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Page 1: FINS1612 Master Doc

KNGXNOTES

FINS1612

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[FINS1612]

ComprehensiveNotes

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TABLEOFCONTENTS

TableofContents.........................................................................................................................................2

1.IntroductiontotheFinancialSystem........................................................................................................3

2.TheBankingSystem...............................................................................................................................14

3.EquityMarketsI.....................................................................................................................................29

4.EquityMarketsII...................................................................................................................................45

5.EquityMarketsIII...................................................................................................................................55

6.CFAEthicsandStandardsofPractice......................................................................................................63

7.DebtMarkets.........................................................................................................................................69

8.ForeignExchangeMarkets.....................................................................................................................83

9.InterestRateDetermination..................................................................................................................94

10.FuturesandForwards.........................................................................................................................105

11.Options...............................................................................................................................................115

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1.INTRODUCTIONTOFINANCIAL

SYSTEM

1.1THEFINANCIALSYSTEMANDFINANCIALINSTITUTIONS

Afinancialsystemhas:

- Money:amediumofexchange

- Markets:facilitateexchangeofgoodsandservices- Surplusunits:saversoffundsavailableforlending- Deficitunits:borrowersoffundforcapitalinvestmentandconsumption

- Flowoffunds:movementoffundthroughthefinancialsystembetweensaversandborrowers

Thewiderangeoffinancialproductsavailableinafinancialsystemfacilitatesportfoliostructuringi.e.thebuyingandsellingofassetsandliabilitiestobestmeetcurrentsavings,investmentandfundingneeds.

Anassetportfolioisacombinationofassets,eachcomprisingoffourmainattributes,whichare:

1. Returnoryield:thetotalfinancialbenefitreceived(interestandcapitalgain)fromaninvestment;

expressedasapercentage

2. Risk:thepossibilityorprobabilitythatanactualoutcomewillvaryfromtheexpectedoutcome;

uncertainty

3. Liquidity:accesstocashandothersourcesoffundstomeetday-to-dayexpensesandcommitments

4. Time-PatternofCashFlow:thefrequencyofperiodiccashflows(interestandprincipal)associatedwithafinancialinstrument

FinancialSystem:comprisesarangeoffinancialinstitutions,financialinstrumentsandmarketswhich

interacttofacilitatetheflowoffundsthroughthefinancialsystem;overseenbyacentralbank;supervised

byaprudentialregulator

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Financialsystemsalsoprovideimportanteconomicandfinancialinformation:

- Informationaffectspriceandinvestmentdecisions;therefore,theprovisionoftimelyandaccurate

informationisessentialforanefficientfinancialsystem

Financialsystemhasanimportantroleintheimplementationofmonetarypolicy:

- MonetaryPolicy:actionsofacentralbankthatinfluencesthelevelofinterestratesinordertoachieveeconomicoutcomes;primarytargetisinflation

- Inflation:anincreaseinpricesofgoodsandservicesovertime;measuredbytheconsumerprice

index(CPI)

CATEGORIESOFFINANCIALINSTITUTIONS

Therearefivecategoriesoffinancialinstitutionsbasedonthedifferencesbetweentheinstitutions’sourceoffundsandusesoffunds:

1. Depositoryfinancialinstitutions:acceptdepositsandprovideloanstocustomers

Examplesincludewhendepositsplacedindemanddepositaccountsortermdepositaccountswith

o Commercialbanks

o BuildingSocieties

o CreditCooperatives

2. Investmentbanks:specialistprovidersoffinancialandadvisoryservicestocorporations,high-net-worthindividualsandgovernment

Servicesincludeadvisingclientson:

o MergersandAcquisitions

o Portfoliorestructuring

o Financialriskmanagement

NOTE:theymayalsogiveloansbutnotveryoften

3. Contractualsavingsinstitutions:offerfinancialcontractssuchasinsuranceandsuperannuation;largeinvestors

o Liabilitiesaremainlycontractswhichspecifythatinreturnforperiodicpaymentsmadetothe

institution,theinstitutionwillmakespecifiedpayoutstotheholderofthecontractif/whenan

eventspecifiedbythecontractoccurs

o Thelargepoolofcashreceiptsisreinvested

4. Financecompaniesandgeneralfinanciers:borrowfundsdirectfrommarketstoprovideloansand

leasefinancetocustomers

o Raisesfundsbyissuingfinancialinstrumentssuchascommercialpapers,medium-termnotes

andbondsinthemoneymarketsandcapitalmarkets

5. Unittrusts:investorsbuyunitsissuedbythetrust;pooledfundsinvested(e.g.equitytrustsandpropertytrusts)

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1.2FINANCIALINSTRUMENTS

Thefinancialinstrumentbecomesanassetonthebalancesheetoftheprovideroffunds,butaliabilityor

shareholder’sequitydependingonthenatureofthecontractfortheborroweroffunds

Financialinstrumentsmaybedividedintothreebroadcategories:

1. Equity2. Debt3. Derivatives

1.EQUITY

OrdinaryShare/CommonStock:theprincipalformofequityissuedbyacorporation;bestowscertainrightsto

theshareholder

- Havenomaturitydatei.e.permanentinnature- Maybesoldtootherinvestorsonthestockexchange- Sourceofincome=dividendpayments+capitalgain

o Shareholdersareentitledtotheprofitsofthebusinessintheformofdividendso Thevalueofthesharesmayincreaseovertime,representingacapitalgain

Note:thereisnoobligationtopaydividends,paymentsaremadeatthefirm’sdiscretion- Residualrankinginbankruptcy:Intheeventoffailureofthecorporationshareholdersarethelastto

bepaidout- Votingrights

- Ownershipinterests

- Gettoparticipateintheupsideofthecompanybutarealsoexposedtothedownside

HybridSecurities:arefinancialinstrumentsthatincorporatesthecharacteristicsofbothdebtandequity(e.g.

preferenceshares)

- Preferenceshareholdersareentitledtoreceiveaspecifiedfixed-dividendforadefinedperiodsimilar

tofixed-interestpayments

- Thesepaymentstakepriorityoverordinarydividends

- Preferenceshareholdersalsotakepriorityoverordinaryshareholdersduringliquidation

Financialinstrument:issuedbyapartyraisingfunds,acknowledgingafinancialcommitmentandentitling

theholdertospecifiedfuturecashflows

Equity:thesumofthefinancialinterestsaninvestorhasinanasset;anownershipposition

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2.DEBT

DebtInstruments:representacontractualclaimandentitletheholdertoaclaim(aheadofequityholders)to

theincomestreamoftheborrowerand/ortheassetsoftheborroweriftheborrowerdefaults

Longer-TermDebt

InstrumentsIssuedinto

CapitalMarkets

Short-TermDebtInstruments

issuedintoMoneyMarkets

ProvidedbyFinancial

Institutions

- Debentures

- UnsecuredLoans

- CommercialBills

- PromissoryNotes

- TermLoans

- MortgageLoans

- Overdrafts

Debtcanbecategorizedintwoways:

1. Securedvs.Non-Secured:theformerbeingadebtinstrumentthatprovidesthelenderwithaclaim

overspecifiedassetsiftheborrowerdefaults

2. Negotiablevs.Non-NegotiableDebtInstrument:theformerbeingaredebtinstrumentsthatcanbe

soldbytheoriginallenderthroughafinancialmarket

- Temporaryinnature(hasamaturity)- Obligationtorepaythefacevalueatmaturity,oftenwithinterestcosts(periodpayments)

associated- Seniorrankinginbankruptcy- Seniorrankingalsoinincomedistribution

§ Debtisacontractualobligation,unlikedividends

- Consideredtobea‘safe’investment

- Inbankruptcy,debtwillalwaysberepaidunlessthevalueoftheassetsofthefirmarelessthanthe

valueofthedebt

o Interestpaymentsareeither:

§ Fixed,or

§ Floating(BBSW+creditspread)

InterestratedeterminedbyanindicatorsuchastheBBSW

BBSW=BankBillSwapRate(AustralianTerm,overseascalledLIBORLondonInter-BankOvernightRate)

Debt:isaloanthatmustberepaid

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3.DERIVATIVES

Therearefourbasictypesofderivativescontracts:

1. FuturesContract:anexchange-tradedagreementtobuyorsellaspecificcommodityorfinancial

instrumentataspecificpriceatapredeterminedfuturedate

2. ForwardContract:anover-the-counteragreementthatlocksinaprice(interestrateorexchange

rate)thatwillapplyatafuturedate

3. OptionContract:theright,butnottheobligationtobuyorsellacommodityorsecurityata

predeterminedexerciseprice;theoptionbuyerpaysapremiumtotheoptionwriter

4. SwapContract:anagreementbetweentwopartiestoswapfuturecashflows;interestrateswaps

andcurrencyswaps

Theunderlyingassetmaybe:

- Financial

- Physical

- Anotherderivative

Whenyouaretradingderivatives,youaretradingbasedonthepricemovementsoftheunderlyingassetbutyouarenottradingtheunderlyingassetitself.

Derivativesusedto:

- Arbitrageà“exploitingmarketinefficienciesi.e.pricedifferentialswithinmarkets”- Speculate- Hedge

Derivatives:afinancialinstrumentwhosevalueisderivedfromthatofanunderlyingasset

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1.3FINANCIALMARKETS

THEMATCHINGPRINCIPLE

TheGFC:WhytheMatchingPrincipleissoimportant

- Anumberoffinancialinstitutionswerefundinglonger-terminvestmentwithshort-termfinancein

themoneymarkets

- DuringtheGFCshort-termfinancingavailablethroughthemoneymarketceasedbecauseof

uncertaintyinrelationtothesub-primemarketcollapse

- Asaresult,theinstitutionsexperiencedliquidityproblemsastheywerenolongerabletofinance

BalancesheetofbanksduringtheGFC:

Assets Liabilities

Mortgages Wholesalefunding

-Longterm -Short-term‘hotmoney’

-Poorquality(subprime) -Easilyspooked;refusedtorolloverdebt

-Complicatedtoassess Equity

Notasmuchasrequirednow,struggledtoabsorblosses

PRIMARYANDSECNDARYMARKETTRANSACTIONS

Primarymarket:securityissuedforthefirsttimeàthecreationofanewfinancialinstrument

- Capitalraisingforcorporation(/deficitunit)

- Maybenegotiableornon-negotiable

- Ifanofferinggoeswell(beitdebtorequity),thisisgoodpublicityforthefirm

Secondarymarket:iftheassetisnegotiable,thenitcanbesoldonthesecondarymarket.

- Doesnotraisecapitalfortheinitialissuer

- Transferofownership

- Generatesliquidityintheprimarymarket

o Investorflexibility(canonsellwhendesired)

o Transparentpricediscovery

MatchingPrinciple:theideathatshort-termassetsshouldbefundedwithshort-termliabilitiesandlonger-

termassetsshouldbefundedwithlonger-termliabilitiesandequity

Security:financialassetthatcanbetradedinaformalsecondarymarket

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DIRECTFINANCEANDINTERMEDIATEDFINANCE

Theissueofnewfinancialinstrumentsgeneratesaflowoffundsthroughprimarymarketsfromtheproviderof

fundstotheuseroffunds.Thisflowcanoccurintwoways:

1. Thefundsmayflowthroughadirectrelationshipfromtheprovideroffundstotheuseroffunds

2. Theflowoffundsmayoccurthroughafinancialintermediarysuchasabank

DIRECTFINANCE

SurplusUnits--------(BrokersandDealers)-------->DeficitUnits

Transactionsmayincludebrokersanddealers:

- Broker:anagentwhocarriesouttheinstructionsofaclient- Dealer:makesamarketinasecuritybyquotingbothbuy(bid)andsell(offer)prices

THEBENEFITSANDDISADVANTAGESOFDIRECTFINANCE

Directfinanceisgenerallyonlyavailabletocorporationsandgovernmentauthoritiesthathaveestablisheda

goodcreditrating(theassessmentbyacreditratingagencyofthecreditworthinessofanobligortoafinancial

obligation)

Advantages Disadvantages

Removesthecostofafinancialintermediary Therecanbeaproblemofmatchingthepreferenceof

lendersandborrowers

Itallowsaborrowertodiversifyfundingsourcesby

accessingboththedomesticandinternational

moneyandcapitalmarkets

Theliquidityandmarketabilityofadirectfinance

instrumentmaybeofconcern

Itenablesgreaterflexibilityinthetypesoffunding

instrumentsusedtomeetdifferentfinancingneeds Thesearchandtransactioncostsassociatedwitha

directissuecanbequitehigh

Anorganizationmayenhanceitsinternational

profilebycarryingouttransactionsinthe

internationalmarkets

Itcanbedifficulttoassessthelevelofriskof

investmentinadirectissue,particularlydefaultrisk

INTERMEDITEDFINANCE

- Anintermediaryobtainsfundingfromsurplusunits(savers)whoreceivefinancialinstrumentsissued

bytheintermediarysuchastermdepositreceipts

DirectFinance:fundingobtaineddirectfromthemoneymarketandcapitalmarket

IntermediatedFinance:Financialtransactionconductedwithafinancialintermediary

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- Theintermediarythencreatesaseparatecontractualagreementwiththeborrower.

- Thesaverhasnoclaimontheincomeorassetsoftheultimateborrower,thoseentitlementsreside

withtheintermediary

- Thesaveronlyhasclaimonthepaymentofinterestandtheprincipalatmaturity

THEBENEFITSOFFINANCIALINTERMEDIATION

Anessentialroleofanintermediaryistoresolvetheconflictingpreferencesofsurplusunitsanddeficitunits,

andthusencouragebothsavingsandproductivecapitalinvestment.

Intermediariesperformarangeoffunctionsthatareimportanttobothsaversandborrowers:

- AssetTransformation:theabilitytoprovideawiderangeofproductsthatmeetcustomers’portfolio

preferences.Intermediariescanreceivesmallamountsfrommanysaversandpoolthemintolarger

amountsandmakethemavailabletoborrowers

- MaturityTransformation:offeringproductswitharangeoftermstomaturity.Intermediaries

conductliabilitymanagementtoturnshort-termloansintolonger-termborrowings

- CreditRiskDiversificationandTransformation:asaver’screditriskexposureislimitedtothe

intermediary;theintermediaryisexposedtothecreditriskoftheultimateborrower

- LiquidityTransformation:measuredbytheabilityofasavertoconvertafinancialinstrumentinto

cashatsomethingclosetothecurrentmarketpriceofthefinancialinstrument.

Anintermediarymaybeabletolowertransactionfeesbyspreadingfixedcostsacrossalargenumber

oftransactions

- EconomiesofScale:financialintermediariesareabletodevelopcost-efficientdistributionsystems

suchasATMs,EFTPOS,telephoneandinternetbankingetc.

WHOLESALEANDRETAILMARKETS

Institutionalinvestorsinclude:

- Commercialbanks -Buildingsocieties

- Insuranceoffices -Creditunions

- Superannuationfunds -Governmentauthorities

- Investmentbanks -Largecorporations

- Fundmanagers -Financecompanies

- Wholesaleinvestorscanaccumulatelargequantitiesofsurplusfundsandusetheirmarketpowerand

investmentskillstoobtainhigherreturnsthatwouldnormallybeavailableintheretailmarket.

- Wholesaleborrowerscanusetheirgoodcreditstandinginthemarkettoaccessthosefunds

WholesaleMarket:directfinancialflowtransactionsbetweeninstitutionalinvestorsandborrowers

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- Marketparticipantsarepricetakersi.e.financialintermediariescansetbothdepositandlending

ratesofinterest

- Retailinvestorsaren’ttotallyexcludedfromthewholesalemarkets,theyareabletoaccessitthrough

managedinvestmentproductssuchascashmanagementaccountsandunittrusts

MONEYMARKETS

- Consideredshort-termifthetimetomaturityislessthan12months

- Themoneymarketisattractivetoinstitutionalinvestorsasthemarketsare(normally)highlyliquid

andthesecuritiesgenerallyhavewelldevelopedsecondarymarkets

- Itallowsthemtoinvestsurplusfundswhilealsobeingavailableforanyfinancingneeds

- Itisusedbyborrowerstobridgethemismatchbetweentheirshort-termcashexpenditurewiththeir

short-termcashreceipts

MONEY-MARKETSUBMARKETS

Moneymarketscompriseanumberofsubmarketsincluding:

- CentralBank:SystemLiquidityandMonetaryPolicyo Centralbanksusethemoneymarketstocarryouttransactionsthatwillmaintain,orchangethe

amountofliquiditythatisavailablewithinthefinancialsystem

o TheCentralbankimplementsitsmonetarypolicybytargetingthecashrate,hencethecentral

bankcarriesoutmoneymarkettransactionssothatthecashrateremainsatitstargetlevel

- Inter-BankMarketo Thelendingandborrowingofveryshorttermfundsbybanksinthepaymentssystem

- BillsMarketo Discountsecuritiesareshorttermsecuritieswithafacevaluepayableatmaturitysoldataprice

lessthanthefacevalueanddonotofferanyinterest

- CommercialPaperMarketo Commercialpapersarepromissorynotes(discountsecurities)issuedintothemoneymarketby

corporationswithagoodcreditrating

o Somesegmentsofthemarketcomprisetheissueofcommercialpaperswithasset-backed

securitiesbutthismarkethassinceevaporatedduetotheGFCasmanyofthoseassetsturned

outtobesub-primesecuritieswithahighriskofdefault

- NegotiableCertificateofDepositMarketo Adiscountsecurityissuedbythebank

RetailMarket:comprisesoftransactionsprimarilyofindividualsandsmalltomediumsizedbusinesses

MoneyMarkets:wholesalemarketsinwhichshort-termsecuritiesareissuedandtraded

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CAPITALMARKETS

- Consideredshort-termifthetimetomaturityismorethan12months

EQUITYMARKET

EquityMarket:facilitatetheissueoffinancialsecuritiesthatrepresentownershipinterestsinanasset(e.g.stock)

Equityprovidesasourceoflong-termfundingthatdoesnothavetoberepaid.Equityisavailableto:

- Financephysicalinfrastructuresuchasbuildingsandequipment

- Providecreditorconfidenceindealingwiththefirm

- Ensuretheavailabilityoffundstoabsorbabnormallosses

- Improvetheliquidityofthebusiness

CORPORATEDEBTMARKET

Medium-to-longertermdebtinstrumentsissuedintothecorporatedebtmarketinclude:

- Termloans:providedbycommercialandinvestmentbanks

- Commercialpropertyfinance:loanssecuredbyaregisteredmortgageoverthebusinessproperty

beingfinanced

- Debentures:acorporatebond,wheresecurityisgivenintheformofachargeovertheassetsofthe

borrower

- Unsecurednotes:acorporatebondwithnosecurityattached- Subordinateddebt:wheretheclaimsofthedebtholderaresubordinatedagainstotherdebtlenders

- Leasearrangements:periodicleasepaymentsmadeinreturnforborrowinganasset

- Securitization:thesaleofexistingassets,suchasmortgageloanstogeneratenewfunds

GOVERNMENTDEBTMARKET

Governmentsneedtobudgetwithregardtotheircashflowandcapitalexpenditure.

- Governmentfundbudgetdeficitsthroughlong-termborrowingsinbothdomesticandinternational

capitalmarkets

- Ifthegovernmenthasshort-termliquidityfundingneedduetoamismatchofcashinflowsfromm

taxationandcashoutflowstomeetcommitmentssuchaspensionpayments,thismaybemanaged

throughshorttermsecurities

- Asideeffectofgovernmentborrowingsis‘crowdingout’

- Crowdingout:governmentborrowingthatreducesthenetamountoffundsavailableforother

lendinginthefinancialsystem

CapitalMarkets:marketsforlonger-termfunding;includesequity,corporatedebtandgovernmentdebt

andissupportedbytheforeignexchangeandderivativesmarket

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FOREIGNEXCHANGEMARKET

TheForeignexchangemarketfacilitatesthebuyingandsellingofforeignsecurities.

- Financialinstrumentsissuedintheinternationalcapitalmarketsareusuallydenominatedinaforeign

currency

- Therefore,interestpaymentsandprincipalrepaymentsrelatedtointernationaldebtcommitments

requiretheborrowertopurchasethenecessaryforeigncurrencyinordertomakethosepayments

- Foreignexchangeriskistheriskthattheexchangeratebetweencurrencieswillchange

DERIVATIVESMARKET

DerivativesMarketsaremarketsinsyntheticriskmanagementproducts;futures,forwards,optionsandswaps

tohelpborrowersmanageriskassociatedwithcapital-markettransactions

Theprincipalriskstobemanagedinclude:

- Interestraterisk

- Foreignexchangerisk

- Pricerisk

1.4FLOWOFFUNDS,MARKETRELATIONSHIPSANDSTABILITY

- Amodernfinancialsystemfacilitatestheefficientflowoffundsfromprovidersoffundstousersof

funds

- Asstrongfinancialsystemwillencouragesavingsandinvestment,whichshouldleadtoeconomic

growth

- Thesectorialflowoffundsinadomesticeconomycanbedividedintofoursectors:

1. BusinessCorporations

2. FinancialCorporations

3. Government

4. Households

- Anadditionalsectoristhe‘rest-of-the-world’sector

- Asectormaybeasurplusordeficitsectordependingonwhetheritisanetprovideroffundsoranet

useroffunds

- Financialcrises,suchastheGFChaveasignificantdisruptiveimpactontheflowoffundsinthe

financialsystemandhighlighttheimportantofstabilitywithinthefinancialsystem

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2.THEBANKINGSYSTEM

- Thereisadirectcorrelationbetweenthenatureofcommercialbankbusiness,therelativesizeofthe

banksandthelevelofbankregulation

- Mostdevelopedeconomieshavesignificantlyreducedthelevelofbankregulationi.e.deregulationandtherehasthereforebeenconsiderablegrowthinthecommercialbankingsector

Importanceofbanks:amajor“financialintermediation”whichprovidesthefollowingbenefitstothefinancial

system(discussedintopic1)

2.1THEMAINACTIVITIESOFCOMMERCIALBANKING

Thecorefunctionofcommercialbanksistogathersavingsfromdepositorsandinvestors(surplusunits)and

usethosefundsintheprovisionofloanstocustomers(deficitunits).

- Pre-1980sregulated;Assetmanagement:o Abankrestrictsgrowthinitslendingtotheleveloffundsavailablefromitsdepositorbase

- Post-1980sderegulated;Liabilitymanagemento Abankactivelymanagesitssourcesoffunds(liabilities)tomeetfutureloandemands(assets)

o Borrowdirectlyfromdomesticandinternationalcapitalmarkets

o Provisionofotherfinancialservices

o Off-balance-sheet:contingentliabilitiessuchasthepromisetofinancefuturetrade

transactions

Assets Liabilities

- Personaland

housingfinance

- Commercial

lending

- Lendingto

Government

- Otherbankassets

- Currentaccountdeposit

- Calldeposit

- Termdeposit

- Certificatesofdeposit

- Billacceptanceliabilities

- Debtliabilities

- Foreigncurrencyliabilities

Equities

- Loancapital(hybridsecurities)and

shareholders’equity

CommercialBanks:arethemaintypeoffinancialinstitutionthatoperateswithinafinancialsystemand

provideafullrangeoffinancialservices

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2.2SOURCESOFFUNDS

LIABILITIESANDEQUITIES

Sourcesoffundsappearinthebalancesheetaseitherliabilitiesthatthebankwilleventuallyrepayoras

equityfundsprovidedbyshareholders.

Banksofferarangeofdepositandinvestmentproductswithdifferentmixesofliquidity,return,maturityand

cashflowstructuretoattractthesavingsofsurplusentities:

1. Currentaccountdeposits2. Callordemanddeposits3. Termdeposits4. Negotiablecertificatesofdeposit

5. Billsacceptanceliabilities6. Debtliabilities7. Foreigncurrencyliabilities8. Loancapitalandshareholder’sequity

1.CURRENTACCOUNTDEPOSITS

CurrentAccountDeposits:liquidfundsheldinachequeaccount;chequedrawntopurchasegoodsandservices�

- Highlyliquid�- Maybeinterestornon-interestbearing- Interestpaid(ifany)isusuallyquitelowandreflectsthehighlyliquidnatureoftheaccount�

2.CALLORDEMANDDEPOSITS

Callordemanddeposits:fundsheldinsavingsaccountsthatcanbewithdrawnon�demand�

- Heldinaccountsotherthanachequeaccountwherethefundsareavailableondemand

- Generallyreferredtoassavingsaccounts

- Receivesverysmallinterestpaymentsasitisveryliquid

- Traditionallychargetransactionandaccountservicefees

- E.g.passbookaccount,electronicstatementaccountwithATMandEFTPOS�

3.TERMDEPOSITS

Termdeposit:fundslodgedinanaccountforapredeterminedperiodataspecifiedinterestrate

- Term:onemonthtofiveyears

- Lossofliquidityowingtofixedmaturity

- Higherinterestratethancurrentorcallaccountsduetolossofliquidity

- Generallyfixedinterestrate

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4.NEGOTIABLECERTIFICATESOFDEPOSITS

CertificateofDeposit:ashort-termdiscountsecurityissuedbyabank;facevaluerepayableatmaturity

- Issueddirectlyintothemoneymarket- Issuedatadiscounttofacevalue- SpecifiesrepaymentofthefacevalueoftheCDatmaturity- Negotiablesecurity:canbesoldintoadeepandliquidsecondarymarket- Shortterm(30to180days)

5.BILLACCEPTANCELIABILITIES

BillofExchange:ashort-termsecurityissuedintothemoneymarketatadiscounttothefacevalue.Theface

valueisrepaidtotheholderatmaturity.Thebankmayactaseithertheacceptortothebillorthebankmay

discountthebill.

Acceptance

- Bankacceptsprimaryliabilitytorepayfacevalueofbilltoholder

- Issuerofbillagreestopaybankfacevalueofbill,plusafee,atmaturitydate

- Acceptancebybankguaranteesflowoffundtoitscustomerswithoutusingitsownfunds

6.DEBTLIABILITIES

Bond:securitieswhichpayaregularinterestcoupontotheholder,andtheprincipalpaidatmaturity.Interest

canbefixedorvariable.

- Debenture:abondsupportedbyaformofsecurityattachedtoacorporatebond,beingachargeover

theassetsoftheissuer(e.g.collateralizedfloatingcharge)- UnsecuredNote:abondissuedwithnosupportingsecurity

7.FOREIGNCURRENCYLIABILITIES

ForeignCurrencyLiabilities:debtinstrumentsissuedintotheinternationalcapitalmarketsthatare

denominatedinaforeigncurrency

- Allowsdiversificationoffundingsourcesintointernationalmarkets

- Facilitatedmatchingofforeignexchangedenominatedassets

- Meetsdemandofcorporatecustomersforforeignexchangeproducts

8.LOANCAPITALANDSHAREHOLDERS’EQUITY

Sourcesoffundsthathavecharacteristicsofbothdebtandequity(e.g.subordinateddebenturesand

subordinatednotes)

- Subordinatedmeanstheholderofthesecurityhasaclaimoninterestpaymentsortheassetsofthe

issuer,afterallothercreditorshavebeenpaid(excludingordinaryshareholders)

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2.3USESOFFUNDS

ASSETS-USESOFFUNDS

Usesoffundsappearinthebalancesheetasassets

Themajorityofbankassetsareloansthatgiverisetoanentitlementtofuturecashflows(i.e.interest

repaymentofprincipal:

1. Personalandhousingfinance2. Commerciallending3. Lendingtogovernment4. OtherBankAsset

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1.PERSONALANDHOUSINGFINANCE

1.HousingFinance:theprovisionoflong-termfundstoenablethepurchaseofresidentialproperty.Involves

registeringamortgageoverapropertyandpaidthroughregularamortizedloaninstalments.

- Mortgage:aformofsecuritywherebyalenderregistersaninterestoverthetitleofaproperty

- Amortizedloaninstallments:regularandequalloaninstallmentsthatcomprisethecurrentinterest

paymentduepluspartrepaymentoftheloanprincipaloutstanding

Securitization:wherenon-liquidassetssuchasmortgagesaresoldintoatrust;thetrusteeissuesnew

securities;cashflowsfromtheoriginalsecuritiesareusedtorepaythenewsecurities

- E.g.abankgroupsupalargenumberofmortgagesandcombinesthemintoatrust- Thismortgagebackedsecurityisthensoldtoinvestorsforadditionalfunds- Cashflowsreceivedfromthemortgagearethendistributedtoinvestors

2.Investmentpropertyfinance:fundingthatenablesaborrowertopurchasepropertytorentorleasetoathirdparty.Hereabankalsohasaregisteredmortgageovertheproperty

3.Fixed-termloan:aloanprovidedforapredeterminedperiod;usedtopurchasespecifiedgoodsorservices

4.Creditcard:acardfacilitythatprovidesaccesstofundsthroughelectronicdistributionsystem:ATMs,

EFTPOS

2.COMMERCIALLENDING

Involvedbankassetsinvestedinthebusinesssectorandlendingtootherfinancialinstitutions

1.Fixed-termloan:aloanwithnegotiatedtermsandconditions:

- Periodoftheloan- Interestratesi.e.fixedorvariableratessettoaspecifiedreferencerate(e.g.BBSW)àBankBillSwap

Rate(BBSW):theaveragemid-pointofbanksbidandofferratesinthebankbillsecondarymarket- Timingofinterestpayments- Repaymentofprincipal

2.Overdraft:anarrangementwithabankthatallowsabusinesstoplaceitsoperatingaccountintodebitupto

anagreedlimit

3.Commercialbills:abillofexchangeissuedtoraisefinanceforabusiness;adiscountsecurity;maybesold

intothemoneymarket

- Bankbillsheld:Billsofexchangeacceptedanddiscountedbyabankandheldasassetsinsteadofbeingresoldintothemoneymarket

4.Rolloverfacility:anarrangementwherebyabankagreestodiscountnewbillsoveraspecifiedperiodas

existingbillsmature

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5.Leasing:anarrangementinwhichtheownerofanasset,thelessor,allowsalesseetousetheassetin

returnforperiodicleasepayments

3.LENDINGTOGOVERNMENT

1. Treasurynotes(T-Notes)o Short-termdiscountsecuritiesissuedbythecommonwealthgovernment

o Discountsecurity,payableatmaturity

1. Treasurybondso MediumtolongertermsecuritiesissuedbytheCommonwealthgovernment

o Paysaspecifiedinterestcouponstreamperiodically

2. Stategovernmentdebtsecurities

Lowriskandlowreturn

ThereareotherbenefitsofGovernmentsecurities:

- Areaninvestmentalternativeforsurplusfundsthatabankisholding

- Areasourceofliquidityastheycanbeeasilysoldinthesecondarymarketwhenfundsareneededfor

furtherlending

- Providesincomestreamsandpotentialcapitalgains,whereasholdingcashdoesnot

- Maybeusedascollateraltosupportbank’sownborrowingsinthedirectfinancemarkets

- MaybeusedforaRepurchase(REPO)Agreementswiththecentralbankinordertoraiseclearedfundsforpaymentsettlements

- Improvethequalityofthebalancesheetbyholdingagroupofassetswithlower-riskattributes

- Enableabanktomanagethematuritystructure(matchingprinciple)ofitsbalancesheetby

purchasingsecuritieswitharangeofmaturitiesandcashflows

- Allowabanktomanageitsinterestrateriskbybuyingandsellingsecuritieswithdifferentinterest

ratestructures

4.OTHERBANKASSETS

Suchaselectronicnetworkinfrastructureandsharesincontrolledentities

2.4OFF-BALANCESHEETBUSINESS

OBStransactionsareasignificantpartofabank’sbusiness.OBStransactionscanbedividedintofourmajor

categories:

1. Directcreditsubstitutes–SBLC2. Tradeandperformancerelateditems–DocLC

3. Commitments–underwritings,repos4. Foreignexchange,interestratesandothermarketraterelatedcontracts

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1.DIRECTCREDITSUBSTITUTES

Directcreditsubstitute:anundertakingprovidedbyabanktosupportthefinancialobligationsofaclient

- Contingentliabilityenteredforafee

- Includes:guarantees,indemnitiesandlettersofcomfort

2.TRADEANDPERFORMANCERELATEDITEMS

Trade-and-performancerelateditem:anundertakingprovidedbyabanktoathirdpartypromisingpayment

underthetermsofaspecifiedcommercialcontract.

- Documentarylettersofcredit:whereabanksubstitutesitscreditstandingforthatofitsclient- Performanceguarantees:whereabankagreestoprovidefinancialcompensationtoathirdpartyifa

clientdoesnotcompletethetermsandconditionsofacontract

3.COMMITMENTS

Commitments:thecontractualfinancialobligationsofabankthatareyettobecompletedordelivered

- Bankundertakestoadvancefundsormakeapurchaseofassetsatsometimeinthefuturesuchas:

o Forwardpurchasesagreements:whereabankcontractstobuyaspecifiedasseto Underwritings:abankguaranteesaclientthat,subjecttoarangeofconditions,itwillcover

anyshortfallsinfundsreceivedfromaprimarymarketissueofdebtorequitysecuritieso Repurchaseagreements:abanksellsanassetsuchasgovernmentsecurities,onthe

understandingthatthebankwillrepurchasethemataspecifieddate(forahigherprice)o Loansapprovedbutnotyetdrawndowno Creditcardlimitapprovalsthathavenotyetbeenusedbycardholders

4.FOREIGNEXCHANGE,INTERESTRATESANDOTHERMARKETRATERELATEDCONTRACTS

Theuseofderivativeproductstomanageexposurestoforeignexchangerisk,interestraterisks,equityprice

riskandcommodityrisk(i.e.hedging)

- Forwardexchangecontracts:abankcontractstobuyorsellatafuturedateaspecifiedamountofa

foreigncurrencyatanexchangeratethatissettoday

- Currencyswaps:abankexchangesaprincipalamountandongoingassociatedinterestpaymentsthat

aredenominatedinaforeigncurrency

- Forwardrateagreements:acompensationagreementbetweenabankandclientbasedonanotional

principalamount.Onepartycompensatestheotherpartyifinterestratesmoveaboveorbelowan

agreedinterestrate.

- Interestratefuturescontracts:exchange-tradedagreementstobuyorsellaspecificsecurityata

specificpriceatapredeterminedfuturedate

- Interestrateoptionscontract:providestheright,butnottheobligation,tobuyorsellaspecifiedfinancialinstrumentatanagreeddateandprice

- Equitycontracts:includesfuturesandoptionscontractsbasedonspecifiedstockpricesorstockindices.Thesecontractslockintheequitypricetodaythatwillapplyataspecifiedfuturedate

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VOLUMEOFOFF-BALANCESHEETBUSINESS

- TotheextentthattheseOBSactivitiesinvolverisk-takingandpositionsinderivativesecurities,OBS

activitiesraisesomeconcernaboutbankregulation

- Thisisparticularlyimportantconcernwhenthesizeofoffbalancesheetactivitiesisconsidered

- Thenotionalvalueofsuchactivitiesismorethan5timesthetotalvalueofassetsheldbythebanks

2.5REGULATIONSANDPRUDENTIALSUPERVISION

- TheGFChighlightedtheimportanceofeffectiveregulatoryframeworks

- Anumberoffinancialinstitutionscollapsedduringthecrisis�

- Theamountofleverageonthebalancesheetsoftheseinstitutionswasaprimaryfactorcontributing

totheirweakness�

- Debateconcerningbankregulationandprudentialsupervisionhasconcentratedonhowregulators

canmaintainastablefinancialsystem�

- Reasonsforregulationofbanks�

o Importanceofthebankingsectorforhealthoftheeconomy

- Prudentialsupervision

o Impositionandmonitoringofstandardsdesignedtoensurethesoundnessandstabilityofa

financialsystem

AUSTRALIANREGULATORYSTRUCTURE

- ReserveBankofAustralia(RBA):systemstabilityandpaymentssystem

- AustralianPrudentialRegulationAuthority(APRA):prudentialregulationandsupervisionofdeposit-takinginstitutions

- AustralianSecuritiesandInvestmentsCommission(ASIC):marketintegrityandconsumerprotection

- AustralianCompetitionandConsumerCommission(ACCC):competitionpolicy

2.6BACKGROUNDTOCAPITALADEQUACYSTANDARDS

Thebusinessactivitiesoffinancialinstitutionswillinevitablyinvolvetheneedtowrite-offofabnormal

businesslosses

- Liabilitiescannotbewrittenoffasthesemustbepaidwhendue

- HenceCapitalheldbyfinancialinstitutionsservesasthe‘buffer’againstsuchlosses

- Ifcapitalisinadequate,afinancialinstitutionmayfaceinsolvency.

- Thishassignificantimplicationsforthestabilityofthefinancialsystem�

- ThecapitaladequacystandardssetdowninBaselIIandIIIdefinetheminimumcapitaladequacyfora

bank�

- Thestandardsaredesignedtopromotestabilitywithinthefinancialsystem�

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Functionsofcapital

- Sourceofequityfundsforacorporation

- Demonstratesshareholdercommitment�

- Providesfundingforgrowthandsourceoffutureprofits

- Write-offperiodicabnormalbusinesslossesà�absorbslosses/protectsothercreditholders

- Lowerinsurancepremiumsasthefirmbecomeslessrisky

Theevolutionoftheinternationalfinancialsystemledtodevelopmentofinternationalcapitaladequacy

standardsinordertostrengthentheglobalfinancialsystem

- 1988BaselIcapitalaccordandBaselII(2008)capitaladequacyguidelines�- BaselIII(2010)�

2.7BASELIIANDBASELIII

MainelementsofBaselII

- Creditriskofbanks’assetsandOBSbusiness- Marketrisksofbanks’tradingactivities- Operationalrisksofbanks’businessoperations- Formandqualityofcapitalheldtosupporttheseexposures- Riskidentification,measurementandmanagementprocessesadopted�

- Transparencythroughaccumulationandreportingofinformation�

MINIMUMCAPITALADQUACYREQUIREMENT

- Minimumrisk-basedcapitalratioof8%

o Minimum4%heldasTier1capital

§ Highestqualitycorecapital�

o RemaindercanbeheldasTier2(supplementary)capital

§ UpperTier2–specifiedpermanenthybridinstruments�

§ LowerTier2–specifiednon-permanentinstruments�

- Regulatorcanrequireaninstitutiontoholdarisk-weightedcapitalratioabove8%

THEDEFINITIONOFCAPITAL

Tier1Capital:corecapital,consistsofthehighestqualityofcapitalelementsthatfullysatisfyalltheessential

capitalcharacteristics:

- Provideapermanentandunrestrictedcommitmentoffunds

- Theyarefreelyavailabletoabsorblosses

- Theydonotimposeanyunavoidableservicingchargeagainstearnings

- Theyrankbehindtheclaimsofdepositorsandothercreditorsintheeventofwinding-up

- E.g.ordinaryshares,retainedearnings,disclosedreserves,anyminorityinterests

Tier2Capital

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- UpperTier2:consistsofelementsthatareessentiallypermanentinnature,includingsomehybrid

capitalinstruments,mandatoryconvertiblenotes,perpetualsubordinateddebt

- LowerTier2:consistsofinstrumentsthatarenotpermanent–i.e.datedorlimitedlifeinstruments

e.g.termsubordinateddebt

BASELIISTRUCTURALFRAMEWORK

PILLAR1–CAPITALADEQUACY

1.1CREDITRISK

CreditRisk:riskthattheborrowerwillnotmeetcommitmentswhendue.

Therearethreealternativewaysforabanktomeasurecreditrisk:

1. TheStandardisedapproach2. TheFoundationInternal-RatingsBasedApproach(FIRB)

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3. TheAdvancedInternalRatings-BasedApproach(AIRB)

StandardisedApproach:

- Riskweightsappliedtobalance-sheetandOBSitemstocalculateminimumcapitalrequirement

- Riskweightsderivedfromexternalratinggradeorsupervisor

- Forresidentialhousingloans,riskweightrelatestoloan-to-valuationratio(LTVR)andlevelof

mortgageinsurance

- OBSitemsconvertedtobalance-sheetequivalentsbydeterminingthecreditconversionfactorandmultiplyingbytheapplicableriskweighting

- Non-market-relatedOBStransactions,e.g.documentaryletterofcredit

- Market-relatedOBStransactions–creditconversionfactorcanbedeterminedby:

o Currentexposuremethod–currentandpotentialcreditexposuresmark-to-market(contract

revaluedbyitscurrentquotedprice)

o Originalexposuremethod–notionalcontractvaluemultipliedbyacreditconversionfactor

Internalratings-basedapproachinvolvesbanksusingsomeoralltheirownriskmeasurementmodelfactors,

subjecttosupervisorapproval.Twoapproachesavailable:

1. FoundationInternalRatings-BasedApproach(FIRB)a. Bankdeterminesprobabilityofdefaultandeffectivematuritybutreliedonsupervisor

estimatesforothercreditriskcomponents

2. AdvancedInternalRatings-BasedApproach(AIRB)a. Bankprovidesestimatesofallcreditriskcomponents

1.2OPERATIONALRISK

Operationalrisk:riskoflossfrominadequateorfailedinternalprocesses,peopleandsystems,orexternal

eventsE.g.internal/externalfraud,workplacesafety,businesspractices,damagetophysicalassets,systems

failure

Mainoperationalriskmanagementobjectives:

1. Operationalobjectives—impactoflossofbusinessfunctionintegrityandcapability�

2. Financialobjectives—lossesowingtooperationalriskexposure,costofrecoveringoperationsand

ongoingfinanciallosses�

3. Regulatoryobjectives—prudentialstandardsofbanksupervisors�

Businesscontinuitymanagement:isthemaintenanceofstrategiestoensurethecontinuationofcritical

businessfunctions

BaselIIrequiresbankstoholdadditionalcapitaltosupportexposuretooperationalrisk

Withthestandardizedapproachtooperationalrisk,aninstitutionisrequiredtomapanddivideitsactivities

intotwoareasofbusiness:

1. Retail/commercialbanking

2. Allotheractivities

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Institutionmustdocumentitsmappingprocess,detailingpolicyandprocedurestomapthefullrangeof

businessactivities.Thisprocessmustbesubjecttoindependentreview.

1.3MARKETRISK

MarketRisk:riskoflossesresultingfromchangesinmarketratesinFOREX,interestrates,equitiesand

commodities

- Generalmarketrisk:changesintheoverallmarketforinterestrates,equities,FOREXandcommodities�

- Specificmarketrisk:changesinthevalueofasecurityowingtoissuer-specificfactors.Affectsonlyinterestrateandequitypositionsofinstitutions�

Twoapproachestomarketriskcapitalrequirements�

1. Internalmodel—mustbeapprovedbytheprudentialsupervisorandrequiresastatisticalprobability

modelthatmeasuresfinancialriskexposures,i.e.valueatrisk(VaR)2. Standardizedapproach

PILLAR2–SUPERVISORYREVIEWOFCAPITALADEQUACY

Supervisoryreviewprocessisintendedto:

- Ensurebankshavesufficientcapitaltosupportalltheriskexposuresintheirbusiness

- Encouragebankstodevelopanduseimprovedriskmanagementpoliciesandpracticesinidentifying

andmeasuringandmanagingriskexposures

Abank’ssupervisorisexpectedtoevaluatehowwellthebankisactuallyassessingitscapitalneedsrelativeto

itslevelofrisk,andareexpectedtointervenewhenassessmentsseeminadequate.

Pillar2seekstoencouragebankstobetterunderstandandaccountforrisksincompletely/notcapturedin

Pillar1andfactorsexternaltothebank,likeachangingbusinesscycle.

TheBaselcommitteeonBankingSupervisionhasidentifiedfourkeyprinciplesofsupervisoryreview:

1. Banksshouldhaveaprocessforassessingtheiroverallcapitaladequacyinrelationtotheirriskprofile

andastrategyformaintainingtheircapitallevels

2. Supervisorsshouldreviewandevaluatebanks

3. Supervisorsshouldexpectthebankstooperateabovetheminimumregulatorycapitalratiosand

shouldhavetheabilitytorequirethebankstoholdcapitalinexcessoftheminimum

4. Supervisorsshouldseektointerveneatanearlystagetopreventcapitalfallingbelowtheminimum

levelstosupporttheriskcharacteristicsofabankandshouldrequirerapidremedialactionifcapitalis

notmaintainedorrestored

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PILLAR3–MARKETDISCIPLINE

Aimistodevelopdisclosurerequirementsthatallowthemarkettoassessinformationonthecapitaladequacy

ofaninstitution,i.e.increasethetransparencyofaninstitution’sriskexposure,riskmanagementandcapital

adequacy

- Prudentialsupervisorstodetermineminimumdisclosurerequirementsandfrequency�

- BaselIIrecommendsarangeofqualitativeandquantitativeinformationdisclosurerelatingto

principalpartsofPillarsIandII�

BASEIII –BROADFRAMEWORK

BaselIIIwasdevelopedin2010.

- AimstoenhancetheriskcoverageoftheBaselIIframeworkbyenhancingcapitaladequacy

requirements

- ItisgenerallyacceptedthatAustralianADIsarewell-placedtomeettherequirementsoftheBaselIII

Threeprincipalaims:

1. Boostthebankingsector’sabilitytoabsorbshocksarisingfromfinancialandeconomicstress,

2. Improveriskmanagementandgovernance,and

3. Strengthenbanks’transparencyanddisclosure.

1.STRENGTHENCAPITALBASE

- IncreaseminimumTier1capitalto6%(4%inBaselII)ofrisk-weightedassets(RWA)by2015.

- IncreaseminimumCommonEquityTier1capitalto4.5%(2%inBaselII)ofRWAby2015.

- Improvethequalityofcapital(e.g.tighterdefinitionofCommonEquityTier1capitaltoincludeonly

commonstocks,retainedearnings,andothercomprehensiveincome).�

- Createcapitalconservationbuffer(new)foruseduringafinancialcrisisandeconomicdistress.

(Startingfrom0.625%ofRWAin2016andincreasingto2.5%ofRWAby2019.)�

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2.LIQUIDITYREQUIREMENTS

- Minimumliquiditycoverageratio(LCR)toensurebankshavesufficienthigh-qualityliquidassets(HQLA)forexpectednetcashoutflowsovera30-dayperiodstressscenario.�

- Minimumnetstablefundratio(NSFR)toensurethatassetsatgreaterriskofsufferingaone-yearstresseventarematchedwithlongertermsourcesoffinancing.�

3.GOVERNANCE&SYSTEMATICRISKMITIGATION

- Createfirm-widegovernanceandriskmanagement.�

- Requiresoundcompensationpractices.�

- Widencoverageofrisks(e.g.highercapitalrequirementsforsecuritizationexposure,counterparty

creditrisk,OTCactivities,etc.).�

- Createcountercyclicalcapitalbuffer(new)tomitigatesystemicriskduringafinancialcrisisand

economicdistress.�

- Setmaximumleverageratiostopreventexcessleverageingoodtimesandreducethedeleveraging

dynamicinperiodsofstress.�

- Identifyglobalsystemicallyimportantbanks(G-SIBs)forspecialtreatment(e.g.,greaterloss

absorbency,moreintensesupervisoryoversight,strongerresolution,reducingtheirsystemic

importanceovertime,etc.).�

2.8LIQUIDITYMANAGEMENTANDOTHERSUPERVISORYCONTROLS

Liquidity:accesstosourcesoffundstomeetday-to-dayexpensesandcommitments

Tutor’sdefinition:Aliquidmarketisoneinwhichyoucaneasilyfindacounterpartytoyourtrade,inamanner-thatistimely-haslowtonotransactioncostsofwhichthemaintransactioncostisabid-askspread/brokercommission-atfairmarketprice

Bankshavespecialliquidityproblemsowingto:

- Mismatchinmaturitystructureofbalancesheetassetsandliabilitiesandassociatedcashflows�

- Roleofbanksinthepaymentssystem�

LiquidityprudentialstandardAPS210(APRA)

- Theboardofdirectorsandmanagementmustimplementaliquiditymanagementstrategy,whichis

reviewedannually

- Asystemformeasuring,assessingandreportingliquidity

- Manageliquidityrelatedtobalance-sheetandOBSactivities

- Emphasisonbanks’internalliquiditymanagementpractices

- Strategymustincludeacontingencyplan- APRAreservesrighttospecifyminimumlevelofliquidassets�

APRAstipulatesthattwoscenariosmustbeaddressed:

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- Goingconcern:referstothenormalbehaviorofcashflowsintheordinarycourseofbusiness.Abank

mustbeabletospecifyhowitsliquidityobligationsandcommitmentsaretobemetonaday-to-day

basisoveratleastthenext30days- NameCrisis:referstothebehaviorofcashflowsinadverseoperatingcircumstances.Abankmustbe

abletodemonstrateitisaletoaccesssufficientliquiditytokeepoperatingduringthecrisissituation

foratleastfivebusinessdays

SUPERVISORYCONTROL

- APRA’sliquiditystandardAPS210aimstoensurethatbankstonotfaceasituationwheretheyhave

insufficientfundstomeettheirobligations�

- BaselIIIintroducesseveralreformstoliquiditystandards.Thefirstofthese(theLCR)willbecome

effectivein2015�

- ThemostimportantofthesereformsaretheLiquidityCoverageRatio(LCR)andtheNetStableFundingRatio(NSFR)�

- Therequirementwillbefortheseratiostoexceed100percent.InthecaseoftheLCR,thismeansthat

bankswillhavetoallowfora30day‘survivalhorizon’�

- ThisrequirementwillbeseveraltimesstricterthantheexistingAPRAliquiditystandards.APRA’s

currentstandardsallowfora5-daysurvivalhorizon(i.e.Enoughliquiditytosurvivea5dayperiodof

acutestress)�

- Otherregulatoryandsupervisorycontrols:

o Riskmanagementsystemscertification�o Businesscontinuitymanagement�o Audit�o Disclosureandtransparency�o Largeexposures�o Foreigncurrencyexposures�o Ownershipandcontrol�