Management of Financial Institutions

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What is Financial Institution?

What are the Different types of Financial Institutions?
What are the functions of financial institutions?
Explain the different types of services provided by a bank or Financial
Institution
Why Financial Intermediary is necessary?
Or, Importance of Financial Intermediary
What do meant by Asset Liability Management (ALM) of a financial
institution?
What are the rationale of liquidity and liability management?
What are the sources of funds of a commercial bank and what are the
regulations imposed on them?
Explain the different types of liabilities dealt with the financial institutions
with example.
What do you meant by non-banking financial institutions and what are its
different types?
What is financial intermediary and what are the advantages enjoyed by
market participants from this?
Define depository institutions and describe its different types
What do you mean by liquidity management and what are its different
strategies?
Why are financial institutions concerned with liquidity?
Or, Importance of liquidity of commercial bank
What is an insurance company and what are its various types?
What is an investment company? What are its different types?
What do you mean by mutual fund? Discuss the different aspects of mutual
funds.
Define credit risk. What are the three steps in credit risk management
process
Or, Discuss the risk management process for a Bank/ Financial Institution
Explain interest rate risk with example
Define CAMELS rating and write down the composite ratings of this
Explain the concept of mobile financial services. Discuss the various
services offered by it
What are the ways in which an investment-banking firm may be involve in
the issuance of a new security?
What do you mean by reputation risk? What type of losses may be induced
in a bank due to reputation risk?
Explain different types of risks faced by a financial institution
Discuss the purpose of Market Discipline in relation with accounting
disclosures under revised Regulatory Capital Framework for banks in line
with Basel-II

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What are the components of Tier-I & Tier-II capital according to Basel
Accord?
Short Note: Securitization, Loan Sales, Mobile Banking, Spread & Burden
Name the financial statements prepared by a bank
Describe the functions of Credit Administration Department of a bank
What are the principal money market and capital market instruments
available to the banks in Bangladesh?
What are the sources & uses of funds of depository financial institution?
What are the sources & uses of funds of a non-bank?
What do you mean by Loan Securitization? Explain its impact on banks
Importance of Loan Securitization
What is minimum capital and liquidity requirement for a non-bank financial
institution?
What are the differences between market value and book value of capital
Why banks and other financial institutions sell loan
What are the sources of revenue and areas of expenses for a bank &
insurance company?
Define different capital requirement
Point out the major guidelines regarding management of capital according
to Basel-II
Explain spread & burden with example
Explain liability structure financial institutions
Explain re-pricing model with example
Discuss the important aspects that should be considered by a banker while
financing an industrial project
What are the processes for measuring and evaluating the performance of a
financial institution?

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1. What is Financial Institution?

Financial institutions are institutions that provides financial services for its clients
or members. Probably the most important financial service provided by financial
institutions is acting as financial intermediaries. FIs include commercial banks,
savings and loan associations, investment companies, insurance companies and
pension fund. Every modern economy has FIs, which perform key financial
functions for individuals, households, corporations, small and new business, and
government.
2. What are the Different types of Financial Institutions?
Different types of FIs are:
1. Depository Institutions: These are the FIs, those accepts deposits. These
deposits represent the liabilities of the deposit-accepting institution. Their
income is derived from two sources: a) the income generated from the
loans they make and the securities they purchase, and b) fee income. The
various types of depository institutions are:
a. Commercial Banks: It provides numerous services in financial
system. The services can classify into i) individual banking, ii)
institutional banking, and iii) global banking.
b. Credit unions: They are commonly known as cooperative societies.
The purpose of credit union is to service their members saving and
borrowing needs.
2. Insurance companies: it provides insurance policies, which are legally
binding contracts for which the policy holder pays insurance premium and
the company promise to pay to policy holder on the occurrence of future
events.
3. Mutual Funds: These are the portfolios of securities, mainly stocks, bonds,
and money market instruments. The investment manager actively
manages the portfolio i.e. buy and sell securities.
4. Pension funds: It is a fund that is established for eventual payment of
retirement benefits financed by contribution by the employer. A pension is
a form of employee remuneration for which the employee is not taxed
until funds are withdrawn.
3. What are the functions of financial institutions?
The main functions of financial institutions of this nature are as follows:
1. Accepting Deposits
2. Providing Commercial Loans
3. Providing Real Estate Loans
4. Providing Mortgage Loans
5. Issuing Share Certificates
Finance companies provide loans, business inventory financing and indirect
consumer loans. These companies get their funds by issuing bonds and other
obligations.

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The functions of financial institutions, such as stock exchanges, commodity

markets, futures, currency, and options exchanges are very important for the
economy. These institutions are responsible for maintaining liquidity in the
market and managing price change risks. As part of their various services, these
institutions provide investment opportunities and help businesses to generate
funds for various purposes.
The functions of financial institutions like investment banks are also vital and
related to the investment sector. These companies are involved in a number of
financial activities, such as underwriting securities, selling securities to investors,
providing brokerage services, and fund raising advice.
4. Explain the different types of services provided by a bank or
Financial Institution
Banks provide a number of important financial services to businesses:
1. Loans provide businesses with expansion capital. A bank will lend a business
a given sum for a specified period of time.
2. Business account services enable a business to transact its day-to-day
affairs, for example paying wages into employee's accounts, paying bills, and
taking up periods of credit.
3. Overdraft facilities enable a business to have a short period of credit to
smooth out cash flow difficulties.
4. Cheques, credit cards and bank drafts enable a business to smoothly
manage its day-to-day payments and transactions.
5. The bank will also provide systematic and ongoing advice, particularly to
small businesses and start-ups.
6. Banks also provide long-term finance in the form of mortgages for the
purchase of land and property.
7. Merchant banks and issuing houses also support companies in the
management of share issues.
5. Why Financial Intermediary is necessary?
Or, Importance of Financial Intermediary
Financial intermediaries appear to have a key role in the restructuring and
liquidation of firms in distress. In particular, there is rich evidence that financial
intermediaries play an active role in the reallocation of displaced capital.
Financial intermediaries can perform this role by aggregating the information on
firms collected in the credit market. The function of intermediaries as
matchmakers between savers and firms in the credit market can support their
function as internal markets for assets.
Moreover, the financial intermediaries also assume importance in today's world
as function for clearing and settling payments, function for provision of a
mechanism for pooling of funds and subdivision of shares, it allows provision of
ways to transfer economic resources, it allows provision of ways to manage
uncertainty and control risk, provides price information, and so on.

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6. What do meant by Asset Liability Management (ALM) of a financial

institution?
Asset-Liability Management (ALM) is a senior level management responsible for
supervision/ management of market risk (mainly interest rate and liquidity risks)
comprises of senior officials from treasury, chief financial officer, business heads
generating and using the funds of the bank, credit, and individuals from the
departments having direct link with interest rate, foreign exchange and liquidity
risks. The CEO must be the head of the committee.
Modern risk management now takes place from an integrated approach to
enterprise risk management that reflects the fact that interest rate risk, credit
risk, market risk, and liquidity risk are all interrelated.
7. What are the rationale of liquidity and liability management?
The rationales behind liquidity management are as below:
1. Ensuring enough liquidity to guarantee the orderly funding of members
needs;
2. Providing a prudent cushion for unforeseen liquidity needs;
3. Investing liquid funds in a manner which emphasizes the need for security
and liquidity.
The rationales underlying liquidity and liability management are as below:
1. Liability management focuses on Economic Value.
2. Liabilities and their associated assets are mutually dependent.
3. The level of risk associated with a given financial objective can be reduced
4. Greater rewards are generally expected from portfolios with higher levels
of risk.
5. Expected risk/reward trade-off tends to worsen as more constraints are
imposed
6. Asset and liability cash flows cannot be projected with certainty.
7. The overall risk of a portfolio may be reduced through hedging.
8. What are the sources of funds of a commercial bank and what are
the regulations imposed on them?
Banks are highly leveraged financial institutions, which mean that most of their
fund comes form borrowing. However, just like any others business enterprise,
the bank mobilizes fund from the following two categories of sources:
1. Funds form own sources: This source consists of funds owned by the
banking institution, namely share capital, reserve fund and other reserves,
retained earnings, etc.
2. Borrowed funds: this source consists of deposits in various types of accounts
and borrowings from other banks, Bangladesh bank and other sources.
In case of banks, the borrowed funds, mainly the deposits in various types of
accounts, constitute the major part of banks funds in comparison with the
owned funds in the form of capital and reserve. Therefore, borrowed funds are
main basis of banking operations.
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Regulations imposed on commercial bank by BB:

As a central bank, Bangladesh bank imposed some rules and regulations for
banking industry are mentioned below:
1. Minimum capital requirement: Tk. 400 cr.
2. SLR for banks-19%, for Islamic banks-11.5%
3. CRR for banks and Islamic banks-6%
4. Bank rate-5%
5. Repo-7.25%, reverse repo-5.25%
6. Interest rate on credit: Export-7%, Agri.-7%, Industrial term-13%
7. Single borrower exposure limit-35% for funded & non-funded credit
8. KYC, observation on abnormal transactions
9. Classification on performing and non-performing loans
10.
Financial inclusion-Opening A/c with Tk.10/00
11.
Green Banking
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Stress testing
13.
BASEL-II and Up coming BASEL-III
14.
Environmental risk management
9. Explain the different types of liabilities dealt with the financial
institutions with example.
The liabilities are differentiating into two types i.e. Current and Non-Current. The
distinction is made on the basis of time period.
a) Current Liability: It is one which the entity expects to pay off within one
year from the reporting date.
b) Non-Current Liability: It is one which the entity expects to settle after one
year from the reporting date.
Types and examples
Following are examples the common types of liabilities along with their usual
classifications.
Liability
Classification
Long Term Bank
Loan
Non-current
Bank Overdraft
current
Short Term Bank
current
Loan
Trade Payables
current
Debenture
Non-current
Tax Payable
Current
It may be appropriate to break up a single liability into their current and noncurrent portions. For instance, a bank loan spanning two years and carrying 2
equal installments payable at the end of each year would be classified half as
current and half as non-current liability at the inception of loan.

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10. What do you meant by non-banking financial institutions and what

are its different types?
A non-banking financial institution (NBFI) is a company that regulated by the
financial institutions act, 1993 of Bangladesh bank and engaged in the business
of loans advances, acquisition of shares, bonds, debentures, securities by Govt.
or local authority. A NBFI which is a company and which has its principal
business of receiving deposits under any scheme or arrangement or any other
manner, or lending in any manner is also a non-banking financial company.
NBFIs are doing functions like that of banks; however there are a few
differences:
1. A NBFI cant accept demand deposit
2. It is not a part of the payment and settlement system and as such cant
issue cheques to its customers
3. Deposit insurance facility is not available for NBFI depositors unlike in case
of banks.
The NBFIs IS Classified that they are licensed by Bangladesh bank are as
follows:
1. Equipment leasing company: It is the processing of securing the use of
equipment by way of a rental agreement for a specified period of time.
2. Hire purchase Company: Leasing goods by making installment payment
over the time basis on rent-to-own arrangement that buyer does not
obtain ownership until the full amount is paid.
3. Loan Company: Lending to the others individuals, groups or companies.
4. Investment Company: It is a company that issues securities and is
primarily engaged in the business of investing in securities.
They do business in financing for venture capital, merchant banking, investment
banking, mutual association, mutual company, leasing company and building
society would be included as NBFIs.
11. What is financial intermediary and what are the advantages
enjoyed by market participants from this?
The most important contribution of financial intermediaries is a steady and
relatively inexpensive flow of funds from saver to final users or investors.
Financial intermediaries include depository institutions, such as, commercial
banks, savings and loan associations, savings banks and credit unions, which
acquire the bulk of their funds by offering their liabilities to the public mostly in
the form of deposit. Beside this insurance companies and pension funds are also
act as financial intermediaries.
Advantages enjoyed by market participants:
1. Investors can get more choices concerning maturity for their investments
& borrowers can get more choices for the length of their debt obligations
2. Borrowers can get longer term loan at a lower cost
3. Attaining cost-effective diversification
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4. Lower cost accrue to the benefit of the investor

5. Markets participants get the benefit of using cheques, credit cards, debit
cards & electronic transfer of funds through financial intermediaries
12. Define depository institutions and describe its different types
Depository Institutions are financial institutions those accepts deposits. These
deposits represent the liabilities of the deposit-accepting institution. With the
funds raised through deposits and other funding sources, depository institutions
both make direct loans to various entities and invest in securities. Their income
is derived from two sources: a) the income generated from the loans they make
and the securities they purchase, and b) fee income.
The various types of depository institutions are:
1. Commercial Banks: It provides numerous services in financial system. The
services can classify into i) individual banking, ii) institutional banking, and
iii) global banking.
2. Credit unions: They are commonly known as cooperative societies. The
purpose of credit union is to service their members saving and borrowing
needs.
3. Savings and loan associations (S&Ls): The basic aspects behind to
providing of funds for financing the purchase of homes. The collateral for
the loans would be the home being financed. S&Ls are either mutually
owned or have corporate stock ownership.
4. Saving Banks: this can be mutually owned (in which case they are called
mutual savings banks) or stockholder owned. The principal assets of
savings banks are residential mortgages and the principal source of founds
is deposits.
13. What do you mean by liquidity management and what are its
different strategies?
Liquidity management refers to those activities within a financial institution to
ensure that holdings of liquid assets (e.g. cash, bank deposits and other financial
assets) are sufficient to meet its obligations as they fall due, including
unexpected transactions. Banks are primarily in the business of raising deposits
and making loans that transform liquid liabilities into liquid assets. It has two
broad aspects:
a. Asset Liquidity: It measures the ease with which a bank can convert its
assets into cash.
b. Market Liquidity: It measures ability to raise capital form other market
participants at short notice.
The main strategies that bank takes positively for an effective liquidity
management are as follows:
1. Each bank has to formulate a suitable but specific liquidity policy
2. Based on the past information or data, ALCO or liquidity mgt committee
must bring desired changes in the composition of assets and liabilities.
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3. Continuous customer relationship with large borrowers, depositors and

other liability holders etc will help the bank to secure required funds
during liquidity crisis.
4. Bank should prepare contingency plan including arrangement for line of
credit with large banks and suppliers of credit adverse liquidity position
arising from banks specific crisis or general market crisis.
5. The internal norms/limits may be fixed for certain type of transaction that
will have an adverse impact or liquidity position. For example: i)
borrowing from call money market as well as from repo market, ii)
Desired ratios for short-term liabilities to short term assets, loans to total
deposits.
14. Why are financial institutions concerned with liquidity?
Or, Importance of liquidity of commercial bank
Liquidity, or the ability to fund increases in assets and meet obligations as they
come due, is crucial to the ongoing viability of any banking organization.
Therefore, managing liquidity is among the most important activities conducted
by banks. Sound liquidity management can reduce the probability of serious
problems.
So, banks must visualize and evaluate liquidity needs under different business
scenarios. Liquidity represents the ability to deal with shortage of funds and
surplus of funds. Irrespective of size of a bank, adequate liquidity is essential to
meet commitments when due and to undertake new transaction when desirable.
Considering the importance of managing liquidity risk, each bank is required to
have a suitable policy in this regard which must cover objectives of liquidity
management, framework for assessing and managing liquidity, funding
strategies and internal norms including delegation of authority etc.
15. What is an insurance company and what are its various types?
A company that offers insurance policies to the public, either by selling directly
to an individual or through another source such as an employee's benefit plan.
An insurance company is usually comprised of multiple insurance agents. An
insurance company can specialize in one type of insurance, such as life
insurance, health insurance, or auto insurance, or offer multiple types of
insurance.
Types of Insurance Company:
1. Life insurance: It pays the beneficiary of the life insurance policy in the
event of the death of the insured.
2. Health Insurance: the risk insured is medical treatments that the company
pays the insured all or a portion of the cost of the medical treatments.
3. Property and casualty insurance: the risk insured by property and casualty
insurance companies is damage to various types of properties.

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4. Liability insurance: the risk insured against is litigation or the risk of lawsuits
against the insured due to actions by the insured or others.
5. Disability insurance: It insured against the inability of employed persons to
earn an income in either their own occupation or any others.
6. Long-term care insurance: It insured as custodian care for the aged who
become concerned about outliving their assets and being unable to care for
themselves as they age.
16. What is an investment company? What are its different types?
Public corporation organized to invest in large blocks of securities of diverse
firms, and to obtain its capital from issues of shares or units. Investment
companies give a small investor the advantage of a full time professional
investment management, and a very much wider spread of risk that it would
have been otherwise possible.
They are divided into three major types:
1. Open-end funds/ mutual funds- that have a floating number of issued shares,
and sells or redeem their shares at their current net asset value.
2. Closed-end funds/ investment trusts- that can sell only a fixed number of
shares that are traded on stock exchanges, usually at a discount to their net
asset value.
3. Unit investment trusts / unit trusts- that sells their redeemable securities
which represent interests in the securities held by the trust in its investment
portfolio.
17. What do you mean by mutual fund? Discuss the different aspects
of mutual funds.
A mutual fund is a type of Investment Company that pools money from many
investors and invests the money in stocks, bonds, money-market instruments,
other securities, or even cash.
The manager invests this money then continues to buy and sell stocks and
securities according to the style dictated by the funds prospectus.
There are several important aspects of mutual funds:
1. Investors in mutual funds own a pro rata share of overall portfolio
2. The investment manager of the mutual fund actively manages the
portfolio, that is buys some securities and sells others
3. The value or price of each share of portfolio, called Net Asset Value (NAV),
equals the market value of the portfolio minus the liabilities of the mutual
fund divided by the number of shares owned by the mutual fund
investors.
4. The NAV or price of the fund is determined only once each day, at the
close of the day
5. All new investments into the fund or withdrawals from the fund during a
day are priced at the closing NAV
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18. Define credit risk. What are the three steps in credit risk
management process
Or, Discuss the risk management process for a Bank/ Financial
Institution
Credit Risk: Credit risk arises from the potential that a borrower will fail to
meet its obligations in accordance with agreed terms. It also refers the risk of
negative effects on the financial result and capital of the bank caused by
borrower's default. It comes from a bank's dealing with individuals, corporate,
banks and financial institutions or a sovereign.
A financial institution employ a four-step procedure to measure and manage
institution level exposure are mentioned below:
1. Risk identification: The institution must recognize and understand risks
that may arise from both existing and new business initiatives. Risk
identification should be a continuing process, and should be understood at
both the transaction and portfolio levels.
2. Risk Measurement: Once risks have been identified, they should be
measured in order to determine their impact on the banking institutions
profitability and capital.
3. Risk Monitoring: The institution should put in place an effective
management information system (MIS) to monitor risk levels and facilitate
timely review of risk positions and exceptions that should be frequent,
timely, accurate, and informative.
4. Risk Control: The institution should establish and communicate risk limits
through policies, standards, and procedures that define responsibility and
authority that should serve as a means to control exposure to various risks
19. Explain interest rate risk with example
Interest rate risk is a risk that the value of investment will change due to a
change in the absolute level of interest rates, in the spread between two rates,
in any other interest rate relationship.
Interest rate risk affects the value of bonds more directly than stocks, and it is a
major risk to all bondholders. As interest rates rise, bond prices fall and vice
versa. The rationale is that as interest rates increase, the opportunity cost of
holding a bond decreases since investors are able to realize greater yields by
switching to other investments that reflect the higher interest rate. As example,
a 5% bond is worth more if interest rates decrease since the bondholder
receives a fixed rate of return relative to the market, which is offering a lower
rate of return as a result of the decrease in rates.
20. Define CAMELS rating and write down the composite ratings of this
A CAMELS rating is an international bank-rating system where bank supervisory
authorities rate institutions according to six factors. These are
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C - Capital adequacy
A - Asset quality
M - Management quality
E - Earnings
L - Liquidity
S - Sensitivity to Market Risk
Bank supervisory authorities assign each bank a score on a scale of one (best) to
five (worst) for each factor. The system helps the supervisory authority identify
banks that are in need of attention.
The composite rating:
Composite
Rating
Range
1

1 - 1.4

1.5 - 2.4

2.5 - 3.4

3.5 - 4.4

5&6

4.5 - 5 & 6

Description

Strong: Highest rating is indicative of performance is

higher
Satisfactory: Performance is average or above that
adequately provides for safe and sound operation
Fair: It is not satisfactory nor unsatisfactory but
characterized by performance of below average quality.
Marginal: performance is below average. It might
evolve into weakness that could threat the viability if
not changed.
Unsatisfactory: Performance is critically deficient that
need immediate remedial attention.

21. Explain the concept of mobile financial services. Discuss the

various services offered by it
Mobile banking refers to the activities of banking and financial services with the
help of mobile communications. The scope of offered service may include
facilities to conduct bank and stock market transactions, to administer accounts
and to access customized transaction.
The mobile banking is consists of 3 inter-related concepts:
i) Mobile accounting,
ii) Mobile brokerage,
iii) Mobile financial information services.
Mobile banking can offer services are:
i) Accounting information: Mini statement, transaction alert, loan & card
accessibility, balance checking, order & stop payment of check, etc.
ii) Payments, deposits, withdrawals & transfers: Local & global fund transfer,
commercial payments, bill payment, etc.
iii) Investment: Portfolio management service, real time stock quotes, etc.

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[As per Bangladesh bank DCMP circular in September 2011, the following mobile
financial services may be allowed:
1. Disbursement of inward foreign remittances
2. Cash in-out using mobile account through agents/ bank branches/ ATMs/
Mobile operators outlets
3. Person to business payment i.e. utility bill, merchant payments
4. Business to person payment i.e. salary, dividend and refund warrant,
vendor payments, etc
5. Govt. to person payment i.e. elderly allowances, freedom-fighter
allowances, subsidies, etc
6. Person to govt. payments i.e. tax, levy payments
7. Persons to person payments
8. Other payments like microfinance, overdrawn facility, insurance premium,
DPS, etc.]
22. What are the ways in which an investment-banking firm may be
involve in the issuance of a new security?
Investment banking involves managing pools of asset such as closed and openend mutual funds. Investment bankers act as agents on a fee basis or a
principal, purchasing the securities from the issuer at one price and seeking to
place them with public investors at a slightly higher price. The objective in funds
management is to select asset portfolio to beat some return-risk performance
benchmark. Since this business generates fees that are based on the size of the
pool of asset managed, it tends to produce a more stable flow of income than
does either investment banking or trading.
Investment banking refers to activities related to underwriting and distributing
new issues that can be either first-time issues of debt or equity is already trading
seasoned issues. Finally, in addition investment banker operates with corporate
securities markets that may participate as an underwriter (primary dealer) in
govt., municipal and mortgage-backed securities.
23. What do you mean by reputation risk? What type of losses may be
induced in a bank due to reputation risk?
Reputational risk is the current or prospective indirect risk to earnings and
capital, decline in the customer base, costly litigation arising from adverse
perception of the image of the banks on the part of its stakeholders. It may
originate from the lack of compliance with service standards, failure to deliver on
commitments, lack of customer-friendly service and fair market practices,
unreasonably high costs, inappropriate business conduct or unfavorable
authority opinion and actions.
Several paths by which reputation risk can induce losses for a firm/Bank:

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1. Loss of current or future customers, for example increased advertising costs

are necessary to restrain reputation damage.
2. Loss of employees or managers within bank, an increase in hiring costs
3. Reduction in current or future business partners
4. Increased costs of financial funding
5. Increased costs due to govt. policy, supervisory regulations fines or
penalties.
24. Explain different types of risks faced by a financial institution
As per BB guideline different types of risks faced by a financial institution are:
1. Residual risks: Collaterals can pose the risks like legal and documentation
risks
2. Credit concentration risk: Exposure in the same economic or geographic
sector and/or in dependent industries
3. Interest rate risk: It in banking book has to be taken into account as a
potential risk.
- Gap or mismatch risk
- Basis risk
- Net interest position risk
- Embedded option risk
4. Liquidity risk:
- Term liquidity risk
- Withdrawal/call risk
- Structural liquidity risk
- Market liquidity risk
5. Settlement risk: It arises when an executed transaction is not settled
6. Reputation risk: It arise due to lack of compliance, customer-friendly
service, fair market practices, failure to deliver on commitments, high costs,
etc.
7. Strategic risk
8. Environmental risk: The uncertainty or probability of losses that originates
from any adverse environmental or climate change events
9. Other material risks
25. Discuss the purpose of Market Discipline in relation with
accounting disclosures under revised Regulatory Capital Framework
for banks in line with Basel-II
The purpose of market discipline in the revised adequacy framework is to
complement the minimum capital requirements and the supervisory review
process that the aim is to establish more transparent and more disciplined
financial market so that stakeholders can assess the position of a bank regarding
holding of assts and to identify the risks relating to the assts and capital
adequacy.

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1. It is expected that the disclosure framework does not conflict with

requirement under accounting standard as set by BB
2. Under minimum capital requirement, banks will use specified
approaches/methodologies for measuring the various risks they faced and
the resulting capital requirements.
3. The disclosures should be subject to adequate validation, since information
in the annual financial statements would generally be audited and published.
26. What are the components of Tier-I & Tier-II capital according to
Basel Accord?
The components of Tier-I & Tier-II capital according to BASEL accord are:
TIER-1 (core capital):
1. Paid up capital
2. Non payable share premium a/c
3. Statutory reserve
4. General reserve
5. Retained earning
6. Minority interest to subsidiaries
7. Non cumulative irredeemable preference shares
8. Dividend equalization account
TIRE 2 (supplementary capital):
1. General provision (1% of CL)
2. Assets revaluation reserves
3. All other preference shares
4. Exchange equalization a/c
27. Short Note: Securitization, Loan Sales, Mobile Banking, Spread &
Burden
Securitization of loan:
Securitization is taken to mean a device of structured financing where an entity
seeks to pool together its interest in identifiable cash flows over time, transfer
the same to investors either with or without the support of further collaterals
and thereby achieve the purpose of financing. It is the financial practice of
pooling various types of contractual debt. The principal and interest on the debt,
underlying the security, is paid back to the various investors regularly.
Loan sales:
A loan sale is a commodity used term for the sale of loan pools. Loans acquired
from failed financial institutions are generally sold in pools through sealed bid
sale. Typically sale contains loans that have similar characteristics. The loans are
refined into pools according to specific criteria. Pooling considerations may
include loan size, quality type, collateral and location.
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Mobile banking:
Mobile banking refers to the activities of banking and financial services with the
help of mobile communications. It is consists of 3 inter-related concepts:
i. Mobile accounting,
ii. Mobile brokerage,
iii. Mobile financial information services.
The services may be offered are:
i. Accounting information: Mini statement, transaction alert, balance checking
etc.
ii. Payments, deposits, withdrawals & transfers: Local & global fund transfer,
bill payment, etc.
iii. Investment: Portfolio management service, real time stock quotes, etc.
28. Name the financial statements prepared by a bank
The financial statement has prepared by a bank are listed in 4 categories:
1. Balance Sheet: It presents the financial position at a given date by Assets
Liabilities
Equity
2. Income Statement: represents the company's financial performance in
terms of net profit or loss that composed Income:
Expense
3. Cash Flow Statement: It presents the movement in cash and bank balances
by Operating Activities
Investing Activities
Financing Activities
4. Statement of Retained Earnings: It presents the movement in owners'
equity that derived by Net Profit or loss
Share capital issued or repaid
Dividend payments
Gains or losses recognized directly in equity
Effects of a change or correction in accounting policy or error
29. Describe the functions of Credit Administration Department of a
bank
A typical credit administration unit performs following functions:
1. Documentation: To ensure that all security documentation complies with
the terms of approval and is enforceable
2. Disbursement: To control facility disbursements only after all terms and
conditions of approval have been met, and all security documentation is in
place
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3. Credit Monitoring: Keep track of borrowers compliance with credit terms,

identifying early signs of irregularity, conducting periodic valuation of
collateral and monitoring timely repayments.
4. Custodial Duties: Storage of security documents should be centralized.
Appropriate insurance coverage should be maintained on assets pledged as
collateral.
5. To maintain control over all security documentation
6. Compliance monitoring: To monitor borrowers compliance with covenants
and agreed terms and conditions, and general monitoring of account
conduct/performance
30. What are the principal money market and capital market
instruments available to the banks in Bangladesh?
The financial market in Bangladesh is mainly of following types:
1. Money Market: The instruments that are generally traded in the money
market constitute:
a) treasury bills
b) short-term bonds of govt. & central bank
c) negotiable certificates of deposits
d) bankers acceptances
e) commercial papers
- bills of exchange
- promissory notes
- mutual funds
2. Capital Market: The instruments that are generally traded in the capital
market for medium and long term and, in cases such as equities, for
unspecified periods are constitute:
a) long-term government securities
b) corporate bonds
c) stocks
d) municipal bonds issued by state and local government units
e) mortgages
31. What are the sources & uses of funds of depository financial
institution?
Deposits and others funding sources, depository institutions both make direct
loans to various entities and invest in securities. Income is derived from 2
sources i) income generated from the loans ii) fee income
32. What are the sources & uses of funds of a non-bank?
Sources of funds of NBFIs:
1. Capital, reserves and profit
2. Currency
3. Demand deposits
4. Other deposits
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a. Banking and financial institutions

b. Public sector
c. Private sector
d. Foreign
5. Borrowings
6. Funds from other financial institutions
a. Domestic
b. Foreign
7. Insurance, provident and pension funds
8. Other liabilities
Uses of funds of NBFIs:
1. Currency
2. Deposits with other financial institutions
a. Domestic
b. Foreign
3. Loans and advances
a. Banking and financial institutions
b. Public sector
c. Private sector
d. Foreign
4. Securities
a. Treasury bills
b. Commercial bills
c. Malaysian Government Securities (MGS)
d. Corporate
o Private Debt Securities (PDS)
o Equities
e. Foreign
f. Others
5. Gold and forex reserves
6. Other assets
33. What do you mean by Loan Securitization? Explain its impact on
banks
Securitization is the practice of creating and selling interests in the returns from
a large pool of illiquid assets (assets that cannot easily be transferred).
Securitizing assets with low liquidity, such as loans, allows the owner to sell the
assets more easily.
The impacts of securitization are as follows:
1. Creates of markets in financial claims by creating tradeable securities
2. Spread of holding of financial assets as the security is designed in minimum size
marketable lots as necessary
3. Promotion of savings- securitization makes it possible for the simple investors to
invest in direct financial claims at attractive rates
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4. Reduces costs- The intermediation costs, since the specialized-intermediary

costs are service-related, and comparatively lower
5. Risk diversification- Securitization spreads diversified risk to a wide base of
investors, with the result that the risk inherent in financial transactions is
diffused
6. Focuses on use of resources, and not their ownership as a custodian for the several
investors who thereafter acquire such claim
34. Importance of Loan Securitization
The issuers use securitization to finance their business activities. The financial
assets that support payments on asset- backed securities include residential and
commercial mortgage loans, as well as a wide variety of non mortgage assets.
Securitized assets may be applied to any asset that has a reasonably
ascertainable value, or that generates a reasonably predictable future stream of
revenue.
Securitization leads to structured finance, as the resulting security is not a
generic risk in entity that securitizes its assets, but in specific assets or cash flows of
such entity. The idea of securitization is to create a capital market product that
is, it results into creation of a security which is a marketable product.
Therefore, there is large scope for development in this area. Capital markets are
today a place where we can trade, claims over entities, claims over assets, risks,
and rewards. Let us consider certain types of securitization.
35. What is minimum capital and liquidity requirement for a non-bank
financial institution?
Minimum capital requirement for NBFIs:
As per department of financial institutions and markets of Bangladesh bank
circulate that the NBFIs to raise the paid-up capital by June 30, 2012 from Tk.50
crore to Tk. 100 crore and they would not be allowed to offer cash dividends
until they fulfilled the newly-set paid-up capital requirement as a part of
implementation of BASEL II. The foreign financial institutions operating in
Bangladesh will also have to fulfill the same paid-up capital requirement.
[For Banks, as a part of implementation of Basel-II accord, banks are required
to maintain minimum capital to risk-weighted assets ratio at 10% of which core
capital will not be less than 5% effective from December 31, 2007. However,
minimum capital requirements as required under Article 13 of Banking
Companies Act, 1991 for all banks has been raised to Tk.400 crore of which the
paid up capital shall be minimum Tk.200 crore. Banks having capital shortfall will
have to meet the shortfall by august 11, 2011.]
Minimum liquidity requirement for NBFIs:
Required reserved 6%, raised from 5.50. Effective from 15 December 2010
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Financial institute is required to maintain a Cash Reserve Ratio (CRR) of 2.50%

on its customer deposits. The CRR is maintained with the non-interest bearing
current account with the Bangladesh Bank. In addition, every financial institute
is required to maintain a Statutory Liquidity reserve (SLR) of 5% (including CRR)
on all its liabilities
[For Banks, the present statutory liquidity reserve (SLR) requirement is 20% of
total demand and time liabilities, 4% of which is to be maintained as cash
reserve ratio (CRR), and the rest 16% as approved securities. The SLR
requirement for Islamic banks is 10% and they are to keep 4% of this reserve as
CRR and the rest 6% in approved securities.]
36. What are the differences between market value and book value of
capital
Sl.
Book Value
Market Value
Book value is the price paid for a
Market value is the current price at
1
particular asset.
which you can sell an asset.
2 This price never changes
The price may be changed
useful to help track profits and
It indicates the profit (or loss)
3
losses
incurred.
The need for book value also
It is not raises from generally
4 arises when it comes to generally
accepted accounting principles
accepted accounting principles
Sometimes creates problems for
5
It generates the appropriate price
assets price being fixed
37. Why banks and other financial institutions sell loan
The banks and FIs sell loan due to profits and reduce the some capital
expenditures are mentioned below:
1. Reserve Requirement: Regulatory authority imposes non-interest bearing
requirements, are a form of tax that adds to the cost of funding the loan
portfolio. Regulatory taxes such as reserve requirements create an incentive
for banks to remove loans from the balance sheet by loan selling.
2. Fee Income: Banks and financial institutions often report any income
earned from selling loans. As a result, originating and quickly selling loans
can boost banks and financial institutions reported income under current
accounting rules.
3. Capital Costs: The reserve requirements imposed as a burden as long as
required capital exceeds the amount that they struggle to meet adequate
capital requirements holding more debt capital rather than equity capital.
4. Liquidity Risk: the liquidity is a major problem due to liabilities tends to be
highly liquid. To resolve it, some of its loans sales to outside investors and
significantly reduced the liquidity as assets on the balance sheet.

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38. What are the sources of revenue and areas of expenses for a bank
& insurance company?
Sources of revenue of a Bank:
1. Interest Earned
- Discount bills
- Income on investments
- Balances with other banks & FIs
2. Other Income
- Commission, exchange, brokerage
- Sale of investments
- Revaluation of investments
- Sale of land building and other assets
- Exchange transactions
Areas of expenses of a bank:
1. Interest Expense
- Interest on deposits
- Interest on borrowings to other banks & FIs
- Others
2. Operating Expenses
- Provisions
- Rent, taxes
- Printing, stationery, advertising, publicity
- Depreciation
- Fees of auditors & advocacy
- Utility bill
- Repairs and maintenance
- Insurance
Sources of revenue of a Insurance Company:
- Premiums paid by Policy owners
- Income from investments
Areas of
-

expenses of a Insurance Company:

Commissions paid to agents
Expenses to investigate, litigate, settle claims
Advertising
Computerized racing and policy issuance systems
Postage and telephone charges
Travel expenses
Salaries

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39. Define different capital requirement

Capital requirement is categorized in three tiers:
1. Tier-1 capital called Core Capital comprises of highest quality of capital
elements:
a) Paid up capital
b) Non-repayable share premium account
c) Statutory reserve
d) General reserve
e) Retained earnings
f) Minority interest in subsidiaries
g) Non-cumulative irredeemable preference shares
h) Dividend equalization account
2. Tier-2 capital called Supplementary Capital represents other elements,
which fall short of some of the characteristics of the core capital but contribute
to the overall strength of a bank:
a) General provision
b) Revaluation reserves
- Fixed assets
- Securities
- Equity instrument
c) All other preference shares
d) Subordinated debt
3. Tier-3 capital called Additional Supplementary Capital, consists of short-term
subordinated debt (original maturity 2 to 5 years) would be solely for the
purpose of meeting a proportion of the capital requirements for market risk.
40. Point out the major guidelines regarding management of capital
according to Basel-II
The major guidelines regarding capital management are as pointed below:
1. Tier-1 Core Capital:
a) Paid up capital
b) Non-repayable share premium account
c) Statutory reserve
d) General reserve
e) Retained earnings
f) Minority interest in subsidiaries
g) Non-cumulative irredeemable preference shares
h) Dividend equalization account
2. Tier-2 Supplementary Capital:
a) General provision
b) Revaluation reserves
- Fixed assets
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- Securities
- Equity instrument
c) All other preference shares
d) Subordinated debt
3. Tier-3 Additional Supplementary Capital: Short-term subordinated debt that
original maturity 2 to 5 years.
4. Foreign banks operating:
a) Tier-1 consists- Funds from head office
- Remittable profit retained
- Other items approved by BB
b) Tier-2 consists- General provision
- Borrowing from head office in foreign currency
- Revaluation of securities
- Other items approved by BB
5. Conditions pf maintaining capital:
a) Tier-2 will be limited to 100% of amount of Tier-1
b) 50% of revaluation reserves for fixed assets & securities eligible for Tier-2
c) 10% of revaluation reserves for equity instruments eligible for Tier-2
d) Subordinated debt should limited up to 30% of the amount of Tier-1
e) Limitation of Tier 3: 28.5% market risk needs to support by Tier-1. Market
Risk support from Tier-3 should up to 250% of Tier-1
41. Explain spread & burden with example
Spread: An interest rate spread is lending rate minus deposit rate, %.
Interest rate spread is the interest rate charged by banks on loans to private
sector customers minus the interest rate paid by commercial or similar banks for
demand, time, or savings deposits. The terms and conditions attached to these
rates differ by country, however, limiting their comparability.
Burden:
Burden Rate is indirect costs associated with employees, over and above gross
compensation or payroll costs. Typical costs associated with the burden rate
include payroll taxes, worker's compensation and health insurance, paid time off,
training and travel expenses, vacation and sick leave, pension contributions and
other benefits.
Burden=(Non-interest operating Expenditure - Non-interest operating income) /
Average Total Assets
A bank with a low burden ratio is more better off. An increasing trend would
show lack of burden bearing capacity

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42. Explain liability structure financial institutions

Liability Structure refers to deposit sources of funds that comprise to Core deposits of regular bank customers
Purchased deposits are acquired on a non-personal basis
Demand deposits, small time and savings deposits, large time deposits
Liability management is based on purchased funds.
Brokered deposits
The components of liability structure are1. Amounts owed to central banks
2. Amounts owed to credit institutions
3. Amounts owed to customers
4. Debts evidenced by certificates
5. Liabilities (other than deposits) held for trading
6. Provisions
7. Subordinated liabilities
8. Other liabilities
9. Capital and reserves
43. Explain re-pricing model with example
The Re-pricing Model called re-pricing GAP model1. Income oriented model:
Target variable = Net Interest Income = Interest Revenues Interest
Expenses
2. Interest Rate Gap difference between assets and liabilities sensitive to
interest rates changes in a predefined time period
3. An asset or a liability is sensitive if, in the relevant time period (gapping
period), it reaches its maturity or there is a renegotiation of the interest
rate
G=SA-SL

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44. Discuss the important aspects that should be considered by a

banker while financing an industrial project
Each project should define:
1. Stakeholders
2. Project goals
3. Resources (people, budget etc).
4. Deadline (schedule)
5. Milestones
6. Project scope
7. Known constraints
8. Risk management
45. What are the processes for measuring and evaluating the
performance of a financial institution?
Evaluating a Bank's Performance
A.
Determining Long-Range Objectives
B.
Maximizing The Value of the Firm: A Key Objective for Nearly All
Financial-Services Institutions
C.
Profitability Ratios: A Surrogate for Stock Values (Many small banks
do not have an active stock market and product or geographic
subsets of a bank do not have stock prices.)
1.
Key Profitability Ratios (ROE, ROA, NIM, NIMPLL, EPS,
Efficiency Ratio, Fee Income Ratio)
2.
Interpreting Profitability Ratios
D.
Measuring Risk in Banking and Financial Services (pp. 181-188) We
will not cover these now but will cover them in detail in the appropriate
places during the semester. (Credit Risk, Liquidity Risk, Market Risk,
Interest-Rate Risk, Foreign Exchange & Sovereign Risk, Off-Balance Sheet
Risk, Operational (Transactional) Risk, Legal and Compliance Risk,
Reputation Risk, Strategic Risk, and Capital Risk)
Key Performance Indicators among Bankings Key Competitors (NOTE:
when an income statement item for a period is combined with a balance
sheet item for a specific time the average of the balance sheet item for
the income statement period should be used.)

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