Professional Documents
Culture Documents
Universal Banks - A universal bank has the same powers as a commercial bank
with the following additional powers: the powers of:
1. Investment House as provided in existing laws - An Investment House is an
enterprise engaged in guaranteed underwriting of securities of another person or
enterprise, including securities of government and its instrumentalities.
2. Power to invest in non-allied and allied enterprises.
Rules for equity investments of Universal Banks in allied and non allied enterprises:
1.
The total investment in equities of allied and non allied enterprises should not
exceed 50% of the net worth of the bank.
2.
The equity investment in any one enterprise, whether allied or non allied,
should not exceed 25% of the net work of the bank.
Rules for equity investments of Universal Banks in Financial allied enterprises
1.
A universal bank can own up to 100% of the equity in a thrift bank, a rural bank
or a financial allied enterprise.
2.
A publicly listed universal bank of commercial bank may own up to 100% of the
voting stock of only 1 other universal or commercial bank.
Rules of equity investments of Universal bank in Non allied enterprises
1.
A universal bank may own up to 100% of the equity in a non financial allied
enterprise.
2.
The equity investment of a universal bank in a single non allied enterprise shall
not exceed 35 % of the total equity or the voting stock in that enterprise.
B.
Rules for equity investments of Commercial Banks in allied and non financial allied
enterprises:
1.
The total investment in equities of allied and non allied enterprises should not
exceed 35% of the net worth of the bank.
2.
The equity investment in any one enterprise, should not exceed 25% of the net
work of the bank.
3.
A commercial bank may own up to 100% of the equity of a thrift bank or a rural
bank.
4.
For equity investment in other financial allied enterprises, including another
commercial bank, they are only allowed a minority holding in that enterprise.
5.
A commercial bank may own up to 100% of equity in non financial allied
enterprise.
C.
Thrift Banks - A thrift bank has the power to accept savings and time deposits, act
as a correspondent with other financial institutions and as a collection agent for
government entities, issue mortgages, engage in real estate transactions and extend
credit. In addition, thrift banks may also maintain checking accounts, act as a
depository for government entities and local government units and engage in quasibanking and money market operations subject to the approval of the Bangko Sentral.
As per the banker Derrick Low, thrift banks are generally smaller in scale than
universal and commercial banks.
Three Types of Thrift Banks:
1. Savings and Mortgage Banks
2. Stock Savings and Loans Association
3. Private Development Banks
D.
Rural Banks - A rural bank has the power to provide adequate credit facilities to
farmers and merchants or to cooperatives of such farmers and merchants and, in
general, to the people of the rural communities of which the rural bank operates in.
Usually, Rural banks are privately owned and managed.
E.
F.
G.
Other Classifications
Authority Given to BSP under the GBL:
Policy Direction - Under this power, the BSP is allowed to prescribe ratios,
ceilings, limitations or other forms of regulation on the different types of accounts
and practices of banks and quasi banks in conformity with internationally accepted
standards and Bank International Settlements or BIS.
C.
D.
Examination by the BSP - BSP has the authority to examine the bank itself and
likewise, any enterprise wholly or majority-owned or controlled by the bank.
Requisites in Organizing Banks or Quasi-Banks:
1.
2.
3.
4.
1.
MB may prescribe its own rules on the type of stock that a bank may issue but all
stock issues must be par value stocks. (Sec. 9, RA 8791)
2.
Banks are prohibited from acquiring its own shares as security for a loan. (Sec.
10, RA 8791)
3.
Foreign - Domestic Stockholdings must be 40-60. (follow the control test but
supplement it with the grandfather rule) ( Sec. 11, RA 8791)
4.
Disclosure of Stockholdings of family groups and/or related interests. (Sec. 13,
15 RA 8791)
5.
e.
Whatisliquidityatabank?
Liquidityatabankisameasureofitsabilitytoreadilyfindthecashitmayneedtomeet
demandsuponit.Liquiditycancomefromdirectcashholdingsincurrencyoronaccountatthe
FederalReserveorothercentralbank.Morecommonlyitcomesfromholdingsecuritiesthatcan
besoldquicklywithminimalloss.Thistypicallymeanshighlycreditworthysecurities,including
governmentbills,whichhaveshorttermmaturities.Indeediftheirmaturityisshortenoughthe
bankmaysimplywaitforthemtoreturntheprincipalatmaturity.Shortterm,verysafe
securitiesalsotendtotradeinliquidmarkets,meaningthatlargevolumescanbesoldwithout
movingpricestoomuchandwithlowtransactioncosts(usuallybasedonabid/askspread
betweenthepricedealerswillpaytobuythebidandthatatwhichtheywillselltheask.)
However,abanksliquiditysituation,particularlyinacrisis,willbeaffectedbymuch
morethanjustthisreserveofcashandhighlyliquidsecurities.Thematurityofitslessliquid
assetswillalsomatter,sincesomeofthemmaymaturebeforethecashcrunchpasses,thereby
providinganadditionalsourceoffunds.Ortheymaybesold,eventhoughthisincursa
potentiallysubstantiallossinafiresalesituationwherethebankmusttakewhateverpriceitcan
get.Ontheotherside,banksoftenhavecontingentcommitmentstopayoutcash,particularly
throughlinesofcreditofferedtoitsretailandbusinesscustomers.(Ahomeequitylineisaretail
example,whilemanybusinesseshavelinesofcreditthatallowthemtoborrowwithinsetlimits
atanytime.)Ofcourse,thebiggestcontingentcommitmentinmostcasesistherequirementto
paybackdemanddepositsatanytimethatthedepositorwants.
Whydowecareaboutit?
Wecareaboutbankliquiditylevelsbecausebanksareimportanttothefinancialsystem
andtheyareinherentlyfragileiftheydonothavesufficientsafetymargins.Therecentfinancial
crisisdemonstratedinextremeformtheharmthataneconomycansufferwhencreditdriesupin
acrisis.Capitalisarguablythemostimportantsafetybuffer,sinceitprovidestheresourcesto
recoverfromsubstantiallossesofanynatureandalsogivesthosedealingwiththebank
confidenceinitssafety.
However,theproximatecauseofabanksdemiseisusuallyaliquidityproblemthat
makesitimpossibletosurviveaclassicbankrunor,nowadays,amodernequivalent,suchas
aninabilitytoaccessthedebtmarketsfornewfunding.Itisentirelypossiblefortheeconomic
valueofabanksassetstobemorethansufficienttocoverallofitsclaimsandyetforthatbank
togobustbecauseitsassetsareilliquidanditsliabilitieshaveshorttermmaturities.
Whyarebankspronetoruns?
Bankshavealwaysbeenpronetorunsbecauseoneoftheirprinciplesocialpurposesisto
performmaturitytransformation,alsoknownastimeintermediation.Inotherwords,theytake
demanddepositsandothershorttermfundsandlendthembackoutatlongermaturities.
Maturitytransformationisusefulbecausehouseholdsandbusinessesoftenhaveastrong
preferenceforasubstantialdegreeofliquidity,yetmuchoftheusefulactivityintheeconomy
requiresassuredfundingformultipleyears.
Bankssquarethiscirclebyrelyingonthefactthathouseholdsandfirmsseldomtake
advantageoftheliquiditytheyhaveobtained.Inparticular,depositsaresticky.Demand
depositscantheoreticallyallbewithdrawninasingleday,yettheiraveragebalancesshow
remarkablestabilityinnormaltimes.Therefore,bankscanlendoutthefundsforlongerperiods
withafairdegreeofassurancethatthedepositswillremainavailableorthatequivalentdeposits
canbeobtainedfromothersasneeded,perhapswithamodestboostindepositrates.
Theproblemisthatsometimesdepositorsloseconfidenceinabank,orinthebanking
system,andwithdrawtheirfundsenmasse.Thisistheclassicbankrunthathaskilledmanya
bankoverthecenturies.Theonlysurewaytocounterabankrunistorestoreconfidence,asno
bankthatengagesinanormallevelofmaturitytransformationcansurviveabankrununaided.
Asdiscussedbelow,thereismuchthatacentralbankcandotoaidwithliquiditycrises,butthere
arelimitstowhatcanbeaccomplished.
Therisksofdepositrunsaregreatenough,andhavebeendemonstratedoftenenough,
thatvirtuallyallcountrieshaveanationalsystemofdepositinsurance.Theseguaranteethatbank
depositorswillnotlosetheirfunds,uptocertainspecifiedamounts(currently$250,000inthe
US)andsometimeswithlimitsonwhatentitiesareinsured,sothatbanks,forexample,maynot
haveinsuranceontheirdepositsinotherbanks.
Depositinsuranceisaveryimportantprotectionagainstbankruns,whichtherefore
reducestheneedforbankliquidity,butdoesnoteliminateit.However,itisimportanttonote
thatmodernbanksoftenrelytoasignificantextentonshorttermborrowingsinthecapital
markets,sothatarundoesnothavetoinvolvedepositors,ornotsolelydepositors,inorderto
becomeaseriousproblem.
Theinabilitytorolloverdebtthroughnewsecuritiesissuanceshasasimilareffectto
depositwithdrawals.Therecentfinancialcrisisdemonstratedthis,sinceveryfewbanks
experienceddepositruns,yetthisdidnoteliminateliquidityproblems.Largebankinggroups
thatengageinsubstantialcapitalmarketsbusinesseshaveconsiderableaddedcomplexityintheir
liquidityneeds,inordertosupportrepobusinesses,derivativestransactions,primebrokerage,
andotheractivities.
Howcanbanksachieveadequateliquidity?
Bankscanincreasetheirliquidityinmultipleways,eachofwhichordinarilyhasacost,
including:
Shortenassetmaturities
Improvetheaverageliquidityofassets
Lengthenliabilitymaturities
Issuemoreequity
Reducecontingentcommitments
Obtainliquidityprotection
Shortenassetmaturities.
Thiscanhelpintwofundamentalways.
First,ifthematurityofsomeassetsisshortenedbyenoughthattheymatureduringtheperiodof
acashcrunch,thenthereisadirectbenefit.
Second,shortermaturityassetsgenerallyaremoreliquid.
Improvetheaverageliquidityofassets.Assetsthatwillmaturebeyondthetimehorizonofan
actualorpotentialcashcrunchcanstillbeimportantprovidersofliquidity,iftheycanbesoldin
atimelymannerwithoutanexcessiveloss.Therearemanywaysthatbankscanimproveasset
liquidity.Securitiesarenormallymoreliquidthanloansandotherassets,althoughsomelarge
loansarenowdesignedtoberelativelyeasytosellonthewholesalemarkets,sothisisamatter
ofdegreeandnotanabsolutestatement.Shortermaturityassetsareusuallymoreliquidthan
longerones.Securitiesthatareissuedinlargevolumeandbylargecompaniesgenerallyhave
greaterliquidity,asdomorecreditworthysecurities.
Lengthenliabilitymaturities.Thelongertermaliability,thelesslikelythatitwillmaturewhile
abankisstillinacashcrunch.
Issuemoreequity.Commonstockisroughlyequivalenttoabondwithaperpetualmaturity,with
theaddedadvantagethatnointerestorsimilarperiodicpaymentshavetobemade.(Dividends
arenormallypaidonlyoutofprofitsandarediscretionary.)
Reducecontingentcommitments.Cuttingbackthevolumeoflinesofcreditandothercontingent
commitmentstopayoutcashinthefuturereducesthepotentialoutflows,therebyimprovingthe
balanceofsourcesandusesofcash.
Obtainliquidityprotection.Abankcanpayanotherbankoraninsurer,orinsomecasesacentral
bank,toguaranteetheavailabilityofcashinthefuture,ifneeded.Forexample,abankcouldpay
foralineofcreditfromanotherbank.Insomecountries,bankshaveassetsprepositionedwith
theircentralbankthatcanbeusedascollateraltoborrowcashinacrisis.
Allofthesetechniqueshaveanetcostinnormaltimes.Financialmarketsusuallyhavean
upwardslopingyieldcurve,meaningthatinterestratesarehigherforlongertermsecuritiesthan
theyareforshortertermones.Thisissooftenthecasethatsuchacurveiscalledanormalyield
curveandtheexceptionalperiodsarereferredtoasshowinginverseyieldcurves.Whenthe
yieldcurvehasanupwardslope,shorteningassetmaturitiesdecreasesinvestmentincomewhile
lengtheningliabilitymaturitiesraisesinterestexpense.Similarly,moreliquidinstrumentshave
loweryields,allelseequal,reducinginvestmentincome.Equity,foritspart,ismoreexpensive
thandebt1,and1TheModiglianiMillertheoremoffinanceholdsthat,underidealized
conditions,holdingmoreequityreducesthecostofeachunitofequityanddebtbyenoughto
exactlycounterthehighercostofequityversusdebt.However,thereareavarietyofreasons
whythisdoesnotholdtothefullextentinpractice,includingthetaxadvantagesthatbanksand
otherfirmsreceiveonpaymentsofinterest,butnotofstockdividends.Therefore,thenetcostof
equitydoesexceedthatofdebtforthebank.5liquidityprotectionnormallycomesatacost,
althoughsomecentralbankfacilitiesmayhavelittleornocostuntildrawndown.
Howmuchliquidityisenough?
Sinceliquiditycomesatacost,abankfacesatradeoffbetweenthesafetyofgreaterliquidity
andtheexpenseofobtainingit.Thismakesitdifficulttoanswerthequestionofhowmuch
liquidityisenough.Worseningthedifficultyisthecomplexityofthefinancialsystemandthe
challengeofpredictingitsfuturestateandthereforetheprobabilityandseverityoffuturecash
crunches.Bankstrytoensurethattheyhavesufficientliquiditytomeetallrelevantregulatory
requirements,plusabuffertoreducethelikelihoodthatliquidityfallsbelowthesethresholdsand
triggersaregulatoryormarketresponseorcreatesconstraintsonthebanksactions.Inasimilar
way,theytrytoensurethattheyhavesufficientliquiditytoavoidadowngradefromthecredit
ratingagenciestoalevelbelowthebankstargetrating,althoughtherealwaysremainsthe
optionofacceptingalowerrating.Moresophisticatedbanksalsotrytoholdtheprobabilityofa
cripplingliquiditycrisistobelowsomefractionofapercenteachyear,basedontheirinternal
modeling