Ltd., 1998
Banks and Lending
6
Regulation No. 2/2000 concerning the classification of credits and placements, issued in
Monitorul Oficial al României No. 316/2000
Banks and Lending
Total liabilities
Indebtedness level x 100
total assets
Current asset
Immediate Liquidity x 100
short term liabilities
Owners’ equity
Solvency Ratio x 100
owners’ equity + liabilities
net profit
Profit margin x 100
turnover
- 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:
to be recorded as a company, under the provisions of the law;
to have the capital paid off;
to carry out legal and efficient activities;
to have good indicators; to have opportunities to re-imbursement
at maturity both the credits and interests;
to possess moral and materiel guarantees;
to agree the contractual terms etc.
In the final analysis of a loan, lenders must rely upon cash flow to repay
loans. Cash flow from a firm’s operations, although not directly available,
can be derived through adjustments to the firm’s balance sheet and income
statement.
Under the provisions of the Law No 58 – the Banking law, the credit
documents needed for the conclusion of the convention between the bank
and a potential client (see Annex No. 2) are the following:
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);
Company’s Overview;
Specimen of signature of each person that authorised the credit and the
name of the bank.
Banks and Lending
Progress Test
3. List and comment the five stages of the analysis of a new lending
proposition.
7. List all the types of loans classified by maturity, destination and pricing.
ANNEX No 1
CREDIT REQUEST
Please find attached the necessary documents for each type of security. The bank has the right to
choose the securities for the credit facility.
Banks and Lending
ANNEX No 2
The Romanian Bank… S.A. registered in the Register of Trade under no…
Branch… hereby called “the bank”, represented by L. C. as general
manager, and
The company “X” SRL, registered in the Register of Trade under
no………….hereby called “the borrower”, represented by Mr. Y, as general
manager, has agreed upon the following:
1. The bank grants the borrower a loan amounting USD 135,000, for 90
days, with an annual interest rate of 9.5%, in order to pay for a piece of
land of 400 sqm, located in Bucharest.
2. The loan is granted through the account no…………….
3. Payment settlement is money transfer, as a general rule for all
instalments, the possible cash payments being approved in the long run
as the necessities require.
4. The loan is granted on a temporary basis, until stocks are constituted and
expenses recorded, by direct discount of payment documents, in
conformity with the approval ceilings the bank disposes of at the time.
5. During loan employment and collection, the bank is allowed to adjust
the interest rate in accordance with the evolution of inflation and cost of
financial resources. The new interest rate is to be applied to the loan
balance of the date of changing. The borrower is to be informed within 5
days, in writing, with no other specification. In case that, after being
notified, the borrower does not pay the rest of the principal and interest
within less than 10 days since notification, the bank is entitled to
consider the new interest level as accepted and payment of the newly
computed amount (rest of principal and interest) as granted, with no
other specifications.
6. The interest and fees for the loan granted are computed and paid
monthly, beginning with a month after the loan is granted; cashing being
performed directly by the bank, out of the borrowers direct account,
based on statement of account. Interest computation period is since the
21st of the last month till the 20th of the current month.
Banks and Lending
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.
TOTAL
DATE PRINCIPAL INTEREST
AMOUNT
August, 30, 2000 45,000 1,068.75 46,068,75
September, 30, 2000 45,000 712.5 45,712.5
October, 30, 2000 45,000 356.25 45,356.25
TOTAL 135,000 2,137.5 137,137.5
L. C X
Glossary
account = cont;
~ foreign exchange = devize în cont;
~ payable = cont creditor;
~ receivable = cont debitor;
~ settled = cont achitat;
bank ~ = cont bancar;
current ~ = cont curent;
foreign exchange ~ = cont în devize;
on one’s ~ = pe cont propriu;
personal ~ = cont personal;
profit and loss ~(P&L- in UK) = cont de profit şi pierdere;
sales ~ = cont de vânzări (al agentului / comisionarului);
sight ~ = depozit la vedere;
statement of ~ = extras de cont;
the running of an ~ = mişcarea contului;
to keep open accounts = a ţine contabilitatea / conturile;
accountant = contabil;
certified ~ = contabil autorizat;
accounting = contabilitate;
Glossary
balance = sold;
bank ~ = sold bancar;
credit ~ = sold creditor;
debit ~ = sold debitor;
bank = bancă;
~ deposit = depozit bancar;
~ loan = împrumut bancar;
agricultural ~ = bancă agricolă specializată în acordarea de credite
pentru dezvoltarea agriculturii;
central ~ = bancă care realizează politica economică a guvernului;
clearing ~ = bancă de compensare, în acest caz, banca este membră a
unei case de compensaţie, specializată în decontarea cecurilor;
commercial ~ = bancă comercială specializată în constituirea de
depozite, efectuarea de transferuri de fonduri; poate să fie o societate
pe acţiuni sau o bancă particulară;
discounting ~ = bancă specializată în scontarea cambiilor;
Federal Reserve Bank = Banca Centrală a Statelor Unite ale Americii;
Industrial ~ = o bancă care face parte dintr-un grup de case mici
financiare, care primeşte investiţii de la persoane fizice;
issuing ~ = instituţie financiară care gestionează o nouă emisiune de
acţiuni;
joint-stock ~ = bancă constituită ca societate pe acţiuni;
Glossary
charge = taxă;
commission = comision;
deposit = depozit;
discount = scontare;
~ house = casă de scontare;
~ market = piaţa scontului;
~ rate = rata scontului.
in bail = în custodie;
merger = fuziune;
Glossary
mortgage = ipotecă;
rediscount = rescontare;
shareholder = acţionar;
solvency = solvabilitate;
subsidiary = filială;
lend to the banking companies (to) = refinance the banking system (to)
= a acorda împrumuturi băncilor / a
refinanţa;
redeemable = recuperabil;
warrant = warrant;
bankrupt = faliment;
overdraft = descoperit în cont; sold debitor; sumă trasă din cont fără
acoperire.
Glossary
chairman = preşedinte;
MONEY SERVICES
banknotes = bancnote;
bearer = purtător;
Glossary
by cable = telegrafic;
cashier = casier;
cheque = cec;
coins = monede;
cross = barare;
drawee = tras;
drawer = trăgător;
Glossary
endorsement = andosare;
expenses = cheltuieli;
holder = deţinător;
owner = proprietar;
Glossary
proceeds = venituri;
remitter = remitent;
fraud = fraudă;
network = reţea;
~ transmission = reţea de transmisie;
password = parolă;
user = utilizator;
retailer = detailist;
keyboard = tastatură;
accountant = contabil;
Act/charter/law = lege;
banker/bank = bancă;
creditor = creditor;
customer/client = client;
debtor = debitor;
forgery = fraudă;
mortgage = ipotecă;
proceeds = venituri;
sealed = sigilat;
solicitor = avocat;
theft = furt;
RISKS MANAGEMENT
commitments = angajamente;
solvency = solvabilitate;
liquidity = lichiditate;
shareholder = acţionar;
assets = active;
accountant = contabil;
lending = împrumut;
Glossary
liabilities = pasive;
loss = pierdere;
repayment = plată;
BIBLIOGRAPHY
w.w.w.bnro.ro
w.w.w.bis.org
w.w.w.europa.eu.int
w.w.w.pambuccian.ro/RlegSingn.htm
w.w.w.pambuccian.ro/R-LegEcom.htm
w.w.w.usic.org/papers/stateoftheinternet99.htm