ukrainian academy of banking banking department course: banking lecture 3 bank borrowed funding anna...

Ukrainian Academy of Banking

Banking Department

Course: Banking

Lecture 3Lecture 3Bank borrowed funding Bank borrowed funding

Anna Vladimirovna Buriak

Game: “Translating words”Game: “Translating words”

2 groups of people with their leaders

Agenda

1. Borrowed deposit funding (retail)

2. Borrowed non-deposit funding(wholesale)

3. Off-balance sheet activity

Types of bank funds

The main source of bank funds are borrowed funds, whose share in the banking system average of 80% of the total funds, and the rest (20%) are in own funds.

Active vocabularyActive vocabulary

Deposit account (Britain) = Savings Account (America)

Current (demand) deposit (Britain) = Checking Account (America)

Money market deposit account (MMDA)

Certificate of deposit (CD)

Statement savings

To make a deposit (place money on deposit)

Annual percentage yield

One of the main banking activities is acceptance of deposit from the public for the purpose of lending to businessmen and others who may

need loans.

Bank deposits serve different purposes for different people:

Some people cannot save regularly - they deposit money in the bank only when they have extra income. The

purpose of deposit then is to keep money safe for future needs.

Some may want to deposit money in a bank for as long as possible to earn interest or to accumulate savings with interest so as to buy a flat

etc.

Keeping in view these differences, banks offer the facility of opening different types of deposit accounts by people

Bank deposit accounts may be classified as follows:

Savings Bank Account

Current Deposit Account

Fixed Deposit Account

Money Market Deposit Account

Savings Bank Account

If a person has limited income and wants to save money for futureneeds, the Saving Bank Account is most suited for his purpose.

This type of account can be opened with a minimum initial deposit that varies from bank to bank.

Money can be deposited any time in this account.

Withdrawals can be made either by signing a withdrawal form or byissuing a cheque or by using ATM card. Normally banks put some restriction on the number of withdrawal from this account.

The rate of interest on savings bank account varies from bank to bank and also changes from time to time.

A minimum balance has to be maintained in the account as prescribed by the bank.

Current Deposit Account

Big businessmen, companies and institutions have to make payment through their bank accounts. Since there are restriction on number of withdrawals from savings bank account, that type of account is not suitable for them. They need to have an account from which withdrawal can be made any number of times.

Banks open current account for them.

This account also requires certain minimum amount of deposit while opening the account. On this deposit bank does not pay any interest on the balances. For the convenience of the accountholders banks also allow withdrawal of amounts in excess of the balance of deposit. This facility is known as overdraft facility. It is allowed to some specific customers and up to a certain limit.

Fixed Deposit Account (also known as Term (Time) Deposit Account)

Many a time people want to save money for long period. If money is deposited in savings bank account, banks allow a lower rate of interest. Therefore, money is deposited in a fixed deposit account to earn a interestat a higher rate.

This type of deposit account allows deposit to be made of an amount for a specified period. This period of deposit may range from 15 days to three years

or more during which no withdrawal is allowed.


A money market deposit account is a type of deposit account that offers a relatively high interest rate. Money market accounts are similar to savings accounts, but :

Where savings accounts usually have a fixed interest rate, these accounts have rates that vary regularly based on money markets.

Instead of using these deposits to fund mortgages and other credit instruments, banks reinvest your savings into traditionally secure, short-term holdings.

Many money market accounts require initial deposits of $2,500 or more. Although some banks allow new customers to start accounts with as little as $1,000, minimum balance amounts may also apply, which can quickly negate the extra dividends from your higher interest rate.


Money market accounts may appeal to depositors who:

Can afford to start an account with more than $2,500

Intend to keep a sizable balance in the account

Enjoy the flexibility of writing some checks from the account

Require regular access to their funds

Agenda




BANK EQUITYBANK EQUITY

RETAIL (DEPOSITS)RETAIL (DEPOSITS)

WHOLESALEWHOLESALE (NON-DEPOSITS)(NON-DEPOSITS)

BANK LIABILITIESBANK LIABILITIES

WHOLESALE (NON-DEPOSITS)WHOLESALE (NON-DEPOSITS) BANK FUNDINGBANK FUNDING

unpersonal nature unpersonal nature - they are not associated with a specific customer of the bank and bought in the market (from other financial institutions, non-financial corporations, state and local authorities, and foreign entities);

initiative initiative for fund raising belongs to the bankbank;

usually used by large bankslarge banks;

usually short-termshort-term.


““bright side”bright side”

-usage of investment usage of investment opportunities;opportunities;

-security from security from unexpected retail unexpected retail

withdrawalswithdrawals

““dark side”dark side”

-transmission of shocks transmission of shocks throughout the financial throughout the financial

system;system;

-bank relies on short-term bank relies on short-term wholesale funds to support wholesale funds to support

long-term illiquid assetslong-term illiquid assets

Daniel Tarullo (member of the Daniel Tarullo (member of the Board of Governors of the United Board of Governors of the United

States Federal Reserve Board)States Federal Reserve Board)

“Short-term wholesale funding plays a critical role in the financial system. During normal timesDuring normal times, it helps to satisfy investor demand for safe and liquid investments, lowers funding costs for borrowers, and supports the

functioning of important markets… During periods of stresDuring periods of stress, however, runs by providers of short-term

wholesale funding and associated asset liquidations can result in large fire sale externalities and otherwise undermine financial stability.”


UKRAINE

Loans from other banks Loans from the

central bank

Funds of investors

Loans from other banks

Terms of receiving - from a few days to 3-6 months.

The main purpose of obtaining interbank

credit: - maintain current liquidity

- expansion of active operations.

Loans from the

National bank of Ukraine

obtaining loans from the National Bank of

Ukraine on various refinancing procedures.

Funds of investors

Bonds issue – banks have the right to issue bonds in an amount not greater than 3-fold the size of

their.

!!!!!!It is forbidden to issue bonds for the share capital formation and to cover losses from business

activities.

The interbank lending market refers to the money market money market (over-the-counter (OTC) market).(over-the-counter (OTC) market).

The interbank lending market is a market in which banks make banks make loans to one anotherloans to one another for a specified term.

Most interbank loans are for maturities of one week or lesone week or lesss, the majority being overnight.

Funds are transferred through the purchase and sale of money market instruments— highly liquid short-term debt securities.highly liquid short-term debt securities.

Banks are required to hold an adequate amount of liquid assets, such as cash, to manage any potential bank runs by clients. If a bank cannot meet these liquidity requirementsliquidity requirements, it will need to borrow money in the interbank market to cover this. Some banks, on the other hand, have excess liquid assets above and beyond the liquidity requirements. These banks will lend money in the interbank market, receiving interest on the assets.

Interbank lending market

Such loans are made at the interbank rate (also called the

overnight rate if the term of the loan is overnight).

The interbank rate is the rate of interest charged on short-term loans between banks.

The interest rate charged depends on the availability of money in the market, on the specific terms of the contract, such as term length.

There is a wide range of published interbank rates, including the federal funds rate (USA), the LIBOR (UK) and the Euribor federal funds rate (USA), the LIBOR (UK) and the Euribor (Eurozone).(Eurozone).

Interbank lending market

The National Bank of Ukraine as main regulator can influence on the scope of activity, liquidity and other

indicators of banks.

Thus, the NBU enters the credit market with the following objectives:

Regulation of bank liquidity in Ukraine; Providing stabilization loans to support and financial rehabilitation of banks; Maintaining macroeconomic stability.

National Bank to regulate liquidity banks act as lender of last

resortuse the following tools: tools:

refinancing operations (permanent line to provide refinance to banks for overnight loans, refinancing loans);

repos transactions (transactions direct repo, reverse repo transactions);

activity with their own debt obligations (certificates of deposit overnight and up to 90 days);

activity with government bonds of Ukraine.

Agenda




Bank balance sheet is a statement of its assets and liabilities.

Off-balance sheet activity? It’s special type of bank activities. They represent the

operations which are not seen in the bank balancesheet.

But…in fact…Some of the OBS activities are evidenced

simultaneously in the balance sheet and off-balancesheet.

* The typical examples are futures, forwards oroptions. These derivative instruments are recorded

in the balance sheet in their real value and in the off-balancesheet in their nominal value.

As the off-balance sheet activities are future potentialbalance sheet assets, they are connected with a certain

level of credit risk.

After the off-balance sheet asset transforms intothe balance sheet asset, there is a probability that the counterpart will not fulfill its obligation (e.g. pays his debt).

The meaning of the balance-sheet activity

1.off-balance sheet fee (income) producing activities can improve earnings ratios, at a faster pace than on-balance sheet fee producing activities.

2. Because these types of activities remain off the balancesheet, capital to asset ratios (with the exception of risk-based

capital ratios) are not adversely affected regardless of the volume of business conducted. But, the volume and risk of the off-balance sheet activities needs to be considered by the examiner in the evaluation of

capital adequacy.

What does off-balance sheet activity include?

-loan commitments;-letters of credit;

- swaps, futures, forwards, and option contracts

OFF-BALANCE SHEETLENDING ACTIVITIES

1. Letter of credit - document issued by a bank on behalfof its customer authorizing a third party to draw drafts onthe bank up to a stipulated (оговоренный) amount and with specified terms and conditions. The letter of credit is a conditional commitment on the bank’s part to provide payment on drafts drawn in accordance with the document terms.

The two primary areas of risk relative to LCs are creditrisk (the possibility of default on the part of the accountparty), and funding risk (the potential inability of the bankto fund a large draw from normal sources).


• Bank loan commitments:– Promise by a bank to a customer to make a future loan under certain conditions.

Most commercial and industrial loans are made under some form of guarantee (informal or formal).

Line of credit -- Informal commitment of a bank to lend funds to a client firm.

Revolving line of credit -- Formal agreement by a bank to lend funds on demand to a client firm under the terms of the contract. Bank is exposed to interest rate risk.

Funding risk -- Risk that many borrowers will take down commitments at the same time and thereby strain bank liquidity.


• Derivatives:

– Swaps, options, futures, forward contracts, and securitized assets.

– Regulators (including the Commodity Futures Commission, SEC, Federal Reserve, OCC, and FDIC) are very concerned with derivative exposures of banks (e.g., liquidity, fraud, human risks).

Other off-balance sheet activities

• Loan sales:

– Banks can sell loans to a third party as a source of funds. For a fee the selling bank often continues to service the loan payment and handle other responsibilities of the loan.

– Allows banks to make loans without relying on deposits and converts traditional lending to a quasi-securities business.

– On the other hand, other buying institutions become more like banks.

Securitization

– financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling consolidated debt as bonds, pass-through (вторичные) securities, or collateralized mortgage obligation (CMOs), to various investors.

ukrainian academy of banking banking department course: banking lecture 3 bank borrowed funding anna...

Documents

deposit bank

saving bank account

purpose of deposit

balance of deposit

term time deposit account

acceptance of deposit

type of account

bank accounts