Bank Operation

Functions, Facilities
and
Services
 FUNCTIONS
Deposit
1. As institutional requirement
(Incorporation, maintenance margin, ESCROW,
Sinking Fund)
2. to avail its other services
(Loan, SDB, Bills Purchase)
3. for safekeeping
4. interest generation

Late for Clearing/Special Clearing

Contingent Accounts / ADB
 Commercial and Universal
Average Daily Balance:
  = totals each day's ending transaction value in
an account for the cycle and divides by the
total number of days in the cycle
Example:
Assume that a savings deposit recorded the following
transactions:
10/14 --- NA 50,000
10/20 …. 20,000
10/25 …. 10,000
What would be the client’s ADB?
 FUNCTIONS
2. Loan
Consumer / Corporate
3. Exchange - transfer of funds w/o physical
transfer ; SWIFT , CHIPS
Forex :
buying, selling, reference
 FUNCTIONS
 SWIFT
Society for Worldwide Interbank Financial
Telecommunications
-remittances

 CHIPS
Clearing House Interbank Payments System 
- trades
 FUNCTIONS
4. Trust
Fiduciary Services
“bank within a bank”

5. Advisory
wealth management
financial planning
estate disposition
 FUNCTIONS
 Services: (ADB / Fee Based Income)
- MC/CC Purchase
- Night Depository
- PDC Warehousing
- Payroll
- Deposit Pick-Up
 Equity Investment
Commercial Universal
Financial Allied 35% 50%
Non-Financial Allied 100%
Non-Allied 50%
Any Enterprise 25% 25%
Thrift/Rural 100% 100%
Quasi Bank 40%
 Investment Bank
 Corporate financial capital and financial
consultancy (commodities and derivatives)
Two Main Sides:
Buy = securities trading/portfolio management
Sell = underwriting of securities, marketing of
financial products, publishing financial research

 Samples:
JP Morgan Chase, Goldman Sachs, Morgan Stanley, Citigroup,
Deutsche, Credit Suisse, Barclays, UBS, Wells Fargo, BNP Paribas
 Banks in the Financial Market
 Structure
1. Perfect Competition
2. Monopolistic Competition
3. Oligopolisitic
4. Monopolistic

 Position
1. Leadership
2. Challenger
3. Follower
4. Nich
 Banks in the Financial Market
 Asymmetric Information

 Adverse Selection

 Free-Rider Problem

 Moral Hazard

 Principle-Agent Problem

 Liquidity Mismatch
 SAMPLE CHECKS
Checking Account

FEATURES:

 Payee’s Account

 Check No.

 Amount
(words/figures)

 Signature
BRSTN = Bank Routing Symbol Transit
 BRSTN Number (BIC)
MICR = Magnetic Ink Character
Recognition
 MICR
 Checking Account
 Second Endorsement

 Second Presentment

BP 22 = Anti-Rubber Check
 Checking Account
REASONS OF RETURN
RCOCI

DAIF / DAUD Fixed Fee: P1,0000 + 200 for every excess of

P40,000 x no. of days+ P1,000 (return)
SPO

Account Closed
Sample:
Signature Differs
A DAIF check was lodged as RCOCI
Suspicious on Friday amounting to P50,000.
Raised Amount
Since Monday was considered a
holiday, how much was the TOD
Material Alteration Charge given by the bank to the client?
Specimen Cards
ACCOUNT OPENING
• 7 years old
(read and write)

• ITF Account

•Type of Accounts
- Single
- Joint
( “and” / “or” )

Deposit Insurance
Coverage :

P500,000 for every

account name ; $10,000
for FCDU
Sample Problem:
 Mr. Angelo Reyes opened a time deposit
account amounting to P1.5M for his family, his
wife Melissa and two children namely Bimbi
and Riza. After a while, he opened a checking
account and Trust fund of P300T and P1M
respectively. How much could he secure and
his family from the bank in case of bank
declaration of closure? Explain.
 Deposit Claims in case of Death
 BIR Declaration

 Obituaries

 Will and Testament

 Death Certificate

 Letter of Adjudication
 BANK ORGANIZATION
GUIDELINES
 Certificate of Authority – SEC
- articles of Incorporation

 Board of Directors – 5 to 15 members

- less than 21 directors = merged/consolidated

 Treasury Stocks
- 40% of the voting stock for foreign individuals and non-bank
corporations

 Prohibition on Public Officials

BANK ORGANIZATION GUIDELINES
 Banking Days and Hours
- all working days at least 6 hours a day

 Strikes and Lockouts

 7 days unsettled, to be reported by BSP to
Labor – NLRC
 President of the Philippines may intervene or
assume jurisdiction
 Bank Management
 Board of Directors
- own one share of the capital stock
 Commercial = 2/3 (10 out of 15)
 Thrift/Savings = majority (11 out of 15)
 Rural Bank = All members must be Filipino
 Bank Officers
-President – “court of last resort”
-Vice President – defined by the Board
-Branch Manager – representative of the
HO to a location
-Operations Officer – in charge with the
implementation of bank procedures
 Bank Management
 Audit vs Compliance

 Conservator

 Teller Function

 Bookkeeping Function
 Supervision and Examination
-checking on the conformity with the banking laws
and procedures

= Surprise Cash Count

= DOSRI
= Internal Control / Dual Custody practice
= reporting and disclosures
refusal – P50T to P100T & 1 year in prison
false statement - P200T, not more than 5 years
= examination of books
 Supervision and Examination
 Embezzlement = taking of funds that belongs
to depositors and customers

 Defalcation = misappropriation of funds which

belongs to stockholders

 Peculation = all kinds of embezzlement,

defalcation or misappropriation of funds
 Supervision and Examination
 Causes of Peculation:
1. Gambling
2. Pride and Envy
3. Living beyond one’s income (lifestyle check)
4. Unsound salary policies
5. Poor employee relations
6. Immorality
Bank Reserves
and
Liquidity
 Bank Reserves and Liquidity
Primary
Legal Reserves / Working Reserves / Excess
Reserves
- non-earning assets
- Cash, Due to Banks, “Hot Money”
- “Deposit substitutes”
Penalty: 1/10 of 1% per day of the deficiency
Secondary
-easily converted to cash
Investment Reserves
 Bank Reserves and Liquidity
 Suppose that a bank is to retain a reserve
requirement of P10.5M, but as per record
reported, its outstanding reserve balance
would be P8M. This was the case for a
week already. How much would be the
penalty to be imposed?
 Bank Reserves and Liquidity
 Structure of Funds:
1. Hot Money
2. Vulnerable Funds
3. Stable Funds

Liquidity Reserve:
.95 x(hot money and non deposit funds-legal
reserves held) + .3
x(vulnerable deposit and NDF-LRH) +.15
x(stable deposits and NDF-LRH)
 Bank Reserves and Liquidity
 First Bank finds its deposits as follows:
Hot Money…………... $25M
Vulnerable Funds…… 24M
Stable Funds ……….. 100M
If bank wants to keep a 95% reserve behind its deposits
with 3% legal reserve requirements, 30% and 15% on
vulnerable funds and stable funds respectively, what
would be the bank’s total liquidity requirement?

Note: Bank Loan used to be at $135M but turned

recently to $140M with a trend growth rate of 10%
yearly
 Bank Reserves and Liquidity
.95(25M-.03x$25M)
+.30(24M-.03x24M)
+.15(100M-.03x100M)
+140M x.10 + (140M-135M)

= 23.04 + 6.98 + 14.55 + 19

Liquidity Requirement : $63.57M

 Measuring Liquidity Mismatch on Banks’
Balance Sheets

LIQUIDITY STRESS RATIO FORMULA:

 calculates the potential
liquidity shortfall
   experience severe
liquidity problems if
its liquidity stress ratio
is higher

 Off balance sheet

Matching Demand and Supplies of Liquidity
Flowing
 Demand
Deposit withdrawals + volume of acceptable loan requests +
repayment of borrowings + operating expenses + dividend
payments to stockholders

 Supplies
Incoming Deposits + Revenues from the sale of non deposit
services + customer loan repayments + sales of assets +
borrowing from the money market
 Estimated Liquidity Deficit/Surplus

Estimated Change
in Deposits
Less :
Estimated Change
in Loans
 Change in Deposits
 ∆deposits = f projected growth in
personal income in the company,
estimated increase in retail sales, current
growth of the nation’s money supply,
projected yield on money market deposits
and estimated rate of inflation
 Change in Loans
 ∆Loans = f projected growth in the
economy (GDP), projected quarterly
corporate earnings, current growth in the
money supply, projected prime loan rate
minus the commercial paper and
estimated rate of inflation
 Deposit Multiplier

 ∆Deposit = ∆Money Supply

Initial Deposit x 1/Required Reserve Ratio

 3 Components of Liquidity Positions
 Trend - constant growth in 10 years

 Seasonal –week or months compared to most

recent year-end deposit and/or loan level

 Cyclical – positive or negative deviations from

a bank’s total expected deposits and loans
depending upon the strength and weakness of
the economy of current year
 Liquidity Indicators
 Cash Position
Cash and Deposits Due from Banks

 Liquid Securities
Marketable Securities

 Capacity Ratio
*Loan and Leases / Total Assets
* most illiquid
 Liquidity Indicators
 Pledged Securities
Pledged Securities/ Security Holdings

 Hot Money Ratio

Money market / volatile liabilities

 Deposit Brokerage Index

Brokered Deposits/Total Deposits
 Liquidity Indicators
 Core Deposit Ratio
Core Deposits / Total Assets

 Deposit Composition Ratio

Demand Deposit / Time Deposits

 Loan Commitment Ratio

Unused Loan commitments/total assets
 Deposit Multiplier Formula
 ∆ Deposits = ∆ Money Supply

 = Initial Deposit x [ 1 / RRR ]

End