Chapter 2 The Banking Sector Websites: http://www.apra.gov.au http://www.asic.gov.au http://www.accc.gov.au Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger.
Download ReportTranscript Chapter 2 The Banking Sector Websites: http://www.apra.gov.au http://www.asic.gov.au http://www.accc.gov.au Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger.
Chapter 2 The Banking Sector Websites: http://www.apra.gov.au http://www.asic.gov.au http://www.accc.gov.au Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 1 Learning Objectives • Evaluate the functions and activities of commercial banks • Identify the main sources and uses of funds and reasons for changes • Analyse the importance of changes in the role of banks on the financial system Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 2 Learning Objectives (cont.) • Examine the market structure of the banking sector • Outline the nature and importance of banks off-balance-sheet (OBS) business • Consider the regulation and prudential supervision of banks Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 3 Chapter Organisation 2.1 2.2 2.3 2.4 2.5 2.6 2.7 Introduction Functions of Banks Sources of Funds Uses of Funds Off-balance-sheet Business Regulation and Prudential Supervision Summary Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 4 2.1 Introduction • Banking Act 1959 (Cwlth) – Authorises a financial institution to operate as a bank • Three categories of banks – Incorporated banks: domestic and foreign – Unincorporated foreign bank branches – Foreign bank representative offices Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 5 2.1 Introduction (cont.) • Importance of banks – Largest share of assets of all institutions Share declined 1950s to mid-1980s due to regulation which • • – – constrained development of banks supported evolution and growth in NBFIs Role in international financial markets Increase in managed funds activities and OBS business Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 6 2.1 Introduction (cont.) Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 7 Chapter Organisation 2.1 2.2 2.3 2.4 2.5 2.6 2.7 Introduction Functions of Banks Sources of Funds Uses of Funds Off-balance-sheet Business Regulation and Prudential Supervision Summary Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 8 2.2 Functions of Banks • Asset management (−1980s) – Loans portfolio is tailored to match the available deposit base • Liability management (1980s−) – Deposit base and other funding sources are managed to fund loan demand Commercial bill market Provision of other financial services OBS Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 9 Chapter Organisation 2.1 2.2 2.3 2.4 2.5 2.6 2.7 Introduction Functions of Banks Sources of Funds Uses of Funds Off-balance sheet Business Regulation and Prudential Supervision Summary Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 10 2.3 Sources of Funds • Sources of funds appear in the balance sheet as either liabilities or shareholders funds • Banks offer a range of deposit and investment products with different mixes of liquidity, return, maturity and cash flow structure to attract the savings of surplus entities Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 11 2.3 Sources of Funds (cont.) • Current deposits – Funds held in a cheque account – Highly liquid – May be interest or non-interest bearing • Call or demand deposits – Funds held in savings accounts that can be withdrawn on demand – e.g. passbook account, electronic statement account with ATM and EFTPOS Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 12 2.3 Sources of Funds (cont.) • Term deposits – Funds lodged in an account for a predetermined period at a specified interest rate Term: one month to five years Loss of liquidity due to fixed maturity Higher interest rate than current or call accounts Generally fixed interest rate Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 13 2.3 Sources of Funds (cont.) • Negotiable certificates of deposit (CDs) – Paper issued by a bank in its own name – Issued at a discount to face value – Specifies repayment of the face value of the CD at maturity – Highly negotiable security – Short term (30 to 180 days) Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 14 2.3 Sources of Funds (cont.) • Bill acceptance liabilities – Bill of exchange – A security issued into the money market at a discount to the face value. The face value is repaid to the holder at maturity Acceptance Issuer of bill agrees to pay bank face value of bill, plus a fee, at maturity date Acceptance by bank guarantees flow of funds to its customers without using its own funds Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 15 2.3 Sources of Funds (cont.) • Debt liabilities – Medium- to longer-term debt instruments issued by a bank Debenture • A bond supported by a form of security, being a charge over the assets of the issuer (e.g. collateralised floating charge) Unsecured note • A bond issued with no supporting security Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 16 2.3 Sources of Funds (cont.) • Foreign currency liabilities – The issue of debt instruments into the international capital markets that are denominated in a foreign currency allows diversification of funding sources into international markets facilitates matching of foreign exchange denominated assets meet demand of corporate customers for foreign exchange products Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 17 2.3 Sources of Funds (cont.) • Loan capital – Sources of funds that have the characteristic of both debt and equity (e.g. subordinated debentures and subordinated notes) Subordinated means the holder of the security has a claim on interest payments or the assets of the issuer, after all other creditors have been paid (excluding ordinary shareholders) Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 18 Chapter Organisation 2.1 2.2 2.3 2.4 2.5 2.6 2.7 Introduction Functions of Banks Sources of Funds Uses of Funds Off-balance-sheet Business Regulation and Prudential Supervision Summary Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 19 2.4 Uses of Funds • Uses of funds appear in the balance sheet as assets • The majority of bank assets are loans which give rise to an entitlement to future cash flows, i.e. interest and repayment of principal Lending to government Commercial lending Personal finance Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 20 2.4 Uses of Funds (cont.) • Lending to government – Treasury notes – Short-term discount securities issued by the Commonwealth Government Treasury bonds Medium- to longer-term securities issued by the commonwealth government that pay a specified interest coupon stream State government debt securities – Low risk and low return – Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 21 2.4 Uses of Funds (cont.) • Commercial lending (business sector and other financial intermediaries) – Fixed-term loan A loan with negotiated terms and conditions • • • • Period of the loan Interest rates – Fixed or variable rates set to a specified reference rate (e.g. BBSW) Timing of interest payment Repayment of principal Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 22 2.4 Uses of Funds (cont.) – Overdraft – Bank bills held – A facility allowing a business’s operating account into debit up to an agreed limit Bills of exchange (see slide 15) accepted and discounted by a bank and held as assets A rollover facility is where a bank agrees to discount new bills over a specified period as existing bills mature Leasing Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 23 2.4 Uses of Funds (cont.) • Personal finance – Housing finance – – – Mortgage Amortised loan Investment property Fixed-term loan Credit card • Other bank assets (e.g. infrastructure, shares in controlled entities) Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 24 Chapter Organisation 2.1 2.2 2.3 2.4 2.5 2.6 2.7 Introduction Functions of Banks Sources of Funds Uses of Funds Off-balance-sheet Business Regulation and Prudential Supervision Summary Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 25 2.5 Off-balance-sheet Business • OBS transactions are a significant part of a bank’s business • OBS transactions include – Direct credit substitutes – Trade and performance-related items – Commitments – Market rate-related transactions Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 26 2.5 Off-balance-sheet Business (cont.) • Direct credit substitutes – An undertaking by a bank to support the financial obligations of a client (e.g. ‘stand-by letter of credit’) The bank acts as guarantor on behalf of a client for a fee Client has a financial obligation to a third party Bank is only required to make a payment if the client defaults on a payment to a third party Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 27 2.5 Off-balance-sheet Business (cont.) • Trade and performance-related items – A form of guarantee provided by a bank to a third party, promising financial compensation for non-performance of commercial contract by a bank client Examples • • Documentary letters of credit Performance guarantees Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 28 2.5 Off-balance-sheet Business (cont.) • Commitments – The contractual financial obligations of a bank that are yet to be completed or delivered Bank undertakes to advance funds or make a purchase of assets at some time in the future Examples • Forward purchases • Underwriting Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 29 2.5 Off-balance-sheet Business (cont.) • Market rate-related transactions – The use of derivative products to manage exposures to foreign exchange risk, interest rate risk, equity price risk and commodity risk, i.e. hedging – Examples – Futures, options, foreign exchange contracts, currency swaps, forward rate agreements (FRAs) Also used for speculating Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 30 2.5 Off-balance-sheet Business (cont.) • Volume of OBS business – At June 2001, the face value of OBS business undertaken by banks in Australia was over six times the level of total assets – Over 92% of OBS business is based on market rate-related transactions Nature and size of contracts combined with the volatility and speed of contract repricing has resulted in extraordinary losses Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 31 Chapter Organisation 2.1 2.2 2.3 2.4 2.5 2.6 2.7 Introduction Functions of Banks Sources of Funds Uses of Funds Off-balance-sheet Business Regulation and Prudential Supervision Summary Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 32 2.6 Regulation and Prudential Supervision • Objectives of regulation and prudential • • • • supervision Wallis Report Capital adequacy requirements Liquidity management Other regulatory and supervisory controls Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 33 Objectives of regulation and prudential supervision • Reasons for regulation of banks – Importance of the banking sector for health of the economy • Prudential supervision – Control of the money supply – The imposition and monitoring of standards designed to ensure the soundness and stability of the banking sector Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 34 Wallis Report • Inquiry into the Australian Financial System with a focus on – – – – the effect of compulsory superannuation and changing savings patterns on customer needs technology facilitating easy access to a greater range of financial products the need for a change in regulatory framework motivated by financial market globalisation and the Campbell Report findings the changing financial landscape due to the evolution of business needs, financial markets and products Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 35 Wallis Report (cont.) • Post-inquiry Regulatory Structure – Australian Securities and Investments Commission (ASIC) – Australian Prudential Regulation Authority (APRA) – New prudent regulator of deposit-taking institutions (previously RBA) Australian Competition and Consumer Commission (ACCC) – Market integrity and consumer protection Competition policy RBA System stability and monetary policy Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 36 Capital adequacy requirements (cont.) • Capital Standards – Bank for International Settlements (BIS) developed international capital adequacy requirements (1988) – Adopted in all major industrial countries (including Australia) – Banks required to hold minimum 8% capital to risk-weighted assets and OBS items Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 37 Capital adequacy requirements (cont.) • Capital measured in two tiers Tier 1: core capital • • e.g. ordinary shares, general reserves, retained earnings tier 1 capital required to be at least 50% of bank’s required capital base Tier 2: supplementary capital • • upper tier 2: e.g. asset revaluation reserves perpetual subordinated debt lower tier 2: e.g. term subordinated debt Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 38 Capital adequacy requirements (cont.) • Risk Weighting of Balance Sheet Assets Asset risk weightings are based on the counterparty to the transaction • 0% notes and coins, claims against central governments and central banks • 20% • 50% 100% claims against local governments, domestic banks and international banks loans secured by residential mortgages all other assets and claims against counterparties • Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 39 Capital adequacy requirements (cont.) • Application of Asset Risk Weightings Asset type Cash and cwth govt securities Loans to local govt Housing loans Loans to corporations TOTAL Asset value ($billion) 2 000 1 000 24 000 20 000 47 000 Risk weight (%) Risk-weighted asset value ($billion) 0 20 50 100 0 200 12 000 20 000 32 200 Total capital requirement: 8% x $32 200 billion = $2576 billion Tier 1 capital requirement: $32 200 x 4% = $1288 billion To fund these assets, the bank requires $2576 in capital. The remaining $44 424 billion could be raised as liabilities Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 40 Capital adequacy requirements (cont.) • OBS Credit Conversion STEP 1: Convert face value of OBS transactions to on-balance sheet equivalents 100% Direct credit substitutes, sales and repurchase agreements 50% Performance-related contingencies, note issuance facilities, underwriting 20% Trade-related contingencies, including documentary letters of credit, acceptance of trade bills 0% Commitments with residual maturity less than one year – STEP 2: Apply risk-weightings based on counterparty – Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 41 Capital adequacy requirements (cont.) • OBS Credit Conversion OBS items Financial guarantees issued on behalf of corporations Performance bonds for state governments Housing loan approvals Documentary letters of credit issued for corporations TOTAL Face value of contract ($m) Credit conversion factor (%) Credit equivalent ($m) 700 100 700 500 50 250 100 20 2000 50 2000 250 3450 3000 The asset risk-weightings are then applied to the credit equivalent column (as per the on-balancesheet items) Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 42 Liquidity management • Liquidity – Access to sufficient funds for a bank to meet its business operating commitments • APS210-Liquidity – Replaced PAR and LGS – Emphasis on bank’s own internal liquidity management practices – APRA reserves the right to specify minimum level of liquid assets Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 43 Other regulatory and supervisory controls • Risk management systems certification • Audit • Disclosure and transparency • Large exposure • Foreign currency exposures • Ownership and control Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 44 Chapter Organisation 2.1 2.2 2.3 2.4 2.5 2.6 2.7 Introduction Functions of Banks Sources of Funds Uses of Funds Off-balance-sheet Business Regulation and Prudential Supervision Summary Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 45 2.7 Summary • Banks are the dominant institution and have moved to liability management • Sources of funds include deposits (current, call and term deposits) and non-deposit sources (bill acceptances, debt and foreign currency liabilities, OBS business and other services) • Uses of funds include government, commercial and personal lending Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 46 2.7 Summary (cont.) • OBS transactions are a major part of a bank’s business and include direct credit substitutes – trade and performance-related items – commitments – market rate-related transactions – • APRA’s bank prudential supervision requirements include capital adequacy, liquidity management and other controls Copyright Copyright 2003 2003 McGraw-Hill McGraw-Hill Australia Australia Pty Ltd PtyPPTs Ltd t/a PPT Slides t/a Financial Institutions, FinancialInstruments Accountingand by Willis Markets 4/e by Christopher Viney Slides Slidesprepared preparedbyby Anthony Kaye Watson Stanger 47