BANK CAPITAL

Mentor: Prof.dr. Fikret Hadi Ass.mr. Velid Efendi

Studenti: Alikadi Lejla 67675 orali Armina 67551 Zahirovi Selma 67703

Sarajevo, novembar 2010.g.

1

Capital of bank

Capital is a relatively cheap source nondeposit, that is permanently invested in the bank a guarantor for the risk and the basis for determining the volume of placements. Capitalization of the bank: the dynamic growth of capital in compliance with the scope of bank activities.

Capital Functions
1. 2. 3. 4. 5. 6.

Deposit protection Protection against loss Source of funding for regular activities Coverage taken and the potential risk, Expanding the scope of the bank's activities, Funding of non-interest bearing assets.

How much capital bank need ?

Leverage factor - financial leverage? If the rate of capital is 8%, leverage factor is 1 / 0, 08 = 12.5 1 KM of capital form 12.5 KM of assets. According to international standards minimum rate of capital is 8% of weighted risk assets, but in our country is 12%.

Types of capital
International standard: Primary (equity capital and reinvested earnings), Secondary (subordinated bonds with a maturity period over 5 years and fixed interest rate), Capital of the third level - used to cover market risk (short-term subordinated bonds with a maturity up to 2 years and up to 250% of primary capital).

Types of capital and adequacy

In our country: Basic capital, Supplemental capital, Additional and Net Capital

Net Capital = basic capital+ additional capital + deductible items

Core capital and Net capital

Core capital represents a total amount of equity, general legal reserve of bank, other reserves which are not related to the assessment of asset quality , and retained or undistributed profits of the bank from previous years. Net capital is the amount used for calculating capital adequacy ratio of banks. Net equity is the difference between the amount of capital (basic, supplementary and additional) and deduction items.

Additional capital and Share capital

Additional capital we used to cover market risks. Additional capital is excess of basic and additional capital above the needs to cover credit risk. Share capital includes permanent preference shares, ordinary shares, premiums for permanent preference shares and ordinary shares, retained earnings and capital reserves.

Supplementary capital

Supplementary capital consist of: Share capital General reserves of the bank to cover credit losses Accrued income in the current year Subordinated debt Hybrid or convertible items

Decision on minimum standards for managing operational risk in banks

Operational risks result from: Inadequate internal systems, procedures and controls Weaknesses and omissions in carrying out business activities, Illegal actions by employees External events, which the bank may put at risk

Decision on minimum standards for managing operational risk in banks

Calculation of capital requirement for operational risk through the method of primary indicator: MAKOR - a potential loss based on exposure to OR MAKOR = 15% of the average amount of gross profit realized in the last three financial years POR weighted operational risk= MAKOR x 8,33 (100/12) - Added to the total weighted risk assets of banks in the calculation of capital adequacy ratio.

Capital adequacy ratio

Capital adequacy ratio:

NET CAPITAL (TOTAL RISK ASSETS OF BANKS + POR)

Commercial Bank in B&H ranked by total amount of the capital at December 9, 2009
Bank

Capital
31.12. 2008.

Capital
31.12. 2009.
367.006.000 KM 368.873.000 KM

Divergence
2,63% 9,07%

Raiffeisen 357.610.000 KM bank Sarajevo UniCredit bank Mostar 338.186.000 KM

Razvojna banka FBiH Sarajevo

Privredna banka Sarajevo Volksbank Banja Luka

108.519.000 KM

110.992.000 KM

2,28%

28.417.000 KM

37.336.000 KM

31,39%

44.955.000 KM

46.016.000 KM

2,36%

Commercial Bank in B&H ranked by total amount of the capital at December 9, 2009
Bank
Vakufska banka Sarajevo

Capital
31.12. 2008.
51.038.000 KM

Capital
31.12. 2009.
49.542.000 KM 35.318.000 KM 15.789.000 KM 63.414.000 KM

Divergence
-2,93% -21,14% 29,99% 4,75%

ProCredit banka 44.788.000 KM Sarajevo FIMA banka Sarajevo NLB Tuzlanska banka Tuzla 22.554.000 KM 60.539.000 KM

Hypo Alpe Adria 190.880.000 KM 182.030.000 KM -4,64% banka Mostar

Factors of business reporting system

A complete line of business reporting system requires specialized accounting system to determine factors underlying the report: Capital required (These account for losses that are expected and losses that are unexpected )

Revenues generated Funds used Overhead consumed

Capital management

Potential management actions to solve capital problem

Banks Has Capital Shortage:

1. Slow growth of assets and liabilities a. sell fixed assets b. sell or securitize loans 2. Decrease risk mix of assets 3. Increase internal generation a. increase net income b. decrese dividend payout

Capital management

Banks Has Capital Shortage:

4. Raise capital externally a. issue new stock b. sell notes or debentures

Bank has Excess Capital

1. Increase growth of assets and liabilities a. internal opportunities b. acquisition 2. Increase risk mix of assets

Capital management

Potential management actions to solve capital problem

Bank has Excess Capital:

3. Decrease internal generation a. decrease net income b. increase dividend payout 4. Reduce external capital a. repurchase stock b. retire notes or debentures

Planning phase of capital increase:

Phase I: on the basis of balance sheet and flow it determines the required amount of additional capital Phase II: designing the structure of internal and external capital Phase III: determining the optimal structure of external capital

RAISING CAPITAL EXTERNALLY

Should All Capital Be Common Equity? The availability of the varius forms of external capital; The need for flexibility in issuing capital in future years; The financial effects of the various forms of capital,such as leverage,immediate dilution... The availability of new common equity capital at anything like a reasonable price varies widely among banks Such banks must work to develop a market for them stock,and there are times when such banks cant sell common stock...

Financial Effects of Senior Capital

The issuence of senior capital results in lower immediate dilution of earnings per common share;

In the long run senior capital usually increases per share on common stock because it introduces favorable financial leverage. Many larger commercial banks and their holding companies are subject to the 34 percent corporate income tax and should use subordinated debentures as their source of senior capital;

Newer Forms of Senior Capital

Banks and bank holding companies have found some forms that regulators find acceptable as part of bank capital; The lower cost of convertibles does not by itself mean that convertables are cheaperthan nonconvertibles The overall potential advantages of convertibles as a commercial bank's financial strategy are convincing. Individual banks may also have special conditions that make covertible issues more favorable to them than bank in the typical bank in the general market...

Newer Forms of Senior Capital

Common stock has to be issued when a new bank is
formed. Common stock may also be appropria te form of raising external capital to finance growth. Two techniques that a few smaller banks have used successfully to establish a reasonable price are: (1) using preemptive rights offerings of new shares to existing shareholders and (2) holding periodic stock auctions in which those who wish to buy or sell shares can bid for them or place them in an auctionlike setting

REFERENCES:

Fikret Hadi;Velid Efendi, Bankarstvo: Pregled predavanja i vjebi 2. dio, Ekonomski fakultet u Sarajevu, 2006. Timothy W. Koch; Steven Scott MacDonald, Bank Management, South-Western Pub, 2005. Peter S. Rose; Sylvia Conway Hudgins, Bank Management and Financial Services, McGraw-Hill/Irwin, 2008. http://www.beta.ba/index, Rangiranje banaka po iznosu kapitala, 20. 11. 2010., 14:04 http://www.investopedia.com/terms/c/capitaladequacyrati o.asp, 20.11.2010., 15:03