GROUP A

AHLI KUMPULAN NO MATRIK

1) NOR AKILAH BINTI IBRAHIM 212333 2) NUR SYAZANA ASMAA’ BINTI AHMAD SAYUTY 212340 3) NURUL FATIN ASYIQIN BINTI ROSLAN 212388 4) NUR AZYAN AZWANI BINTI ABD WAHID 212343 5) NOORFAZIRAH BINTI AHMAD 212352

NAMA PENSYARAH : DR. SHAZIDA JAN BINTI MOHD KHAN

THE BANKING SYSTEM

COMMERCIAL BANKA financial institution that provides services, such as accepting deposits, giving business loans and auto loans, mortgage lending, and basic investment products like savings accounts and certificates of deposit.

Functions :-

Acceptance of DepositsAdvancing loansCredit Creation

BALANCE SHEET OF COMMERCIAL BANK

Assets Liability

Reserves Cash in bank Deposits at the central bank Deposits at the commercial bank Cash on collectionLoanSecuritiesOthers

Deposit Current deposit Savings Deposits Fixed depositBorrowingOther

Capital Account

MANAGEMENT OF COMMERCIAL BANK

Banks operate in uncertainty & exposed to the risk

Exists a trade-off between risk & return

Four principles of management that should be noted :-

1. Asset management

2. Liability management

3. Capital adequacy management

GENERAL PRINCIPLES OF BANK MANAGEMENT

FOUR PRIMARY CONCERNS OF THE BANK IS :-

Liquidity management.

Asset management

Liability management

Managing capital adequacy

LIQUIDITY MANAGEMENT

Deposit outflows must match deposit inflows.

To keep enough cash on hand, the bank manager must engage in liquidity management.

Financial institutions face liquidity management problems because the volume of cash flowing in rarely matches exactly the volume of cash flowing out.

Financial institutions are sensitive to interest rate movements, which affect the flow of savings they attract from the public and the earnings from the loans and securities they acquire.

Liquidity managers usually meet their institutions’ cash needs through two methods :-

1. Asset management or conversion; ie., the selling of selected assets.

2. Liability management ie, the borrowing of enough liquidity to cover a financial institution’s cash demands as they arise.

Liquidity indicators supply bank managers with signs that a liquidity problem is developing. They include:

Ratio of cash to total assets.

Ratio of “hot money” assets to “hot money” liabilities.

Cost of borrowing for liquidity needs relative to the cost other institutions face.

Monitoring the intentions of the bank’s biggest customers.

ASSET MANAGEMENTFour basic methods of asset management:

Find borrowers who will pay high interest rates and are unlikely to default.

Purchase securities with high returns and low risk.

Lower risk by diversifying.

Manage the liquidity of its assets so that it can satisfy its reserve requirements without incurring large costs.

LIABILITY MANAGEMENTRaising Funds for a Financial Institution. Factor to be considered :-

The relative cost of raising funds from each source.

The risk (volatility or dependability) of each fund’s source.

The length of time (maturity) for which a source of funds will be needed.

The size and market access of the financial institution attempting to raise funds.

Laws and regulations that limit access to funds.

Relative Cost Factor.

The relative cost factor is important because, other things remaining the same, a financial institution would prefer to borrow from the cheapest sources of funds available.

Also, if an institution is to maintain consistent profitability, its cost of fund raising must be kept below the returns earned on the sales of its services.

CAPITAL ADEQUACY

Functions of bank capital:

Help to prevent bank failure

Affects returns for equity holders

Required by regulatory authorities

Capital and bank failure

Assume that both banks write off $5 of their loan portfolio. Total assets decline by $5, and bank capital, which equals assets minus liabilities, also declines by $5.

Theory of Bank Management

The approach that introduced in managing bank to achieve the objective of maximizing profit

Commercial loan theory (Real Bills Doctrine)

Banks face a dilemma returns – liquidity

- if the assets were hold with high liquidity, it cannot bring a lot of income

- if given a loan; higher income but liquid assets low

to overcome the dilemma and balance between liquidity, risk and return :-

- provide short-term bank loans like, loan to finance

the production of goods (self-liquidating loans or real bills)

- This loan is secured by finished products in the production process in order to secure repayment when the goods are sold to end users

- With this loan - the bank can create liquidity and earnings

Weaknesses :-

- can even help banks keep liquidity, but the return / low results

- if all banks practice & there is a crisis in economy - liquidity of the banking system cannot be maintained

- To solve this problem - the role of the Central Bank should be established & act as a source of final loan

Transition theory (The Theory Shiftability)

Bank asset allocation shift is done to balance between profitability, liquidity, risk

Liquidity can be created if banks buy long-term assets (high risk, low liquidity) and short-term assets - both reserve assets (low risk, high liquidity)

To obtain the liquidity, asset must be sale

The transition of this asset holdings will be if all banks to sell assets at the same time

To ensure the success of adding liquidity of the banking system - the Central Bank acted to buy all short-term assets

The anticipated income theory

Introduced to overcome the liquidity level low

According to this theory: bank assuming the loan portfolio (long-term) as a source of liquidity

- The bank will give the installment loans (eg.mortgage), and

loan repayment (payments) are continuously considered as providing continuous flow of funds to the bank, and this increases the level of bank liquidity

Asset-liability management theory

Emphasis on management / coordinating both sides of the balance sheet - assets and liabilities simultaneously to maximize profits

Bank combining and matching maturities and at the same time choose the assets to be held and liabilities are to be offered by taking into account interest rate risk involved in make decisions about loans to be made

CENTRAL BANKIs a reserve bank, or monetary authority is a public institution that manages a state's currency, money supply, and interest rates.

Examples: European Central Bank (ECB) and the Federal Reserve of the United States, Bank Negara Malaysia

The chief executive of a central bank is normally known as the Governor, President or Chairman especially the US Federal Reserve's Board of Governors.

Functions of a central bank may include:

Implementing monetary policies.

Determining Interest rates

Controlling the nation's entire money supply

The Government's banker and the bankers' bank ("lender of last resort")

Managing the country's foreign exchange and gold reserves and the Government's stock register

Regulating and supervising the banking industry

Setting the official interest rate – used to manage both inflation and the country's exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms

MONETARY POLICY- THE USES OF FINANCIAL POLICY

Central Bank plays a role in controlling the stability of the economy by applying monetary policy to influence the money supply (Ms) and the rate of interest (r).

Divided into two :-

(i) Policy of Quantitative Finance (Ms influence and r)

(ii)Qualitative Monetary Policy (influenced form of loans and investment banks).

During inflation, the government will conduct a contractionary monetary policy, while the expansionary monetary policy in use during deflation.

POLICY OF QUANTITATIVE FINANCE

Change the bank rate

- Bank rate is the interest rate the central bank imposed on commercial banks.

Inflation: ↑ bank rate - the cost of borrowing ↑ -I ↓ - ↓ AD - P ↓ Deflation (Unemployment): bank rate ↓ - borrowing costs ↓ - I ↑ - ↑ AD – P

Operating in open market

a) Inflation : @ BNM sell government bonds treasury bills to commercial banks and the public - money held ↓ - ↓ expenses - P ↓

b) Deflation : otherwise.

Change the statutory reserve ratio (RRR) and the ratio of liquid assets

a) Inflation : RRR ↑ - ↓ amount of money to loan - Ms. ↓ - ↓ AD - P ↓

b) Deflation : otherwise.

Funding : Funding delay the sale of securities by commercial banks and the general public, this action extends the maturity of government securities.

a) Inflation : Reduce the production of short-term government securities and increase the production of long-term securities - Ms. ↓ - ↓ AD - P ↓

b) Deflation : otherwise.

QUALITATIVE MONETARY POLICY

Selective credit control - efforts to promote @ BNM prevent people making installment credit, mortgages and margin requirements.

Inflation : Prevent / reduce

(a) The purchase of assets by raising rates installment payment, reducing the amount of loan credit, shorten the repayment period;

(b) Restricting the purchase of fixed assets in mortgage;

(c) Prevent the purchase of shares for the purpose of speculation.

LIMITATION OF MONETARY POLICY

There are several mechanisms that can explain the economic impact of the implementation of monetary policy.

Among them include savings and investment, cash flow, money and credit, asset prices and exchange rates.

Savings and Investment :-

• The interest rate that is too high will increase the cost of borrowing to finance spending, the individuals tend to save or defer expenses.

• Rising mortgage rates tend to affect households to postpone buying a house or reduce the quantity of expenses for the purchase of a home.

Liquidity flow :-

• This section refers to the impact of interest rates in influencing the amount of cash needed to spend.

• Most of the household at a time, taking advantage of the financial arrangement that allows them to borrow

• Net interest payments on the debt shows an increasing trend in proportion of disposable income.

• Financial flows affect the business sector because almost most business borrowers affected by this

• Changes in interest rates affect the overall cash flow.

Money and Credit :-

• The type of very important mechanism of monetary policy in open market operations to make adjustments in the financial system.

• The rate of interest charged by the bank have been adjusted, and an essential part of this mechanism is that monetary policy affects the economy through loans ratio.

• A policy that is too tight will reduce the supply of funds to banks and this will force them to reduce their bank loans.

• Although the price has not changed much loan, potential borrowers to get a loan in the event the policy is somewhat less strict.

Asset Prices :-

• Interest rates are also found to affect the value of assets, which in turn influence individual wealth and spending decisions.

• Based on theory, the interest rate is too high is expected to increase the opportunity cost of holding the asset.

• In general, the fall in asset prices was found to reduce spending and borrowing capacity of the individual is also reduced.

Exchange Rate :-

• Fluctuations in exchange rates affect the economy through changes in the relative price of domestic goods and services and imports.

• The import price of the direct relation with the exchange rate, the higher the price of imports, the higher exchange rate.