1.

Modern banks in developed financial markets offer different types of deposit services, from
non-interest bearing transactional services to the interest-bearing ones, and also non-
transactional deposits (term and savings deposits). One of the most used models for
determining the price of deposit services is: The model of determing the price of deposits by
the costs or the cost plus price. Provide the basic elements of this model of deposit services
pricing. What influenced many banks to accept this model of „free“ pricing. Explain your
opinion about this model.

Cost-plus deposit pricing encourages banks to determine what costs they are incurring in labor and
management time, materials, etc., in offering each deposit service. When considering this approach
to pricing deposits, a bank has two ways of pricing their sercies:

- Unbundled service pricing, and

- Pooled service pricing

Unbundled service pricing means that deposits are priced separately from other services, and each
deposit is priced high enough to recover all or most of the cost of providing that service, using the
following cost-plus pricing formula:

Unit price charged the customer for each deposit service = Operating expense per unit of deposit
service + Estimated overhead expense allocated to the deposit-service funcation + Planned profit
margin from each service unit sold

Pooled-funds approach demands an accurate calculation of the cost of each deposit service.
Management needs to:

- Calculate the cost rate of each source of funds (adjusted for reserves requried by the central
bank, deposit insurance fees, and float)
- Multiply each cost rate by the relative proportion of all funds coming from that particular
source, and
- Sum all resulting products to derive the weighted average cost of all funds raised

This approach is based on the assumption that it is not the cost of each type of deposit that matters,
but rather the weighted average cost of all funding sources.

Cost plus deposit pricing allows a bank to incorporate all the costs related to a deposit in its price,
which makes it popular. In my opinion, however, the price of deposit calculated should only serve as
a reference for optimization of resource constraints related to a deposit, since the customer searches
for the most appealing option on the market, not the one covering the costs a bank incurrs.

2. Basel I Accords represents an international standard for banking supervision, which until 2009
was the basic standard for Capital requirement. After the global financial crisis, BIS Bank
introduces a new standard known as Basel II in order to promote the better capital
management of banks and to prevent insolvency. Discuss the difference between Basel I and
Basel II standards, what was introduced with the new standard and how do you expect that
these changes affect the stability of the banking sector.

Under the capital standards brought into being by the Basel Agreement, differing risk weights will
apply to different kinds of bank assets. It is an attempt to reduce the risk of default of banks and
increase their incentive to hold less risky assets by encouraging them to keep their capital costs as low
as possible.
Basel I used a one size fits all approach to determine a bank's capital requirements. Basel II recognizes
that different banks have different risk exposures and should be subject to different capital
requirements. It also broadens the types of risk considered for determining capital requirements,
including credit, market and operational risk.

Basel I provided a basic definition of capital, according to which the capital consists of two basic
components:

1. Primary capital (Tier 1): Ordinary shares and surplus, retained earnings, non-cumulative
preference shares without maturity date, minority interests at the expense of equity in
associated affiliates...
2. Secondary capital (Tier 2): reserves for losses on loans and leases, long-term bonds,
cumulative preferred shares without maturity...

Basel II introduced new pillars:

- Minimum capital needs: Term capital requirements means that capital is needed to cover the
risk. The types of risk considered by this pillar include market risk, credit risk and operational
risk.
- The supervision of capital adquacy. The supervision of capital adequacy seeks to ensure
optimal level of capial in accordance with the risk profile of each bank, and includes those risks
taht are not included in Pillar 1, such as interest rate risk, liquidity risk, concentration risk.
- Market discipline

Even though Basel II was an improvement over the original Basel agreement, it failed to properly
regulate the behavior of global systematically important institutions and their ability to use
securitization and off-balance sheet vehicles to drive, disregarding the risk related to them.

3. The highest risks in banks are concentrated in the credit portfolio. Therefore, a high quality
credit risk analysis is immanent to all modern banks. The Bank analyzes various aspects of the
creditworthiness of its clients with this analysis. During the credit analysis, bankers pay special
attention to the collateral that serves as securing loans. State what banks can accept as a
collateral when approving a loan. What they are especially mindful of when considering the
quality of the collateral offered by their clients. Discuss the problems of banks in BiH from
the aspect of collateral realization.

Common types of loan collateral:

- Accounts receivable – the lender takes a security interest in the form of a stated percentage
of the face amount of accounts receivable (sales on credit) shown on a business borrower's
balance sheet.
- Factoring – a lender can purchase a borrower's accounts receivable based upon some
percentage of their book value. The percentage figure depends on the quality and age of the
receivables.
- Inventory – in return for a loan, a lender may take a security interest against the current
amount of inventory of goods or raw materials a business borrower owns.
- Real property – following a title search, appraisal, and land survey, a lending institution may
take a security interest in land and/or improvements on land owned by the borrower and its
claim (a mortgage) with a government agency in order to warn other lenders that the
property has already been pledged
 - Personal property – lenders often take a security interest in automobiles, furniture and
equipment, securities and other forms of personal property a borrower owns
- Personal gurantees – a pledge of the stock, deposits, or other personal assets held by the
major stockholders or owners of a company may be required as collateral to secure a
business loan

Banks are striving to perfect its claim against the borrower's collateral and are keen on determining
whether the borrower possess assets of sufficient quality and value to backstop a loan. Expecting a
scenario when they will need to act on that claim, the banks are especially mindful of:

- Checking the strength of claim to the collateral,

- Cooperability of the loan user
- The value of collateral and its marketability,
- Outcome of eventual legal proceedings,
- Possibility of bankruptcy of the loan-user,
- The consequences of relationship with the client and other clients,
- Consequences for the bank reputation

The major problem banks in Bosnia and Herzegovina are facing a problem of low marketability of the
collateral and low cooperability of the loan users which are prone to unethical behavior in an attempt
to avoid returning the loan received.

4. Banks in developed financial markets have been facing serious competition in recent years.
Their competitors are the banks and other financial institutions. The share of banks in the
structure of the financial assets is declining. List the competitors of banks in the developed
financial markets and briefly indicate their characteristics. Also, indicate the most important
competitors of banks in the domestic financial market.

Among bank's closest competitors are savings associations, credit unions, money market funds,
mutual funds, hedge funds, security brokers and dealers, investment banks, finance companies,
financial holding companies, and life and property-casualty insurance companies. Banks have very
similar financial statements to credit unions and savings associations. The only difference may be in
the structure of their loan portfolio. Credit unions probably have more loans to individuals and savings
associations may have more real estate loans as well as loans to individuals.

More differences exist between banks and other major competitors. These differences exist because
of each company's unique function. Finance companies have loans but on their balance sheet they are
called accounts receivables. In addition, they show heavy reliance on money market borrowings
instead of deposits. Insurance companies are different in taht loans they make to businesses show up
on the balance sheet as bonds, stocks, mortgages and other securities. On the liability side, insurance
companies receive the majority of their funds from insuracne premiums paid by customers for
insurance protection. Mutual funds hold primarily corporate stocks, bonds, asset-backed securities
and money market instruments and their liabilities consist primarily of shares of the mutual funds sold
to the public. Security holders and dealers tend to hold a similar ranage of securities funded by
borrowings in the money and capital markets.

NOTE: Na ovo nisam odgovorio, nisam našao u svojoj literaturi.

5. Credit risk management represents an important function in the operations of each bank.
There are several aspects that the bank needs to take into account in particular. Two
important asepcts are: (macro aspect) the banking system in which the bank is located and is
 operating, and other aspect are the limits during the loan approval process (micro). Explain
the country's risk and its impact on the operations of banks. What does it depend on and
how does it manifest itself in the banking business. Next, explain the concept of „credit
limits“ as an element of the credit policy of banks. Why banks use it and why is it significant.

Country risk is taken to refer to the possibility that sovereign borrowers of a particular country may
be unable or unwilling, and other borrowers unable, to fulfil their foreign obligations for reasons
beyond the usual risks which arise in relation to all lending. A very wide variety of factors may prevent
borrowers of a given country from fulfilling their foreign obligations, which makes country risk a
difficult concept to define with precision. The risks range from the consequences of official actions or
important socio-political changes in the borrowing country to largely unpredicateble events such as
natural disasters or external shocks arising from global phenomena like world depression or the
consequences of an oil price rise.

The factors affecting the country risk are best described as a part of the major country risk evaluation
methods banks use for their estimation:

- The checklist approach, which lists economic and political factors believed to be significantly
correlated with loan risk,
- The Delphi method, which uses expert opinion to make an assessment of country risk, and
- Using market interest rates attached to deposits traded in the Eurocurrency makrets to
develop implied risk premium measures for bank loan rates
- Advanced statistical models based on changes in selected key variables, including growth of
the domestic money supply, the ratio of real investment to gross national product and the
ratio of a nation's imports to foreign exchange reserves.

Many analysts also follow the Euromoney Country risk index and the Institutional Investor Index as
well as the International Country Risk Guide published by leading financial magazines taht can help
assess the risk of a loan in a particular country. The country risk is considered when pricing both loans
and deposits to clients from a particular country.

Credit limits are threshold that a creditor allows its clients to owe at any one time without having to
review their credit file, or a maximum amount a bank is willing to risk in an account. Credit limits help
the banks in the following ways:

- It frees up valuable time for other credit management tasks,

- It speeds up the sales process,
- It reduces and improves collection activity and efforts, and
- It is an account monitoring tool

6. Banking supervision is an important segment of banking business. At the national level in BiH,
there are entity banking agencies that supervise banks and adopt operational rules for
implementing the law on banks. Discuss the role and importance of supervisors for
supervising the banking sector. Also, present some of the decisions of the FBiH Banking
Agency. Point out its basic provisions and the intention of the supervisor by brining it!

Regulation of the banking sector is needed to ensure consumer confidence in the financial sector.
The main reasons for financial sector regulation are:

- To ensure systemic stability,

 - To provide smaller, retail clients with protection,
- To protect consumers against monopolistic exploitation

Banking Agency of Federation of Bosnia and Herzegovina shall grant licence only if an amount of the
bank's capital stock has been paid. The main requirement of the Agency is that the minimum amount
of capital in cash of the bank and the lowest amount of net capital which the bank must keep up shall
not be less then KM 15.000.000. The additional requirements of the Agency are:

- It needs to be confident taht the bank will comply with provisions of Law and projections for
the future condition of bank are documented,
- It needs to be confident that the qualifications and experience of the Supervisory Board and
Management of the bank will be appropriate for the banking activities that the bank will be
licensed to engage,
- It needs to be confident that all holders of significant ownership interest are of sufficient
financial stability, and suitable business background

NOTE: Na ovo nisam odgovorio, nisam našao u svojoj literaturi.

7. The lending process is very important in the banking business. On the one hand, the state, or
its entities, through the regulators, make the procedures of the credit process, on the other
hand, individual banks have their own policies and procedures to prescribe the lending
process. List the basic steps of the lending process. Provide and explain aspects of the „6C“
approach to assessing the creditworthiness of clients used by modern banks. What is the
significance of the assessment of the aspect of „character“ when assessing creditworthiness
and why it is important.

Steps in the lending process:

- Finding prospective loan customers,

- Evaluating a prospective customer's character and sincerity of purpose,
- Making site visits and evaluating a prospective customer's credit record,
- Evaluating a prospective customer's financial condition,
- Assessing possible loan collateral and signing the loan agreement
- Monitoring compliance with the loan agreement and other customer service needs

The 6C approach to assessing the creditworthiness of clients used by modern banks consists of the
following aspects:

- Character – the loan officer must be convinced the customer has a well-defined purpose for
requesting credit and a genuine intention to repay. Responsibility, truthfulness, serious
purpose, and serious intention to repay are the variables considered.
- Capacity – the loan officer must be sure that the customer has the authority to request a
loan and the legal standing to sign a binding loan agreement. This customer characteristic is
known as the capacity to borrow money.
- Cash – this feature of any loan application centers on the question: does the borrower have
the ability to generate enough cash – in the form of cash flow – to repay the loan?
- Collateral – in assessing the collateral impact of a loan request, the loan officer must
determine that the borrower possesses adequate net worth or own enough quality assets to
provide adequate support for the loan
 - Conditions – the loan officer and credit analyst must be aware of recent trends in the
borrower's line of work or industry and how changing economic conditions might affect the
loan
- Control – this factor centers on such questions as whether changes in law and regulation
could adversely affect the borrower and whether the loan request meets the lender's and
the regulatory authorities' standards for loan quality

Character is an important aspect to consider since it serves as an action to reduce the risks of default
arising from unethical behavior of prospective clients.

8. Banks in developed financial markets have been facing serious competition in recent years,
from other banks and various financial institutions. The share of banks in the structure of
financial assets is declining. In response to this, and in the context of financial deregulation,
banks are entering „new“ areas by offering products and services of their competitors. State
what such an approach provides to the banks. Which products and services are offered by
banks in developed financial markets. Discuss the perspective of banks, both in the world
and in BiH.

Banking is becoming a more volatile industry due, in part, to deregulation which has opened up
individual banks to the full force of the financial marketplace. At the same time the number and variety
of banking services has increased greately due to the pressure of intensifying competition from
nonbank financial-service providers and changing public demand for more conveniently and reliably
provided services. Adding to the intensity of competition, foreign banks have enjoyed success in their
efforts to enter overseas and attract away profitable domestic business and household accounts.

In general, banks are becoming larger and more complex organizations with more departments and
services and greater specialization. Deregulation and service innovation have accelerated this trend
as intense competition at home and abroad has encouraged banks to become larger organizations,
serving broader and more diversified market areas. Even small banks are reorganizing to meet these
challenges by being more efficient in meeting their broader-based customer needs.

Some of the services offered by banks in developed financial markets are as follows:

- Traditional bank loans,

- Cash management and transaction services,
- Credit and other debt financing facilities – loans, overdrafts, syndicated loans, commercial
paper, bonds and other facilities,
- Commitments and gurantees,
- Foreign exchange and interest-rate transactions,
- Securities underwriting and fund management services,
- Overdraft finance
- Asset-based finance:
o Hired purchase agreements,
o Leasing
- Factoring and invoice discounting,
- Trade crediting,
- Venture capital, etc.

With the development of technology, especially technology related to blockhain and virtual currencies
it is expected that the banking sector will further diversify and enter the world of digital banking in
new ways. Technological innovation, globalization and trends related to conglomeration will force all
banks to enter the market segments closely related to their core services.