Banking 4.ppt

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BANKING Tome Nenovski, Ph. D. 07.06.22 05:49 AM 1 1 AMERICAN COLLEGE S K O P J E ”PRINCIPLES OF BANKING” Chapter 4 Instructror: Tome Nenovski, Ph. D.

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Transcript of Banking 4.ppt

  • 1.
    • AMERICAN COLLEGE
  • S K O P J E
  • PRINCIPLESOF BANKING
  • Chapter 4
  • Instructror : Tome Nenovski, Ph. D.

2. 4. BANKING PRODUCTS AND SERVICES

  • - Bank product definition:It is every product or service produced by bank no matter if it is a debtor or a creditor and no matter if that is done in its own name and account or for somebody elses name and account;
  • - Traditional bank task is to collect money and to invest money in different parts of the economy;
  • -General opinion:Bank has only mediator role in collecting money and extending credits;

3.

  • 4. BANKING PRODUCTS AND SERVICES/2
  • - The effects of bank globalization and competition: some classical products became unprofitable and replaced with new products;
  • - Banks should be directed in doing the following activities:
  • - collecting funds (deposits, credits, capital) for financing bank credit and other activities;
  • - introducing and servicing new credits;
  • - introducing and doing contemporary noncredit transactions (money transfers, information..);

4.

  • 4. BANKING PRODUCTS AND SERVICES/3
  • - selling consultant and management services;
  • -selling new products and services: brokerage, insurance, investment banking, investment funds foundation, agent activities, trust services etc.;
  • - bank as guarantee etc.
  • - Not every bank can do all the above mentioned activities.

5.

  • 4.1. HISTORICAL DEVELOPMENT OF BANKING PRODUCTS AND SERVICES
  • - Banks have been offeringmany and different productsand services to their clients throughout the history;
  • - Introduction and evolution of banking products and services have been conditioned by thelevel of economic and banking development and by the public needs ;
  • -Most importantbanking products and services throughout the history:

6.

  • 4.1. HISTORICAL DEVELOPMENT OF BANKING PRODUCTS AND SERVICES/2
  • a)Exchanging (trading) foreign currency;
  • b)Discounting commercial bills (bills of exchange);
  • c)Collecting funds at the market (savings, deposits);
  • d)Collecting deposit money (realizing checking orders);
  • e)Security depot services; gold and jewelry estimation.

7.

  • 4.1. HISTORICAL DEVELOPMENT OF BANKING PRODUCTS AND SERVICES/3
  • f)Government activities support (extending credits; buying Government securities);
  • g)Trust services.
  • - Intensive banking products development during the middle centuries (a period of strong economic development, technological innovations, foreign trade the case of Lombardia, etc.).

8.

  • 4.2.CLLASIC BANKING PRODUCTS
  • - Evolution and modification of banking products during the centuries;
  • - Banking products stabilization during first half of XX- th century clasical banking products and services;
  • - Numerial products and service;
  • - The oldest, largest and most voluminous banking products are collectingdeposits , extendingcreditsandoff-balanced or neutralbanking products and services.

9.

  • 4.2.CLASIC BANKING PRODUCTS/2
  • 4.2.1. DEPOSITS
  • - Depositium= Commited goods, commited deposit;
  • - Deposit= A certain amount of money that the bank is obliged to pay off or to transfer on depositor order;
  • - Deposit =Specific credit that depositors have extended to the bank;
  • - The importance of quantity, prices, liquidity and profitability;
  • - Deposits are basis for bank development;
  • - Deposits are basis for creating and developing bank mobilizing function;

10.

  • 4.2.1. DEPOSITS
  • - Clients deposits consist 15-20% of total available funds for financing bank placement;
  • - The credit quantity, quality, structure and credit pricing depends on deposits quantity, quality, structure and deposits pricing;
  • - Crutial issues for each bank in deposit management: 1) Where and how much funds the bank can collect for the lowest price; 2) How can the bank always have enough deposits to realize planned credit and other service quantity?
  • - Big bank competition on deposit market.

11.

  • 4.2.1.1. Types of deposits
  • - Different approaches in determining the types of deposits;
  • - Most often deposits are clasified as deposit money, savings and time deposits;
  • - Retail deposits and corporate deposits;
  • - Recently the most exploit clasification is on transaction and non transaction deposits.

12.

  • 4.2.1.1. Types of deposits/2
  • a) Transaction deposits
  • -Companies and citiziens keep their transaction deposits at special bank accounts: cheques accounts, transfer accounts; current accounts etc.;
  • - Transaction deposits realize money payment and turnover function;
  • - Transaction deposits are known asdeposit money ;
  • -No interest bearing deposits(they are mostly represented and the cheapest funds resources for each bank);

13.

  • 4.2.1.1. Types of deposits/3
  • a) Transaction deposits
  • - Interest bearing deposit money(cheques, savings..):
  • 1)Negotiable order of withdrawal NOW;
  • 1.2)Money market deposit account MMDAs(term deposits with limited privileges for
  • making payments by the depositor);
  • 1.3)Deposits super NOW.

14.

  • 4.2.1.1. Types of deposits/4
  • b) Non transaction deposits (savings and term deposits)
  • - Interest bearing deposits with no allowance for making payments by their owners;
  • 1) Savings
  • - They are sight deposits;
  • - Bear higher interest than transaction
  • deposits and have lower service costs;
  • - Banks must pay attention to growing citizen
  • interest awearness;

15.

  • 4.2.1.1. Types of deposits/5
  • b) Non transaction deposits (savings and term deposits)
  • 2) Term deposits
  • - These deposits bear higher interest than
  • savings;
  • - Deposits with volatile interst rates;
  • - Cerificate of deposits CDs(transferable and
  • non transferable CDs; revocable and non
  • revocable CDs);

16.

  • 4.2.2. CREDITS/LOANS
  • - Credits are second most important banking products;
  • - Credits represent over of bank assets and almost 2/3 of bank total revenues
  • - Extending credit is theheart of the bank industry ;
  • - Big concentration ofrisk ;
  • - Need for carefulcredit analysis ;
  • - For maximizing the profit, the bank has to insist on the highest possible invested money return, parallel to decreasing the ever present credit risk;

17.

  • 4.2.2. CREDITS/2
  • - Credit principles:
  • 1)Financing credit worthy clients;
  • 2)Financing most profitable projects with lowest risk;
  • 3)Diversifing assets (credits) for lowering risk;
  • 4)Part of the assets (credits) must be very high liquid (to be transformed in primary liquidity in very short period of time).

18.

  • 4.2.2.1. TYPES OF CREDITS
  • - Different types of credits for different clients ;
  • - Credits for different purposes;
  • -Factorsthat determine structure of bank credit portfolio:
  • 1)Market area characteristics;
  • 2)How big the bank is (how big bank capital is);
  • 3)Bank general credit policy, bank management expeirence and personnel proffesional skills;
  • 4)The expected income from each credit (gross income versus net income);
  • 5)Number of bank clients;
  • 6)Costs for extending a certain credit -The importance of Functional Cost Analysis.

19.

  • 4.2.2.1. TYPES OF CREDITS/2
  • - Commercial and retail credits;
  • - Insured and uninsured credits;
  • - Fixed interest credit rates and flexible interest credit rates;
  • - Credits that are payed off at once and credits that are paid on instalements;
  • - Most often credit division: Short - term and long - term credits (loans).

20.

  • a) SHORT-TERM CREDITS
  • - Up to one year term to maturity;
  • - Credits that are used for financing temporarily and seasonal companies and citizen needs;
  • 1) Self liquidating credits
  • - Credits used for buying raw materials;
  • - Credits paid off by selling stock of goods;
  • - Credit term of maturity: 2-3 months;
  • - These credits represent more than of bank credits to
  • corporations.

21.

  • 2) Credits for working capital
  • - Very similar to self liquidating credits;
  • - Term to maturity: couple of days to 1 year;
  • - Used for covering companies seasonal needs;
  • - The importance of credit lines;
  • - Collateral: Stoks or client money receivables;
  • - Commitment fee on unused credit;
  • - Compensatory deposit.
  • 3) Temporarily credit for construction
  • - Credit must be collateralized by long-term mortgage;

22.

  • 4) Assets based credits
  • - Credits based on client stock of goods (up to 30% of total credit) and money receivables (up to 60% of total credit);
  • - The cases of factoring /commission trade (higher risk higher interest rate).
  • 5) Open credit line
  • - Up to one year term to maturity;
  • - Flexible interest rate;
  • - Without collateral (Alternative: Compensatory deposit);
  • - Extended to the most credible clients;
  • - Informal and formal (agreed) credit lines.

23.

  • 6) Retail trade (business) credit
  • - Collateralized by businessman goods;
  • 7) Credits to security dealers
  • - Collateralized by first class government securities;
  • - Term to maturity: Several days.
  • 8) Syndicated credits
  • - Several banks extend credit in a big amount to some big corporation.

24.

  • b) LONG TERM CREDITS (LOANS)
  • - Term to maturity over one year;
  • - These credits are used for financing long trying company needs, particularly for buying fixed assets, refinancing other credits, mergers and acquisitions etc.
  • -Most often classificationis: Term credits, Revolving credits, Project credits, Credits for supporting companies merger or acquisition and Credit line stand by.

25.

  • 1) Term (investment) credits
  • - Most frequent long term credit;
  • -Usage:Financing middle and long term business investment (equipment, machines, object construction);
  • - Paying back by installments (monthly, three months,6 months);
  • - Depreciation plan;
  • -Collateral:Long trying capital (equipment, building, land);
  • -Higher interest ratethan interest rate on short-term credits;
  • -High level of credit risk;

26.

  • 2) Revolving credits
  • - One of most flexible type of credits;
  • - It could cover 3,4, or 5 years;
  • - Collateral: Some client real assets;
  • - They are used for buying long trying turnover resources;
  • - Formal bank financial obligation;
  • - Confirmed credit line (less obligatory credit agreement);
  • - Business credit cards.
  • 3) Project credits
  • - Credits for mines, refineries, electric power systems etc.;
  • - Most risky credits;
  • - Long-term syndicated credits;
  • - Shelter based credits (collateralized by credited company assets);
  • - Non shelter base credits (presence ofbig risk).

27.

  • 4) Credit for companies merger and acquisition
  • - Leveraged by out (LBO) credits;
  • - Bank Consortium;
  • - Collateral: Client real property or its turnover assets;
  • - Very risky type of credit.
  • 5) Stand by credit line
  • - Credits for note issuing facilities NIF (commercial securities);
  • - Term to maturity:3-7 years;
  • - Bank agrees to buy commercial securities if the company could not sell securities at the profitable interest rate.

28.

  • 4.2.3. OFF - BALANCE SHEET (NEUTRAL) BANK PRODUCTS AND SERVICES
  • - Bank plays neither the role of debtor nor the role of creditor;
  • - The oldest bank products and services;
  • - For such services bank pays off provision fee, not interest;
  • - Two types of neutral bank services: Interference and Commission services.

29.

  • 4.2.3. OFF - BALANCE SHEET (NEUTRAL) BANK PRODUCTS AND SERVICES/2
  • a)Service that bank is doing on behalf of client name and account is calledinterference service:
  • - Payment turnover (making payments home or in abroad);
  • - Collection activities(collecting funds from client money receivables and investing money on behalf of the client; paying client obligations for rents, electric power, etc.);

30.

  • 4.2.3. OFF - BALANCE SHEET (NEUTRAL) BANK PRODUCTS AND SERVICES/3
  • b) Bankservice that is done on behalf of its own name and client account is calledcommission service:
  • - Client securities emission;
  • - Issuing commercial letters of credit;
  • - Issuing guarantees and guarantee letters;
  • - Depot services;
  • - Buying and selling securities (brokerage activities);

31.

  • 4.2.3. OFF - BALANCE SHEET (NEUTRAL) BANK PRODUCTS AND SERVICES
  • -Commission credit activities (credits for supporting issuing or buying out company commercial papers..) ;
  • - Trust services: Bank acts as a client agent withfull responsibilityin managing client property or asan agentfor doing some specific activities. Three types of trust services:
  • a)Corporative trust service (realization of securities emission);
  • b)Corporative agency service (transfer client securities, paying dividends, paying company obligations, registration of company securities etc.);
  • c)Company employers benefits trust (pensions, profit distribution, accounting, reporting etc).

32.

  • 4.3. CONTEMPORARY BANKING PRODUCTS
  • - Bank domination on money market till the end of 70s of XX century;
  • - Appearance and development of investment and pension funds;
  • - Issuing own company securities for collecting the needed money;
  • - Money market competition increase;
  • - Banks are forced to broaden their activities and to create new products and services, particularly in dealing with securities;

33.

  • 4.3.1. Most important contemporary banking products
  • a)Annuities (saving-deposit instrument)
  • - Fix Annuities;
  • - Variable annuities;
  • b)Joint venture loans (founding company with joint capital);
  • c)Leasing;
  • d)Pension plans;
  • e)Project financing;

34.

  • 4.3.1. Most important contemporary banking products/2
  • f)Insurance activities (issuing insurance policies) Bank and Insurance company as parts of some Bank Holding company Convergence;
  • -Advantages for banks :1)Stabilizing bank cash flow and efficiency Stabilizing bank profitability;2)Economies of scale;3)Economies of scope;

35.

  • 4.3.1. Most important contemporary banking products/3
  • g)ATS (Automatic Transfer Savings) accounts;
  • h)Overnight repurchase (margin account);
  • j)Financial and information advice for the clients (solving the problem of information irregularity information asymmetry);
  • k)Electronic change of data and making payments.
  • Bank revolution:Offering new products and services for increasing clients appropriates;
  • Banks asmultifunctional super storesof modern time;
  • Universal Banking.

36.

  • 4.4. DEALING WITH SECURITIES
  • - Emission and selling client securities (underwriting) and buying and selling securities on behalf of the clients (brokerage services);
  • - In some countries investment banks are only authorized to deal with securities. Reasons for that are:
  • - dealing with securities is very risky;
  • - possible conflict of interests between bank and clients;
  • - financial market efficiency is increasing by competition between bank credits and issuing client own securities;

37.

  • 4.4. DEALING WITH SECURITIES/2
  • - In other countries it is completely allowed banks to deal with securities (it decreases risk of bankruptcy and increases competition);
  • - Three ways of dealing with securities on behalf of the client:
  • a)Service for securities emission on primary market;
  • b)Service for buying and selling securities on secondary market (brokerage service);
  • c)Consultant service.

38.

  • 4.4. DEALING WITH SECURITIES/3
  • 4.4.1.Service for securities emission on primary market
  • - Three bank functions:
  • a)Consultant function;
  • b)Overtaking securities emission (Overtaking risk by the bank for selling the client securities Extending commission credit for buying out securities);
  • c)Selling the client securities;
  • - Price for covering bank costs (provision as a percent of sold securities): Different costs for Public offering and Private placement.

39.

  • 4.4. DEALING WITH SECURITIES/4
  • 4.4.2. Brokerage services (secondary market)
  • - Bank trust services for realizing client orders for buying or selling securities;
  • - Bankinvestment plans : voluntarily and automatic;
  • - Dividend reinvesting plans;
  • - Security swaps;
  • - Paying off provision fee.

40.

  • 4.4. DEALING WITH SECURITIES
  • 4.4.3. Financial-consultancy services
  • - Client financial performance analyses;
  • - Possible fund resources;
  • - Client ownership and client financial
  • reconstruction advice (merger, acquisition) etc.
  • - Paying off provision fee.

41.

  • KEY WORDS/TERMS:
  • Banking product
  • Exchanging foreign currency
  • Discounting commercial bills
  • Depot service
  • Trust service
  • Off-balanced (neutral) bank products and services
  • Deposit
  • Deposit money
  • Retail deposits
  • Corporate deposits
  • Transaction deposits
  • Non transaction deposits
  • Savings

42.

  • KEY WORDS/TERMS:
  • Term deposits
  • Certificate of deposits CDs
  • Credit/Loan
  • Credit principles
  • Commercial credits
  • Short-term and long-term credits
  • Self-liquidating credits
  • Credits for working capital
  • Assets based credits
  • Open credit line
  • Retailtrade (business) credit
  • Credits to security dealers
  • Syndicated credits

43.

  • KEY WORDS/TERMS:
  • Investment credits
  • Revolving credits
  • Project credits
  • Credits for companies merger and acquisition
  • Stand by credit line
  • Interference service
  • Making payments
  • Collection activities
  • Commission service
  • Commercial letter of credit
  • Guarantees
  • Annuities
  • Join venture loans

44.

  • KEY WORDS/TERMS:
  • Leasing
  • Pension plans
  • Project financing
  • Insurance activities
  • ATS Automatic Transfer Savings
  • Overnight repurchase
  • Securities
  • Brokerage services

45.

  • CHECKING QUESTIONS:
  • What is bank product?
  • Enumerate at least five of the most important banking products and services throughout the history?
  • Define bank deposit in contemporary sense.
  • What is the main function of transaction deposits?
  • Make difference between no interest and interest bearing transaction deposits.
  • What is non transaction deposits consisted of?
  • What bank has to insist on for maximizing profit when extends credits/loans?
  • What are the main credit principles (4)?
  • What are the main factors that determine structure of bank credit portfolio (6)?
  • Explain shortly the meaning of self-liquidating credits.
  • Explain shortly the meaning of credits for working capital.

46.

  • CHECKING QUESTIONS:
  • Explain shortly the meaning ofassets based credits.
  • Explain shortly the meaning of open credit line
  • Explain shortly the meaning of retailtrade (business) credit;
  • Explain shortly the meaning of credits to security dealers;
  • Explain shortly the meaning of syndicated credits;
  • Explain shortly the meaning of term (investment) credits;
  • Explain shortly the meaning ofrevolving credits;
  • Explain shortly the meaning of project credits;
  • Explain shortly the meaning of credit for companies merger and acquisition;
  • Explain shortly the meaning of stand by credit line;
  • What does it mean interference bank service?
  • What does it mean commission bank service/

47.

  • CHECKING QUESTIONS:
  • Enumerate at least five types of bank commission services.
  • What are annuities?
  • What is bank leasing?
  • What are the advantages of insurance activities for a bank?
  • Define overnight repurchase bank activity.
  • What are the ways (3) of bank dealing with securities on behalf of the client?
  • What are the bank service functions (3) on primary securities market?