Capitalofbanks-BANKARSTVO PRAVO

8/2/2019 Capitalofbanks-BANKARSTVO PRAVO

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BANK CAPITAL

Mentor: Studenti:

Prof.dr. Fikret Hadi Alikadi Lejla 67675

Ass.mr. Velid Efendi orali Armina 67551

Zahirovi Selma 67703

Sarajevo, novembar 2010.g.

1


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Capital of bank

Capital is a relatively cheap sourcenondeposit, that is permanently invested inthe bank a guarantor for the risk and thebasis for determining the volume ofplacements.

Capitalization of the bank: the dynamic

growth of capital in compliance with thescope of bank activities.


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Capital Functions

1. Deposit protection

2. Protection against loss3. Source of funding for regular activities

4. Coverage taken and the potential risk,

5. Expanding the scope of the bank's activities,6. Funding of non-interest bearing assets.


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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 standardsminimum rate of capital is 8% of weightedrisk assets, but in our country is 12%.


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Types of capitalInternational standard:

Primary (equity capital and reinvestedearnings),

Secondary (subordinated bonds with amaturity period over 5 years and fixedinterest rate),

Capital of the third level - used to covermarket risk(short-term subordinated bondswith a maturity up to 2 years and up to 250%of primary capital).


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Types of capital and adequacy

In our country:

Basic capital,

Supplemental capital, Additional and Net Capital

Net Capital = basic capital+ additional capital+ deductible items


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Core capital and Net capital

Core capital represents a total amount ofequity, general legal reserve of bank, otherreserves which are not related to the

assessment of asset quality , and retained orundistributed profits of the bank from previousyears.

Net capital is the amount used for calculatingcapital adequacy ratio of banks.

Net equity is the difference between the amountof capital (basic, supplementary and additional)

and deduction items.


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Additional capital and Sharecapital

Additional capital we used to cover marketrisks.

Additional capital is excess of basic and

additional capital above the needs to covercredit risk.

Share capital includes permanent preference

shares, ordinary shares, premiums forpermanent preference shares and ordinary

shares, retained earnings and capital reserves.


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Supplementary capital

Supplementary capital consist of:

Share capital

General reserves of the bank to cover creditlosses

Accrued income in the current year

Subordinated debt

Hybrid or convertible items


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Decision on minimum standards formanaging operational risk in banks

Operational risks result from:

Inadequate internal systems, procedures andcontrols

Weaknesses and omissions in carrying outbusiness activities,

Illegal actions by employees

External events, which the bank may put atrisk


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Decision on minimum standards formanaging operational risk in banks

Calculation of capital requirement for operationalrisk 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 ofbanks in the calculation of capital adequacy ratio.


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Capital adequacy ratio

Capital adequacy ratio:

NET CAPITAL

(TOTAL RISK ASSETS OF BANKS + POR)


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Commercial Bank in B&H ranked bytotal amount of the capital atDecember 9, 2009

Bank Capital31.12. 2008.

Capital

31.12. 2009.

Divergence

Raiffeisenbank Sarajevo

357.610.000 KM 367.006.000 KM 2,63%

UniCreditbank Mostar

338.186.000 KM 368.873.000 KM 9,07%

Razvojnabanka FBiH

Sarajevo

108.519.000 KM 110.992.000 KM 2,28%

PrivrednabankaSarajevo

28.417.000 KM 37.336.000 KM 31,39%

Volksbank

Banja Luka

44.955.000 KM 46.016.000 KM 2,36%


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ommerc a an n ran e ytotal amount of the capital atDecember 9, 2009

Bank Capital31.12. 2008.

Capital

31.12. 2009.

Divergence

Vakufska banka

Sarajevo

51.038.000 KM 49.542.000 KM -2,93%

ProCredit bankaSarajevo

44.788.000 KM 35.318.000 KM -21,14%

FIMA bankaSarajevo

22.554.000 KM 15.789.000 KM 29,99%

NLB Tuzlanskabanka Tuzla

60.539.000 KM 63.414.000 KM 4,75%

Hypo Alpe Adriabanka Mostar

190.880.000 KM 182.030.000 KM -4,64%


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Factors of business reporting

system

A complete line of business reporting systemrequires specialized accounting system todetermine factors underlying the report:

Capital required (These account for losses thatare expected and losses that are unexpected )

Revenues generated Funds used

Overhead consumed


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Capital management

Potential management actions to solvecapital 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 assets3. Increase internal generation

a. increase net income

b. decrese dividend payout


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Capital management

Banks Has Capital Shortage:4. Raise capital externally

a. issue new stock

b. sell notes or debentures

Bank has Excess Capital1. Increase growth of assets and liabilities

a. internal opportunities

b. acquisition

2. Increase risk mix of assets


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Capital management

Potential management actions to solvecapital problem

Bank has Excess Capital:

3. Decrease internal generation

a. decrease net income

b. increase dividend payout

4. Reduce external capitala. repurchase stock

b. retire notes or debentures


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Planning phase of capitalincrease:

Phase I: on the basis of balance sheet andflow it determines the required amount ofadditional capital

Phase II: designing the structure of internaland external capital

Phase III: determining the optimal structureof external capital


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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,suchas 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 sellcommon stock...


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Financial Effects of Senior Capital

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

In the long run senior capital usually increases per shareon common stock because it introduces favorablefinancial leverage.

Many larger commercial banks and their holdingcompanies are subject to the 34 percent corporateincome tax and should use subordinated debentures astheir source of senior capital;


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Newer Forms of Senior Capital

Banks and bank holding companies have found someforms that regulators find acceptable as part of bankcapital;

The lower cost of convertibles does not by itself meanthat convertables are cheaperthan nonconvertibles

The overall potential advantages of convertibles as acommercial bank's financial strategy are convincing.

Individual banks may also have special conditions thatmake covertible issues more favorable to them thanbank in the typical bank in the general market...


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Newer Forms of Senior Capital

Common stock has to be issued when a new bank isformed. Common stock may also be appropria te form ofraising external capital to finance growth.

Two techniques that a few smaller banks have usedsuccessfully to establish a reasonable price are:

(1) using preemptive rights offerings of new shares to existingshareholders and

(2) holding periodic stock auctions in which those who wish tobuy or sell shares can bid for them or place them in anauctionlike setting


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REFERENCES:

Fikret Hadi;Velid Efendi, Bankarstvo: Pregledpredavanja i vjebi 2. dio, Ekonomski fakultet uSarajevu, 2006.

Timothy W. Koch; Steven Scott MacDonald, BankManagement, 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 iznosukapitala, 20. 11. 2010., 14:04

http://www.investopedia.com/terms/c/capitaladequacyratio.asp, 20.11.2010., 15:03

Capitalofbanks-BANKARSTVO PRAVO

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