money
FUNCTIONS OF BANKING CAPITAL:
1. increases the credibility in a bank 2)mkes sure the bank has funds bf it starts collecting deposits,3)works as absorber against risks and losses in a business4) K means + growth so capital is a source of growth of a bank5)for regulator it can be a way to control the growth of a bank
WHAT CONSTITUTES BANK CAPITAL
Capital (Net Worth = A – L)
Total Equity Capital is the sum of: 1) Surplus 2)Undivided profits and capital reserves 3)Preferred stock 4)Common stock (acciones communes)5)Net unrealized holding gains (losses) on available-for-sale securities
BASEL STANDARDSThe Basel Agreement grew to include risk-based capital standards for banks in 12 industrialized countries. Today most countries in the world have adopted the Basel capital requirement standard.a bank’s minimum capital requirement is linked to its credit risk with the main idea:The greater the credit risk, the greater the required capital
– RWA
RISK-WEIGHTED ASSETS’s an aggregated measure of different risk factors affecting the evaluation of financial products. All the risk components are considered together to “correct” the nominal value of financial assets. In this way, a proper measure of the extent to which the underlying risk is increasing or decreasing the accounting value of financial assets is generated.
Capital Adequacy Ratio= Capital (Tier1+Tier2)/RWA
RWE = Risk Weighted Assets
– CAPITAL ADEQUACY
Different perspective on how much capital is adequate:
1 perspective: Regulators that prefer + capital because it reduces the likelihood of bank failures and increases bank liquidity2 perspectives: Bankers thatprefer – capital because:Lower capital increases ROE, all other things the same
T 5
LOAN TYPES:
uAnnuity loans(in retail loan portfolio): Annuities are the same (just the proportion of interest and principal is changing)
uBullet loans Ideal for RE projects. principal is maturity
uAmortization loans used in corporate financePrincipal is amortized due to life of the loan
– steps in the lending policy?1. Loan requests. 2. Customers fill out a loan application.3. An interview with a loan officer to assess the customer’s character and sincerity of purpose. 4 Site visits5. Credit References:Contact with others creditors 6. Loan Evaluation:complete financial statements anResolutions of directors authorizing the negotiation of a loan with the bank.7. Credit Analysis of cash flows and backup assets8. Access to the guarantee if the loan agreement is defaulted 9Preparation and signature of document10. Loan Monitoring: to ensure that the terms of the loan are being followed and that all required payments are being made.
– Interest rate parity theory
A theory in which the interest rate difference between two countries (A and B) is equal to the difference between the forward exchange rate and the spot exchange rate. Interest rate parity plays an essential role in foreign exchange markets, connecting interest rates, spot exchange rates and foreign exchange rates.
When they are equal there is no room for arbitrage:(Forward rate / spot rate) = (1 + interest rate A) / (1 + interest rate B)
– types of FX regimes
1) Monetary union 2)Fixed exchange rate regime: (Value of a currency is pegged relative to the value of one other currency) 3) Floating exchange rate regime (Value of a currency is allowed to fluctuate against all other currencies) 4) Managed float regime (dirty float): Attempt to influence exchange rates by buying and selling currencies
managed floating regime: A managed floating exchange rate is a regime that allows an issuing central bank to intervene regularly in FX markets in order to change the direction of the currency’s float and shore up its balance of payments in excessively volatile periods. This regime is also known as a “dirty float”.
currency board regime: a C. B agreement is “a monetary regime based on an explicit legislative commitment to exchange domestic currency for a specific foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority”. A currency board is an exchange rate regime based on the full convertibility of a local currency into a reserve one, by a fixed exchange rate and 100 percent coverage of the monetary supply backed up with foreign currency reserves. For currency boards to work properly, there has to be a long-term commitment to the system and automatic currency convertibility.
– Loose monetary policy: A loose monetary policy occurs when the money supply is expanded and is easily accessible to citizens to encourage economic growth.
Tight monetary policy: Tight, or contractionary, monetary policy is a course of action undertaken by a central bank such as the Federal Reserve to slow down overheated economic growth to constrict spending in an economy that is seen to be accelerating too quickly or to curb inflation when it is rising too fast.
– Traditional tools of monetary policy
Open Market Operations: the Central Bank can change the amount of reserves in the banking system by its purchases and sales of government securities issued by the Government
Discount rate: interest rate the Central Bank charges to member banks on loans
Reserve requirements enable central banks to control money supply and thus ensure monetary stability and the liquidity of individual banks and the banking system as a whole as well as the smooth functioning of the payment system
– monetary policy and inflation: In the short run many factors can affect inflation beside monetary policy. In the long run there is a relatively stable relationship between excess growth in the money supply and inflation.
– why do we need customers’ protection
consumers may be subjected to opportunistic behavior and excessive prices by financial institutions that possess considerably more information. For example, if banks were not required to disclose the costs and terms of loans in a standardized format, consumers would not be able to readily compare one potential transaction with another, leading them to pay more than they should for credit or opt out of the
Moreover, financial markets may not allocate credit in a way that is reflective of full and impartial access to credit markets. Regulatory standards prohibiting such discrimination are one way to help ensure that all individuals have adequate access to credit.