3.WEEK COMMERCIAL BANKS, INSURANCE COMPANIES, FINANCE HOUSES AND ETC...

3.WEEK

COMMERCIAL BANKS, INSURANCE COMPANIES, FINANCE HOUSES AND

ETC...

11-2McGraw-Hill/Irwin

Commercial Banks

Commercial banks are the largest group of financial institutions in terms of total assets

Major assets are loans Major liabilities are deposits—thus, they are considered depository

institutions Perform services essential to U.S. financial markets

play a key role in the transmission of monetary policy provide payment services provide maturity intermediation

Banks are regulated to protect against disruptions to the services they perform

Sources of income; Interest from the loans made and securities invested in. Fee Income.

Commercial banks are the largest group of financial institutions in terms of total assets

Major assets are loans Major liabilities are deposits—thus, they are considered depository

institutions Perform services essential to U.S. financial markets

play a key role in the transmission of monetary policy provide payment services provide maturity intermediation

Banks are regulated to protect against disruptions to the services they perform

Sources of income; Interest from the loans made and securities invested in. Fee Income.


Commercial Bank Assets

Loans generate revenue for banks They are primary activity of the commercial banks. Bank loans

given to business for investment purposes and to individuals for purchases of durable goods. In both ways business activity increaes In the U.S. commercial and industrial loans are

declining because of nonbank substitutes such as commercial paper

mortgages are increasing in importance

Loans generate revenue for banks They are primary activity of the commercial banks. Bank loans

given to business for investment purposes and to individuals for purchases of durable goods. In both ways business activity increaes In the U.S. commercial and industrial loans are

declining because of nonbank substitutes such as commercial paper

mortgages are increasing in importance

Commercial loans; S-T, M-T financing activities, A/R, inventory, W.C., Plant and equipment etc.

Consumer Loans: Financing personal expenditures; car, durable goods, credit card loans.

Real Estate: Temporary construction financing, L-T loans to finance residences, office building, factories, outlets.


Loans are also; W.C Loan: S-T for support activities of

businesses Term Loan: To finance the purchase of fixed

assets, macninery for a period exceeding one year.


Cash assets are held to meet reserve requirements and to provide liquidity. Cash; Banks are required to hold some cash to maintain

liquidity and realize any withdrawal request by depositors. Due from banks; Any deposits the bank has placed with

other banks. Central Bank; The banks reserve account holds with the

central bank. Securities; Contains t-bills and government bonds.

Permanent Assets are fixed assets owned by the banks as plant and equipment.




Commercial banks face unique risks because of their asset structure credit (default) risk is the risk that loans are not repaid or that the

issuer of the security will default. liquidity risk is the risk that depositors will demand more cash

than banks can immediately provide. interest rate risk is the risk that interest rate changes erode net

worth. It is a result of mismatching of A&L with respect to their maturities. The typical problem faced is lending for a longer term than the maturity of the liabilities. This results in a decrease in spread income when interest rates increases.

credit, liquidity, and interest rate risk all contribute to a commercial bank’s level of insolvency risk

Regulatory Risk: The risk of changes in regulations that will effect earnings negatively.

Commercial banks face unique risks because of their asset structure credit (default) risk is the risk that loans are not repaid or that the

issuer of the security will default. liquidity risk is the risk that depositors will demand more cash

than banks can immediately provide. interest rate risk is the risk that interest rate changes erode net

worth. It is a result of mismatching of A&L with respect to their maturities. The typical problem faced is lending for a longer term than the maturity of the liabilities. This results in a decrease in spread income when interest rates increases.

credit, liquidity, and interest rate risk all contribute to a commercial bank’s level of insolvency risk

Regulatory Risk: The risk of changes in regulations that will effect earnings negatively.

Depository Funds: Deposits are the main source of funding. They can be categorized based on; Maturity Depositors Negotiability

Commercial Bank Liabilities & Equity

Accoring to maturity, bank deposits are categorized as;

Demand deposits (Checking Account) Time deposits

One month Three-month Six-month One year


According to depositors (who makes the deposits); Saving deposits: made by individuals with no

commercial links benefit from SDIF (Savings Deposit Insurance Fund)

Commercial deposits Interbank deposits Official deposits Certificate of Deposits (CDs)


According to the negotiability; Negotiable deposits (CDs: Certificates of deposits): To

the bearer. Non-negotiable deposits (All Others): They are

evidenced through passbooks. Pass books must be to the name.

CDs emerged in Turkey in the 1980’s. They were seen by some people as tax heaven instruments because of their bearer nature. So that they were banned.


Non Depository Funds (Borrowed Funds): Interbank funds borrowed Repos Borrowing from;

Central bank (at discount rate) Other banks Abroad.




Minimum levels of equity capital are required by regulators to act as a buffer against losses common and preferred stock surplus or additional paid-in capital retained earnings

Minimum levels of equity capital are required by regulators to act as a buffer against losses common and preferred stock surplus or additional paid-in capital retained earnings

ROLES OF THE COMMERCIAL BANKS

The main role of the commercial banks is taking deposits and making loans. Others;

Carrying out currency exchanges Providing credits by discounting commercial loans Safekeeping of customer valuables such as gold,

securities etc. Supporting government activities with credit Purchasing government securities

In today’s world, banks increase their services and activities, such as providing;

financial advising to customers who use credits and have savings,

equipment leasing services through which the bank buys the equipment and rent it to customers,

selling insurance policies such as life and non-life, security brokerage services to their customers through buying

bonds and other securities mutual funds, which usually provide higher returns than that on

bank deposits.



Broad classification of services: Individual banking Institutional banking Global banking


Off-Balance-Sheet Activities

Commercial banks engage in many fee-related activities that are conducted off the balance sheet guarantees such as letters of credit future commitments to lend derivative transactions (e.g., futures, forwards, options, and

swaps) Off-balance-sheet asset

when an event occurs, this item moves onto the asset side of the balance sheet or income is realized on the income statement

Off-balance-sheet liability when an event occurs, this item moves onto the liability side

of the balance sheet or an expense is realized on the income statement

Commercial banks engage in many fee-related activities that are conducted off the balance sheet guarantees such as letters of credit future commitments to lend derivative transactions (e.g., futures, forwards, options, and

swaps) Off-balance-sheet asset

when an event occurs, this item moves onto the asset side of the balance sheet or income is realized on the income statement

Off-balance-sheet liability when an event occurs, this item moves onto the liability side

of the balance sheet or an expense is realized on the income statement


Commercial Banks

Retail banking is consumer-oriented residential and consumer loans are funded by

accepting small deposits community banks specialize in retail banking

Wholesale banking is commerce-oriented commercial and industrial loans are often funded with

purchased funds regional or superregional banks engage in a

complete array of wholesale banking activities money center banks rely heavily on nondeposit or

borrowed sources of funds often borrowed in the federal funds market

Retail banking is consumer-oriented residential and consumer loans are funded by

accepting small deposits community banks specialize in retail banking

Wholesale banking is commerce-oriented commercial and industrial loans are often funded with

purchased funds regional or superregional banks engage in a

complete array of wholesale banking activities money center banks rely heavily on nondeposit or

borrowed sources of funds often borrowed in the federal funds market


Commercial Banks

Because larger banks generally lend to larger corporations, their interest rate spreads and net interest margins are usually narrower than those of smaller banks interest rate spread is the difference between lending and

deposit rates net interest margin is interest income minus interest

expense divided by earning assets Large banks tend to pay higher salaries and invest more in

buildings and premises than small banks Large banks tend to diversify their operations more and

generate more noninterest income than small banks

Because larger banks generally lend to larger corporations, their interest rate spreads and net interest margins are usually narrower than those of smaller banks interest rate spread is the difference between lending and

deposit rates net interest margin is interest income minus interest

expense divided by earning assets Large banks tend to pay higher salaries and invest more in

buildings and premises than small banks Large banks tend to diversify their operations more and

generate more noninterest income than small banks


Industry Performance

U.S. commercial banks flourished during the economic expansion of the 1990s

The economic downturn of the early 2000s caused performance to deteriorate only slightly

By 2003 ROA and ROE had reached all-time highs In the fourth quarter of 2006 mortgage delinquencies

(particularly subprime mortgages) surged Losses from falling values of subprime mortgages caused

fourth quarter 2007 net income to hit a 16-year low

U.S. commercial banks flourished during the economic expansion of the 1990s

The economic downturn of the early 2000s caused performance to deteriorate only slightly

By 2003 ROA and ROE had reached all-time highs In the fourth quarter of 2006 mortgage delinquencies

(particularly subprime mortgages) surged Losses from falling values of subprime mortgages caused

fourth quarter 2007 net income to hit a 16-year low


Wholesale Banking Services

Controlled disbursement accounts

Account reconciliation Lockbox services Electronic lockbox Funds concentration Electronic funds transfer Check deposit services Electronic initiation of letters

of credit

Controlled disbursement accounts

Account reconciliation Lockbox services Electronic lockbox Funds concentration Electronic funds transfer Check deposit services Electronic initiation of letters

of credit

Treasury management software

Electronic data interchange Facilitating business-to-

business e-commerce Electronic billing Verifying identities Assisting small business

entries in e-commerce

Treasury management software

Electronic data interchange Facilitating business-to-

business e-commerce Electronic billing Verifying identities Assisting small business

entries in e-commerce


Retail Banking Services

Automated teller machines (ATMs) Point-of-sale (POS) debit cards Preauthorized debits and credits Paying bills via telephone Online banking Smart cards (stored-value) cards Internet banking

complements existing business for already existing banks

some new internet-only banks have no “brick and mortar”

Automated teller machines (ATMs) Point-of-sale (POS) debit cards Preauthorized debits and credits Paying bills via telephone Online banking Smart cards (stored-value) cards Internet banking

complements existing business for already existing banks

some new internet-only banks have no “brick and mortar”


International Commercial Banking

Commercial banking has truly become an international and global market

The four largest banks in the world, as of 2007, are from four different countries UBS Group is a Swiss bank with $1.96 trillion in

assets Barclays Bank is a U.K. bank with $1.96 trillion in

assets BNP Paribas is a French bank with $1.90 trillion in

assets Citigroup is a U.S. bank with $1.88 trillion in assets

Commercial banking has truly become an international and global market

The four largest banks in the world, as of 2007, are from four different countries UBS Group is a Swiss bank with $1.96 trillion in

assets Barclays Bank is a U.K. bank with $1.96 trillion in

assets BNP Paribas is a French bank with $1.90 trillion in

assets Citigroup is a U.S. bank with $1.88 trillion in assets



Advantages of international expansion risk diversification economies of scale distribute new product innovations internationally opportunity to find the cheapest and most available

sources of funds service the needs of domestic multinational

corporations regulatory avoidance

Advantages of international expansion risk diversification economies of scale distribute new product innovations internationally opportunity to find the cheapest and most available

sources of funds service the needs of domestic multinational

corporations regulatory avoidance



Disadvantages of international expansion information and monitoring costs are generally higher

in foreign markets foreign assets may be subject to nationalization or

expropriation by host country governments the fixed costs of establishing foreign organizations

may be extremely high

Disadvantages of international expansion information and monitoring costs are generally higher

in foreign markets foreign assets may be subject to nationalization or

expropriation by host country governments the fixed costs of establishing foreign organizations

may be extremely high


Global Banking Performance

Banks in most regions of the world posted strong performance in the early and mid-2000s mortgage lending boosted revenue in France and

Spain as personal bankruptcies rose worldwide, U.K. banks’

profitability was maintained because of diversification in 2001 the Japanese government backed the

purchase of $90 billion of shares of Japanese banks in an attempt to avert a banking collapse

the Chinese state-run banking system deteriorated in the early 2000s, which caused China to ease restrictions on foreign bank operations

Banks in most regions of the world posted strong performance in the early and mid-2000s mortgage lending boosted revenue in France and

Spain as personal bankruptcies rose worldwide, U.K. banks’

profitability was maintained because of diversification in 2001 the Japanese government backed the

purchase of $90 billion of shares of Japanese banks in an attempt to avert a banking collapse

the Chinese state-run banking system deteriorated in the early 2000s, which caused China to ease restrictions on foreign bank operations

Commercial Banks in Turkey(Sep 2011)Commercial Banks 31

State Owned 3Privately Owned 11Foreign Banks 17Banks under DIF 1

Develop. and Inv. Banks 13State Owned 3Privately Owned 6Foreign Banks 4

Sector Total 45

Depository Institutions other than Banks in Int. MarketsSAVINGS AND LOANS (S&Ls) S&Ls were originally allowed to exist in order to

gather savings and pool depositor funds to finance home mortgages.

SAVINGS BANKS A savings bank is an institution similar to an S&L.

The asset structure is similar, with the principal assets being residential mortgages. However, because states permitted greater portfolio diversification than was permitted by the federal regulators of S&Ls, state-chartered savings banks faired better during the 1980s.

CREDIT UNIONS They are the smallest of the depository

institutions. The purpose of them is to serve their members’

saving and borrowing needs. They obtain their funds from deposits of their

members. The assets of them consist of small consumer loans to their members and credit card loans.

Depository Institutions other than Banks in Int. Markets

INSURANCE COMPANIES

They are risk bearers. Their major task (underwriting Process):

Deciding which applications for insurance they should accept or reject.

Determine how much to charge for insurance if they accept the application.

INSURANCE COMPANIES

There are two kinds of sources for the insurance companies;

Initial Underwriting Income (Insurance Premium)

Investment income

INSURANCE COMPANIES

TYPES OF INSURANCE COMPANIES in Turkey Life Insurance Companies

Term Insurance Whole Life Insurance Other Life Insurer activities;

Private pension funds Accident and health insurance Group insurance: providing health insurance

coverage to corporate employees.

INSURANCE COMPANIES

Non-life Insurance Companies fire transport accident engineering agriculture health

INSURANCE COMPANIES

Differences of non-life insurance from life insurance;

Non-life insurance covers a wide variety of activities. However, life insurance is more focused.

Non-life insurance policies often last for a short-term (one year or less) as opposite to the long-term and even permanent life insurance policies.

FACTORING COMPANIES

Factoring is a process of purchasing accounts receivables or invoices from a business at a discount.

Factoring companies provide short-term financing service.

They fill the financial gap between the time of selling and collecting receivables.

They have two kinds of income; Commission (fee) Advance payment

FORFAITING COMPANIES

Forfaiting is a kind of fixed rate medium term financing of international trade of capital goods.

A forfaiting company purchases a series of promissory notes, bills of exchange etc., which are medium or long term especially at a discount on a non-recourse basis.

In Turkey although there are some forfaiting companies, factoring companies are allowed to run forfaiting transactions.

LEASING COMPANIES

Leasing is a source of financing, enabling firms to use the fixed assets (machinery, equipment etc.) without any cost. Leasing company purchases the machinery, equipment or other assets for its customer firm.

LEASING COMPANIES

The types of products that are subject to leasing are summarized below;

Transport vehicles (Bus, car, ship, aircraft etc.) Construction machines (Doser, Forklift, etc.) Machinery and equipment (Manufacturing machines, generator,

etc.) Office Hardware Equipment and Material (computer, fax etc.) Electronic and optic instruments (security systems, audio-visual-

light systems, air condition) Medical equipment (diagnosis equipment, dental units, optic

units etc.) Real Estate (building) Tourism equipment (heat-cooling, kitchen-laundry etc.)

LEASING COMPANIES

The reasons for preferring leasing over bank credits are; Firms can purchase these goods without making

cash payment but banks require a significant amount of advance payment for the credits of such assets.

While it is possible to extend a lease agreement, banks will require a new loan origination.

The most important reason to choose leasing over bank loans is that the Financial Leasing Agreement is exempted from all types of taxes. Leasing expenses are tax deductible.

EXCHANGE BUREAUS (MONEY CHANGERS)

Money changers are not free to engage in any other line of business other than;

buying and selling and changing currencies importing and exporting precious metals and

gems (processed or otherwise)

PARTICIPATION BANKS

Participation banks do give almost every service commercial banks run. The main distinction is that these institutions do not receive/pay interest.

Profit (and loss) sharing takes the place of interest payments and/or collections.

MONEY LENDERS

They are individuals that engage their own funds in money for interest business, who are required to have had mandates from the Treasury.

These individuals are not free; to engage in any securities business to borrow either from banks or money and

capital markets to issue fixed-income securities

FINANCE HOUSES

Their activities consist of mainly consumer loans.

They are not free; to take deposits to issue guarantee letters

but free to issue fixed-income securities and borrow from the Turkish money markets.

GENERAL FINANCE CORPORATIONS (GFC) The purpose for these corporations is to issue asset-backed-

securities for public. GFCs issue asset-backed-securities in return for the following

receivables that must be assigned to them. Consumer credits Housing loans Leasing receivables Export receivables Promissory notes in the sales portfolios of corporations Receivables in TC Ziraat Bank’s portfolio as a result of the

Agricultural Credit Cooperatives consumer lending Small business loans of Halk Bank Promissory notes portfolios of Real Estate Investment Trusts

3.WEEK COMMERCIAL BANKS, INSURANCE COMPANIES, FINANCE HOUSES AND ETC...

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