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What is financial institution and what are the different types of financial
institution? November, 2010
Conventionally, financial institutions are composed of organizations such as banks, trust
companies, insurance companies and investment dealers. Almost everyone has deal with a financial
institution on a regular basis. Everything from depositing money to taking out loans and exchange
currencies must be done through financial institutions. A financial institution is an institution that
provides financial services for its clients or members.
Financial institutions provide service as intermediaries of financial markets. They are
responsible for transferring funds from investors to companies in need of those funds. Financial
institutions facilitate the flow of money through the economy. To do so, savings are brought to provide
funds for loans.
Probably the most important financial service provided by financial institutions is acting as
financial intermediaries. Most financial institutions are regulated by the government. Broadly speaking,
there are four major types of financial institutions:
i. Depositary Institutions (Bank) : Deposit-taking institutions that accept and manage deposits
and make loans, including banks, building societies, credit unions, trust companies, and mortgage
loan companies. Deposit-type financial institutions mainly fall under four classifications:
commercial banks, savings and loan associations, credit unions, and the newer Internet banks.
Commercial banks generally compete by offering the widest variety of services; however, they
generally do not offer the highest interest rates on deposits or the lowest interest rates on loans.
Savings and loan associations have slightly different ownership arrangements than banks, but
they are similar to commercial banks. Savings and loan associations may offer slightly higher
rates than commercial banks on deposits and somewhat lower rates than commercial banks on
loans. Credit unions are similar to savings and loan associations, but they are not-for-profit
organizations and are owned by their members. Internet banks are electronic banks that do not
have traditional brick-and-mortar branches. Because they have fewer branches, employees, and
capital expenditures than traditional banks, they can generally pay higher interest rates on
deposits and charge less for loans than traditional banks do.
ii. Contractual Institutions : Insurance companies and pension funds;
iii. Investment Institutes: [Investment Banks - Underwriting|underwriters], [Security Firms
-Broker];
iv. Credit Unions: Credit unions are another alternative to regular commercial banks. Credit unions
are almost always organized as not-for-profit cooperatives. Like banks and S&Ls, credit unions
can be chartered at the federal or state level. Like S&Ls, credit unions typically offer higher rates
on deposits and charge lower rates on loans in comparison to commercial banks.
v. Shadow Banks: The housing bubble and subsequent credit crisis brought attention to what is
commonly called "the shadow banking system." This is a collection of investment banks, hedge
funds, insurers and other non-bank financial institutions that replicate some of the activities of
regulated banks, but do not operate in the same regulatory environment.and
vi. Nonbank Financial institutions: Nonbank financial institutions consist of two main kinds:
mutual fund companies and brokerage firms. Mutual fund companies have broken into the
banking arena. With many mutual fund companies, you can now write checks against your
mutual fund account. Brokerage firms have also gotten into the act. Many brokerage firms now
allow you to write checks, issue credit cards and ATM cards, and make loans. Brokerage firms
offer these and many other account features that were once reserved for traditional banks.
What is meant by non-banking financial institutions and what are its different
types? November, 2010
Non-banking financial institutions, or NBFIs, are financial institutions that provide banking
services, but do not hold a banking license. These institutions are not allowed to take deposits from the
public. Nonetheless, all operations of these institutions are still covered under banking regulations.
NBFIs do offer all sorts of banking services, such as loans and credit facilities, retirement planning,
money markets, underwriting, and merger activites. A non-bank financial institution (NBFI) is a
financial institution that does not have a full banking license or is not supervised by a national or
international banking regulatory agency. NBFIs facilitate bank-related financial services, such as
investment, risk pooling, contractual savings, and market brokering.
A non-banking financial institution is a company registered under the company act, 1913 and
engaged in the business of loans advances, acquisition of shares/stocks/bonds/debentures/securities by
government or local authority or other securities of like marketable nature, leasing, hire-purchase but
does not includes any institution whose principal business is that of agriculture activity, industrial
activity, sales/purchase/construction of immovable property. A NBFI which is a company and which has
it principal business of receiving deposits under any scheme or arrangement or any other manner, or
lending in any manner is also a non-banking financial company.
Financial/Depository institutions offering checking accounts or commercial loans but not both
is called nonbank banks Peter S. Rose.
Services provided
NBFIs offer most sorts of banking services, such as loans and credit facilities, private education
funding, retirement planning, trading in money markets, underwriting stocks and shares, TFCs(Term
Finance Certificate) and other obligations. These institutions also provide wealth management such as
managing portfolios of stocks and shares, discounting services e.g. discounting of instruments and
advice on merger and acquisition activities. The number of non-banking financial companies has
expanded greatly in the last several years as venture capital companies, retail and industrial companies
have entered the lending business. Non-bank institutions also frequently support investments in property
and prepare feasibility, market or industry studies for companies.
However they are typically not allowed to take deposits from the general public and have to find
other means of funding their operations such as issuing debt instruments.
Differences from banks:
(1) A BNFI connot accept demend deposits.
(2) It is not a part of the payment and settlement system and as such connot issue cheques to its
customers.
(3) Deposit insurance facilty not available for NBFI depositors unlike in case of banks.
The NBFIs that are licensed by Bangladesh Bank are as follow:
(1) Equipment leasing company
(2) Hire-purchase company
(3) Loan company
(4) Investment Company.
They do business in financing for venture capital. Merchant banking, Investment banking,
Mutual association, Mutural Company, leasing company and building society would be included as
NBFI.
(1) Othe Nonbank Financial Institutions are(2) Savings and Loanscompany
(3) Credit Unions
(4) Shadow Banks
(5) Mutual Fund Companies
(6) Brokerage Firms.
(7) Development finance institutions
(8) Leasing companies
(9) Investment companies
(10) Modaraba companies
2
(11)
(12)
(13)
(14)
What are the sources of funds of a commercial bank and what are the
regulations imposed on commercial bank? May, 2012 & 2011.
The sources of funds of commercial banks are(1) Funds from own sources: this are Paid up capital
Share capital
Reserves funds and others reserves funds
Retained earning and
Statutory reserves funds
(2) Funds from the borrowing sources: These are Depository funds
Loan and advaces from other commercial banks and central bank.
Loan at call money
A set of acts, laws, regulations, and guidelines have been enacted and promulgated time to to
perform the commercial banks role particularly, to control and regulate countrys monetary and
financial system. Among others, important laws and acts include:
1. Bangladesh Bank Order, 1972 (P.O. No. 127 of 1972)
2. Bank Company Act, 1991
3. The Negotiable Instruments Act, 1881
4. The Bankers Book Evidence Act, 1891
5. Foreign Exchange Regulations Act, 1947
6. Financial Institutions Act, 1993
7. Bank Deposit Insurance Act, 2000
8. Money Loan Court Act, 2003
9. Micro Credit Regulatory Authority Act, 2006
10. Money Laundering Prevention Act,2012
11. Anti-terrorism Act, 2009 and
12. Anti Terrorism (Amendment) Act,2012
On the other hand, regulations and guidelines broadly include Bangladesh Bank Regulations and
Foreign Exchange Regulations.
What types of regulations seek to enhance the net social benefits of commercial
banks services to the economy?
Six types of regulation seek to enchance the net social benefits of commercial banks services to
the economy. This are(1) Safty and soundness regulation: To protect depositors and borrowers against the risk of
commercial bank failure.
(2) Monetary policy regulation: here the regulations control and implement monetary policy
by requiring minimum level of cash reserves to be held agaist commercial bank deposits.
(3) Credit allocation regulation: These regulations may require a commercial bank to hold a
minimum amount of assets in one particular sector of the economy or to set maximum
interest rates, prices or fees to subsidise certain sectors.
(4) Consumer protection regulation: This type of regulation is imposed to prevent the
commercial bank from discriminating unfairly in lending.
(5) Investor protection regulation: Here laws protect investors who directly purchase
securitires and /or indirectly purchase securities by investing in mutual or pension funds
managed directly or indirectly by commercial banks and
(6) Entry and chartering regulation: Entry and activity regulations limit the number of
commercial banks in any given financial services sector, thus impacting the charter value
of commercial banks operating in that sector.
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
Service proliferation
Rising competions
Degegulation
Raising funding cost
An increasingly interest-sensitive mix of funds
Technological revolution
Consolidation and geographic expantion
Globalization of banking
Increasing risk fo failure.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
xii.
What is financial intermediary and what are the advantages enjoyed by market
participants from this?
Every modern economy has intermediaries, which perform key financial functions for
individuals, households, corporations, small and new business, and governvent. The most important
contribution of financial intermediaries is a stready and relatively inexpensive flow of funds from
savers to final users or investors. Financial intermediaries includes depository institutions, such as ,
commercial banks, saving and loan associations, saving banks and credit unions, which acquire the
bulk of their funds by offering their liabilities to the public mostly in the form of deposit. Beside this
insurance companies (life, property and companies) and pension funds are also act as financial
intermediaries.
Advantages enjoyed by market participants arei. Investors can get more choices concering maturity for their investments and borrowers can get
more choices for the length of their debt obligations.
ii. Borrowers can get longer term loan at a lower cost as a financial intermediary is willing to
make longer term loans at a lower cost to the borrower
iii. Attaining cost-effective diversifications in order to reduce risk by purchasing the financial
assets of a financial intermediary is an important economic benefit for the market participants.
iv. The lower costs acute to the benefits of the investor who benefit from a lower borrowing cost
because of investment professional employed by financial intermediaries and
v. Market participants get the benefit of using cheques, credit cards, debit cards and electronic
transfer of funds through financial intermediaries
Explain the concept of mobile banking. May, 2011
Mobile banking (also known as M-Banking, m-banking, SMS Banking) is a term used for
performing balance checks, account transactions, payments, credit applications and other banking
transactions through a mobile device such as a mobile phone or Personal Digital Assistant
(PDA). The earliest mobile banking services were offered over SMS. With the introduction of the first
primitive smart phones with WAP support enabling the use of the mobile web in 1999, the first
European banks started to offer mobile banking on this platform to their customers. Mobile banking
has until recently (2012) most often been performed via SMS or the Mobile Web.
A mobile banking conceptual model:
In one academic model, mobile banking is defined as Mobile Banking refers to provision and an
ailment of banking and financial services with the help of mobile telecommunication devices. The scope
of offered services may include facilities to conduct bank and stock market transactions, to
administer accounts and to access customized information.
According to this model Mobile Banking can be said to consist of three inter-related concepts:
i.
Mobile Accounting
ii. Mobile Brokerage
iii.
Mobile Financial Information Services
Most services in the categories designated Accounting and Brokerage are transaction-based.
We can also classify mobile banking based on the nature of the service:
Push Pull
Funds transfer
Transaction
Bill payment
Share trade
Check order
Minimum balance
Account balance inquiry
Inquiry
Alert
12
Past Performance - Across historical time periods for the same firm (the last 5 years for
example),
ii.
Future Performance - Using historical figures and certain mathematical and statistical
techniques, including present and future values, This extrapolation method is the main source of
errors in financial analysis as past statistics can be poor predictors of future prospects.
iii.
Comparative Performance - Comparison between similar firms.
These ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet
and / or the income statement, by another, for example :
Net income / equity = return on equity (ROE)
Net income / total assets = return on assets (ROA)
Stock price / earnings per share = P/E ratio
i.
The cash flow statement is intended toi. Provide information on a firm's liquidity and solvency and its ability to change cash flows in
future circumstances.
ii. Provide additional information for evaluating changes in assets, liabilities and equity.
iii. Improve the comparability of different firms' operating performance by eliminating the effects of
different accounting methods.
iv. Indicate the amount, timing and probability of future cash flows.
The cash flow statement has been adopted as a standard financial statement because it eliminates
allocations, which might be derived from different accounting methods, such as various timeframes for
depreciating fixed assets.
Cash flow activities.
The cash flow statement is partitioned into three segments, namely: 1) cash flow resulting
from operating activities; 2) cash flow resulting from investing activities; and 3) cash flow resulting
from financing activities.
The money coming into the business is called cash inflow, and money going out from the business
is called cash outflow.
Operating activities.
Operating activities include the production, sales and delivery of the company's product as well as
collecting payment from its customers. This could include purchasing raw materials, building inventory,
advertising, and shipping the product.
Under IAS 7, operating cash flows include:
i.
Receipts from the sale of goods or services.
ii.
Receipts for the sale of loans, debt or equity instruments in a trading portfolio.
iii.
Interest received on loans.
iv. Payments to suppliers for goods and services.
v. Payments to employees or on behalf of employees.
vi.
Interest payments (alternatively, this can be reported under financing activities in IAS 7, and
US GAAP).
vii.
Buying Merchandise.
Items which are added back to [or subtracted from, as appropriate] the net income figure (which is
found on the Income Statement) to arrive at cash flows from operations generally include:
i.
Depreciation (loss of tangible asset value over time).
ii.
Deferred tax.
iii.
Amortization (loss of intangible asset value over time).
iv. Any gains or losses associated with the sale of a non-current asset, because associated cash
flows do not belong in the operating section.(unrealized gains/losses are also added back
from the income statement).
Investing activities
Examples of investing activities arei. Purchase or Sale of an asset (assets can be land, building, equipment, marketable
securities, etc.)
ii.
Loans made to suppliers or received from customers.
iii.
Payments related to mergers and acquisitions.
iv. Dividends Received.
Financing activities
Financing activities include the inflow of cash from investors such as banks and shareholders, as well as
the outflow of cash to shareholders as dividends as the company generates income. Other activities
which impact the long-term liabilities and equity of the company are also listed in the financing
activities section of the cash flow statement.
Under IAS 716
i.
ii.
iii.
iv.
v.
of cash flow reflects how much cash is generated from a company's products or services. Generally,
changes made in cash, accounts receivable, depreciation, inventory and accounts payable are reflected
in cash from operations.
Cash flow is calculated by making certain adjustments to net income by adding or subtracting
differences in revenue, expenses and credit transactions (appearing on the balance sheet and income
statement) resulting from transactions that occur from one period to the next. These adjustments are
made because non-cash items are calculated into net income (income statement) and total assets and
liabilities (balance sheet). So, because not all transactions involve actual cash items, many items have to
be re-evaluated when calculating cash flow from operations.
For example, depreciation is not really a cash expense; it is an amount that is deducted from the
total value of an asset that has previously been accounted for. That is why it is added back into net sales
for calculating cash flow. The only time income from an asset is accounted for in CFS calculations is
when the asset is sold.
Changes in accounts receivable on the balance sheet from one accounting period to the next
must also be reflected in cash flow. If accounts receivable decreases, this implies that more cash has
entered the company from customers paying off their credit accounts - the amount by which AR has
decreased is then added to net sales. If accounts receivable increase from one accounting period to the
next, the amount of the increase must be deducted from net sales because, although the amounts
represented in AR are revenue, they are not cash.
An increase in inventory, on the other hand, signals that a company has spent more money to
purchase more raw materials. If the inventory was paid with cash, the increase in the value of inventory
is deducted from net sales. A decrease in inventory would be added to net sales. If inventory was
purchased on credit, an increase in accounts payable would occur on the balance sheet, and the amount
of the increase from one year to the other would be added to net sales.
The same logic holds true for taxes payable, salaries payable and prepaid insurance. If
something has been paid off, then the difference in the value owed from one year to the next has to be
subtracted from net income. If there is an amount that is still owed, then any differences will have to be
added to net earnings.
Investing:
Changes in equipment, assets or investments relate to cash from investing. Usually cash changes from
investing are a "cash out" item, because cash is used to buy new equipment, buildings or short-term
assets such as marketable securities. However, when a company divests of an asset, the transaction is
considered "cash in" for calculating cash from investing.
Financing
Changes in debt, loans or dividends are accounted for in cash from financing. Changes in cash from
financing are "cash in" when capital is raised, and they're "cash out" when dividends are paid. Thus, if a
company issues a bond to the public, the company receives cash financing; however, when interest is
paid to bondholders, the company is reducing its cash.
Mention the characteristics of cash flow statement.
i. It is a periodical period.
ii.
It is combined the beginning and inter-balance.
iii.
It is combined the consequences several balance sheets, profit and loss account and inner
analysis statement.
iv. Cash flow statement cannot prepare in a single stage. It is prepared by the different event
of the organization.
v. It shows the financial changes of the organization.
18
Distinguish a cash flow statement from a fund flow statement or state the differences between the
cash budget and cash flow statement.
19
Cash flow statement is prepared from the transactions affecting cash and cash equivalents only.
Taking in to account all sources and uses of cash, it starts with the opening balance of cash and cash
equivalents and reaches the closing balance of cash and cash equivalents,. Cash flow statements are
useful to identify the current liquidity problems which are to be corrected.
Fund flow statement analyses the sources and application of funds of long term nature and the
changes in working capital. It tallies funds generated from various sources with various uses to which
they are put. It is based on accrual accounting system and very useful for long range financial planning.
The distinguish between the two are1
Sl
Difference subjects
foundation
2
3
Beginning surplus
Process of working
Utility
Main source
21
and interest rate risk. Failure to identify the risks associated with business and failure
to take timely measures in giving a sense of direction threatens the very existence of
the institution. It is, therefore, imperative for the Financial Institutions to form Asset
Liability Management Committee (ALCO) with the senior management as its
members to control and better manage its Balance Sheet Risk. Asset Liability
Management (ALM) is an integral part of Bank Management; and so, it is essential to have a structured
and systematic process for manage the Balance Sheet.
A technique companies employ in coordinating the management of assets and liabilities so that
an adequate return may be earned. Also known as "surplus management."
In banking, asset and liability management (often abbreviated ALM) is the practice of
managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the
bank. This can also be seen in insurance. Banks face several risks such as the liquidity risk, interest rate
risk, credit risk and operational risk. Asset liability management (ALM) is a strategic management tool
to manage interest rate risk and liquidity risk faced by banks, other financial services companies
and corporations.
.
Asset-liability management is defened by the attaining the financial policy formulation,
Planning and forecasting, directing, decision making, coordinating and controlling the total works.
ALM is control of a banks sensitivity to changes in market interest rates to limit losses in its net
income or equity.
Today, bankers have learned to look at their asset and liability portfolios as an integrated whole,
considering how the banks total fortfolio contributes to its broad goals of adequate profitability and
acceptable risk. This type of coordinated and integrated bank decision making is known as asset liability
mamangement. These techniques of asset liability management provide the bank with the defensive
weapons to handle business cycles and seasonal pressures on its deposits and loans and with the
offensive weapons to construct portfolios of assets that promote the banks goals.
22
(2)
model. There are several different approaches to this pursuit of the highest profit margin that may be
used by any corporation or business. The advantages of wealth maximization area. Profit is the yardstick of efficiency.
b. Proper utilization of resources.
c. Social welfare.
Wealth maximization: Wealth is the abundance of valuable resources or material possessions.
The word wealth is derived from the old English weal, which is from an Indo-European word stem.
An individual, community, region or country that possesses an abundance of such possessions or
resources is known as wealthy. The concept of wealth is of significance in all areas of economics,
and clearly so for growth economics and development economics . The advantages of wealth
maximization area. Easy and Clear concept.
b. Consideration of time value of money.
c. Consideration of risk
d. Emphasis of price of share
e. Consideration of the interest of all parties.
f. Expansion of market and business.
g. Qualitative improvement of Financial decision
h. Consistent dividend policy.
What are the factors of financial decisions for investment? Discuss it and
what are the influencing factors on financial decisions?
The factors of financial decision for investment are(1) Investment decisions.
(2) Financing decisions.
(3) Dividend decisions.
There are two types of influencing factors are
(1) Internal factors: These area. Size of the business
b. Nature of business
c. Legal form of organizations
d. Business cycle
e. Ecomonic life of organization
f. Structure of assets
g. Possibility of regular and stable income.
h. Term of credit
i. Philosophy of management
j. Liquidity position of business
(2) External factors: These area. Ecomonic condition of the country
b. Government policy
c. Tax policy
d. Condition of money market
e. Political situation
23
How the major financial decisions adjust between income and risk of business?
The fundamental decisions of a financial manager are the investment decision, financing
decision and distrution dividend decision. Base on these decisions, a financial firm determines the
financial needs; Cash flow statement, fund flow statement, time division, capital decision and earning
the profit from the capital decision and distribute profit among the shareholders or owners. To take
financial decision a financial manager coorditate between the financial risk and earning of the
organization. To do this important task a financial manager planning and forecasting, directing,
coordinating and controlling the future estimate risk and income, take necessary steps to minimize the
risk and how to protect the future risk. When a financial manager can coordinate among the earning and
risk and then maximize the wealth and income of the organization. Stae the the flowchart how a
financial manager coordinate the risk and income of the organization is discuss below:Financial mamager
Maximisation of share value
Financial decisions
Investment decisions
Finacing decisions
Dividend decisions
Return
Trade off
Risk
A financial managers main goal or objective is to maximize the wealth by reducing the risk at a
minimum level. He takes decision that unnecessary risks are to be avoided. He has to monitor the cash
inflow and outflow statement to earn maximum profit. By this one side is to secure the cash and other
side is correct the uses of cash.
financial goals of their organization. Financial managers work in many places, including banks and
insurance companies. Most financial managers work full time, and many work long hours.
Financial manager is the person who has the responbility to allocate funds to current and fixed
assets to obtain the best mix of financing alternative and to deveop an appropriate dividend policy
within the contex of the firms objectives.
There is no business that does not want to make a lot of money, in as little time as possible, and
still have a little left over after all expenses have been paid. It is the work the finance manager in any
company to put in place strategies that will ensure the business does well financially.
Qualities of Financial managers areThe term finance manager is usually a general term for all the other individuals who deal in
different financial matters. There are financial controllers, treasure, credit managers and also risk
insurance managers. All these deal with matters that are still financial but different in more than one
certain ways. However, the qualities to look out for are still the same. To have a good financial manager
he/she has to be a people person. Since most of the time these individuals work with a team he/she will
have to have good communication skills. This will help them interact well with the other managers.
Furthermore, their managerial role means that they are supervisors; therefore, with good interpersonal
skills they can be able to lead others.
Financial managers do also require some marketing skills. This will best tell you whether the
candidate you have has some inclinations to money earning activities. He/she may not have the required
education, but you could have them try to sell you a product so that you can see whether they have a
money making sense or not.
With the increase in financial technical computer based instruments a financial manager must
have know-how on computers. Moreover, if he/she is adaptable to changes it would be easy for them to
change as technology also changes. As the world evolves, new trends come and go and this means that
the person you hire to take care of your financial work should also be on the look-out for new trends so
that he/she can direct the company to a more profitable position. In addition they should have
knowledge of the tax laws that govern your companies industry so that they can incorporated these laws
in every aspect that they undertake.
Education and experience are also key factors to look into as you go about hiring a financial
manger. Good financial manager are those with enough job experience. As for education, go for those
with advanced degrees in finance, economics, business administration and even risk management.
Although experience and skills are paramount, it is good to choose a candidate who shows a willingness
to learn. This is because such candidates are more likely to be good managers than those showing no
willingness at all to learn from others.
Every business owner wants to make money, pay his/her expenses and still have some of it left
over. The best way that they can ensure they are making profits is by hiring a finance manager.
However, not just any individual can handle company's financial matters. Even though there is more
than one different financial manager titles the qualities to look out for are the same. The individual you
choose has to have the right education, experience, and the ability to work as a team.
Financial managers must usually have a bachelors degree and more than 5 years of experience
in another business or financial occupation, such as loan officer, accountant, auditor, securities sales
agent, or financial analyst.
What is interest rate? Why is imposing interest rate? What are the characteristics of interest
rate?
25
The amount charged, expressed as a percentage of principal, by a lender to a borrower for the
use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage
rate (APR). The assets borrowed could include, cash, consumer goods, large assets, such as a vehicle or
building. Interest is essentially a rental, or leasing charge to the borrower, for the asset's use. In the case
of a large asset, like a vehicle or building, the interest rate is sometimes known as the lease rate.
When the borrower is a low-risk party, they will usually be charged a low interest rate; if the borrower is
considered high risk, the interest rate that they are charged will be higher.
A rate which is charged or paid for the use of money. An interest rate is often expressed as
an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount
of principal.
An interest rate is the rate at which interest is paid by a borrower for the use of money that they
borrow from a lender. Specifically, the interest rate (I/m) is a percent of principal (I) paid at some rate
(m). Interest rates targets are also a vital tool of monetary policy and are taken into account when
dealing with variables like investment, inflation, and unemployment.
Reasons for interest rate change
(1)
Political short-term gain: Lowering interest rates can give the economy a short-run
boost. Under normal conditions, most economists think a cut in interest rates will only
give a short term gain in economic activity that will soon be offset by inflation. The
quick boost can influence elections. Most economists advocate independent central
banks to limit the influence of politics on interest rates.
(2)
Deferred consumption: When money is loaned the lender delays spending the money
on consumption goods. Since according to time preference theory people prefer goods
now to goods later, in a free market there will be a positive interest rate.
(3)
Inflationary expectations: Most economies generally exhibit inflation, meaning a given
amount of money buys fewer goods in the future than it will now. The borrower needs to
compensate the lender for this.
(4)
Alternative investments: The lender has a choice between using his money in different
investments. If he chooses one, he forgoes the returns from all the others. Different
investments effectively compete for funds.
(5)
Risks of investment: There is always a risk that the borrower will go bankrupt, abscond,
die, or otherwise default on the loan. This means that a lender generally charges a risk
premium to ensure that, across his investments, he is compensated for those that fail.
(6)
Liquidity preference: People prefer to have their resources available in a form that can
immediately be exchanged, rather than a form that takes time or money to realize.
(7)
Taxes: Because some of the gains from interest may be subject to taxes, the lender may
insist on a higher rate to make up for this loss.
The characteristics of interest rate are(1)
(2)
(3)
(4)
(5)
(6)
Borrower gives money at the certain percentage of orginal amount to the lender.
Borrower and lender fix the interest rate.
It is the amount of financial asset.
It is expressed at percentage.
Original loan amount is the basis of determing the interest and
Generally, it is calculated in a year.
26
Interest rates are directly correlated to the performance of the world economy. Government
officials craft monetary policy to manage national economies by influencing the banking system. At the
micro-level, investors and private consumers should have some appreciation for the connection between
interest rates and the economy before making financial decisions.A yield curve displaying the
relationship between spot rates of zero-coupon securities and their term to maturity.
The resulting curve allows an interest rate pattern to be determined, which can then be used to
discount cash flows appropriately. Unfortunately, most bonds carry coupons, so the term structure must
be determined using the prices of these securities. Term structures are continuously changing, and
though the resulting yield curve is usually normal, it can also be flat or inverted.
Identification
Interest rates are referred to as the "cost of money." Lenders that offer capital for investment are
compensated with interest payments from borrowers.
Features
(1)
Interest rates measure risks.
(2)
Lenders demand additional compensation for lending capital to riskier borrowers.
(3)
Investors also expect to earn a premium that is higher than the rate of inflation to make
any transaction worthwhile.
(4)
Treasuries, which have been described as "risk-free" investments, are a benchmark for
evaluating interest rates.
There are four types of term structure of interest rates theory. These are(1)
Fishers Classical theory.
(2)
Liquidity Preference theory.
(3)
Loanable fund theory.
(4)
Expectation theory.
Explanation/components of interest rates:
Explanation or components of interest rate is difficult because differences of ecomonic factors
are to be analysis. Some factors that influence and changes the interest rates. This is the factor of
analysis the nominal interest. This are(1)
Real risk free interest rate
(2)
Expected rate of inflation
(3)
Corporate bond.
What is liquidity? Or define liquidity.
27
The ability of an asset to be converted into cash quickly and without any price discount is called
liquidity. Liquidity refers to how quickly and cheaply an asset can be converted into cash. Money (in
the form of cash) is the most liquid asset. Assets that generally can only be sold after a long exhaustive
search for a buyer are known as illiquid.
Definition of Liquidity is:
1. The degree to which an asset or security can be bought or sold in the market without affecting the
asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily
bought or sold are known as liquid assets.
2. The ability to convert an asset to cash quickly. Also known as "marketability".
There is no specific liquidity formula; however, liquidity is often calculated by using liquidity
ratios.
In accounting, liquidity (or accounting liquidity) is a measure of the ability of a debtor to pay their
debts as and when they fall due. It is usually expressed as a ratio or a percentage of current liabilities
( How the liquidity position can be measured? Or how do the way of liquidity condition
measured?)
For a corporation with a published balance sheet there are various ratios used to calculate a measure of
liquidity. These include the following:
i.
The current ratio, which is the simplest measure and is calculated by dividing the total current
assets by the total current liabilities. A value of over 100% is normal in a non-banking
corporation. However, some current assets are more difficult to sell at full value in a hurry.
ii.
The quick ratio - calculated by deducting inventories and prepayments from current assets and
then dividing by current liabilities - gives a measure of the ability to meet current liabilities from
assets that can be readily sold. A better way for a trading corporation to meet liabilities is from
cash flows, rather than through asset sales, so;
iii.
The operating cash flow ratio can be calculated by dividing the operating cash flow by current
liabilities. This indicates the ability to service current debt from current income, rather than
through asset sales.
What types of sources can use of liability management?- Narrate in short.
i. Time certificate of deposit: In America from the 1960 the main sources of the liability
liquidity management is time certificate of deposit of commercial banks. It is salable and
transferable. This certificate is 90 days or 1 year and interest rate is determined
comparing the treasure bills and other instrument.
ii.
Loan from other commercial bank: The second liability is the loan from other
commercial banks.
iii.
Loan from the central bank.
iv. Issue shares.
v. Loan from the reserve fund.
Liquidity is a prime concern in a banking environment and a shortage of liquidity has often been
a trigger for bank failures. Holding assets in a highly liquid form tends to reduce the income from that
asset (cash, for example, is the most liquid asset of all but pays no interest) so banks will try to reduce
liquid assets as far as possible. However, a bank without sufficient liquidity to meet the demands of
their depositors risks experiencing a bank run. The result is that most banks now try to forecast their
liquidity requirements and maintain emergency standby credit lines at other banks. Banking regulators
also view liquidity as a major concern. For most banks, the most pressing demands for liquidity
typically arise from(1) Customer deposits withdrawals
(2) Credit requists from quality loan coutomers
(3) Repayment of nondeposit borrowers
(4) Operating expenses and taxes incurred in producing and selling services
(5) Payment of stockholder cash dividends.
Liquidity has a critical time dimension. Some bank liquidity needs are immediate or nearly so.
Longterm liquidity demands arise from seasonal, cyclical and trend factors. For example, liquid funds
are generally in greater demand during the fall and summer coincident with school, holidays and
customer travel plans. The essence of the liquidity manabement problem for a bank may be described in
two succinct statements:
(1)
Rarely are the demands for bank liquidity equal to the supply of liquidity at any
particular moment in timel. The bank must continually deal with either a liquidity deficit
or a liquidity surplus.
(2)
There is a trade-off between bank liquidity and profitability. The more bank resources are
tied up in readiness to meet demands for liquidity; the lower is that banks expected
profitability.
Thus, ensuring adequate liquidity is a never-ending problem for bank management that will
always have significant implications for the banks profitabilitly. Liquidity managerment decisions
cannot be made in isolation from all the other service areas and departments of the bank.
Why are financial institutions concerned with liquidity? November, 2010
Liquidity is a prime concern in a banking environment and a shortage of liquidity has often been
a trigger for bank failures. Holding assets in a highly liquid form tends to reduce the income from that
asset (cash, for example, is the most liquid asset of all but pays no interest) so banks will try to reduce
liquid assets as far as possible. However, a bank without sufficient liquidity to meet the demands of
their depositors risks experiencing a bank run. The result is that most banks now try to forecast their
liquidity requirements and maintain emergency standby credit lines at other banks. Banking regulators
also view liquidity as a major concern. For most banks, the most pressing demands for liquidity
typically arise from(1)
Customer deposits withdrawals
(2)
Credit requists from quality loan coutomers
(3)
Repayment of nondeposit borrowers
(4)
Operating expenses and taxes incurred in producing and selling services
(5)
Payment of stockholder cash dividends.
Liquidity has a critical time dimension. Some bank liquidity needs are immediate or nearly so.
Longterm liquidity demands arise from seasonal, cyclical and trend factors. For example, liquid funds
are generally in greater demand during the fall and summer coincident with school, holidays and
customer travel plans. The essence of the liquidity manabement problem for a bank may be described in
two succinct statements:
(1) Rarely are the demands for bank liquidity equal to the supply of liquidity at any particular
moment in timel. The bank must continually deal with either a liquidity deficit or a
liquidity surplus.
(2) There is a trade-off between bank liquidity and profitability. The more bank resources are
tied up in readiness to meet demands for liquidity; the lower is that banks expected
profitability.
29
Thus, ensuring adequate liquidity is a never-ending problem for bank management that will
always have significant implications for the banks profitabilitly. Liquidity managerment decisions
cannot be made in isolation from all the other service areas and departments of the bank.
What is liability management and what are its different strategies? November, 2010
Use and management of liabilities, such as customer deposits, by a bank in order to facilitate lending
and allow for balanced growth. Management of money accepted from depositors as well as funds
secured from other institutions constitute liability management. It also involves hedging against changes
in interest rates and controlling the gap between the maturities of assets and liabilities.
In banking, asset and liability management (often abbreviated ALM) is the practice of managing
risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. This
can also be seen in insurance.
Banks face several risks such as the liquidity risk, interest rate risk, credit risk and operational
risk. Asset liability management (ALM) is a strategic management tool to manage interest rate risk and
liquidity risk faced by banks, other financial services companies and corporations.
Banks manage the risks of asset liability mismatch by matching the assets and liabilities
according to the maturity pattern or the matching of the duration, by hedging and by securitization.
Modern risk management now takes place from an integrated approach to enterprise risk
management that reflects the fact that interest rate risk, credit risk, market risk, and liquidity risk are all
interrelated.
Strategies of liquidity management are classified below(1) Asset-liability Management or asset coversion strateties: The oldest approach to meeting bank
liquidity needs to known as asset liquidity management. It is the reliance on liquid assets that
can be readily sold for cash to neet a banks liquidity needs. Liquid asset is a readily marketable
asset with a relatively stable price that is reversible.
(2)
(3)
Balance (asset and liability) liquidity management strategies: Balanced liquidity management is
the combined use of liquid asset holdings to meet a banks liquidity needs.
Explain the forces of demand for and supply of liquidity. November, 2010
A banks need for liquidity-immediately spendable fund-can be viewed within a demend supply
framework. What activities give rise to the demand for liquidity inside a bank and what sources can the
bank rely upon to supply liquidity when spendable funds are needed? This are(1)
Supplies of liquid funds come from area)
Incoming customer deposits
b)
Revenues from the sale of nondeposit services
c)
Customer loan repayment
d)
Sales of bank assets and
e)
Borrowing from the money market.
(2)
Demands for Bank liquidity typically arise from area)
Customer deposits withdrawals
b)
Credit requists from quality loan coutomers
c)
Repayment of nondeposit borrowers
d)
Operating expenses and taxes incurred in producing and selling services and
e)
Payment of stockholder cash dividends.
Liquidity has a critical time dimension. Some bank liquidity needs are immediate or nearly so.
Longterm liquidity demands arise from seasonal, cyclical and trend factors. For example, liquid funds
are generally in greater demand during the fall and summer coincident with school, holidays and
30
customer travel plans. The essence of the liquidity manabement problem for a bank may be described in
two succinct statements:
(1)
Rarely are the demands for bank liquidity equal to the supply of liquidity at any
particular moment in timel. The bank must continually deal with either a liquidity deficit
or a liquidity surplus.
(2)
There is a trade-off between bank liquidity and profitability. The more bank resources are
tied up in readiness to meet demands for liquidity; the lower is that banks expected
profitability.
Thus, ensuring adequate liquidity is a never-ending problem for bank management that will
always have significant implications for the banks profitabilitly. Liquidity managerment decisions
cannot be made in isolation from all the other service areas and departments of the bank.
What are the rationales of liquidity and liability management? May, 2012
The rationales of liquidity and liability managent are(1) The liquidity must keep track of the activities of all funds using and funds-raising department
within the bank.
(2) The liquidity should know in advance, wherever possible, when the banks biggest credit or
deposit customers plan to withdraw their funds or add to their deposit.
(3) The liquidity, in cooperation with the senior management and the board of directors, must
make sure the banks pririties and objectives for liquidity management are clear. Today,
liquidity management has generally been relegated to a supporting other role compared to a
banks number one priority-making loans and supplying other fee generating services to all
qualified customers.
(4) The banks liquidity needs and liquidity position. Excess liquidity that is tinuing basis to
avoid both excess and deficit liquidity positions.
(5) Loan and deposits must be forecast for a given liquidity planning period
(6) The estimated change in loans and deposits must be calculated for that same planning period
(7) The liquidity manager must estimate the banks net liquid funds, surplus or feficit.
No bank can tell fro sure if it hs sufficient liquidity until it has passed the markets test. Specifically,
management should look at these signals are(1)
Public confidance
(2)
Stock price behavior
(3)
Risk premiuns on CDs and other borrowings
(4)
Loss sales of assets
(5)
Meeting commitment to credit customers
(6)
Borrowing from the central bank.
(4)
Without the prior approval of the Bangladesh Bank, any bank directly or indirectly can
not give loan or any other benefits to any person or any institution that value isa. More that 15% of that bank company act capital
b. In secured loan, easy convertible financial securities are more that 15% of that
bank company act capital.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
Borrowed money
Reserve fund
Paid up capital
Statutory Reserve fund
General reserve fund
Other Reserve Fund
Borrowed from central bank,
Money at short notice
Call money
Bank Certificate
Deposit Certificate
Acceptability
35
ii.
Marketability
iii.
Owership
iv. Adequacey
v. Non-encumbrance
vi. Transferability
vii.
Quality
viii.
Price stability
ix. Determinability of price
x. Ability
xi. Honesty
xii.
Easy Storeability
Why Inportant:
i. Loan amount is considered to approve for this security.
ii.
A banker always remember the price stability or change the price..
iii.
By security a banker can know the actual price of this security.
iv. By security a bankder set the loan amount.
v. Security saves a banker if loanee becomes defaulter.
Regulations imposed:
A set of acts, laws, regulations, and guidelines have been enacted and promulgated time to to
perform the commercial banks role particularly, to control and regulate countrys monetary and
financial system. Among others, important laws and acts include:
13. Bangladesh Bank Order, 1972 (P.O. No. 127 of 1972)
14. Bank Company Act, 1991
15. The Negotiable Instruments Act, 1881
16. The Bankers Book Evidence Act, 1891
17. Foreign Exchange Regulations Act, 1947
18. Financial Institutions Act, 1993
19. Bank Deposit Insurance Act, 2000
20. Money Loan Court Act, 2003
21. Micro Credit Regulatory Authority Act, 2006
22. Money Laundering Prevention Act,2012
23. Anti-terrorism Act, 2009 and
24. Anti Terrorism (Amendment) Act,2012
On the other hand, regulations and guidelines broadly include Bangladesh Bank Regulations and
Foreign Exchange Regulations.
36
repayment. In the event of the bankruptcy of the borrower, the unsecured creditors will have a general claim on
the assets of the borrower after the specific pledged assets have been assigned to the secured creditors, although
the unsecured creditors will usually realize a smaller proportion of their claims than the secured creditors.
In some legal systems, unsecured creditors who are also indebted to the insolvent debtor are able (and in
some jurisdictions, required) to set-off the debts, which actually puts the unsecured creditor with a matured
liability to the debtor in a pre-preferential position.
Secured loans:
Secured loans are those loans that are protected by an asset or collateral of some sort. A secured
loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes
a secured loan/ credit owed to the creditor who gives the loan. The debt is thus secured against the
collateral in the event that the borrower defaults, the creditor takes possession of the asset used as
collateral and may sell it to regain some or the entire amount originally lent to the borrower.
Secured loans are not just for new purchases either. Secured loans can also be home equityloans
or home equity lines of credit or even second mortgages. Such loans are based on the amount of home
equity, or the value of your home minus the amount still owed. Your home is used as collateral and
failure to make timely payments can result in losing your home.
There are two purposes for a loan secured. In the first purpose, by extending the loan through
securing the debt, the creditor is relieved of most of the financial risks involved because it allows
the creditor to take the property in the event that the debt is not properly repaid. In exchange, this
permits the second purpose where the debtors may receive loans on more favorable terms than that
available for unsecured debt, or to be extended credit under circumstances when credit under terms
of unsecured debt would not be extended at all. The creditor may offer a loan with attractive interest
rates and repayment periods for the secured debt.
Four types of secured loan or credit:
(1)
Mortgage loans: A mortgage loan is a secured loan in which the collateral is property,
such as a home.
(2)
Non-recourse loans: A nonrecourse loan is a secured loan where the collateral is the only
security or claim the creditor has against the borrower, and the creditor has no further
recourse against the borrower for any deficiency remaining after foreclosure against the
property.
(3)
Foreclosure: A foreclosure is a legal process in which mortgaged property is sold to pay
the debt of the defaulting borrower and
(4)
Repossession: A repossession is a process in which property, such as a car, is taken back
by the creditor when the borrower does not make payments due on the property. Depending
on the jurisdiction, it may or may not require a court order.
If you have suffered bad credit in the past, you may still qualify for a secured loan. Every year,
people apply for and accept secured loans to finance vehicles, property, vacations and property
renovations.
(2)
obligations, secured in the form of property, surety, guarantee or other as collateral (originally denoted
by the term security), whereas the latter often presents bilateral obligations secured by more liquid
assets such as cash or securities, often known for margin.
Collateral security is extra security provided by a borrower to back up his/her intention to
repay a loan. Collateral securities are the securities bought against funding by the third party.
In lending agreements, collateral is a borrower's pledge of specific property to a lender,
to secure repayment of a loan. The collateral serves as protection for a lender against a borrower's
default - that is, any borrower failing to pay the principal and interest under the terms of a loan
obligation. If a borrower does default on a loan (due to insolvency or other event), that borrower forfeits
(gives up) the property pledged as collateral - and the lender then becomes the owner of the collateral.
To link, to the extent possible, the amount of required capital to the amount of risk taken
To further focus the supervisor-bank dialogue on the measurement and management of risk and the
connection between risk and capital
To increase the transparency of bank risk-taking to the customers and counterparties that ultimately
fundand hence sharethese risk positions.
Proposed changes to elements of the capital ratio under Basel II, diagram:
Regulatory capital (Definition unchanged)
===================================
Measure of risk exposure (Risk-weighted assets)
(Measure revised)
further defined as temporary rather than permanent social systems that are constituted by teams within
or across organizations to accomplish particular tasks under time constraints.
Project management is the discipline of planning, organizing, securing, managing, leading, and
controlling resources to achieve specific goals. A project is a temporary endeavor with a defined
beginning and end (usually time-constrained, and often constrained by funding or
deliverables), undertaken to meet unique goals and objectives, typically to bring about beneficial change
or added value. The temporary nature of projects stands in contrast with business as usual (or
operations), which are repetitive, permanent, or semi-permanent functional activities to produce
products or services.
Processes of Project:
The project development stages traditionally, project management includes a number of elements: four
to five process groups, and a control system. Regardless of the methodology or terminology used, the
same basic project management processes will be used. Major process groups generally include:
i.
initiation
ii.
planning or development
iii.
production or execution
iv.
monitoring and controlling
v.
closing
In project environments with a significant exploratory element (e.g., research and development), these
stages may be supplemented with decision points (go/no go decisions) at which the project's
continuation is debated and decided. An example is the Phasegate model.
Steps of a project:
i.
Identification of project ideas
ii.
Evaluation of project ideas
iii.
Project Feasibility study
iv. Project selection.
vi.
vii.
Project size
Production process
Raw material
Skills
Others area. Project purpose & design
b. Technology & process
c. Product mix & production capacity
d. Safety provision
e. Transportation
f. Schedule of construction
g. Land and location
h. Furniture & Fixture and
i. Repairs & maintenance.
(4)
(5)
(6)
(7)
(2)
44
losses themselves may also be called "risks". Almost any human endeavor carries some risk, but some are much more risky
than others. Risk exposure to the chance of injury or loss; a hazard ordangerous chance: It's not worth the risk. In Insurance,
(1)
The hazard or chance of loss.
(2)
The degree of probability of such loss.
(3)
The amount that the insurance company may lose.
(4)
A person or thing with reference to the hazard involvedin insuring him, her, or it.
(5)
The type of loss, as life, fire, marine disaster, orearthquake, against which an insurance policy is drawn.
Risk is defined as the variability in the actual return emanating from a project in future over its working life in relation to
the estimated return- L.J. Gitman.
Economic uncertainty
Natural uncertainty
Human uncertainty
Increase interest rate.
Avoiding risk
Taking risk
Transfering risk
Reducing risk.
iii.
Collateralized Debt Obligations (CDO, CLO, CBO)
iv. Asset Backed Commercial Paper (ABCP)
Benefits of Securitization:
i. Less Expensive, More Broadly Available Credit
ii. More Options for Investors
iii.
Flexibility for the Originator
iv. Current Conditions of Consumer ABS and Residential MBS Markets
v. Consumer ABS
vi. Residential MBS
The Obstacles & Policy recommendations
Lack of appropriate legislation
True Sale (Isolation from bankruptcy of the Originator)
Tax neutral bankruptcy remote SPE
Stamp Duties
Taxation & Accounting
Eligibility
Debt market
Lack of Investor Appetite
Risk management failures, including the excessive or imprudent use of leverage
and mismanagement of liquidity risk.
Credit ratings methodologies and assessments that proved to be overly optimistic,
and excessive reliance on credit ratings.
Deteriorating underwriting standards and loan quality.
Gaps in data integrity, reliability and standardization.
A breakdown in checks and balances and lack of shared responsibility for the
system as a whole.
i.
ii.
iii.
iv.
Commercial banks: Commercial banks provide numerous services in our financial system. The
services can be broadly classified as follows: (a) individual banking, (b) institutional banking,
(c) Global banking. Indiviadual banking encompasses consumer lending, residential mortage
lending, consumer installment loan, credit card financing, automolile financing, brokerage
service, student loans etc. Loans to nonfinancial corporations, financial corporations and
government entities fall into the category of institutional banking. Global banking covers a
broad range of activities involing corporate financing and capital market and foreign exchange
products and services. Most global banking activities gererate fee income rather than interest
income.
Credit unions: Their unique aspect is the common bond requirement for credit union
membership. In our country, they are commonly known as cooperative societies. According to
the statutes, members in a credit union shall be limited to groups having a common bond of
occupation or association. Or to groups within a well defined neighborhood, community or rural
region. The dual purpose of credit unions is to serve their members saving and borrowing
needs.
Savings and loan association (S&Ls): S&Ls represent a fairly old institution. The basic
motivation behind creation of S&ls was the providing the funds for financing the purchase of a
home. The collateral for the loans would be the home being financed. It is either mutually owned
or have corporate stock ownership. Mutually owned means there is no stock outstanding, so
technically depositors are the owners. To increase the ability of S&ls to expand the sources of
funding available to bolster their capital. While most mortgage loans are for purchase of homes,
S&Ls do make contruction loans. The bulk of the liabilities of S&Ls consisted of passbook
saving accounts and time deposits.
Saving banks: These institutions are similar to, although much older than, S&ls. They can be
mutually owned (in which case they are called mutual saving banks) or stock holder owned. The
principal assets of saving banks are residential mortgages and the principal source of funds is
deposits.
ii.
Use existing securities as collateral for borrowing from the central bank or other
financial institutions. Banks are allowed to borrow at the discount window of Bangladesh
bank.
iii.
Raise short term funds in the money market. This alternative primarily includes sunig
marketable securities owned as collateral to raise funds in the repurchase agreement
market.
iv. Sell securities that a bank own. It requires that the depository institution invest a portion
of its funds in securities that are both liquid and have little price risk. Price risk means
the prospect that the selling price of the securities will be less than its purchase price,
resulting a loss.
Short term securities entail price risk. It is therefore short term, or money market, debt obligation that a
depository institution will hold as an investment to satisfy withdrawals and customer loan demand.
Securities held for the purpose of satisfying net withdrawals and coutomer loan demands are sometimes
referered to as secondary reserves. The percentage of a depository institutions asset held as secondary
reserves will depand both on the institutions ability to raise funds from the other sources and on its
managements risk performance for liquidity (safety) versus yield. Depository institutions hold liquid
assets not only for operational purposes, but also becauses of the regulatory requirements.
iii.
company and if debt equity ratio of company is not favorable the company may show real liabilities as
off-balance sheet items which will make the debt equity ratio of company favorable and therefore it will
help the company in taking loan from bank. It is due to this reason bank pay particular attention to off
balance sheet items before giving loans to companies.
The components of off-balance sheet items are as follows:
i. Contngent liabilities
a. Acceptances and endorsements
b. Letter of guarantee
c. Irrevocable letters of credit
d. Bills for collection
e. Other contingent liabilities
ii.
Other commitments:
a. Documentary credits and short term trade related transactions
b. Forward assets purchased and forward deposits placed
c. Undrawn note issuance and revolving endrwriting facilities
d. Undrawn formal standby facilities, credit lines and other commitments.
The major part of the insurnance company underwriting process is deciding which applications
for insurance they should accept and which one they should reject, and if they accept, determing how
much they should charge for the insurance. This is called the underwriting process. For example, an
insurance company may not provide life insurance to someone with terminal cencer or automobile
insurance to some with numerous traffic violations.
Insurance company collect insurance premiums initially and make payments later when e.g. the
insured persons death) or if (e.g. an automobile accident) an insured event occurs, insurance companies
maintain the initial premiums collected in an investment portfolio, which generates a return. Thus
insurance companies have tow sources of income: the initial underwriting income (the insurance
premium) and the investment income. The insurance companys profit results from the difference
between their insurance premiums and investment returns on the one hand and their operating expense
ad insurance payments on the other.
Types of insurance companies:
i. Life insurance: For life insurance, the risk insured against is death. The life insurance
company pays the beneficiary of the life insurance policy in the event of the death of the
insured.
ii.
Health insurance: In the case of health insurance, the risk insured is medical treatment of
the insured. The health insurance company pays the insured ( or the provider of the
medical service) all or a portion of the cost of the medical treatment by doctors, hospitals
or others.
iii.
Property and casualty insurance: The risk insured by property and casualty insurance
companies are demage to various types of property. Specifically it is insurance against
financial loss caused by damage, destruction or loss of property as the result of an
identifiable event that is sudden, unexpected or unusual.
iv. Liability insurance: With the liability insurance, the risk insured against is litigation or
the risk of law suits against the insured due to actions by the insurd or others.
v. Disability insurance: Disability insurance insures against the inability of employed
persons to earn an imcome in either their own occupation or any occupation. Typically
own occupation disability insurance is written for professionals and any occupation for
workers.
vi. Long term care insurance: An individual have been living longer, they have become
concerned about outliving their assets and being unable to care for themselves as the age.
An addition, custodial care for the aged has become very expensive. Thus, there has been
an increased demand for insurance to provide custodial care for the aged who are no
longer able to care for themselves. This care may be provided in either the insureds own
residence or a separate custodial facility.
i.
ii.
iii.
Open-end-funds: These are commonly referred to simply as mutual funds. Open-end-funds are
portfolios of securities, mainly stocks, bonds and money market instruments. These are several
important aspects of mutual funds.
a. Investors in mutual funds own a pro rata share of overall portfolio.
b. The investment manager of the mutual fund actively manages the portfolio, that is, buys
some securities and sells other.
c. The value or price of each share of portfolio, called net asset value, equals the market
value of the portfolio minus the liabilities of the mutual funds divided by the number of
shares owned by the mutual fund investors.
d. The price of the fund is determined only once each day, at the close of the day.
e. All new investments into the fund or withsrawals from the fund during a day are priced
at the closing Net asset vaule.
Closed-end-funds: The shares of a closed end fund are very similar to the shares of common
stock of a corporation. The new shares of closed-end-funds are initially issued by an underwriter
for the fund. And after the new issue, the number of shares remains constant. After the initial
issue, thre are no sales or purchases of fund shares by the fund company. The shares are traded
on a secondary market. As the price of the shares of a closed-end- funds are determined by the
supply and demand in the market in which these fundas are traded; the price can fall below or
rise above the net asset value per share. Shares selling below net asset value are said to be
trading at a discount while shares trading above net asset value are trading at a premium.
Unit trusts: A unit trust is similar to closed-end-funds in that the number of unit cerfiticates is
fixed. Unit trusts typically invest in bonds. They differ in several ways from both mutual funds
and close-end-funds that specialize in bonds.
a. There is no active trading of the bonds in the portfolio of the unit trust. Once the unit
trust is assembled by the sponsor (usually a brokerage firm or bond underwriter) and
turned over to a trustee, the trustee holds all the bonds until they are redeemed by the
issuer.
b. Unit trusts have a fixed termination date, while mutual funds or close-end-funds do not.
c. Unlike the mutual funds and close-end-funds investors, the unit trust investor knows that
the portfolio consist of a specific portfolio of bonds and has no concern that the trustee
will alter the portfolio.
Investment banking refers to activities related to underwriting and distrusting new issues fo debt
and equity securities. New issues can be either first time issues of a companys debt or equity securities
or the new issues of a firm whose debt or equity is already trading seasoned issues.
Surities under writing can be undertaken though either public or private offerings. In private offerings,
an investment banker acts as a private placement agent for a fee, placing the securities with one or a few
large institional investors such as life insurance companies. In a public offering, the securities may be
underwriten on a best efforts or a firm commitment basis and the securities may be offered to the public
at large. With best efforts underwriting, investment bankers act as agent on a fee basis related to their
success in placing the issues with investors. In firm commitment underwriting, the investment banker
acts a principal, purchasing the securities from the issuer at one price and seeking to place them with
public investors at a slightly higer pirce. Finally, in addition to investment banking operations in the
corpoarate securities markets, the investment banker may participate as an underwriter (primary dealer)
in government, municipal and mortgage-based securities.
9. Technology risk: The risk incurred by an Fl when its technological investments do not produce
anticipated cost saving.
10. Insolvency risk: The risk that an Fl may not have enough capital of offset a sudden decline in the
value of its assets relative to its liabilities.
11. Strategic risk: Strategic risk means the current or prospective risk ot earnings and capital arising
from nonadeaptability with the changes in the business environment, adverse business
decisions, the overlooking of changes in the business environment etc.
12. Enviornment risk and climate change risk: Environment and climate change risk refers to th
uncertainty or probability of losses that originates from any adverse enviormnent or climate
change events (natural or manmade) and / or the non-complinace of the prevailing national
environmental regulations.
13. Settlement risk: Settlement risk arises when an executed transaction is not settled as the standard
settlement system, such as, evidence of bills accepted (foreign and domestic) by counterparty
banks (local/foreign) but payment not realized/payment delayed, all types of receivables (except
bills accepted) not settled in due time.
management information on asset quality and risk posture. Such internal reports need similar
standardization and much frequent reporting invervals, with daily or weekly reports.
2. Position limits and rules: A second step for internal control of active management is the
establishment of position limits. These are imposed to cover exposures to counterparties, credits,
and overall position concerntrations relative to systematic risks. In general, each person who can
commit capital has a wlldefined limit. This applies to traders, lenders and portfolio managers.
Summary reports to management show counterparty, credit and capital exposure by business
unit on a periodic basis. Inlarge institutions with thousands of positions maintained and
transactions done daily, accurate and timely reporting is quite difficult, but perhaps even more
essential.
3. Investment guidelines: Investment guidelines and strategies for risk taking in the immediate
future are outlined in terms of commitments to particular areas of the market, the extent of assetliability mismatching or the need to hedge against systematic risk at a particular time. Guidelines
offer institution level advice as to the appropriate level of active management-given the state of
the market and the willingness of senior management to absorb the risks implied by the
aggregate portfolio. Such guidelines lead to hedging and asset-liability matching. In addition,
securitization and syndication are rapidly growing techiniques of position management open to
participants looking to reduce their exposure to be in line with managements guidelines. These
transactions facilitie asset financing, reduce systematic risk and allow management to
concentrate on customer needs that center more on origination and servicing requirements that
funding positions.
4. Incentive schemes: To the extent that management can enter into incentive compatible contracts
with line managers and make compensation related to the risks borne by these individuals, the
need fro elaborate and costly control is lessened. However, such incentive contracts require
accurate position valuation and proper cost and capital accounting systems. It involves
substantial cost accounting analysis and risk wighting which may take years to put in place.
Notwithstanding the difficulty, well designed compensation contracts align the goals of
managers with other stakeholders in a most desirable way. In fact, most financial debacles can
be traced to the absence of incentive compatibility, as the case of deposit insurance illustrates.
What perspectives are considered by financial institutions in their process of assessing interest rate risk?
Interest rate risk is the current or potential risk to earning and capital arising from adverse
movements in interest. Interest rate risk is very important from the perpectives short term earnings and
economic value consideration. Significantly reduced eraning can pose a threat to capital adequacy. So,
volatility of earning is an important focal point for interest rate analysis. However, measurement of the
impact on economic value (the present value of the banks expected net cash flow) provides a more
comprehensive view of the potential long term effects on an institutions overall exposures.So, focus
will primarily be on:
1. Measuring interest rate risk in relation to economic value and
2. Considering interest rate risk in relation to earning as supplementary measures.
Institutions usually consider two different, but complementary, perpectives in their process of assessing
interest rate risk, which are as follow:
56
a) Earning perspective: The earning perspective focuses on the sensibility of earning in the short
term to interest rate movements. Institutions usually adopt this perspective due to two main
reasons. (1) This is the variable through which an interest change has an immediate impact on
preported earnings; and (2) the assessment of interest rate risk is difficult because it is mainly
based on assumptions about the behavior of long term instruments, such as stable demand
deposits or other moninterest bearing balance sheet intems and those with embedded options.
b) Ecomonic value perspective: the economic value perspective focuses on the sensitivity of the
economic values of the banking book iterms to interest rate changes. To use this approach as the
shorter term earning perspectives will not completely capture the impact of interest rate
movement on the market value of long term positions.
Explain interest rate risk with example.
All depository institutions face interest rate risk. Mangers of a depository institution who have
particular expectations about the future of interest rates will seek to benefit from these expectations.
Those who expect interest rates to rise may pursue a policy to borrow funds for a long time horizon
(that is, to borrow long) and lend funds for a short time horixon (to lend short). If interest rates are
expected to drop, managers may elect to borrow short and lend long.
Interest rate risk can be explained best by an example. Let us suppose that a depository
institution raises tk-1.00 million via deposits that have a maturity of one year and by agreeing to pay an
interest rate of 7%. Ignoring for the time being the fact that the depository institution cannot invest the
entire tk-1.00 million because of reserve requirement , supoose that tk-1.00 million is invested in a
GBTB that mature3s in 15 years paying an interest rate of 9%. Becasuse of the funds are invested in
BGTB, there is no credit risk in this case.
It would seem at first that the depository institution has locked in a spreed of 2% (9% minus
7%). This spread can be counted on only for the first year, though, because the spread in future years
will depend on the interest rate this depository institution will habe to pay depositorys in order to raise
tk-1.00 million after the one year time deposit matures. If interest rates decline, the spread will increase
the depository institution has locked in the 9% rate. If interest rates rise, however, the spread income
will decline. In fact, if this depository institution must pay more than 9% to depositors for the next
14years, the spread will be negative. That is it will cost the depository institution more to finance the
government securities than it will earn on the funds invested in those securities.
In this example, the depository institution has borrowed short (borrowed for one year) and lent
long (invested for 15years). This policy will benefit from a decline in interest rates but be disadvantaged
if interest rates rise. Suppose, the institution could have borrowed funds for 15 years at 7% and invested
in a BGTB matching in one year earning 9%-borrowed long (15 years) and lent short (1year. A rise in
interest rates will benefit the depository institution because it can them reinvest the proceeds from the
maturing one-year government security in a new one-year government security offering a higher interest
rate. In this case a decline in interest rates will reduce the spread. If interest rates fall below 7%, there
will be a negative spread.
future is tk-100.00 then tk-100.00 is the futures price. At the settlement date, Karim will deliver asset
XYZ to Rahim and Rahim will give Karim Tk-100.00m the future price.
The role of futures contract in financial markets is as fellows:
i. The futures market is an alternative market that investors can use to alter their risk
exposure to an asset when new information is acquired. For acquiring new information,
futures market do this efficiently due to liquidity, transactions costs, taxes and leverages
ot the futures contract.
ii.
The futures market will be the price discovery market when market participants prefer to
use this market rather than the cash market to change their risk exposure to an asset.
iii.
The future market and the cash market for an asset are tied together by an arbitrage
process. Because arbitrage is the mechanism that assures that the cash market price will
reflect the information that has been collected in the futures market.
iv. The agreement that futures markets destabilize the prices of the underlying financial
assets is an empirical question, but greater price volatility by itself is not an underlying
attribute of a financial market.
What is meant by Reputatinal risk? What types of losses can be incuced in a bank due to peputational risk?
Reputation risk is the current or prospective indirect risk to earing and capital, decline in the
customer base, costly litigation arising from adverse perception of the image of the banks on the part of
customers, counterparties, shareholders, investors or regulators. Reputation risk may originate from the
lack of compliance with industry service standards, failure to deliver on commitments, lack of customer
friendly service and fair market practices, low or inferior service quality, unreasonably high costs, a
service style that does not harmonize with market benchmarks or customer expectations, inappropriate
business conduct or unfavourabel authority opinion and actions.
Signs of significant and overall quality the extensive and repeated voicing of a negative opinion
on the institutions performance and overall qulity by external persons or organizations, especially if
such negative opinion receives broad publicity along with poor performance by the institution which
may lay the grounds for such opinions. In general, a reputational risk may potentially damage the
standing or estimate of an organization in the eyes of third-parties. The harm to a frims reputation is
intangible and may surface gradually. However, there is strong evidence that equity markets
immedialtely react to the reputational consequences of some events.
There are several paths by which reputational risk can induce losses for a firm:
i. Loss of current or future costumers-Typically this involves a reduction in expected future
renenues, but it could also involve an icrease in costs if , for example, increased
advertising expenditures are necessary to restrain reputational damage.
ii.
Losses of employees or managers within the organization , an increase in hiring costs
iii.
Reputaiton in current or future business partners
iv. Increased costs of financial funding via credit or equity markets
v. Increased costs due to government policy, suvervisory regulations, fines or other
penalties.
What is credit risk? What are the three steps in the credit risk
management process?
Credit risk could be defined as the possibility of losses associated with diminution in the credit quality
of borrowers or counter parties. In a banks portfolio, losses stem from outright default due to inability
or willingness of a customer or counterparty to meet commitments in relation to lending, trading,
steelement and other financial transactions. The credit risk arises due to operation of a number of
external and internal factors.
The external factors comprise of state of economy of the concerned country or even global
economy, foreign exchange risks, trade restrictions, economic sactiona, government policies , natural
calamitites etc.
The internal factors are the factors which may be internal to the borrower or internal to the
financing institutions. The factors internal to the borrowing entity may be planning factors, execution
factors, finance factors, marketing factors etc. The factors internal to financing banks or institutions
58
disclosures should be consistent with how senior management and the board of directors
assess and manage the risks of the bank.
2. Under minimum capital requirement, banks will use specified approaches/methodologies
for measuring the various risks they face and the resulting capital requirements. It is
believed that providing disclosures that are based on a common framework is an
effective means of informing the stakeholders about a banks exposure to those risks and
provides a consistant and comprehensive disclosure framework of risks and its
management that enhances comparability.
3. The disclosures should be subject to adequate validation. Since information in the annual
financial statements would generally be audited, the additionally published with such
statements must be consistent with the audited statements.
5
L
Liquidity
6
S
Sensitivity to market risk
Composition of these dimentions is to be rated on a scale of 1 though 5 &6 in ascending order of
performance deficiency. Thus 1 represent the highest and 5 & 6 represent the lowest and mot critically
deficient level of operating performance. Meaning of the six CAMELS numerical ratings in brief are as
follows:
Rating
Description
1
Strong-It is the highest rating and is indicative of performance that is significantly
higher than average.
2
Satisfactory- It reflects performance that is average or above average. It includes
performance that adequately provides for the safe and sound operation of the banks.
3
Fair- Represent performance that is not flawless to some extent. It is neither
satisfactory nor unsatisfactory but characterized by performance of below average
quality.
4
Marginal- Performance significantly below average, if not changed such
performace mitht evole into weakness or condition that could thread the viability of
a bank.
5&6
Undatisfactory- It is the lowest rating and indicative of performance that is critically
deficient and need immediate remedial attention. Such performance by itself or in
combination with other weakness, threats the viability of a bank.
Each bank is accorded a composite rating that is predicated upon the evaluation of the specific
performance dimension. The composite rating is also based upon a scale of 1 through 5&6 in ascending
order. The six composit ratings are defined and distinguished as: Composite rate=Rate of
(C+A+M+E+L+S)/6.
Scale of composite rangeRating
composite range
description
1
1
Through
1.4
Strong
2
1.5
Through
2.4
Satisfactory
3
2.5
Through
3.4
Fair
4
3.5
Through
4.4
Marginal
5&6
4.5
Through
5&6
Unsatisfactory
periodically received by the bond holder can be reinvested at the same rate that is reinvested at the
calculated yield to maturity.
What are the major features of the underlying collateral and the
structure fro securitization.
A securitized instrument, as compared to a direct claim on the issuer, will generally have the
following features:
1. Marketability: The very purpose of securitiztion is to ensure marketability to financial claims.
Hence, the instrument is structured so as to be marketable. This is one of most important feature
of a securitized instrument. The concept of marketability involves two postulates;
a. The legal and systematic possibility of marketing instrument, and
b. The existence of a market for the instrument.
2. Merchabntable quality: To be market acceptable, a securitized product has to have a
merchantable quality. The concept of merchantable quality in case of physical goods is
something which is acceptable to merchants is acceptable. For widely distributed securitized
instruments, evaluation of the quality and its certification by an independent expert, viz, rating is
common.
3. Wide distribution: The basic purpose of securitization is to distribute the product. The extent of
distribution which the originator would like to achieve is based on a comparative analysis of the
costs and the benefits achieved therby. Wider distribution leads to a cost-benefit in the sense that
the issuer is able to market the product with lower return and hence lower financial cost to him.
4. Homogeneity: To serve as a marketable instrument, the instrument should be packaged as into
homogeneous lots. Homogeneity is a function fo retail marketing. Most securitized instruments
are broken into lots affortabel to the marginal investor and hence the minimum demonization
becomes relative to the needs of the smallest investor. The need to break the whole lot to be
securitized into several homogeneous lots makes securitization an exercise of integration and
differentiation: integration of those several assets into one lump and them the latters
differentialtion into uniform marketable lots.
5. Special purpose vehicle: In case the securitization involves any asset or claim which needs to be
integrated and differentiated , that is, unless it is a direct and unsecurec claim on the issuer, the
issuer will not need an intermediary agency to act as s repository of the asset or claim which is
being securized. In securization of receivables the special purpose intermediary holds the
receivabes with it and issues beneficial interest certificates to the investors.
What are the major features of the half yearly monetary policy (JulyDec) Published by Bangladesh bank?
Major features of Half yearly Monetory Policy (July-Dec.) are1. Reduce private sector credit growth to 18% by the end of the fiscal year fro the exesting
25.5%.
2. Attainment of 7% real GDP growth is FY 2011-12, considering the external environment
would remain benign and stable.
3. Slash the annual average CPI inflation to 7.5% in this fiscal year fro the above 8.8%
clocked in 2010-2011 to help the government meet its target announced in the budget.
4. Monetary policy would be accommodative, but would remain cautious to check credit
flows into unproductive and speculative used.
5. Ensuring adequate credit flows to productive pursuits in manufacturing, agricualture,
trade and othe services.
62
banks
To cope with the international best practices and to make the banks capital more risk sensitive as
well as more shock resilient, Guidelines on Risk Based Capital Adequacy (RBCA) for Banks (Revised
regulatory capital framework in line with Basel II) have been introduced from January 01, 2009 parallel to
existing BRPD Circular No. 10, dated November 25, 2002. At the end of parallel run period, Basel II regime
has been started.
(1)
Instructions regarding Minimum Capital Requirement (MCR),
(2)
Adequate Capital, and
(3)
Disclosure requirement as stated in these guidelines have to be followed by all scheduled
banks for the purpose of statutory compliance.
Scheduled banks will follow the instructions contained in the revised Guidelines on Risk Based Capital
Adequacy for Banks. These guidelines are articulated with the following areas, viz;
(1)
Introduction and constituents of Capital,
(2)
Credit Risk,
63
(3)
Market Risk,
(4)
Operational Risk,
(5)
Supervisory Review Process,
(6)
Supervisory Review Evaluation Process,
(7)
Market Discipline,
(8)
Reporting Formats, and
(9)
Annexure.
These guidelines will be able to make the regulatory requirements more appropriate and will
also assist the banks to follow the instructions more efficiently for smooth implementation of the Basel
II framework in the banking sector of Bangladesh.
These guidelines are structured on following three aspects:
a)
Minimum capital requirements to be maintained by a bank against credit, market, and
operational risks.
b)
Process for assessing the overall capital adequacy aligned with risk profile of a bank as
well as capital growth plan.
c)
Framework of public disclosure on the position of a bank's risk profiles, capital
adequacy, and risk management system.
Scope of application : These guidelines apply to all scheduled banks on Solo basis as well as on
Consolidated basis .
Capital base : Regulatory capital will be categorized into three tiers: Tier 1, Tier 2, and Tier 3.
Tier 1 capital Tier 1 capital called Core Capital comprises of highest quality of capital elements that
consists of : a) Paid up capital :Introduction and constituents of capital Chapter1 2
b) Non-repayable share premium account
c) Statutory reserve
d) General reserve
e) Retained earnings
f) Minority interest in subsidiaries
g) Non-cumulative irredeemable preference shares
h) Dividend equalization account
Tier 2 capital Tier 2 capital called Supplementary Capital represents other elements which fall short of
some of the characteristics of the core capital but contribute to the overall strength of a bank and
consists of: a) General provision2
b) Revaluation reserves Revaluation reserve for fixed assets3
Revaluation reserve for securities4
Revaluation reserve for equity instrument
c) All other preference shares
d) Subordinated debt5
Tier 3 capital Tier 3 capital called Additional Supplementary Capital, consists of short-term
subordinated debt (original maturity less than or equal to five years but greater than or equal to two
years) would be solely for the purpose of meeting a proportion of the capital requirements for market
risk.
For foreign banks operating in Bangladesh, Tier 1 capital consists of the following items:
a) Funds from head office
b) Remittable profit retained as capital
other are(1) Conditions for maintaining regulatory capital
(2) Calculation of capital adequacy ratio
(3) Minimum capital requirements
(4) Reporting requirement and
(5) Penalty for non-compliance
64
Circulars
1.
2.
3.
BRPD Circular No. 09 : Mapping of External Credit Assessment Institutions' (ECAIs) rating scales with Bangladesh Bank (BB) rating
Grade [Nov 16, 2011 ]
BRPD Circular No. 35 : Amendment in Guidelines on Risk Based Capital Adequacy (RBCA) for Banks [Dec 29, 2010]
BRPD Circular No. 31 : Mapping of External Credit Assessment Institutions (ECAIs) rating scales with Bangladesh Bank (BB)
rating Grade [Oct 25, 2010 ]
4.
BRPD Circular No. 24 : Risk Based Capital Adequacy (RBCA) for Banks [Aug 03, 2010 ]
5.
BRPD Circular No. 13 : Supervisory Review Evaluation Process (SREP) [Apr 21, 2010]
6.
BRPD Circular No. 12 : Consolidation for investment in subsidiaries and implication of other Capital Market Exposures for the
purpose of computing eligible Regularory Capital [Mar 29, 2010]
7.
8.
9.
BRPD Circular No. 11: Subordinated Debt for inclusion in Regulatory Capital [Mar 21, 2010]
BRPD Circular No. 10 : Risk Based Capital Adequacy (RBCA) for banks (Revised regulatory capital framework in line with Basel II)
[Mar 10, 2010]
BRPD Circular No. 20 : Risk Based Capital Adequacy (RBCA) for banks (Revised regulatory capital framework in line with Basel II)
[Dec 29, 2009]
10.
BRPD Circular No. 13 : Subordinated Debt for inclusion in Regulatory Capital [Oct 14, 2009]
11.
BRPD Circular No. 05 : Mapping of External Credit Assessment Institutions (ECAIs) rating with Bangladesh Bank Rating Grade [Apr
29, 2009]
BRPD Circular No. 09 : Risk Based Capital Adequacy for Banks (Revised regulatory capital framework in line with Basel II) [ Dec 31,
2008]
12.
13.
BRPD Circular No. 07 : Recognition of eligible External Credit Assessment Institutions (ECAIs) [Sep 23, 2008]
14.
BRPD Circular No. 14 : Implementation of New Capital Accord (Basel II) in Bangladesh.(Road Map) [Dec 30, 2007]
Circular Letters
1.
BRPD Circular Letter No. 05 : Identifying Risk Factors Relating to Islamic Mode of Investment under Risk Based Capital Adequacy
for Banks [Jul 20, 2009]
2.
Risk Based Capital Adequacy for Banks (Basel II) [December 2010]
3.
Risk Based Capital Adequacy for Banks (Basel II) [December 2008]
Balance sheet
Income statements
Fund flow statements
Cash Flow statement
Loan and lease statement
Deposit statement
Investment statement
Nondeposit borrowing statement
Cash and deposits in other institution statement
Equity capial statement
Shareholder statement
Liquidity statement
Verious kinds of reserves statements
Paid up capital
65
ii.
iii.
iv.
v.
vi.
vii.
viii.
Share capital
Reserves funds and others reserves funds
Retained earning and
Statutory reserves funds
Depository funds
Loan and advaces from other commercial banks and central bank.
Loan at call money
Mention the sources of revenue and areas of expenses for a bank and
an insurance company. May, 2012
Sources of revenues are(1) Interest of loans and advances
(2) Brokerages
(3) Commission
(4) Fees
(5) Foreign exchange commission, charges and fees.
(6) Bill discounting
The areas of expenses are(1) Salaries and allowances
(2) Administrative cost or overhead cost
(3) Marketing expenses
(4) Interest of deposits
(5) Stamps
(6) Bad loss loan
(7) Transportations cost
What is minimum capital and liquidity requrirement for nonbank financial institutions? May, 2011
Miminum capita requirement is 100.00 crore taka and liquidity is 6%.
(2)
(3)
(4)
(5)
(6)
(7)
Factually, capital markets have become the financial nerve-center modern economic
world..
As modern institutions, capital markets can not be separated from the weaknesses and
mistakes.
They are always watching the market change, making the analysis and calculations, and
take action on the speculation in the purchase or sale of shares.
Principle of Capital Market Efficiency states that differences between financial assets are
measured primarily in terms of risk and return. Investors choose the highest return for a
given risk level.
The Principle of Comparative Advantage states that people apply the Principles of SelfInterested Behavior, Two-Sided Transactions, and Signaling to an environment
characterized by similar financial assets, low transaction costs, and intense competition
leads to capital market efficiency.
The Principle of Valuable Ideas states that new ideas can provide value when first
introduced, even in an efficient capital market.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
69