FINS1612 W2 Lecture

8/19/2019 FINS1612 W2 Lecture

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FINS1612CAPITAL MARKETS AND

INSTITUTIONS

Lecture 2Commercial Banks


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REVISION


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Learning Objectives

Evaluate the functions and activities of o!!e"#al $an%&

Ident#f' the !a#n sources and uses of fund& fo" o!!e"#al$an%&

Outl#ne the natu"e and #!(o"tane of $an%&) off-balance-seet

business E*a!#ne the !a#n "#&% e*(o&u"e& and onde" "elated #&&ue& of

regulation and !ru"ential su!ervision of $an%&


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Ca!ter Organisation

2+1 Ma#n At#v#t#e& of Co!!e"#al ,an%#n-

2+2 Sou"e& of Fund&

2+. U&e& of Fund&

2+/ Off0$alane0&heet ,une&&

2+ Re-ulat#on and P"udent#al Su(e"v#on

2+6 ,a%-"ound to Ca(#tal Adeua' Standa"d&

2+3 ,a&el II Ca(#tal Ao"d

2+4 L#u#d#t' Mana-e!ent and Othe" Su(e"v#&o"' Cont"ol&

2+5 Su!!a"'


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#utorise" $e!osit-taking Institutions %#$Is&

In Au&t"al#a f#nan#al #n&t#tut#on& that a"e a(("oved to a""' outfinancial interme"iation a"e autho"#&ed $' the Au&t"al#anP"udent#al Re-ulat#on Autho"#t' 7APRA8 and la$elled autho"#&edde(oto"' #n&t#tut#on& 7ADI&8

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2'( )ain #ctivities of Commercial Banking

I!(o"tane of $an%&

9 :#-h level of "e-ulat#on ("#o" to the !#d0154;& on&t"a#ned the#"develo(!ent and led to -"o


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2'( )ain #ctivities of Commercial Banking %cont'&

#sset !ana-e!ent 7=154;&8

9 Loan (o"tfol#o #& ta#lo"ed to !ath the ava#la$le "e!osit $a&e

9 :#-hl' "e-ulated env#"on!ent

Liabilit* !ana-e!ent 7154;&=8

9 Le&& "e-ulated env#"on!ent

9 $e!osit $a&e and othe" fund#n- &ou"e& a"e !ana-ed to fundloan de!and

> ,o""o< d#"etl' f"o! do!e&t# and #nte"nat#onal a(#tal !a"%et

> P"ov#on of othe" f#nan#al &e"v#e&> Off0$alane0&heet 7O,S8 $une&&


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2'2 Sources of +un"s

Sou"e& of fund& a((ea" #n the $alane &heet a& e#the" liabilit* o" sareol"ers) fund&

,an%& offe" a "an-e of de(ot and #nve&t!ent ("odut&


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2'2 Sources of +un"s %cont'&

Cu""ent de(ot&

9 Fund& held #n a heue aount

9 :#-hl' l#u#d

9 Ma' $e #nte"e&t o" non0#nte"e&t $ea"#n-

Call o" de!and de(ot&

9 Fund& held #n &av#n-& aount& that an $e


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Te"! de(ot&

9 Fund& lod-ed #n an aount fo" a ("edete"!#ned (e"#od at a&(e#f#ed #nte"e&t "ate

> Te"!? one !onth to f#ve 'ea"&

> Lo&& of l#u#d#t' due to f#*ed !atu"#t'> :#-he" #nte"e&t "ate than u""ent o" all aount&

> @ene"all' f#*ed #nte"e&t "ate

:#&to"' &ho


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Ne-ot#a$le e"t#f#ate& of de(ot 7CD&8

Sho"t te"! "iscount &eu"#t'

9 Pa(e" #&&ued $' a $an% #n #t& on na!e

9 I&&ued at a "iscount to fae value

9 S(e#f#e& "e(a'!ent of the face value of the CD at !atu"#t'

9 :#-hl' negotiable &eu"#t'

9 sort te"! 7.; to 14; da'&8


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,#ll ae(tane l#a$#l#t#e&

,#ll of e*han-e

9 A &eu"#t' #&&ued #nto the mone* !a"%et at a "iscount to the faevalue+ The fae value #& "e(a#d to the holde" at !atu"#t'

The $une&& that issues the $#ll


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De$t l#a$#l#t#e&

9 Med#u!0 to0lon-e"0te"! de$t #n&t"u!ent& #&&ued $' a $an%

De$entu"e

9 A $ond &u((o"ted $' a fo"! of &eu"#t' $e#n- a ha"-e ove" the

a&&et& of the #&&ue" 7e+-+ ollate"al#&ed float#n- ha"-e8

Un&eu"ed note

9 A $ond #&&ued


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Fo"e#-n u""en' l#a$#l#t#e&

9 De$t #n&t"u!ent& #&&ued #nto the #nte"nat#onal a(#tal !a"%et& thata"e deno!#nated #n a fo"e#-n u""en'

> Allo Fa#l#tate& !ath#n- of fo"e#-n e*han-e deno!#nated a&&et&> Meet& de!and of o"(o"ate u&to!e"& fo" fo"e#-n e*han-e ("odut&

Eu"o!a"%et& ? de$t !a"%et&


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Loan a(#tal

9 Sou"e& of fund& that have the ha"ate"#&t# of $oth de$t andeu#t' 7e+-+ &u$o"d#nated de$entu"e& and &u$o"d#nated note&8

> Su$o"d#nated !ean& the holde" of the &eu"#t' ha& a la#! on #nte"e&t

(a'!ent& o" the a&&et& of the #&&ue" afte" all othe" "ed#to"& have$een (a#d 7e*lud#n- o"d#na"' &ha"eholde"&8

Sha"eholde")& Eu#t'

9 O"d#na"' &ha"e&

9 Reta#ned fund& 9 add#t#onal &ha"eholde"&) fund&


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Ca!ter Organisation


2+2 Sou"e& of Fund&

2+. U&e& of Fund&





2+4 L#u#d#t' Mana-e!ent and Othe" Su(e"v#&o"'

Cont"ol&2+5 Su!!a"'


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2'. /ses of +un"s

U&e& of fund& a((ea" #n the $alane &heet a& asset

The !ao"#t' of $an% a&&et& a"e loans that -#ve "#&e to anent#tle!ent to futu"e a&h flo


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2'. /ses of +un"s %cont'&

Pe"&onal and houn- f#nane

9 :oun- f#nane

> Mo"t-a-e

> A!o"t#&ed loan 7P"#n#(al B Inte"e&t (a'!ent8

9 Inve&t!ent ("o(e"t'

9 F#*ed0te"! loan

9 C"ed#t a"d


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Co!!e"#al lend#n- 7$une&& &eto" and othe" f#nan#al#nte"!ed#a"#e&8

9 F#*ed0te"! loan

> A loan


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Co!!e"#al lend#n- 7$une&& &eto" and othe" f#nan#al#nte"!ed#a"#e&8 7ont+8

9 Ove"d"aft

> A fa#l#t' allo ,#ll& of e*han-e ae(ted and d#&ounted $' a $an% and held a&a&&et&

> A "ollove" fa#l#t' #&


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Lend#n- to -ove"n!ent

9 T"ea&u"' note&

> Sho"t0te"! d#&ount &eu"#t#e& #&&ued $' the Co!!on


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Ca!ter Organisation


2+2 Sou"e& of Fund&

2+. U&e& of Fund&






2+5 Su!!a"'


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2'0 Off-balance-seet Business

O,S t"an&at#on& a"e a -n#f#ant (a"t of a $an%)& $une&&

O,S t"an&at#on& #nlude

9 D#"et "ed#t &u$&t#tute&

9 T"ade and (e"fo"!ane0"elated #te!& 9 Co!!#t!ent&

9 Fo"e#-n e*han-e #nte"e&t "ate0 and othe" !a"%et "ate0"elatedont"at&


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2'0 Off-balance-seet Business %cont'&

D#"et "ed#t &u$&t#tute&

9 An unde"ta%#n- $' a $an% to &u((o"t the financial o$l#-at#on& of al#ent 7e+-+ &tand0$' lette" of "ed#t)8

> The $an% at& a& -ua"anto" on $ehalf of a l#ent fo" a fee

> Cl#ent ha& a f#nan#al o$l#-at#on to a th#"d (a"t'> ,an% #& onl' "eu#"ed to !a%e a (a'!ent #f the l#ent default& on a

(a'!ent to a th#"d (a"t'


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T"ade and (e"fo"!ane0"elated #te!&

9 A fo"! of -ua"antee ("ov#ded $' a $an% to a th#"d (a"t' ("o!#n-financial o!(en&at#on fo" non-!erformance ont"atualo$l#-at#on&+

> Dou!enta"' lette"& of "ed#t> Pe"fo"!ane -ua"antee&


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Co!!#t!ent&

9 The ont"atual f#nan#al o$l#-at#on& of a $an% that a"e *et to $eo!(leted o" del#ve"ed

> ,an% unde"ta%e& to advane fund& o" !a%e a (u"ha&e of a&&et& at&o!e t#!e #n the futu"e e+-+

9 Fo"


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Fo"e#-n e*han-e #nte"e&t "ate0 and othe" market rate-relate"contracts

9 The u&e of "erivative ("odut& to !ana-e e*(o&u"e& to fo"e#-ne*han-e "#&% #nte"e&t "ate "#&% eu#t' ("#e "#&% and o!!od#t'"#&% 7#+e+ hed-#n-8 e+-+

> Futu"e& o(t#on& fo"e#-n e*han-e ont"at& u""en' &


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To the e*tent that the&e O,S at#v#t#e& #nvolve "#&%0ta%#n- and(ot#on& #n de"#vat#ve &eu"#t#e& O,S at#v#t#e& "a#&e &o!eone"n& a$out $an% "e-ulat#on

The not#onal value of &uh at#v#t#e& #& !o"e than t#!e& the total

value of a&&et& held $' the $an%& A -n#f#ant O,S $une&& #& $a&ed on !a"%et "ate0"elated

t"an&at#on&


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Ca!ter Organisation


2+2 Sou"e& of Fund&

2+. U&e& of Fund&






2+5 Su!!a"'


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Regulation an" 1ru"ential su!ervision

The @FC ha& fou&&ed attent#on on the "e-ulat#on of the f#nan#al&'&te!

A nu!$e" of f#nan#al #n&t#tut#on& olla(&ed du"#n- the "#&

The f#ve la"-e&t U+S+ #nve&t!ent $an%&


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2' Regulation an" 1ru"ential Su!ervision

Rea&on& fo" "e-ulat#on of $an%&

9 I!(o"tane of the $an%#n- &eto" fo" ealt of the eono!'

P"udent#al &u(e"v#on

9 The #!(ot#on and !on#to"#n- of &tanda"d& de-ned to en&u"ethe soun"ness and stabilit* of a f#nan#al &'&te!


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2' Regulation an" 1ru"ential Su!ervision %cont'&

Au&t"al#an "e-ulato"' &t"utu"e

9 Re&e"ve ,an% of Au&t"al#a 7R,A8

> S*stem &ta$#l#t' and !a*ment &'&te!

9 Au&t"al#an P"udent#al Re-ulat#on Autho"#t' 7APRA8

> P"udent#al "e-ulat#on and &u(e"v#on of "e!ositor* #n&t#tut#on&insurance off#e& and su!erannuation fund&

9 Au&t"al#an Seu"#t#e& and Inve&t!ent& Co!!#&on 7ASIC8

> )arket #nte-"#t' and Investor ("otet#on

9 Au&t"al#an Co!(et#t#on and Con&u!e" Co!!#&on 7ACCC8

> Com!etition (ol#'


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Ca!ter Organisation


2+2 Sou"e& of Fund&

2+. U&e& of Fund&






2+5 Su!!a"'


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Backgroun" to Ca!ital #"e,uac* Stan"ar"s

The $une&& at#v#t#e& of f#nan#al #n&t#tut#on&


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Basel (

@lo$al#&at#on of $an%#n- &'&te! #+e+ ,an% Ca(#tal adeua'neededG

The o!!#ttee 7@1;8


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4ier ( ca!ital

T#e" 1 a(#tal o" o"e a(#tal on&t& of the h#-he&t ,ualit* a(#tal ele!ent&


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4ier 2

T#e" 2 o" &u((le!enta"' a(#tal #nlude& othe" ele!ent&


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$efinition of ca!ital


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Ca!ter Organisation


2+2 Sou"e& of Fund&

2+. U&e& of Fund&


2+ Re-ulat#on and P"udent#al Su(e"v#on2+6 ,a%-"ound to Ca(#tal Adeua' Standa"d&



2+5 Su!!a"'

Basel II structural frameork


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Basel II structural frameork


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2'5 Basel II Ca!ital #ccor"

,a&el I a(#tal ao"d a((l#ed a &tanda"d#&ed a(("oah to the!ea&u"e!ent of the a(#tal adeua' of $an%&+ ,a&el I


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Ca!ital a"e,uac* stan"ar"

M#n#!u! a(#tal adeua' "eu#"e!ent a((l#e& to o!!e"#al$an%& and othe" #n&t#tut#on& &(e#f#ed $' ("udent#al "e-ulato"

Ca(#tal adeua' &tanda"d

9 M#n#!u! "#&%0$a&ed a(#tal "at#o of 4

> M#n#!u! / held a& T#e" 1 a(#tal 9 :#-he&t ual#t' o"e a(#tal

> Re!a#nde" an $e held a& T#e" 2 7&u((le!enta"'8 a(#tal

9 U((e" 9 &(e#f#ed (e"!anent h'$"#d #n&t"u!ent&

9 Lo


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Basel II structural frameork %cont'&

P#lla" 1JCa(#tal adeua'

9 Cre"it riskJ"#&% that $o""o


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P#lla" 1JCa(#tal adeua' 7ont+8

9 C"ed#t "#&% 7ont+8

9 O,S #te!& onve"ted to $alane0&heet eu#valent& $' dete"!#n#n-the "ed#t onve"on fato" and !ult#(l'#n- $' the a((l#a$le "#&%

Non0!a"%et0"elated O,S t"an&at#on& e+-+ dou!enta"' lette" of "ed#t

> Ma"%et0"elated O,S t"an&at#on&J"ed#t onve"on fato" an $edete"!#ned $'?

u""ent e*(o&u"e !ethodJu""ent and (otent#al "ed#t e*(o&u"e& !a"%0to0!a"%et 7ont"at "evalued $' #t& u""ent uoted ("#e8

o"#-#nal e*(o&u"e !ethodJnot#onal ont"at value !ult#(l#ed $' a "ed#tonve"on fato"


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Capital adequacy requirements (cont.)

Standa"d#&ed a(("oah 0R#&% e#-ht#n- of ,alane Sheet A&&et&

> A&&et "#&%


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A((l#at#on of A&&et R#&% e#-ht#n-&

#sset t*!e #sset value Risk eigt Risk-eigte" asset

%6billion& %7& value %6billion&

Ca&h and


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O,S C"ed#t Conve"on OBS items +ace value Cre"it conversion Cre"it

of contract %6m& factor %7& E,uivalent %6m&

F#nan#al -ua"antee& #&&ued 3;; 1;; 3;;

on $ehalf of o"(o"at#on&

Pe"fo"!ane $ond& fo" ;; ; 2; &tate -ove"n!ent&

:oun- loan a(("oval& 2;;; 1;; 2;;;

Dou!enta"' lette"& of "ed#t 2; 2; ;

#&&ued fo" o"(o"at#on&

TOTAL ./; .;;;

The a&&et "#&%0


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O!erational risk

O!erational risk #& def#ned a& "#&% of lo&& f"o! #nadeuate o"fa#led #nte"nal ("oe&&e& (eo(le and &'&te!& o" f"o! e*te"nalevent&

9 Inte"nal and e*te"nal f"aud

9 E!(lo'!ent ("at#e& and


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)arket Risk

)arket risk #& &(l#t #nto t The "#&% that the value of a &eu"#t'


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P#lla" 2JSu(e"v#&o"' "ev#e< of a(#tal adeua'

9 Intended to ensure $an%& have &uff##ent a(#tal to &u((o"t all"#&%& and encourage #!("oved "#&%0!ana-e!ent (ol##e& and("at#e& #n #dent#f'#n- !ea&u"#n- and !ana-#n- "#&% e*(o&u"e&

&uh a&?

> "#&%& #no!(letel'not a(tu"ed #n P#lla" 1 and fato"& e*te"nal to the$an% l#%e a han-#n- $une&& 'le

> add#t#onal "#&% !ana-e!ent ("at#e& &uh a& eduat#on t"a#n#n-

#nte"nal "e&(on$#l#t#e& dele-at#on and e*(o&u"e l#!#t& #n"ea&ed("ov#on& and "e&e"ve& and #!("oved #nte"nal ont"ol& and "e(o"t#n-("at#e&


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+our ke* !rinci!les of su!ervisor* revie P"#n#(le 1 ? ,an%& &hould have a ("oe&& fo" a&&e&n- the#" ove"all

a(#tal adeua' #n "elat#on to the#" "#&% ("of#le and a &t"ate-' fo"!a#nta#n#n- the#" a(#tal level&

P"#n#(le 2? Su(e"v#&o"& &hould "ev#e< and evaluate $an%&) #nte"nala(#tal adeua' a&&e&&!ent& and &t"ate-#e& a&


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P#lla" .JMa"%et d#&#(l#ne

9 A#! #& to develo( "iscloure "eu#"e!ent& that allo< the !a"%et toa&&e&& #nfo"!at#on on the a(#tal adeua' of an #n&t#tut#on #+e+#n"ea&e the trans!arenc* of an #n&t#tut#on)& "#&% e*(o&u"e "#&%!ana-e!ent and a(#tal adeua'

> P"udent#al &u(e"v#&o"& to dete"!#ne !#n#!u! d#&lo&u"e "eu#"e!ent&and f"euen'

> ,a&el II "eo!!end& a "an-e of ual#tat#ve and uant#tat#ve#nfo"!at#on d#&lo&u"e "elat#n- to ("#n#(al (a"t& of P#lla"& I and II


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Basel .

,a&el III


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Ca!ter Organisation


2+2 Sou"e& of Fund&

2+. U&e& of Fund&


2+ Re-ulat#on and P"udent#al Su(e"v#on2+6 ,a%-"ound to Ca(#tal Adeua' Standa"d&



2+5 Su!!a"'


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Li,ui"it* management strateg*

APRA &tate& that a l#u#d#t' !ana-e!ent &t"ate-' !u&t #nludethe follo


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2': Summar*

,an%& a"e the do!#nant #n&t#tut#on and have !oved to liabilit* !ana-e!ent

Sou"e& of fund& #nlude de(ot& 7current9 call an" term "e!osits8and non0de(ot &ou"e& 7bill acce!tances9 "ebt an" foreigncurrenc* liabilities9 OBS business an" oter services&

U&e& of fund& #nlude -ove"n!ent o!!e"#al and (e"&onal lend#n- O,S t"an&at#on& a"e a !ao" (a"t of a $an%)& $une&& and #nlude

9 d#"et "ed#t &u$&t#tute&

9 t"ade and (e"fo"!ane0"elated #te!&

9 o!!#t!ent&

9 !a"%et "ate0"elated t"an&at#on&

APRA)& $an% ("udent#al &u(e"v#on "eu#"e!ent& #nlude a(#taladeua' l#u#d#t' !ana-e!ent and othe" ont"ol&

FINS1612 W2 Lecture

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