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Banking 5ppt576
Banking 5ppt576
Banking 5ppt576
AMERICAN COLLEGE
SKOPJE
PRINCIPLES OF BANKING
Chapter 5
Instructror: Tome Nenovski, Ph. D.
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- Innovation forms:
- new products and services; - new organizational forms; - new systems for realizing bank clients orders; - finding new markets for securing liquidity; - changes in financial instruments etc.
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5. BANK INNOVATIONS
- Computer and information technology as innovation source;
- Introducing and developing financial engineering: inbounding some financial instruments to their consisted parts and their rebounding (new packing) in new instruments;
- Introducing financial derivatives (futures, options, swaps); - New possibilities for transfer risk to other subjects; - Final result of introducing innovations: Bank profitability increase.
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5.1.1. Deregulation
- Banks are most regulated institutions within the economy;
- Bank regulator determines what products and services bank can sell, who can govern bank, on which market bank can act etc.;
- Big alternation: Bank deregulation = No limits for interest rates, directing bank credits and narrow bank specialization; possibility for usage new flexible financial instruments (financial derivatives, new off-balance sheet products etc.);
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5.1.2. Competition
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5.1.3. Information technology - Info-technological revolution; - Transfering money and data at the same moment; - Need for changing classic bank organization (narrowing the number of branches); - Internet development (banking on line);
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5.1.4. Globalization - Internationalization and globalization of bank activities; - Global or planet banks;
- Big banks buy majority of shares of a certain bank they are interested in;
- Universal banks are mostly represented in this process.
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5.1.6. Economies of scope - Bank activities diversification; - Broadening bank activities in insurance, brokerage, investment funds; - Additional bank activities, lower costs and higher bank income; - Cross-selling services; - One-stop- banking; - Banks as financial supermarkets.
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f) Electronic banking;
g) Bank innovations in dealing with securities.
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- Instruments for hedging bank risks; - Appeared in 80s and 90s of XX century; - Types: forwards, futures, options and swaps; - More elaboration about these bank innovation in Chapter 7.
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5.2.2. Securitization - Definition: Conversion of part of the bank assets with lowered market value in securities that are acceptable for investors on secondary market; - Transforming part of bank credits into securities, usually bonds Asset backed securities; - Goals: Regulating bank liquidity, hedging interest rate risk, finding income resource, accomplishing capital adequacy obligation etc.; - Securitization process (to be explained);
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5.2.2. Securitization/3 - Bank benefits from securitization: a) Securing liquidity; b) Hedging interest risk;
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5.2.2. Securitization/3
- Usage of securitization for collecting funds on lower price rather than costs for collecting deposits: - Bonds are part of the bank balance sheet; - Bonds obligation are paid by the bank; - Bonds price is lower than deposit price; - The term of bond maturity, usually, is longer than deposit term of maturity The average Liabilities term of maturity becomes longer; - Weaknesses of that kind of securitization: -Need for additional increase the capital amount (Problem with accomplishing capital adequacy level); - Reserve requirement accomplishing problems.
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- Banks sell new credits or credits with term to maturity up to 3 months; - Reasons why banks sell credits: - changing lower yield with higher yield credits; - lowering credit and interest rate risk; - lowering credit exposure; - getting liquid funds needed for investing in higher yield projects etc.
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5.2.5. Credit derivatives - Bank security in a case of inability of a credit pay off; - Credit swaps: Two banks agree to change repaid parts of credits they have extended to their clients; - Advantages of credit swap: - Each bank can disperse its credit portfolio risk; - Spreading bank presence on other markets.
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- Internet;
- Intranet;
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5.2.6. Electronic banking/2 - Virtual banks; - Advantages for banks that have accepted new information technology: 1) Bank competition increase; 2) Economies of scale and economies of scope development (Bank productivity increase and bank costs decrease); 3) Bank organization changes (merger and acquisition); 4) Bank credit rating increases.
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5.2.7. Bank innovations in dealing with securities a) Mutual funds (A way for deposit disintermediation protection); b) Note Issuance Facilities NIF - Revolving underwriting facility; c) Trade banking (temporarily companys shareholder); d) Securities consulting.
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KEY WORDS/TERMS
Bank innovation Financial derivatives Forwards Futures Options Swaps Deregulation Information technology Globalization Economies of scale Economies of scope Competition 26.03.2014 07:15:58 Tome Nenovski, Ph. D.
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KEY WORDS/TERMS/2
Cross-selling services One-stop banking Securitization Selling credits Participative credits Reproach credits Stand by guarantee Performance guarantee Repayment guarantee Credit derivatives Electronic banking Risk hedging Automate teller machine Post of sale POS 26.03.2014 07:15:58 Tome Nenovski, Ph. D.
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KEY WORDS/TERMS/3
Electronic funds transfer at the point of sale EFTPOS Home banking Mutual funds Note issuance facilities NIF Trade banking
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CHECKING QUESTIONS
1. 2. 3. 4. 5. 6. 7. 8. 9. What are the main reasons for bank innovation appearence? In which forms do innovations appear? What is the final result of introducing bank innovations? What are the main factors that create innovations? What does deregulation consist of? Explain price and product competition. What is hideen behind information technology? Define bank globalization. Define economies of scale.
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CHECKING QUESTIONS/2
11. Define securitization. 12. What are bank benefits from securitization? 13. Why banks sell credits? 14. Enumerate types of selling credits. 15. Explain the meaning of performance and repayment guarantee. 16. How does credit swap function? 17. How does credit option function? 18. What are the main characteristics of electronic banking? 19. What are mutual funds?
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