Upload
samanthafox
View
1.326
Download
0
Tags:
Embed Size (px)
DESCRIPTION
Citation preview
1
International Banking
2
Types of Banking
Central BanksCommercial Banking
Retail Banking Wholesale Banking Private Banking
Investment BankingMortgage BanksIslamic Banks
3
Money – Over 2000 years ago
Banking: 13th-15th CenturiesLombardy and Florence 1463: First Bill of Exchange
Medici Bank
Banknotes: London Goldsmiths17th Century
New World: Gold and Silver Ports become important centres
Merchant Banking: 18th CenturyBaring Brothers
Joint Stock Banks:19th Century
4
5
Role of Banks
Major role in financial system, Keynes (1930).
Central intermediary between savers and borrowers: Fractional reserve banking
Balance Sheet Assets. Liabilities. Net Worth (profitability).
6
Economic functions of banks
Medium of Exchange
Maturity transformation
Risk transformation
7
Commercial BankingSummary Bank Balance Sheet
Assets Liabilities
Cash
Money market funds
Other securities
Lending
Shareholders funds
Deposits
Borrowing
See HBOS Balance Sheet
8
Bank Balance Sheet
Security
Liquidity
Profitability
9
Risk Management
Liquidity Risk
Credit Risk
Market Risk
10
Reserve Requirements
UK: No stipulated reserve requirements
USA: Monetary Control Act (1980) Federal Reserve can impose reserve requirements
If a deficit occurs, bank’s borrow from Central Bank
Interbank Market
11
Liquidity Risk
Liquidity Ratios Ratio of liquid assets to total deposits
Banks should have internal risk management systems:
Percentage of deposits covered by: Cash Money at call Short-term securities Long-term investments
‘Run on a bank’
12
Credit Rationing
Credit market: “thin”. Borrowers offered a price-quantity package on
a “take it or leave it” basis. Excess demand exists at the prevailing price. Conventional response is to raise price. Banks don’t. Conduct Credit Rationing.
13
Pure Debt Contracts
All returns beyond a certain point accrues to borrowers.
Downside losses are shared.Thus, optimal risk for borrowers > bank.Banks don’t have perfect information
about borrower’s investment / attitude to risk.
Classic asymmetric information.
14
Asymmetric Information
Adverse Selection: Increasing interest rates will deter safe
borrowers. Leave banks with risky ones.
Moral Hazard One party changes behaviour contrary to the
interests of the other. With limited liability, pure debt contracts may
encourage borrowers to take more risks than if they were using their own money.
15
Forms of Credit Rationing (Keeton; 1979)
1) Bank lends out a proportion of the requirements.
2) Loan is refused completely.May also be supplementary conditions:
security. Limit on use to which funds are put.
Solution of credit rationing due to nature of pure debt contract.
16
Implications
Economics of information argue that banks exist because they are better at acquiring and processing information.
Solution to the pure debt contract: play a repeated game. If a borrower is going to borrow more than
once. There is an incentive to be honest.
17
Credit Risk
Capital Ratios Ratio of capital to lending Basel Committee (BIS)
Exposure Rules
Risk management Portfolio Diversification Risk Assessment
Increasing capital ratios Increased capital Reduced assets (lending)
18
‘Capital’
Tier 1
Shareholders’ equity Retained profits Tier 2
Revaluation reserves
19
Risk-weighted example
Assets Value (£mn)
Risk Weighting (%)
Risk weighted value (£mn)
Cash 100 0 -
Gilts 200 10 20
Mortgages 1000 50 500
Loans 2000 100 2000
Total 3300 2520
Tier 1 Capital 151.20
Total Capital 226.8
20
Capital Ratios
Tier 1 =
Total =
%6100*2520
2.151
%9100*2520
8.226
21
Deregulation / Liberalisation
NYSE- May Day (1975)LSE – ‘Big Bang’ (1986)Bank and Building Society Act (1986)Single European Market (1992)Japan – ‘Big Bang’ (1990 onwards)USA- Gramm-Leach-Billey (GLB) Act
(1999)
22
‘Off-Balance Sheet’ Transactions
Traditional Banking activities became very competitive Narrow profit margins
Looked for alternative sources of profitTransactions are not included on current
balance sheet. Avoid regulatory costs Greater risks
23
Balance Sheets
Off-balance sheet assetsOff-balance sheet liabilities
Securitisation Collateralised Debt Obligations (CDOs)
Credit Default Swap (CDSs) Insure against credit risk
24
Implications
Risky investmentsFinancial Institutions
Insufficient capital to cover assets
Wider EconomyLack of Credit
Low investment Eventual decline in output and employment
25
Issues
Risk-management issues
Poor risk management Credit ratios too low