Banks

in Their Economic
Environment
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Contents

▸ Economic and Political Aspects

▸ Types of Banks & Its Operations

▸ Banks in Different Legislations

▸ Role of Banks’ Credit Rating

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Banks in Political
&
Economic
Enviroment
Let’s start with the first set of slides
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“Confidence in the system - avoiding massive

withdrawing of creditors’ money - is
an important element”
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1. Political & Economic Enviroment

▸ Banks provide loans and enable private and commercial investment and
growth.
▸ Lending and the associated risk assessments are key tasks of the banks’
business.
▸ Money from savers, investors and from central banks is provided to
economy.
▸ Thus it is important that the bank can borrow enough money from the
central bank, from other commercial banks and from savers and that this
supply is not interrupted.
▸ The failure of a bank can trigger a domino effect in the banking world.
When banks mistrust each other and reduce lending, the economy is also
affected
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“The big banks are just too big; they

are “too big to fail.””
Meaning that their failure could lead to a collapse of the financial
system and the economy.
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Political & Economic Enviroment-Examples

▸ The economic and financial crisis of the recent years took place against the
background of past political, technological and economic developments and
regulatory decisions. Following are the certain examples:

▸ liberalized stock trading-Big Bang (British Government 1986)

▸ Repealing the Glass-Steagall Act in 1999 (U.S Government 1999)
▸ lowered the minimum tradable amount (U.S SEC 2001)
▸ law that allowed corporations to sell their shares of other corporations tax
free (German Government 2005)
▸ Introduction e-trading (U.S 2005)
▸ Financial liberalization and deregulation (Pakistan 1988)
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2. Operations of Various Types of Banks

There are various types of banks to meet the financial

requirements of different categories of people engaged in
agriculture, business and profession etc.
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Operations of Various Types of Banks

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Let’s review some concepts

Central Bank Commercial Bank DFI
• Guiding and regulating • Accept deposits and grant short- • Medium and long-term capital
• No deal with the general public term loans and advances • Subscribing to the shares and debentures
• Government's banker - banker's bank. • Medium-term and long-term loan i. House building finance corporation,
• Maintains Government revenue and • Housing loan on a long-term basis ii. Pakistan Kuwait Investment Company
expenditure under various heads. I. Public Sector Banks limited,
• Monetary and credit policies iii. Pak-China Investment Company limited
II. Private Sector Banks
• Determinant of forex rate
• Currency Notes issuance III. Foreign Banks Specialized Banks
Cooperative Banks Micro Finance Banks • Formed for specific activities
• Provisioning of micro finance I. Zarai Taraqiati Bank
• Formed by cooperative society
services to poor people or low paid
under the Co-operative Societies II. SME Bank
community.
Act. III. Industrial Development Bank
I. Rozgar Microfinance,
I. Primary credit societies,
II. Telenor / Jazz microfinance
II. Central co-operative banks
III. Khushal Bank limited
Islamic Bank
III. State co-operative banks
• Operate Under Islamic Law (sharia)
Investment Bank • Development of Islamic Economics
• Assist individuals, corporations and governments in raising capital as underwriter
I. Bank Islami
• Acting as client’s agent in issuance of securities
II. Meezan Bank
• Assist companies in mergin & accusations
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3. Banks in Different legislations

Article:
The Banking Sector of Pakistan: The case of its Growth and Impact on Rev
enue Generation 2007 to 2012
Written
Sana Zafar , Dr. Farooq Aziz
Research Scholar of Department of Education and Social Sciences,
Hamdard University, Pakistan Faculty of Department of Education and
Social Science, Hamdard University, Pakistan
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4. Impact of Banks Credit Ratings

Bank credit ratings & Their impact 

These are estimates of how likely a bank is to go out of
business or default. They're grades given by agencies such
as Moody's Investors Services.

The banks’ credit rating is of increasing importance. Its

influence on the trust of customers and depositors and
generally on the refinancing, especially on refinancing in the
interbank market, is enormous.
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4. Impact of Banks Credit Ratings

▸ Bank credit ratings are just one tool that consumers and investors can use to
judge financial institutions, but they're not absolute measures of a financial
institution's reliability. They can impact customers differently, depending on
what type of business they do with the bank. People who hold large, open-ended
loans could be affected if a bank’s creditworthiness goes into "junk" territory or
even slumps for a while. These include business lines of credit and home equity
loans.
▸ A bank has to improve its liquidity by preserving capital when it's troubled. It
may therefore have to pull in its credit lines, so you could lose borrowing power.
Sometimes, troubled banks also will begin to close branches and lay off
employees. Such moves wouldn’t affect the safety of your deposits, but they
could strain your relationship with your bank if it were to close your local branch.
▸ Banks with high-level ratings are trusted more by government agencies, local
businesses, and international corporations, in addition to customers.
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4. Impact of Banks Credit Ratings

Credit Rating Agencies in Pakistan:

▸ PACRA (Pakistan Credit Rating Agency Limited)
▹ June 15, 1994-Joint Venture between IFC (International Finance Corporation)-Fitch
Rating & Lahore Stock Exchange
▹ August 18, 1994
▹ Today, PACRA is recognized as a national rating agency by apex regulator of the
country, the SECP and an external credit assessment institution(ECAI) by the SBP
▹ Founding member of Association of Credit Rating Agencies in Asia(ACRAA)

▸ VIS Credit Rating Company Limited

▹ Incorporate in 1997
▹ joint venture between VIS, Karachi Stock Exchange Guarantee Limited (KSE), Islamabad
Stock Exchange Limited (ISE) and Duff & Phelps Credit Rating Co., USA (DCR).
▹ DCR’s merger with Fitch IBCA, DCR sold its interests in DCR-VIS to VIS in 2001.
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4. Impact of Banks Credit Ratings

Standard Rating Scale Use by PACRA

▸ Long Terms Ratings
▹ Investment Grade (AAA, AA, A)
▹ Speculative Grade (BBB, BB B)
▹ Default (CCC, CC,C)

▸ Short Term Ratings

▹ Denote by Alphanumeric (A1+)

Standard Rating Scale Use by VIS Credit Rating Company Ltd

▸ Medium To Long Terms
▹ Investment Grade (AAA, AA+-, A+, A-)
▹ Speculative Grade (BBB, BB+, B-)
▹ Default (CCC, CC,C)
▹ Default Obligation (D)

▸ Short Term Ratings

▹ Denote by Alphanumeric (A-1+)
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4. Impact of Banks Credit Ratings

International Credit Rating Agencies :

▸ Moody’s Investor Services

▸ Standard & Poor's
▸ Fitch Group
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4. Impact of Banks Credit Ratings

Ratings by Agency
MOODY'S FITCH S&P MEANING
Aaa AAA AAA Highest quality, lowest risk
Aa AA AA High quality, low risk
A A A Upper-medium quality, low risk
Baa BBB BBB Medium quality, moderate risk
Ba BB BB Speculative quality, substantial risk
B B B Speculative quality, high risk
Caa CCC CCC Poor quality, very high risk
Ca CC CC In or near default, possibility of recovery
  C C In default, low chance of recovery, may still be paying
obligations
C D D Has defaulted on obligations, will likely continue to do
so
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4. Impact of Banks Credit Ratings

Article: Forecasting Bank Credit Ratings

Written
Periklis Gogas, Theophilos Papadimitriou, Anna Agrapetidou

Department of Economics Democritus University of Thrace

Komotini, 69100, Greece:
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ANY Question
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