Notesale: Turn your study into money

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INES KIRANE
HULT BBA - Y1 - SEM 2

FIN200
1 - OUTLINE
LECT 1/2

Answer to the questions of Last course:
(1) Difference between the interest rate and the Yield of the bond: whatever is attached to
the borrowing is called interest; When we buy and sell the bonds, fluctuate (the return
of the bond might be more than the interest we paid)
- Yield = Return --> what the investor makes out of it
...
Decided by the issuer of the bond
...
Helps to see whats
happening of the overall equity market
...

• DAX for German
• CSCE 40 For france
...


BANKING - RETAIL & CORPORATE
- Money once deposited, odes not sit in a bank vault — at least most of it — is lent out to people
wanting to, say, buy a house or set up a business
...

- Investment bank ➔ a fantastic array of services that our forebears would not have dreamed of:
- prime brokers for hedge funds
- trading in commodity derivatives in dozens of currencies
- Depository institutions / DTIs (Deposit Taking Institutions) ➔ Other institutions conduct
banking activities:
- building societies
- saving and loan associations

1
...

- Taking deposits ➔ the most important and the core purpose of banking
...

- Making loans ➔
- providing payment mechanisms ➔
- Universal banks ➔
- Retail and wholesale commercial banking
...

- 4 types of banking:
- concentration on providing services in just 1/ or 2 segments
- Universal banks offering a full rage of banking
...
1 An overview of the different aspects of banking
Characteristics
CORE BANKING

Clients: mainly
household and
small firms

Holding deposits
Making loans
Payment mechanisms

Other services

CORPORATE BANKING
The three core functions as above
Plus
Cash management

–
–
–
–
–
–
–
–

stockbroker
asset manager
insurance
foreign exchange
pensions
leasing
hire purchase
factoring

Numerous
small
transactions
Extensive
branch
network
for clients
Clients: mainly
large firms

Guarantees

- Benefits of the
-

economy of
scale
The use by ≠
parts of the
Bank of capital
resources <->
against
increasingly
complex cultural
difficulties
...


- ⚠ Not every person in the UK has a current account
...
≠ Direct debit: the company sets it up and debit directly (it can be different
depending on what the company wants to charge) like the phone bill
...


2

FIN200
1 - OUTLINE
LECT 1/2

INES KIRANE
HULT BBA - Y1 - SEM 2

- Cash management ➔ if you have la large amount of money on an account the inflation can eat
it up so infesting on the money market is an option
...

- Guarantees ➔ to make sure that the supplier will trust me as a company, my bak can sing a
guarantee of my trustworthiness
...
If $ decreases, as £ exporter it will affect my business
...


- Syndicated Lending ➔ several banks gets together and invest in a single project ➔ in order to
spread the risks: Diversification
...

- The 2% Marking is to cover the risk the bank might have in lending this in taking into
account the riskiness of each business
...

- If we expect the %R to go down we go for the Volatile Floaty
...
≠ Hire
Purchase ➔ ei for the car: pay an amount and then small amounts (renting) and then a big
amount, the purchase is done
...
= borrowing on their debtors
...

- Investment banking: are not technically a bank ➔ does not take deposit
...
However, when you become a bank you are more regulated
...
2 types of banking:
- Government

2
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The main
source of funds for banks is deposit
...


3

FIN200
1 - OUTLINE
LECT 1/2

INES KIRANE
HULT BBA - Y1 - SEM 2

- Current Account = Cheque/check account = sight account ➔ individual can withdraw the
money in their current account at very short notice + can transfer the money to so else’s
account
...

- Bank spend a considerable amount in the:
- processing fo transfers
- monthly statements
- Providing conveniently located branches …
...

- Substantial penalties for early withdrawal
- Accounts rarely provide cheque facility
...


3
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- Techniques developed by banks to screen and monitor borrowers to reduce risk
...

- Other banks & institutions on a ST basis = 10-35%
- Interbank lending (24H - 7D) = Repos
- 1 to 10% in tangible (PPE, Gold) / software-intangible assets
- Liquid reserves ➔ for unexpected large outflows
...


- GVT Treasury bills ➔ assets easily convertible into cash
...
Platforms of advertising the financial products in a sense

3
...
Household lending

- Consumer loans = personal loans ➔ unsecured
- Ø specifically assigned collateral to be seized by the bank should the borrower fail to pay
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- %r fixed at constant percentage
...
2
...

4

FIN200
1 - OUTLINE
LECT 1/2

INES KIRANE
HULT BBA - Y1 - SEM 2

- Administrative & Legal costs are low ➔ direct negotiation between borrower and lender
...

- %r: Either fixed or floating
- Banks best rate = LIBOR ➔ typical borrowing = 100 basis points (pbs) > LIBOR
- Speed ➔ matter of hours
- Flexibility ➔ Economic circumstances facing the firm change during the life of the Loans
=> banks are better equipped — and more willing — to alter the terms of the lending
agreement than bond holders
...


3
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Overdraft

- Overdraft facilities are usually arranged for a period of a few months or a year and interest is
charged on the excess drawings
...

- Advantages:
- Flexibility
- flexible amount (even though there is a stated limit) and flexible duration
...


3
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Term loans

- Term loan ➔ a business loan with an original maturity of one year and a specified schedule of
principal and interest payments
...

- Repayment plans:
- Grace period = repayment holidays ➔ only the interest is paid, with the capital being
paid off once the project has sufficiently positive cash flow
...

- Bullet repayment ➔ provides for all the capital to be repaid at the end if the loan term
...

- Drawdown arrangement (> Overdraft) ➔ the lender os committed to providing the finance if
the borrower meets prearranged conditions (≠ overdraft: the lender can virtually withdraw the
arrangement at short notice)
...


3
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Security for bans on business lending

- When banks are considering the provision of debt finance for a firm, they will be concerned
about the borrower’s competence and honesty
...

- Consider carefully both the Qual & Quant of info flows
...

- The ability and determination of the managerial team ?
- A complete understanding of the market environment ?
- 2 types of REL ° Firm-Bank:
- Relationship banking ➔ understanding on both sides that there will be a LT REL° in which
the company provides infos regularly to the bank => the bank can ↓ its screening and
monitoring costs
...

- ✔ Cheap individual services
- ✘ (LT) can make the firm vulnerable in tough times

- ↓ Bank risk ➔ sufficient collateral offered for the loan ➔ Provides a means of covering all of the
majority of the bank’s investment should the firm fail to repay as promised
...

- Floating charge collateral ➔ the legal right for the holder of the loan to seize asset (floats’
over the general assets of the firm ➔ they can be bought/sold/rented without specific
permission from the lender
...

- Going concern ➔ cash flows > assets flows
...
Shares in other companies
...
grant a longer period to pay)

6

FIN200
1 - OUTLINE
LECT 1/2

INES KIRANE
HULT BBA - Y1 - SEM 2

- Loan covenants ➔ restriction on managerial action until the debt has been repaid in full
...

- Personal effects might be used as collateral !
- Erodes the principle of limited liability
- Inhibit risk taking productive activity
- Other factors Banks take into account:
- Creditworthiness ➔ the character and talent of the leaders of the organization
- The amount that the borrower is prepared to put into the project or activity, relative to that
asked from the bank
...
Payment mechanisms  

- Cheque
- Giro slips
- Standing orders and direct debits ➔ Methods used for recurring payments
- Standing orders: the account holders instructs the bank to pay fixed regular amount to a
beneficiary’s account
...

- Plastic cards
- Debit card:
- Credit card:
- EFTPOS: Electronic Funds at Point of Sale/
- Store cards:
- Charge cards:
- Smart cards (electronic purses, chip cards)
- e-money
- Landlines and mobiles phones
- Internet

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Clearing systems

- Clearing banks ➔
- Usually own by the large bans with extensive retail banking operations
...
Corporate banking
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...
Uncommitted facilities

- Uncommitted Facility ➔ the bank does not enter an agreement that makes it obliged to provide
funds at the borrower’s request and the facility can be cancelled and so the borrower may have
to repay at short notice
...

- Uncommitted Line of Credit ➔ alternative of overdraft; the borrower can borrow up to a max
sum of period of 1, 6 months and can repay and borrow again as needed within that time period
...
➔ Banker’s acceptance: the company (the borrower)
that requested that the bank draw up the document, holds it until it need to borrow
...


5
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Committed facilities

- Committed facility: is one where the lender enters into an obligation to provide funds upon
request by the borrower, provided any agreed conditions and covenants in the loan agreement
have been and are being met
...

- ie: loan
...
2
...
Revolving credit

- Revolving credit facility (RCF) ➔ allows the borrower to both draw down the loan in tranches
and to reborrow sums repaid within the term of the facility so long as the committed total limit is
not breached, E [1;5]Y
...
2
...
Project finance
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FIN200
1 - OUTLINE
LECT 1/2

INES KIRANE
HULT BBA - Y1 - SEM 2

- Project finance loan ➔ created by an industrial corporation providing some equity capital for a
separate legal entity (SPV = Special Purpose vehicle) to be formed to build and operate a
project, ie
...

- To make use of the PF, the project need to be easily identifiable and separable from the rest of
the company’s activities so that cash flows and assets can offer the lenders some separate
security
...

- If the Project’s CF are insufficient, the lenders have a claim only on the assets of the
project itself rather than on the sponsors or developers
...

- High transaction & legal costs

- PF points:
(1) Transfer of risk: the project is a stand alone investment ➔ own financing ➔ parent can
gain if successful and limit losses if failure ➔ other assets and CF may be protected from
the effect of project losses
...

(3) Political risk ➔ in this case, set up of an arm’s-length (separate company) relationship
...

(5) Managerial incentives ➔ managers can get equity stake in the project; rewards upon
performance
...
2
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Syndicate lending

- Syndicate Lending ➔ in order to spread their lending to gain the risk-reducing benefits of
diversification, banks prefer — for very large lending — to participate in a number of syndicated
loans in with a few banks each contribute a portion of the overall loan
...

- The managing bank also underwrites much of the loan while inviting other banks to
underwrite the rest — that is, guaranteeing to provide the funds if other banks do not step
forward
...
2
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Revolving underwriting facility and note issuance facility

- Services to larges corporations wanting to borrow by selling commercial paper or medium termnotes into the financial markets
...

- Underwriters take a fee for guaranteeing that someone will buy the issue
...


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- Automatically redirect money …
- Provide software to firms to assist in handling money

7
...


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- ≠ Guarantee
...

- Naturally, the bank will expect its client (the importer) to pay the amount concerned plus
some fees and interest to provide this service
...
The bank advances money and
gets that back with interest and fees when the importer eventually pays
...
FOREX risk management and Interest Risk management

- There are various risk management tools that a bank can offer a cleint to mitigate these
problems
...
Other commercial banking services
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FIN200
1 - OUTLINE
LECT 1/2

INES KIRANE
HULT BBA - Y1 - SEM 2

~ financial supermarkets

10
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Stockbroking
10
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Asset management

- Banks often establish their own range of mutual funds, unit trusts, or investment trusts to offer to
investors, allowing them to place their money in a wide range of shares or other securities in a
portfolio under professional management
...


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Custody and safety deposits

-

Banks ensure safekeeping & ensure interest or dividends are claimed
...

The bank is paid a fee to ask as a custodian ➔ league of global custodians
...


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Insurance and pensions

- Banks often now their customers well and can tailor insurance offerings to have their needs
...

- Allfinanz ➔ Germany
10
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Foreign exchange
+ Traveler’s cheques

10
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Asset-based lending

- Asset-based lending ➔ Banks also provide finance for individuals or companies obtaining the
use of, say, a car, by leasing it or buying it on hire purchase
...


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- The buffer is referred to as capital and loans made are assets of the Bank
...

- Bank making profit for its shareholders & deciding to keep it within the business rather than
distributing it as dividends
...
On top of that the
bank itself might decide to add another 4% of the value of its current account liabilities ➔
Excess reserves
...

(2) Asset management ➔ A bank also need to lend its money (acquire assets) with the
Chapter 2 • Banking: retail and
expectation of a low risk of default in a diversified manner
...

(3) Liability management ➔ capable of finding funds
itsassets
capital
high
enough
(4) Capital adequacy problems (insolvency) ➔ A bankInmust
managingkeep
the bank’s
the seniorat
team
must balance
out the three factors show
2
...
The highest returns usually
level to reduce the chance of insolvency problems (assets
worth
<
liabilities)
while
balancing
tying up bank money in long-term loans and securities where it is difficult and/or cos
the money quickly
...

However, within those generalisations it makes sense for bank loan officers to search

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Ban
like to take a very low-risk approach and anticipate that only around 1 per cent of the
go bad
...
When they do, they cha
interest rate to compensate for the expectation that a higher proportion of these loans w
Exhibit 2
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Asset and Liability management

- In order to maximize the shareholder’s return in the long run ➔
the senior team must balance out the three factors
...


Highest
possible return
on loans made
& securities
bought

Low risk

Adequate
liquidity

- A crucial aspect of asset management is to be diversified so that

no one loan or no one category of loans (property related, retail
A crucial aspect of asset management is to be diversified so that no one loan or no o
related, eg
...

of loans (say, property related or retail related) or securities dominates the portfolio
...
Banks are generally advised to be diversified in terms of where they ob
as well as the adjusting of interest rates offered to lendersMany
to banks
the (e
...

bank
to
obtain
the
target
mic
of
Northern Rock) found in 2008 that they had become over-reliant o
funding
from
the
wholesale
markets
(selling
bonds,
commercial
paper or borrowing
borrowing
...
A balance needs to be struck
...
But whol
can allow a bank to grow its balance sheet rapidly, whereas it takes time to attract d
those advertisements, high-street branches, teaser interest rates, etc
...
The fear here is of insolvency – an inability to repay obligati



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