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Copyright2003 McGraw-Hill Australia Pty Ltd


PPT Slides t/a Financial Institutions, Instruments and Markets /e!y Christopher "i#ey

Slides prepared !y A#tho#y Sta#ger$

Chapter 2

The Banking Sector

Websites:

http://www.apra.gov.au

http://www.asic.gov.au

http://www.accc.gov.au

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Slides prepared !y A#tho#y Sta#ger2

Learning Objectives

Evaluate the functions and activitiesof commercial banks

Identify the main sources and uses offunds and reasons for changes

Analyse the importance of changes inthe role of banks on the nancialsystem

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Slides prepared !y A#tho#y Sta#ger3

Learning Objectives (cont.

Examine the market structure of thebanking sector

Outline the nature and importance ofbanks o-balance-sheet O!"#business

$onsider the regulation and prudentialsupervision of banks

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Slides prepared !y A#tho#y Sta#ger

Chapter Organisation

%&' Introduction

%&% (unctions of !anks

%&) "ources of (unds

%&* +ses of (unds

%&, O-balance-sheet !usiness

%& .egulation and /rudential

"upervision%&0 "ummary

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Slides prepared !y A#tho#y Sta#ger%

2.! "ntro#uction

Banking Act 1959 $1lth#& Authorises a nancial institution to

operate as a bank

2hree categories of banks& Incorporated banks3 domestic and foreign

& +nincorporated foreign bank branches

& (oreign bank representative o4ces

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Slides prepared !y A#tho#y Sta#ger'

2.! "ntro#uction (cont.

Importance of banks& 5argest share of assets of all institutions

"hare declined '6,7s to mid-'687s due toregulation 1hich

constrained development of banks

supported evolution and gro1th in 9!(Is

& .ole in international nancial markets

& Increase in managed funds activities and

O!" business

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Copyright2003 McGraw-Hill Australia Pty LtdCopyright2003 McGraw-Hill Australia Pty Ltd


Slides prepared !y A#tho#y Sta#ger(

2.! "ntro#uction (cont.

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Slides prepared !y A#tho#y Sta#ger)


%&' Introduction



%&* +ses of (unds




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Slides prepared !y A#tho#y Sta#ger*

2.2 $unctions o% Banks

Asset management :'687s#& 5oans portfolio is tailored to match the

available deposit base

5iability management '687s:#& ;eposit base and other funding sources

are managed to fund loan demand $ommercial bill market

/rovision of other nancial services O!"

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Slides prepared !y A#tho#y Sta#ger$0


%&' Introduction



%&* +ses of (unds

%&, O-balance sheet !usiness



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Slides prepared !y A#tho#y Sta#ger$$

2.& Sources o% $un#s

"ources of funds appear in thebalance sheet as either liabilities orshareholders funds

!anks oer a range of deposit andinvestment products 1ith dierentmixes of lio1 structure to attract thesavings of surplus entities

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2.& Sources o% $un#s (cont.

$urrent deposits& (unds held in a che

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2erm deposits& (unds lodged in an account for a

predetermined period at a speciedinterest rate

2erm3 one month to ve years

5oss of li

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PPT Slides t/a Financial Institutions, Instruments and Markets /e!y Christopher "i#eySlides prepared !y A#tho#y Sta#ger

$


9egotiable certicates of deposit$;s#& /aper issued by a bank in its o1n name

& Issued at a discount to face value& "pecies repayment of the face value of

the $; at maturity

& ?ighly negotiable security

& "hort term )7 to '87 days#

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$%


!ill acceptance liabilities& !ill of exchange

A security issued into the money market at adiscount to the face value& 2he face value is

repaid to the holder at maturity

& Acceptance Issuer of bill agrees to pay bank face value of

bill= plus a fee= at maturity date

Acceptance by bank guarantees >o1 of fundsto its customers 1ithout using its o1n funds

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$'


;ebt liabilities& @edium- to longer-term debt instruments

issued by a bank ;ebenture

A bond supported by a form of security= being acharge over the assets of the issuer e&g&collateralised >oating charge#

+nsecured note A bond issued 1ith no supporting security

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Copyright

2003 McGraw-Hill Australia Pty LtdCopyright2003 McGraw-Hill Australia Pty Ltd


$(


(oreign currency liabilities& 2he issue of debt instruments into the

international capital markets that aredenominated in a foreign currency

allo1s diversication of funding sources intointernational markets

facilitates matching of foreign exchangedenominated assets

meet demand of corporate customers forforeign exchange products

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$)


5oan capital& "ources of funds that have the

characteristic of both debt and e

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$*


%&' Introduction



%&* +ses of (unds




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2.' ses o% $un#s

+ses of funds appear in the balancesheet as assets

2he maBority of bank assets are loans

1hich give rise to an entitlement tofuture cash >o1s= i&e& interest andrepayment of principal

5ending to government

$ommercial lending /ersonal nance

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2$

2.' ses o% $un#s (cont.

5ending to government& 2reasury notes

"hort-term discount securities issued by the$ommon1ealth overnment

& 2reasury bonds @edium- to longer-term securities issued by the

common1ealth government that pay aspecied interest coupon stream

& "tate government debt securities& 5o1 risk and lo1 return

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$ommercial lending business sectorand other nancial intermediaries#& (ixed-term loan

A loan 1ith negotiated terms and conditions /eriod of the loan

Interest rates

C (ixed or variable rates set to a speciedreference rate e&g& !!"D#

2iming of interest payment

.epayment of principal

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& Overdraft A facility allo1ing a businesss operating

account into debit up to an agreed limit

& !ank bills held !ills of exchange see slide ',# accepted and

discounted by a bank and held as assets

A rollover facility is 1here a bank agrees todiscount ne1 bills over a specied period asexisting bills mature

& 5easing

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2


/ersonal nance& ?ousing nance

@ortgage

Amortised loan

& Investment property

& (ixed-term loan

& $redit card

Other bank assets e&g& infrastructure=shares in controlled entities#

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2%


%&' Introduction



%&* +ses of (unds




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2'

2.) O%%*ba+ance*sheet

Business O!" transactions are a signicant part

of a banks business

O!" transactions include& ;irect credit substitutes

& 2rade and performance-related items

& $ommitments

& @arket rate-related transactions

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2(


Business (cont. ;irect credit substitutes

& An undertaking by a bank to support thenancial obligations of a client e&g&Fstand-by letter of credit#

2he bank acts as guarantor on behalf of a clientfor a fee

$lient has a nancial obligation to a third party

!ank is only re

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2)


Business (cont. 2rade and performance-related items

& A form of guarantee provided by a bank toa third party= promising nancialcompensation for non-performance of

commercial contract by a bank client Examples

;ocumentary letters of credit

/erformance guarantees

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2*


Business (cont. $ommitments

& 2he contractual nancial obligations of a

bank that are yet to be completed or

delivered !ank undertakes to advance funds or make a

purchase of assets at some time in the future

Examples

(or1ard purchases

+nder1riting

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Business (cont. @arket rate-related transactions

& 2he use of derivative products to manageexposures to foreign exchange risk=interest rate risk= e

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3$


Business (cont. Golume of O!" business

& At Hune %77'= the face value of O!"business undertaken by banks in Australia1as over six times the level of total assets

& Over 6% of O!" business is based onmarket rate-related transactions

9ature and siJe of contracts combined 1ith thevolatility and speed of contract repricing has

resulted in extraordinary losses

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%&' Introduction



%&* +ses of (unds




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33

2., -egu+ation an# ru#entia+

Supervision ObBectives of regulation and

prudential supervision

Dallis .eport

$apital ade

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3

Objectives of regulation and

prudential supervision

.easons for regulation of banks& Importance of the banking sector for

health of the economy

/rudential supervision& $ontrol of the money supply

& 2he imposition and monitoring ofstandards designed to ensure the

soundness and stability of the bankingsector

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3%

Wa++is -eport In

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3'

Wa++is -eport (cont. /ost-in

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3(

Capital adequacy requirements

(cont.)

$apital "tandards& !ank for International "ettlements !I"#

developed international capital ade

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3)

Capita+ a#euac0

reuire1ents (cont. $apital measured in t1o tiers

2ier '3 core capital e&g& ordinary shares= general reserves= retained

earnings tier ' capital re

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3*


(cont.)

.isk Deighting of !alance "heetAssets

Asset risk 1eightings are based on thecounterparty to the transaction

7 notes and coins= claims against centralgovernments and central banks

%7 claims against local governments=domestic banks and

international banks

,7 loans secured by residential mortgages '77 all other assets and claims against

counterparties

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Copyright


PPT Slides t/a Financial Institutions, Instruments and Markets /e!y Christopher "i#eySlides prepared !y A#tho#y Sta#ger 0


(cont.)

Application of Asset .isk Deightings

Asset type Asset value Risk weight Risk-weighted asset

($billion) (%) value ($billion)

$ash and c1th govt

securities % 777 7 7

5oans to local govt ' 777 %7 %77 ?ousing loans %* 777 ,7 '% 777

5oans to corporations %7 777 '77 %7 777

2O2A5 *0 777 )% %77

2otal capital re

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PPT Slides t/a Financial Institutions, Instruments and Markets /e!y Christopher "i#eySlides prepared !y A#tho#y Sta#ger $


(cont.)

O!" $redit $onversion

& "2E/ '3 $onvert face value of O!" transactions to on-balancesheet e

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(cont.)

O!" $redit $onversion OBS items Fae value !"edit onve"sion !"edit

o# ont"at ($m) #ato" (%)euivalent ($m)

(inancial guarantees issued 077 '77 077

on behalf of corporations /erformance bonds for ,77 ,7 %,7

state governments

?ousing loan approvals %777 '77 %777

;ocumentary letters of credit %,7 %7 ,7

issued for corporations

2O2A5 )*,7 )777

2he asset risk-1eightings are then applied to the credit e

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Liquidity management

5i

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Other regulatory and

supervisory controls .isk management systems

certication

Audit

;isclosure and transparency 5arge exposure

(oreign currency exposures

O1nership and control

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Copyright

2003 McGraw-Hill Australia Pty Ltd


PPT Slides t/a Financial Institutions, Instruments and Markets /e!y Christopher "i#eySlides prepared !y A#tho#y Sta#ger %


%&' Introduction



%&* +ses of (unds%&, O-balance-sheet !usiness



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Copyright

2003 McGraw-Hill Australia Pty Ltd


PPT Slides t/a Financial Institutions, Instruments and Markets /e!y Christopher "i#eySlides prepared !y A#tho#y Sta#ger '

2. Su11ar0

!anks are the dominant institution andhave moved to liability management

"ources of funds include deposits

current= call and term deposits# andnon-deposit sources bill acceptances=debt and foreign currency liabilities=O!" business and other services#

+ses of funds include government=commercial and personal lending

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2. Su11ar0 (cont.

O!" transactions are a maBor part of abanks business and include& direct credit substitutes

& trade and performance-related items

& commitments

& market rate-related transactions

A/.As bank prudential supervision

re

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