1. COMMERCIAL BANKS, INSURANCE COMPANIES, FINANCE HOUSES AND ETC...
3.WEEK
COMMERCIAL BANKS, INSURANCE COMPANIES, FINANCE HOUSES AND ETC...

2. Commercial Banks
Commercial banks are the largest group of financial institutions in terms of total assets
Major assets are loans
Major liabilities are deposits—thus, they are considered depository institutions
Perform services essential to U.S. financial markets
play a key role in the transmission of monetary policy
provide payment services
provide maturity intermediation
Banks are regulated to protect against disruptions to the services they perform
Sources of income;
Interest from the loans made and securities invested in.
Fee Income.
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3. Commercial Bank Assets
Loans generate revenue for banks
They are primary activity of the commercial banks. Bank loans given to business for investment purposes and to individuals for purchases of durable goods. In both ways business activity increaes
In the U.S. commercial and industrial loans are declining because of nonbank substitutes such as commercial paper
mortgages are increasing in importance
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4. Commercial Bank Assets
Commercial loans; S-T, M-T financing activities, A/R, inventory, W.C., Plant and equipment etc.
Consumer Loans: Financing personal expenditures; car, durable goods, credit card loans.
Real Estate: Temporary construction financing, L-T loans to finance residences, office building, factories, outlets.

5. Commercial Bank Assets
Loans are also;
W.C Loan: S-T for support activities of businesses
Term Loan: To finance the purchase of fixed assets, macninery for a period exceeding one year.

6. Commercial Bank Assets
Cash assets are held to meet reserve requirements and to provide liquidity.
Cash; Banks are required to hold some cash to maintain liquidity and realize any withdrawal request by depositors.
Due from banks; Any deposits the bank has placed with other banks.
Central Bank; The banks reserve account holds with the central bank.
Securities; Contains t-bills and government bonds.
Permanent Assets are fixed assets owned by the banks as plant and equipment.

7. Commercial Bank Assets
Commercial banks face unique risks because of their asset structure
credit (default) risk is the risk that loans are not repaid or that the issuer of the security will default.
liquidity risk is the risk that depositors will demand more cash than banks can immediately provide.
interest rate risk is the risk that interest rate changes erode net worth. It is a result of mismatching of A&L with respect to their maturities. The typical problem faced is lending for a longer term than the maturity of the liabilities. This results in a decrease in spread income when interest rates increases.
credit, liquidity, and interest rate risk all contribute to a commercial bank’s level of insolvency risk
Regulatory Risk: The risk of changes in regulations that will effect earnings negatively.
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8. Commercial Bank Liabilities & Equity
Depository Funds: Deposits are the main source of funding. They can be categorized based on;
Maturity
Depositors
Negotiability

9. Commercial Bank Liabilities & Equity
Accoring to maturity, bank deposits are categorized as;
Demand deposits (Checking Account)
Time deposits
One month
Three-month
Six-month
One year

10. Commercial Bank Liabilities & Equity
According to depositors (who makes the deposits);
Saving deposits: made by individuals with no commercial links benefit from SDIF (Savings Deposit Insurance Fund)
Commercial deposits
Interbank deposits
Official deposits
Certificate of Deposits (CDs)

11. Commercial Bank Liabilities & Equity
According to the negotiability;
Negotiable deposits (CDs: Certificates of deposits): To the bearer.
Non-negotiable deposits (All Others): They are evidenced through passbooks. Pass books must be to the name.
CDs emerged in Turkey in the 1980’s. They were seen by some people as tax heaven instruments because of their bearer nature. So that they were banned.

12. Commercial Bank Liabilities & Equity
Non Depository Funds (Borrowed Funds):
Interbank funds borrowed
Repos
Borrowing from;
Central bank (at discount rate)
Other banks
Abroad.

13. Commercial Bank Liabilities & Equity
Minimum levels of equity capital are required by regulators to act as a buffer against losses
common and preferred stock
surplus or additional paid-in capital
retained earnings
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14. ROLES OF THE COMMERCIAL BANKS
The main role of the commercial banks is taking deposits and making loans. Others;
Carrying out currency exchanges
Providing credits by discounting commercial loans
Safekeeping of customer valuables such as gold, securities etc.
Supporting government activities with credit
Purchasing government securities

15. ROLES OF THE COMMERCIAL BANKS
In today’s world, banks increase their services and activities, such as providing;
financial advising to customers who use credits and have savings,
equipment leasing services through which the bank buys the equipment and rent it to customers,
selling insurance policies such as life and non-life,
security brokerage services to their customers through buying bonds and other securities
mutual funds, which usually provide higher returns than that on bank deposits.

16. ROLES OF THE COMMERCIAL BANKS
Broad classification of services:
Individual banking
Institutional banking
Global banking

17. Off-Balance-Sheet Activities
Commercial banks engage in many fee-related activities that are conducted off the balance sheet
guarantees such as letters of credit
future commitments to lend
derivative transactions (e.g., futures, forwards, options, and swaps)
Off-balance-sheet asset
when an event occurs, this item moves onto the asset side of the balance sheet or income is realized on the income statement
Off-balance-sheet liability
when an event occurs, this item moves onto the liability side of the balance sheet or an expense is realized on the income statement
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18. Commercial Banks Retail banking is consumer-oriented
residential and consumer loans are funded by accepting small deposits
community banks specialize in retail banking
Wholesale banking is commerce-oriented
commercial and industrial loans are often funded with purchased funds
regional or superregional banks engage in a complete array of wholesale banking activities
money center banks rely heavily on nondeposit or borrowed sources of funds often borrowed in the federal funds market
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19. Commercial Banks
Because larger banks generally lend to larger corporations, their interest rate spreads and net interest margins are usually narrower than those of smaller banks
interest rate spread is the difference between lending and deposit rates
net interest margin is interest income minus interest expense divided by earning assets
Large banks tend to pay higher salaries and invest more in buildings and premises than small banks
Large banks tend to diversify their operations more and generate more noninterest income than small banks
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20. Industry Performance
U.S. commercial banks flourished during the economic expansion of the 1990s
The economic downturn of the early 2000s caused performance to deteriorate only slightly
By 2003 ROA and ROE had reached all-time highs
In the fourth quarter of 2006 mortgage delinquencies (particularly subprime mortgages) surged
Losses from falling values of subprime mortgages caused fourth quarter 2007 net income to hit a 16-year low
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21. Wholesale Banking Services
Controlled disbursement accounts
Account reconciliation
Lockbox services
Electronic lockbox
Funds concentration
Electronic funds transfer
Check deposit services
Electronic initiation of letters of credit
Treasury management software
Electronic data interchange
Facilitating business-to-business e-commerce
Electronic billing
Verifying identities
Assisting small business entries in e-commerce
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22. Retail Banking Services
Automated teller machines (ATMs)
Point-of-sale (POS) debit cards
Preauthorized debits and credits
Paying bills via telephone
Online banking
Smart cards (stored-value) cards
Internet banking
complements existing business for already existing banks
some new internet-only banks have no “brick and mortar”
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23. International Commercial Banking
Commercial banking has truly become an international and global market
The four largest banks in the world, as of 2007, are from four different countries
UBS Group is a Swiss bank with $1.96 trillion in assets
Barclays Bank is a U.K. bank with $1.96 trillion in assets
BNP Paribas is a French bank with $1.90 trillion in assets
Citigroup is a U.S. bank with $1.88 trillion in assets
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24. International Commercial Banking
Advantages of international expansion
risk diversification
economies of scale
distribute new product innovations internationally
opportunity to find the cheapest and most available sources of funds
service the needs of domestic multinational corporations
regulatory avoidance
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25. International Commercial Banking
Disadvantages of international expansion
information and monitoring costs are generally higher in foreign markets
foreign assets may be subject to nationalization or expropriation by host country governments
the fixed costs of establishing foreign organizations may be extremely high
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26. Global Banking Performance
Banks in most regions of the world posted strong performance in the early and mid-2000s
mortgage lending boosted revenue in France and Spain
as personal bankruptcies rose worldwide, U.K. banks’ profitability was maintained because of diversification
in 2001 the Japanese government backed the purchase of $90 billion of shares of Japanese banks in an attempt to avert a banking collapse
the Chinese state-run banking system deteriorated in the early 2000s, which caused China to ease restrictions on foreign bank operations
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27. Commercial Banks in Turkey (Sep 2011)
State Owned 3
Privately Owned 11
Foreign Banks 17
Banks under DIF 1
Develop. and Inv. Banks 13
State Owned 3
Privately Owned 6
Foreign Banks 4
Sector Total 45

28. Depository Institutions other than Banks in Int. Markets
SAVINGS AND LOANS (S&Ls)
S&Ls were originally allowed to exist in order to gather savings and pool depositor funds to finance home mortgages.
SAVINGS BANKS
A savings bank is an institution similar to an S&L. The asset structure is similar, with the principal assets being residential mortgages. However, because states permitted greater portfolio diversification than was permitted by the federal regulators of S&Ls, state-chartered savings banks faired better during the 1980s.

29. Depository Institutions other than Banks in Int. Markets
CREDIT UNIONS
They are the smallest of the depository institutions.
The purpose of them is to serve their members’ saving and borrowing needs.
They obtain their funds from deposits of their members. The assets of them consist of small consumer loans to their members and credit card loans.

30. INSURANCE COMPANIES They are risk bearers.
Their major task (underwriting Process):
Deciding which applications for insurance they should accept or reject.
Determine how much to charge for insurance if they accept the application.

31. INSURANCE COMPANIES
There are two kinds of sources for the insurance companies;
Initial Underwriting Income (Insurance Premium)
Investment income

32. INSURANCE COMPANIES TYPES OF INSURANCE COMPANIES in Turkey
Life Insurance Companies
Term Insurance
Whole Life Insurance
Other Life Insurer activities;
Private pension funds
Accident and health insurance
Group insurance: providing health insurance coverage to corporate employees.

33. INSURANCE COMPANIES Non-life Insurance Companies fire transport
accident
engineering
agriculture
health

34. INSURANCE COMPANIES
Differences of non-life insurance from life insurance;
Non-life insurance covers a wide variety of activities. However, life insurance is more focused.
Non-life insurance policies often last for a short-term (one year or less) as opposite to the long-term and even permanent life insurance policies.

35. FACTORING COMPANIES
Factoring is a process of purchasing accounts receivables or invoices from a business at a discount.
Factoring companies provide short-term financing service.
They fill the financial gap between the time of selling and collecting receivables.
They have two kinds of income;
Commission (fee)
Advance payment

36. FORFAITING COMPANIES
Forfaiting is a kind of fixed rate medium term financing of international trade of capital goods.
A forfaiting company purchases a series of promissory notes, bills of exchange etc., which are medium or long term especially at a discount on a non-recourse basis.
In Turkey although there are some forfaiting companies, factoring companies are allowed to run forfaiting transactions.

37. LEASING COMPANIES
Leasing is a source of financing, enabling firms to use the fixed assets (machinery, equipment etc.) without any cost. Leasing company purchases the machinery, equipment or other assets for its customer firm.

38. LEASING COMPANIES
The types of products that are subject to leasing are summarized below;
Transport vehicles (Bus, car, ship, aircraft etc.)
Construction machines (Doser, Forklift, etc.)
Machinery and equipment (Manufacturing machines, generator, etc.)
Office Hardware Equipment and Material (computer, fax etc.)
Electronic and optic instruments (security systems, audio-visual-light systems, air condition)
Medical equipment (diagnosis equipment, dental units, optic units etc.)
Real Estate (building)
Tourism equipment (heat-cooling, kitchen-laundry etc.)

39. LEASING COMPANIES
The reasons for preferring leasing over bank credits are;
Firms can purchase these goods without making cash payment but banks require a significant amount of advance payment for the credits of such assets.
While it is possible to extend a lease agreement, banks will require a new loan origination.
The most important reason to choose leasing over bank loans is that the Financial Leasing Agreement is exempted from all types of taxes. Leasing expenses are tax deductible.

40. EXCHANGE BUREAUS (MONEY CHANGERS)
Money changers are not free to engage in any other line of business other than;
buying and selling and changing currencies
importing and exporting precious metals and gems (processed or otherwise)

41. PARTICIPATION BANKS
Participation banks do give almost every service commercial banks run. The main distinction is that these institutions do not receive/pay interest.
Profit (and loss) sharing takes the place of interest payments and/or collections.

42. MONEY LENDERS
They are individuals that engage their own funds in money for interest business, who are required to have had mandates from the Treasury.
These individuals are not free;
to engage in any securities business
to borrow either from banks or money and capital markets
to issue fixed-income securities

43. FINANCE HOUSES Their activities consist of mainly consumer loans.
They are not free;
to take deposits
to issue guarantee letters
but free to issue fixed-income securities and borrow from the Turkish money markets.

44. GENERAL FINANCE CORPORATIONS (GFC)
The purpose for these corporations is to issue asset-backed-securities for public.
GFCs issue asset-backed-securities in return for the following receivables that must be assigned to them.
Consumer credits
Housing loans
Leasing receivables
Export receivables
Promissory notes in the sales portfolios of corporations
Receivables in TC Ziraat Bank’s portfolio as a result of the Agricultural Credit Cooperatives consumer lending
Small business loans of Halk Bank
Promissory notes portfolios of Real Estate Investment Trusts