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BBF307 Business Of Banking
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BBF307 Business Of Banking
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Course Code: BBF307
University: Wawasan Open University
MyAssignmentHelp.com is not sponsored or endorsed by this college or university
Country: Malaysia
Question:
By the end of Unit 3, you should be able to:
Discuss the importance of treasury management in the business of banking.
Explain how cash and liquidity management is important for a bank.
Describe how a bank manages its assets, liabilities and capital.
Discuss the types of risks for a bank and how to mitigate them effectively.
By the end of this section, you should be able to:
Define the meaning and purpose of treasury management.
Differentiate between corporate treasury management and banking treasury management.
Corporate and banks are two different entities. Due to that, the functions of their treasuries are also different. A bank treasury focuses on:2
Central bank liquidity and reserve requirements.
Managing banks’ internal liquidity challenges (shortfall as well as surplus).
Earning a respectable return on excess cash and generating excess cash by setting the right pool rates for depositors and bank branches.
Tracking the interest rate mismatch risk.
Covering asset-liability management (ALM) exposure in both local currency as well as foreign exchange books.
Providing support for cross-border trade transactions by quoting appropriate foreign exchange rates.
We offer round-the-clock service to help you manage your foreign exchange requirements according to your business and risk profiles.
Market and currency trend analysis
Fast, efficient and competitive pricing for all your vanilla spot and forward foreign exchange transactions for all G7 and Asian currencies
Competitive pricing for non-deliverable forwards and options helps you hedge your requirements in controlled currencies
Solutions with embedded currency derivatives to improve your foreign exchange hedging rates
By the end of this section, you should be able to:
Explain the nature and purpose of liquidity management services and operation of cash management services.
Describe the main challenges of offering cash management services.
Answer:
Banks face different types of risks mentioned as below –
Credit risk – credit risk is the potential that the counterparty or bank borrower will fail in meeting the obligation as per the agreed terms. Credit risk is generally caused through acceptance, loans and trade financing, interbank transactions, transactions associated with foreign exchange swaps, equities, options, bonds and financial features.
Market risk – market risk is risk of the losses in trading of the bank owing to changes in the interest rates, equity prices, rates of foreign exchanges, credit spreads and commodity prices whose values are set under the public market.
Operational risk – it is the risk of loss generated from failed or inadequate internal processes, systems, people or any external events. This also includes the legal risk; however it excludes the reputational risk and strategic risk.
Liquidity risk – this risk arises from lack of the marketing of any investment that is is not available for selling or buying quickly for minimizing or preventing the loss (DeAngelo and Stulz 2015).
Reputational risk – it is the possible loss regarding the reputational capital of the organization. Reputational risk may arise due to rumours, data manipulation, bad experience of customers and wrong decisions taken in the critical situation.
Major concern areas and reform measures under Basel III are as follows –
Risk management – among various other measures all the banks shall conduct much more thorough analysis of inherent risk in particular securities like complex packages for debt.
Leverage – it aims in reducing the asset ratio that banks built up as compared to deposits, Basel III set significantly tougher standards as compared to previous. Further, in future the banks shall include the off balance sheet exposures while measuring the leverages. Ratio of core Tier 1 capital as compared to total asset of bank without any risk adjustment shall not exceed 3%.
Types of risks encountered by banks if decided for international expansion
Country risk – major risk associated with international expansion is country risk. Apart from the risks associated in domestic operation, banks engaged in the international activities face country risks. It involves the risks regarding likelihood that social, political or economic events and conditions in foreign country will have adverse impact on the financial interest of the institutions. It has the pervasive impact on the international activities and shall be considered explicitly while assessing the exposure risks.
Competitors – one of the major issues regarding internationalisation is competition and pursuing the international strategy. Further, pursuit regarding cost efficiencies is another challenging factor for international expansion. Hence, intensity of the competition as well as threat of new entrants also regarded as risk regarding internationalization (Bessis 2015).
Currency volatility – banks considering internationalization shall take into account the currency volatility factor. Borrowing in the local currency and management of working capital in effective way may reduce the effect of fluctuation in currency.
Political instability – this is another concern in various parts of the world. Poor governance, civil unrest and extreme corruption level are most challenging factors faced by the banks while expanding internationally. Further, various emerging markets are not exploited owing to multitude of the unanswered questions regarding political stability, taxation and infrastructure.
Offshore financial centres play major role under international financial structure. It provides insurance, finance, services related to head-office, holding company and it exists as the economic benefits exceed its cost. Characteristics of offshore financial centres are as follows –
Banking secrecy and the secrecy those are established by the law in different countries, protocol for banking violation is considered as punishable through jail sentence
Generally the offshore centres are based on the common law system that is very mush favourable for the business, for legacy planning and for registration of the trusts.
Most of the time non-residents are subject to 0% or low tax rates, unless there is maintenance expenses and registration fees. This does not state that the residents do not pay any taxes. They are generally subject to high indirect or direct taxes.
Advantages of this banking system are as follows –
The consumer can bank in multiple currencies that is advantageous to the expats with the financial commitments in various currencies or nations.
It is generally designed for offering the customers with maximum flexibilities in accounting usage aspects.
Interest earned is generally paid free from taxation deduction. Hence, those who do not pay tax on the income earned from foreign source will enjoy bigger returns without applying for rebates (Wigan 2014).
Disadvantages of this banking system are as follows –
Offshore term is considered as synonym for immoral and illegal money laundering and activities related to tax evasion. Hence, irrespective of the fact that the banking activity is completely legitimate, offshore banking can be considered as illegal
It is difficult to resolve the issues, if any that may generate with the account if the customer hold it offshore. The reason behind this is that the consumer cannot visit the branch physically and discuss the issue in person with someone.
Reference
Bessis, Joel. Risk management in banking. John Wiley & Sons, 2015.
DeAngelo, Harry, and René M. Stulz. “Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks.” Journal of Financial Economics116, no. 2 (2015): 219-236.
Wigan, Duncan. “Offshore financial centres.” In Europe and the Governance of Global Finance, pp. 156-170. Oxford University Press, 2014.
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