Management of a Bank’s Equity capital Position

Slides:



Advertisements
Similar presentations
Chapter Fifteen The Management of Capital Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
Advertisements

Credit Derivatives.
Chapter 6 The capital play an important role in both starting a bank and insuring its survival. Directors and managers of banks, customers and regulatory.
Part 6 Financing the Enterprise © 2015 McGraw-Hill Education.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Capital Adequacy Chapter 20
Capital Adequacy Chapter 20 © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin.
CAPITAL ADEQUACY Class 12, Chap Lecture outline 2  Introduction to capital adequacy  What is it and why is it important  What are the costs and.
Basel III and Indian Banking System By Prof. (Dr.) Divya Gupta IMIS, Bhubaneswar.
Basel III.
CHAPTER TEN Liquidity And Reserve Management: Strategies And Policies
Chapter 9 The Effective Use of Capital
The Effective Use of Capital
Drake DRAKE UNIVERSITY Fin 288 Credit Derivatives Finance 288 Futures Options and Swaps.
Chapter Six Measuring and Evaluating the Performance of Banks and Their Principal Competitors.
McGraw-Hill /Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Twelve Commercial Banks’ Financial Statements and Analysis.
Functions and Forms of Banking Outline –What is a bank? –What do banks do for their customers? –Why do banks perform those services? –How do banks compare.
Chapter Two Banking Background. Who is in charge of the banks? Germany: Federal Supervisory Authority (BaFin) France: Banking Commission Switzerland:
Ch 9: General Principles of Bank Management
Capital Requirements for Banks Tier 1 capital is related to common stocks, non- cumulative perpetual preferred stocks, and disclosed reserves Tier 2 capital.
Chapter 17 Banking and the Management of Financial Institutions.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
The International Financial System
McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Chapter Fifteen The Management of Capital.
Chapter Fifteen The Management of Capital Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
The Effective Use of Capital
McGraw-Hill/Irwin 20-1 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Importance of Capital Adequacy Absorb unanticipated losses and preserve.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
CHAPTER FOUR The Financial Statements of Banks and Some of Their Closest Competitors The purpose of this chapter is to acquaint the reader with the content,structure.
CHAPTER EIGHT Asset-Backed Securities, Loan Sales, Credit Standbys, and Credit Derivatives: Important Risk Management Tools for Banks and Competing Financial-Service.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Capital Adequacy Chapter 20 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. K. R. Stanton.
CHAPTER FOURTEEN The Management Of Capital The purpose of this chapter is to discover why capital – particularly equity capital – is so important for.
Basel Capital Adequacy Framework
McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Chapter Five The Financial Statements of Banks and Their Principal Competitors.
11 Chapter 5: Balance Sheet and Supplemental Disclosures (omit SCF)
IFRS and Basel 2 Ian Michael Accounting and Auditing Policy Department
Chapter Five The Financial Statements of Banks and Their Principal Competitors Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
Banking, Investing and Insurance BUSINESS AND BANKING AND PROFITABILITY.
CHAPTER Three The Management Of Capital. Tasks Performed By Capital Provides a Cushion Against Risk of Failure Provides Funds to Help Institutions Get.
Stockholders’ Equity Three primary forms of business organization The Corporate Form of Organization ProprietorshipPartnershipCorporation.
RATING OF BANKS. Business Risk of Banks Business risk –Operating risk –Regulatory risk –Environmental risk –Ownership structure –Government support –Governance.
1 MCF 304: Bank Management Lecture 3.1 Bank’s Capital Management.
Basel Committee Norms. Basel Framework Basel Committee set up in 1974 Objectives –Supervision must be adequate –No foreign bank should escape supervision.
1 Banking Risks Management Chapter 8 Issues in Bank Management.
Fin 464 Chapter 15: The Management of Capital. Introduction What is capital? ▫ Funds contributed by the owners of a financial institution ▫ The long-term.
Introduction (5) Bank financial statements (1) Balance Sheet (B) Liabilities  Two major categories of liabilities are included in the balance sheet: (1)
1 COMMERCIAL BANK MANAGEMENT 1. 2 MEASURING AND EVALUATING THE PERFORMANCE OF BANKS PERFORMANCE REFERS TO HOW ADEQUATELY A BANK MEETS THE OBJECTIVES IDENTIFIED.
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.1 CHAPTER 3 Depository Institutions.
RISK MANAGEMENT SYSTEM
The Management of Capital
Chapter 20 Capital Adequacy.
Chapter Thirteen Depository Institutions’ Financial Statements and Analysis.
Banking and the Management of Financial Institutions
Chapter 9 Banking and the Management of Financial Institutions
CHAPTER FOUR The Financial Statements of Banks and Some of Their Closest Competitors
Capital Regulations and Management Chapter 6
CHAPTER TEN Liquidity And Reserve Management: Strategies And Policies
Commercial Bank Operations
CHAPTER FOURTEEN The Management Of Capital
Well – Come to Treasury Management
Kuveyt Turk Participation Bank
Banking and the Management of Financial Institutions
Banking and the Management of Financial Institutions
CHAPTER TEN Liquidity And Reserve Management: Strategies And Policies
CHAPTER FOUR The Financial Statements of Banks and Some of Their Closest Competitors
Copyright © 2002 Pearson Education, Inc.
Chapter 9 Banking and the Management of Financial Institutions
FINANCING A BUSINESS Chapter Goals:
Accounting for Assets Cash Flows.
Presentation transcript:

Management of a Bank’s Equity capital Position Chapter: 15 Management of a Bank’s Equity capital Position M. Morshed

Capital The long-term funds coming from debt & equity that support a bank’s long-term assets & absorb its earnings losses. M. Morshed

Bank Capital & Risk Credit or Default Risk. Liquidity Risk. Interest Rate Risk. Operating Risk. Exchange Risk. Crime Risk (The danger that a bank will lose funds as a result of robbery or other crimes committed by its customers or employees) M. Morshed

Bank Defense Against Risk Quality Management Diversification Portfolio Diversification (spreading out a bank’s credit accounts & deposits among wide variety of customers) Geographical Diversification (seeking out customers located in different communities or countries) Deposit Insurance Owners’ Capital M. Morshed

Types of Bank Capital Common Stock Preferred Stock Surplus (excess of stock’s par value known as premium) Undivided Profits (retained earnings) Equity Reserves (for contingencies purposes) Subordinated Debentures Minority Interest in consolidated subsidiaries. Equity Commitment Notes (debt securities repayable only from the sale of stock) M. Morshed

How Could Bank Raise Capital? Raising Capital Internally - Dividend Policy (Retention and dividend payout ratio) Raising Capital Externally Selling Common Stock. Issuing Preferred Stock Issuing Subordinated Notes & Debentures Selling Assets & Leasing Facilities Swapping Stock for Debt Securities. M. Morshed

Measuring the Size of Bank capital Book or GAAP Capital: Book or GAAP Capital = Book Value of bank Assets – Book Value of bank Liabilities. = Par value of Equity Capital + Surplus + Undivided Profits + Reserves for losses on loans & leases. RAP Capital: Regulatory capital as spelled out by RAP (Regulatory Accounting Principles) RAP Capital = Stockholders’ Equity + Perpetual Preferred Stock + Bad-debt reserves for losses on loans & leases + Subordinated debentures + Minority Interest M. Morshed

Measuring the Size of Bank capital Market-Value Capital: Market-Value Capital (MVC) = Market value of bank assets (MVA) – Market value of bank liabilities (MVL) = Current market price per share of stock outstanding X Number of equity shares issued & outstanding M. Morshed

How Much Capital Does a Bank Need? Reasons for Capital Regulations: To limit the risk of bank failure. To preserve public confidence in banks. To limit losses to the government arising form deposit insurance claims. Research Evidence Private market place is probably more important than government regulation in the long run in determining the amount & type of capitals bank holds. M. Morshed

How Much Capital Does a Bank Need?-----Contd The Judgment Approach: This requires viewing each bank within the context of its own market environment & looking at several different dimensions of internal & external conditions surrounding the bank. Assessment is based on following parameters: Management Quality Asset liquidity. Earnings history. Quality of ownership Occupancy of operating procedures. Deposit volatility. Local market conditions. M. Morshed

How Much Capital Does a Bank Need?-----Contd The Imposition of Minimum Capital Requirements: As per International Lending & Supervision Act of 1983, Imposition of minimum capital requirements upon all banks & called for special reserves behind their foreign loans. The centerpiece of this minimum capital program was the concept of: Primary Capital (common stock, perpetual preferred stock, surplus, undivided profits, capital reserves, mandatory convertible debt, loan & lease losses reserves & minority interest in consolidated subsidiaries less equity commitment notes & intangible assets. ) Secondary Capital (limited preferred stock, subordinated notes & debentures, mandatory convertible debt instruments) M. Morshed

How Much Capital Does a Bank Need?-----Contd Basel Agreement I (1988): An international treaty involving the U.S., Canada, Japan & the nations of Western Europe to impose common capital requirements on all banks in those countries. Under the terms of this agreement, sources of bank capital were divided into two tiers: Tier 1 Capital (core capital) includes common stock & surplus, undivided profits, qualifying noncummulative perpetual preferred stock, minority interest, selected identifiable intangible assets less goodwill & other intangible assets. Tier 2 Capital (supplemental capital) includes the allowance for loan & lease losses, subordinated debt capital instruments, mandatory convertible debt, intermediate term preferred stock, cumulative perpetual preferred stock, equity notes & other long term capital instruments. M. Morshed

How Much Capital Does a Bank Need?-----Contd Basel Agreement requires a banker to divide each contract’s risk exposure to the bank into two categories: Potential Market Risk Exposure: The danger of bank loss at some future time if the customer who entered into a market based contract with the bank fails to perform. Current Market Risk Exposure: To measure the risk of loss to the bank should a customer default today on its contract, which would compel the bank to replace the failed contact with a new one. M. Morshed

How Much Capital Does a Bank Need?-----Contd Basel Agreement II (2004): The New Basel Capital Accord, often referred to as the Basel II Accord or simply Basel II, was approved by the Basel Committee on Banking Supervision of Bank for International Settlements in June 2004 and suggests that banks and supervisors implement it by beginning 2007, providing a transition time of 30 months. It is estimated that the Accord would be implemented in over 100 countries, including India. Basel II takes a three-pillar approach to regulatory capital measurement and capital standards – Pillar1 (minimum capital requirements); Pillar 2 (supervisory oversight); and Pillar 3 (market discipline and disclosures). M. Morshed

Basel II…………Contd. Pillar 1 spells out the capital requirement of a bank in relation to the credit risk in its portfolio, which is a significant change from the “one size fits all” approach of Basel I. Pillar 1 allows flexibility to banks and supervisors to choose from among the Standardized Approach, Internal Ratings Based Approach, and Securitization Framework methods to calculate the capital requirement for credit risk exposures. Besides, Pillar 1 sets out the allocation of capital for operational risk and market risk in the trading books of banks. M. Morshed

Basel II…………Contd. Pillar 2 provides a tool to supervisors to keep checks on the adequacy of capitalization levels of banks and also distinguish among banks on the basis of their risk management systems and profile of capital. Pillar 2 allows discretion to supervisors to (a) link capital to the risk profile of a bank; (b) take appropriate remedial measures if required; and (c) ask banks to maintain capital at a level higher than the regulatory minimum. M. Morshed

Basel II…………Contd. Pillar 3 provides a framework for the improvement of banks’ disclosure standards for financial reporting, risk management, asset quality, regulatory sanctions, and the like. The pillar also indicates the remedial measures that regulators can take to keep a check on erring banks and maintain the integrity of the banking system. Further, Pillar 3 allows banks to maintain confidentiality over certain information, disclosure of which could impact competitiveness or breach legal contracts. M. Morshed