CHAPTER 2 Flashcards
Who authorises financial intermediation institutions?
Australian Prudential Regulation Authority (APRA)
What does the Australian Prudential Authority (APRA) do?
Authorises financial intermediation institutions and labelled them as Authorised Deposit-taking Institutions (ADIs)
Explain the asset management (before 1980´s)
Loan portfolio is tailored to match the available deposit base.
Explain the liability management (after 1980´s)
Deposit base and other funding sources are managed to fund loan demand.
How does the sources of funds of commercial banks appear in the balance sheet?
As liabilities or shareholders funds.
Banks offer a range of products with mixes of…
Liquidity, return, maturity and cash flows
Types of liabilities
Current deposits Term deposits Negotiable certificates of deposits (CDs) Bill Debt liabilities Foreign currency liabilities
Types of equities
Loan capital
Ordinary shares
How does the use of funds of commercial banks appear in the balance sheet?
As assets
Types of assets
Personal and housing finance
Commercial
Government
Personal and housing finance assets
Mortgage
Investment property
Fixed-term loan
Credit card
Commercial assets
Fixed-term loan
Overdraft
Bank bills held
Lease
Government assets
Treasury notes
Treasury bonds
Characteristic of the off-balance-sheet transactions
Conditional: if an event occurs, they convert into on-balance sheet.
Off-balance sheet include:
Direct credit substitutes
Trade and performance related items
Commitments
Market rate-related contracts
Treasury notes
Short-term discount securities issued by the Commonwealth Government.
Treasury bonds
Long-term securities issued by the Commonwealth Government that pay a specified interest coupon stream.
Direct credit substitutes
Undertaken by a bank (guarantor) to support the financial obligation of a client.
A payment is required if the client defaults on a payment to a third party.
Trade and performance related items
Guarantee provided by a bank to a third party, promising financial compensation for non performance contractual obligations.
Commitments
Contractual financial obligation of a bank that are yet to be completed or delivered.
Market rate-related contracts
Derivative products to manage exposures to foreign exchange risk, interest rate risk, equity price risk and commodity risk.
Value of the off-balance-sheet
More than 5 times the total value of the assets held.
Primary factor contributing to the weakness of companies that went to bankrupt in the Global Financial Crisis
Amount of leverage
Imposition and monitoring of standards to promote long-term financial stability.
Prudential supervision
Australian regulatory structure
Reserve Bank of Australia (RBA)
Australian Prudential Regulation Authority (APRA)
Australian Securities and Investments Commission (ASIC)
Australian Competition and Consumer Commission (ACCC)
Reserve Bank of Australia (RBA)
System stability and payment system.
Australian Prudential Regulation Authority (APRA)
Supervision of depository institutions, insurance offices and superannuation funds.
Australian Securities and Investments Commission (ASIC)
Market integrity and investor protection.
Australian Competition and Consumer Commission (ACCC)
Competition policy.
“Buffer” against losses of the financial institutions
Capital adequacy
Functions of capital
Source of equity funds for a corporation
Demonstrate shareholders commitment
Funding for growth and future profits
Write off periodic and abnormal losses
Standarised approach to the measurement of the capital adequacy of banks.
Basel I
Highest quality capital
Tier 1
Comprises ate least half of a banks minimum requires capital
Tier 1
Supplementary capital
Tier 2
Tier 2: Upper
Permanent elements and hybrid capital instruments
Tier 2: Lower
Non-permanent elements, limited life instruments.
Capital accord
Basel II
Defines the minimum capital adequacy required by a bank
Basel II
Elements of Basel II
- Credit risk of a banks assets and OBS business
- Market risk of banks trading activities
- Operational risks of banks business operations
- Form and quality of capital held to support exposures
- Risk identification, measurement and management process adopted
- Transparency through accumulation and reporting of information
Basel II minimum risk-based capital ratio and Tier 1
8%
4% held by Tier 1
Pillar 1 risks
Credit risk
Operational risk
Market risk
Credit risk
Risk that borrower won’t meet commitments when due.
Risk weight for: notes and coins, claims against central governments and central banks
0%
Risk weight for: claims against local governments, domestic banks and international banks
20%
Risk weight for: loans secured by residential mortgages
50%
Risk weight for: all other assets and claims against counterparties
100%
Operational risk
Risk of loss from inadequate or failed internal processes.
Market risk
Risk of changes in the market conditions.
Measure the market risk
VaR
VaR
Statistical probability model that measures financial risk exposures.
Pillar 1
Capital adequacy
Pillar 2
Supervisory review of capital adequacy
Pillar 2 principles
1) Assess overall capital adequacy en relation with risk profile.
2) Review banks internal capital adequacy strategies.
3) Expect banks to operate above the minimum regulatory capital ratio.
4) Intervene at an early stage to prevent capital falling below the minimum levels.
Pillar 3
Market discipline
Intended to ensure banks have sufficient capital to support all risks and encourage improved risk management policies.
Pillar 2
Develop disclosure that allows market to asses information on the capital adequacy of an institution.
Pillar 3
Pillar 3 principle
Transparency of an institutions risk exposure, risk management and capital adequacy.
Enhances capital adequacy requirements
Basel III
Basel II minimum risk-based capital ratio and Tier 1
8%
6% by Tield 1 (4% in Basel II)
