Pertemuan 1 - Banking and financial intermediaries -micro ... · the sums required. It would also...
Transcript of Pertemuan 1 - Banking and financial intermediaries -micro ... · the sums required. It would also...
Pertemuan 1 - Banking and financial intermediaries -micro & macro perspective
Financial intermediation
is a process which involves surplus units depositing funds with financial
institutions who in turn lend to deficit units.
can be distinguished by four criteria:
Their liabilities -i.e., deposits- are specified for a fixed sum which is not
related to the performance of their portfolio
Their deposits are of a short-term nature and always of a much shorter
term than their liabilities
A high proportion of their liabilities are chequeable.
Neither their liabilities nor assets are in the main transferable. This aspect
must be qualified by the existence of certificates of deposit and
securitization.
Different Requirements of Borrowers & Lenders
Borrowers need large quantities of funds whereas the lender only have smaller
amounts of surplus funds; in other words, the capacity of the lender is less than
the size of the investment project.
bank will collect a number of smaller deposits, parcel them together and
lend out a larger sum ‗size transformation‘.
the lender usually wants to be able to have access to his funds in the event of an
emergency; that is, he/she is wary of being short of liquidity.
Banks can fulfil this gap by offering short-term deposits and making loans
for a longer period maturity transformation
Lenders will prefer assets with a low risk whereas borrowers will use borrowed
funds to engage in risky operations risk transformation
Why „they‟ deal through financial intermediaries?
Transaction costs the nature of costs involved in transferring funds from
surplus to deficit units:
Liquidity insurance the financial intermediary acts as an insurance agent.
Asymmetry of information
moral hazard
Assymetric information
1. TRANSACTION COSTS
Search costs
these involve transactors searching out agents willing to take an opposite
position; e.g., a borrower seeking out a lender(s) who is willing to provide
the sums required. It would also be necessary for the agents to obtain
information about the counterparty to the transaction and negotiating and
finalizing the relevant contract.
Verification costs
Cost of the lender to evaluate the proposal for which the funds are
required.
Monitoring costs.
Cost to monitor the progress of the borrower and ensure that the funds are
used in accordance with the purpose agreed.
To prevent moral hazard in miss alocate the funds
Enforcement costs.
Such costs will be incurred by the lender if the borrower violate any of the
contract conditions.
2. Liquidity insurance
the existence of banks enables consumers to alter the pattern of their
consumption (C1, C2) The value of this service permits a fee to be earned by
the financial intermediary.
bank offering fixed money claims overcomes this problem by pooling resources
and making larger payments to early consumers and smaller payments to later
consumers
3. ASYMMETRY OF INFORMATION
Borrower have more information about the project that is the subject of a loan
than the lender
Moral hazard is the risk that the borrower may engage in activities that reduce
the probability of the loan being repaid.
Before loan: Business proposal bout big profit, minim failure
After loan: engage in risky activities
Adverse selection: the lender is not sure of the precise circumstances
surrounding the loan and associated project salah pilih borrower, salah pilih
proyek
Cara bank mengatasi informasi asimetris
the banks are subject to scale economies in the borrowing/lending activity so that
they can be considered information-sharing coalitions;
banks monitoring the firms that they finance, i.e. delegated (representative)
monitoring of borrowers
Banks‘ provision of a commitment to a long-term relationship
1. INFORMATION-SHARING COALITIONS
problem information is costly to obtain and that it is in the nature of a ‗public
good‘.
Resolve it through an intermediary which uses information to buy and hold assets
in its portfolio
can provide information about its project is by way of offering collateral security,
coalition of borrowers‘ (i.e., the bank) can do better than any individual borrower
2. BANKS‟ ROLES IN DELEGATED MONITORING
Screening application of loans so as to sort out the good from the bad, thus
reducing the chance of financing excessively risky loans.
Examining the firm‘s creditworthiness.
Seeing that the borrower follow to the terms of the contract.
3. A MECHANISM FOR COMMITMENT
Japanese and German banks do have a close relationship with their clients and
in many cases are represented on the firms‘ governing bodies.
This enables the bank to have good information about investment prospects and
the future outlook for the firm and to take remedial actions other than foreclosure
in the event of the firm experiencing problems.
This close relationship may help to fix the twin problems of moral hazard and
adverse selection.
Hoshi et al. (1991) provide supportive evidence that firms with close banking ties
appear to invest more and perform more efficiently than firms without such ties.
Fractional Reserve Banking-Intro to Macro
Modern banks produce fiat money on the basis fractional reserves
Money has value because universal acceptance as money
The acceptance of money = social convention + legal system money as
instrument for the legal discharge of debts
Seigniorage rightfully belongs to the community at large & should not be
appropriable by private interest
Fractional Reserve Banking (FRB)
Fund themselves with liabilities that are convertible into cash on demand
But they hold only a fraction of liabilities in the form of cash assets
Result: withdrawals > available cash
Evolution of monetary & banking systems
From commodity money (gold, silver, etc) to more abstract forms of money
From warehouses (or 100% reserves banks) to more modern fractional reserve
banks
The substitution of fiat for commodity money concentrates enormous
economic power in the hands of monetary authority
FRB enormous power in the hands of individual bankers jeopardize the
stability of banking system in the pursuit of personal gain
The evolution of the primitive goldsmith into a bank
Gold as money means of payment, med of exchange
Debts & purchase are paid with gold
Problem holding & transporting gold security & convenience
Market response provide warehouse for gold emergence of the goldsmith
The owner receive a receipt to redeem the gold from goldsmith
From gold to the piece of paper
Repeated trips (both, seller/buyer) to goldsmith is wasteful
Willingness to accept warehouse receipt as mean of payment believe that the
gold is available on demand
Receipts totally displace gold, the inventory of gold unchanged (except newly
mined gold into system)
No need gold for outstanding receipts
Issue more receipts > had gold bcoz no one withdraw gold (exploitation of owner
by goldsmith begin)
The naughty possibility of printing extra receipts changed the world
Instability of fractional reserves bank
As means of payment, “Extra” receipts = authentic receipts
The “extra” loaned + earned interest
Loan are illiquid (must be held to maturity)
Goldsmith provide liquidity transformation
by issue liquid claims
Transformation of pedestrian goldsmith from warehouse clerk
into banker
Liability > capability (bcoz loan are illiquid) insolvency risk of
ruin is endogenous
Temptation from Prob of solvency print extra + make more
loans
Promise to pay on demand not sure
(liquidity issue)
That essence of FRB & its vulnerable +
maximizing behavior part of rational economic agent
Need way out to avoid periodic collapse.. From FRB to CB..
The illiquidity loans (assets) could be liquefied
Need ―bank for goldsmiths‖ to against infrequent redemption the collateral‘s loan
19th century Commercial Bank Clearing House (CBHS) in US banks agreed
to put their resources to unanticipated liquidity drains
Rationale to build central bank this private arrangements did not possess
unlimited capacity so need a ―central‖ as lender of last resort to the community
bankers
Here are come the regulation..
To avoid goldsmith make a huge loans CB will charges very high interest rate
for emergency borrowings
CB imposing cash asset reserve requirements to limit the volume of lending on
the basis of its cash assets
They said it is the most basic prudential regulation but this is a moral hazard
(save a little, get more but secure)
Un convenience of commodity money FRB CB moral hazard
regulation
A model of banks & regulations
n (depositor) = 1
j (bank) = 1
S = y-c
bank fee
Save for only 1 period, c the next period = + y the 2nd period
Interest on deposit =
Negative interest bank cant make loans + charge cost to the depositor
The macroeconomic implications of FRB: The Fixed Coefficient Model (FCM)
FCM = the standard textbook description of the banking firm and industry; it
emphasizes the asset-transformation function of financial intermediaries.
R = Reserves (from deposit)
M = earning asset (from loans)
D = deposit (s x n)
E = equity
r = legal reserve requirement
e = fix prop of capital reserves
Illustration: w/out equity (e=0, r=0.2)
FCM & monetary policy
3 major tools of monetary policy to influence the stock of money & interest rate
OMO = sales & purchases of govt securities (T-bonds) affect amount of
reserves (lending also) buy = lending rise, sale =lending fall
rr changes contractionary monetary policy (to cool down inflation) it
raise rr, to stimulate economy lower rr
Discount rate changes: the rate charged by the Fed to member banks for
short-term borrowings from the Fed
disc rate rise, costly for banks to borrow and build up reserves,
reduces the reserves available to banks & this reduces lending.
discount rate lower increased lending
Large Financial Intermediaries
Brokerage as a Natural Monopoly
Broker = information producer
Problem how customers know that the information the broker provides
is accurate and reliable?
Need higher reputation broker by comparing info from other resources
If single info producer, costly to ensure reliable info
Little less if info from team member of producer
Effective mechanism as long as nobody get free ride
Size of team grows (broker get larger), benefit keep growing
That is brokerage is a natural monopoly
Another ec. benefit from growing large
information reusability
can be reused by a greater number producers within the intermediary, and
yet the cost incurred only once.
Benefited to investment banks, financial newsletters, credit-rating
agencies, and other information producers
Large Financial Intermediaries contd
Asset Transformation as a Natural Monopoly
Bank as asset transformer borrows money from depositors and makes
loans.
Its advantage in being large comes from two sources:
multiple depositors are needed to finance a single bank borrower
and the borrower‘s creditworthiness has to be established through
costly credit analysis. So bank perform this credit analysis once
compared to a situation in which all the depositors engage in costly
screening of the borrower. That is, a bank eliminates duplicated
screening.
the depositors‘ payoff is a debt contract, so they behave risk
averse, by get lower interest rate on deposits. The bank can do this
by diversifying its risk across many different borrowers. And,
because the benefit of diversification keeps growing with size, the
bank is a natural monopoly.
How Banks Can Help Nonbank Financial Contracting More Efficient
bank loans reduce duplication in borrower evaluation by multiple creditors
Bank loan is short maturities periodically renewed bank evaluation of
the borrower‘s ability to meet fixed payment obligations
renews the loan positive signal about the firm to its other creditors so
no need to expend their own resources to duplicate the bank‘s evaluation
Simple example: dokumen yg sdh masuk bank legally secure
How Banks Can Help Nonbank Financial Contracting More Efficient
Banks have a cost advantage in making loans to depositors
The ongoing history of a borrower = borrower‘s cash management
activities
This permits the bank to assess risks of loans to depositors and to monitor
these loans at lower cost than other (competing) lenders.
This consideration is particularly important in short-term loans that are
rolled over because of the relatively more frequent borrower assessments.
This hypothesis has empirical validity in the observation that most short-
term debt is in the form of bank loans.
The Borrower‟s Choice of Finance Source: go to venture capitalist if..
Two very young characteristics.
the entrepreneur in charge may be unsure of his own management
expertise, so that approaching financial intermediary that can provide this
expertise is beneficial.
the borrower has few tangible assets to offer as collateral.
collateral is useful in controlling moral hazard
In the absence of collateral, the lender could use equity participation as a way of
addressing moral hazard.
Thus, it is in the borrower‘s interest to seek a lender who can take an equity
position and thus be able to offer capital at a ‗‗reasonable‘‘ price.
Both factors suggest that such firms should go to venture capitalists not bank
U should go to bank if..
Bank can lend to borrowers because they can offer collateral to secure their debt.
all moral hazard will not be eliminated by collateral, so that there will be an
important role for bank monitoring.
bank loans tend to be of short maturities, thereby generating periodic information
through reassessments of the borrower.
This information is refflected both in the bank‘s decision to renew/terminate the
loan as well as in the new contract terms offered, in combination with information
produced by rating agencies.
This helps to reduce duplication in information production by other creditors of
the firm, thereby diminishing overall contracting costs.
go to banks than venture capitalists because banks can fund their loans with
insured deposits, the borrower is able to obtain a loan at a lower price.
U go to capital market if..
when the firm is well-established and mature, it has a good track record for
repaying its debts.
This reputation can be valuable because it permits the firm to borrow at
preferential rates.
Consequently, bank monitoring to combat moral hazard is less important for such
borrowers, and this permits them to directly access the capital market where
borrowing costs are lower; capital market access would mean that the borrower
would not have to pay the bank its intermediation rents.
Of course, such firms still confront problems of asymmetric information , so that
nondepository financial intermediaries such as investment banks (or credit-rating
agencies) play an important role in the transfer of capital from investors to such
firms. This is because they make information about firms available to investors at
a lower cost than they could acquire themselves.
The venture capitalist provides financing, monitoring, and management
expertise; the bank provides financing and monitoring; and the capital market
provides mainly financing.
Pertemuan 2 - Banking industry
Sejarah industri perbankan
Asal mula Perbankan
1690 di Eropa bank pertama berdiri berbentuk firma
Kebutuhan kerajaan Inggris untuk membangun armada laut tapi tidak ada
dana
Dibangun lembaga intermediasi untuk memenuhi dana tsb.
Kemudian berkembang ke benua lain dibawa oleh bangsa Eropa saat
menjajah.
Jasa penukaran uang jasa penitipan uang jasa peminjaman uang
Evolution of the Banking Industry
Financial innovation is driven by the desire
to earn max profits tranformed the entire financial system
A change in the financial environment will stimulate a search by financial
institutions for innovations that are likely to be profitable
3 basic types of financial innovation
Responses to change in demand conditions
Responses to changes in supply conditions
Avoidance of regulations
Lobbying to channge regulations
Responses to changes in demand conditions
Interest rate volatility
1950s: 1-3.5%; 1970s: 4-11.5%; 1980s: 5-15%
Adjustable-rate mortgages
Lending more attractive if interest rate risk is lower
So, give lower rate and volatile after (adjust to market rate)
Financial derivatives
Born in 1975
Future contracts, their payoffs derived from previously issued
securities, used to hedge risk
Responses to changes in supply conditions
Information technology
- Lowered the cost of processing financial transcactions
- Easier for investors to acquire information
- easier for firms to issue securities
Bank credit & debit cards
Since before WW 2
Individual store (Sears, Macy‘s, Goldwater‘s) provide CC to
purchase w/out cash
1960s, improved computer technology: BankAmericard by Bank of
America Visa; Mastercharge by Interbank Card Association
Mastercard
Issued 200 million cards to purchase & to take loan out easily
Electronic banking
ATM: 24 hours/day cheaper transactions, convenience for
costumer
Home banking by telephone or PC linked up with the bank‘s
computer
Automated banking machine (ABM) combines in 1 location:
ATM, internet connection to the banks‘s website, telephone link to
CS
Virtual bank bank in cyberspace
Junks bonds (BB lower)
Easier screening, investor willing to buy LT debt sec from les-well
corp with lower credit ratings
Commercial paper market
S/T debt sec by large banks & corp
Securitization
Process of transformingilliquid financial assets (mortgages, auto
loans, CC receivables) of banking inst into cap mkt
Financial Engineering
1960s FI confronted drastic changes in the economic environment: inflation &
interest rate climbed sharply & harder to predict changed demand conditions
The rapid advance in computer technology changed supply conditions
Doing business old ways no longer profitable
Financial services & products were not sold
To survive in the new economic environment, FI had to research & develop new
products & services that would meet customer need & profitable, the process
Financial Engineering
Financial Innovation & the Growth of the “Shadow Banking System” (SBS)
Traditional banking business of making loans that are funded by deposits has
been in decline
Lending has been replaced by lending via the securities markets
Non-bank FI provide services similar to traditional commercial banks but less
regulation
SBS buildup systemic risk interelated with the traditional banking system via
credit intermediation chains
SBS do not have deposit insurance, lender of last resort
High level of financial leverage by transforming the maturity of credit (LT to ST)
real estate bubbles
SBS was primary factor in the subprime mortgage crisis of 2007-2008 & global
recession Morgan Stanley & Goldman Sachs merger, Merryll Lynch & Bear
Stearns acquired, Lehman Brothers Bankrupt
Banking business model
Investment Banking/ merchant bank / money market corporations
intermediasi keuangan yang melakukan fungsi khusus investasi, tidak menerima
saving & menyalurkan kredit
Customer segment: korporasi, pemerintah dan investor individual (High Net
Worth Individual) BCG >5jt USD, Merryl Lynch >1jt USD
Fungsi: underwriting securities (penerbitan saham/obligasi) & corporate advisory
services (konsultasi, corp finance, konsultasi mgt M&A, restrukturasi aset),
perdagangan surat berharga dan produk derivatif atas nama client/nasabah,
investment research, brokerage analyst, finance, asset management, & produk
derivatif atas nama perusahaan secara pribadi (proprietary trading), principal
investment
Ex: KFH dengan Liquidity Mgt House
Commercial Banking
Saving & credit
normal banking services at either or both retail and/or wholesale levels
Customer Segment: semua orang atau entitas yang membutuhkan layanan
perbankan mulai dari tabungan, pinjaman, jasa-jasa pembayaran dan
perdagangan luar negeri serta layanan-layanan yang lain business (small and
medium-sized businesses) dan individual customer
Produk: Bank Akseptasi, Pinjaman Konsumen sperti KPR, KKB, multiguna dan
produk investasi umum seperti Rekening Tabungan, Deposito.
Ada 2 jenis fungsi layanan yang diberikan oleh bank komersial yaitu:
Primary Banking: Fungsi pendanaan dan pembiayaan Menghimpun dana
dari masyarakat dalam bentuk simpanan berupa giro, deposito berjangka,
sertifikat deposito, tabungan , dan/atau bentuk lainnya yang dipersamakan
dengan itu
Secondary Banking: Fungsi agency dimana pendapatan bank diperoleh
dari fee based income
Universal Banking
kombinasi antara investment banking dan commercial banking
Customer Segment: berbagai segmen dari perorangan (dengan berbagai latar
belakang ekonomi), entitas bisnis (kecil,besar/korporasi), pemerintah, dan semua
entitas yang membutuhkan layanan jasa keuangan/ financial services.
penyediaan produk dan layanan yang lengkap akan memberikan economic of
scale sehingga lebih efisien dalam biaya opeasional sehingga biaya yang
dibebankan kepada nasabah juga lebih rendah.
Costumer relationship: cust priority, special rate/pricing
Consumer/retail/personal/B2C (Business to Customer) banking
untuk memenuhi kebutuhan nasabah individual/ bisnis dengan tingkat
pendapatan yang stabil.
Keunggulan: kelengkapan produk konsumsi yang ditawarkan dengan proses
yang mudah & sederhana.
revenue streams: margin antara suku bunga tabungan & pinjaman, fee dari
services
Produk: margin antara suku bunga tabungan dan suku bunga pinjaman serta
sebagian kecil fee atau komisi yang berasal dari layanan tambahan seperti
layanan investasi atas permintaan nasabahnya dll.
Partner: merchant berupa supermarket, dealer, perusahaan properti
Retail Banking
memfokuskan diri untuk memberikan pelayanan terutama kepada nasabah
individu dan sektor usaha kecil dan menengah.
Undang- Undang Nomor 20 Tahun 2008 tentang UMKM
Corporate/wholesale/B2B Banking
bank yang melayani kebutuhan-kebutuhan korporasi untuk menunjang
operasional bisnis mereka.
Manajemen cash dan layanan banking yang lain yang biasanya menyesuaikan
(customized) dengan kebutuhan korporasi.
Produk: secure dan unsecured loan, struktur transaksi keuangan yang sangat
canggih dengan melibatkan banyak bank berbeda atau sindikasi dalam
transaksi; deposits & loans from corporations dan large businesses, pembiayaan
alat berat bagi operasional korporasi, pembiayaan infrastruktur pemerintah, resi
gudang, cash management, trade service seperti L/C, kustodian dan
perdagangan mata uang (foreign exchange) untuk kebutuhan korporasi.
Community Banking
berukuran kecil dan hampir semua aktivitasnya diperuntukkan untuk komunitas
lokal
Costumer segment: small business dan sektor pertanian, komunitas lokal
untuk mempertahankan loyalitas nasabah: pendampingan usaha, special
rate/diskon suku bunga bagi nasabah yang sering melakukan transaksi bisnis
Development Banking
No saving
MT & ST financing proyek pembangunan & infrastruktur pemerintah, serta
industry strategis perusahaan swasta dan perusahaan pemerintah.
multipurpose financial institution, bantuan dana baik untuk insitusi swasta/publik.
gap filler ketika bantuan dana / managerial dari sumber lain tidak mampu
memenuhinya
meng-akselerasi pembangunan/pertumbuhan nasional.
Membantu industrialisasi (khusus) dan pertumbuhan ekonomi (umum).
memenuhi kepentingan public/pelayanan public bukan memaksimalkan
keuntungan.
merespon kebutuhan sosial ekonomi.
Ex: Bank Pembangunan Filipina 1958
Agricultural Banking
Development Financial Institution (DFIs) yang ditunjuk atau dimandatkan oleh
pemerintah untuk memberikan pinjaman/pendanaan sektor pertanian guna
mendukung ketahanan pangan nasional.
Tingkat suku bunga yang lebih rendah
Customer relationship: diskon suku bunga/special rate untuk retention lending &
technical assistance
Revenue: bunga, subsidi pemerintah
Ex: Bank for Agriculture and Agricultural Cooperatives (BAAC) di Thailand
(support by Bank Sentral Bank Of Thailand) dan Agriculture Bank of Iran
Cooperative Banking
muncul dengan latar belakang terjadinya krisis yang menimpa bank di berbagai
negara dengan tagline Bigger is not always better terutama dalam soal biaya
model bisnis bank ini memanfaatkan konsep economies of scale
beroperasi berdasarkan prinsip koperasi (kekeluargaan dan kegotongroyongan)
ada anggota dengan simpanan dan iuran anggota (local residents dan small and
medium-sized enterprises (SME)
skema kredit mudah dan sederhana
penghimpunan & penyaluran dana dari & ke anggotanya dan non anggota untuk
keperluan bisnis dan konsumsi serta menyediakan jasa-jasa: leasing, factoring,
insurance & investment funds.
Ex: Rabo bank-Belanda Jumlah anggota:1,9 juta jiwa di seluruh
Belanda,sedangkan jumlah SDM yang saat ini 59,670 orang.
Islamic Cooperative Bank of Malaysia ( ICBM)y ang didirikan oleh Angkatan
Koperasi Kebangsaan Malaysia (Angkasa) asosiasi/perkumpulan koperasi di
seluruh Malaysia dengan anggota 560 koperasi kredit dan 4 juta anggota serta
beberapa asosiasi koperasi non profit seperti koperasi pertanian, pada tanggal
27 November 2010 dengan modal awal/minimum paid in capital (modal disetor)
sebesar RM 300 juta/US$ 97 juta.
Social/ethical Banking
bank yang beroperasi untuk tujuan sosial dan atau lingkungan dari proyek-
proyek yang dibiayai.
menonjolkan prinsip-prinsip transparasi, keadilan, konsumerisme etis memiliki
tata nilai (code) yang komprehensif.
Ex: Islamic Banking
Customer segment: korporasi/perusahaan yg tidak memiliki reputasi negatif
terkait efek lingkungan yang ditimbulkan oleh usahanya.
financial Inclusion, meningkatkan taraf hidup masyarakat miskin karena
kemampuannya untuk menjangkau masyarakat yang unbankable, skema kredit
yang mudah/simple serta bunga rendah. seperti yang dilakukan oleh Grameen
bank di Bangladesh.
cust relationship: personal touch, technical assistance
Revenu: intangible brand image bank peduli thd social problem
Green Banking
Bank bekerjasama dengan multistakeholder pemerintah, LSM, International
Financial Institution (IFI)/International Government Organization (IGOs),Bank
Sentral, komunitas nasabah dan komunitas bisnis untuk mencapai tujuan-tujuan
green banking, meliputi manajemen lingkungan internal, pembiayaan
lingkungan/produk ekologi,pengungkapan/audit lingkungan dan pelaporannya,
merumuskan dan mengadopsi prinsip-prinsip green banking dan
mempromosikannya pemangku kepentingan lainnya
environmental-friendly: e-banking paperless, online system utk paying bills,
opening up CDs dan money market accounts
Cust: perusahaan yang memiliki sertifikasi ramah lingkungan dalam operasional
bisnisnya, ex: First Green Bank, Florida Amerika Serikat membiayai perusahaan
yang memiliki sertifikasi Leadership in Energy and Environmental Design
(LEED) seperti sertifikasi (AMDAL)
Cust relation: personal touch, technical assistance
Ex: Bank of Eustis, Florida feb 2009 bank pertama yang mendorong
dampak positif bagi lingkungan dan tanggungjawab sosial sementara bank tetap
beroperasi dalam fungsi tradisional bank dengan layanan execellent bagi
investor dan nasabah
Subsidiary Banking
Bank anak dari bank besar di luar negeri, untuk ekspansi bisnis & menjangkau
nasabah di luar negeri
Follow the regulation from host country, kalo branch banking follow regulation
from the origin country
Tdk dipengaruhi jumlah aset bank induk, sdgkan branch banking dipengaruhi shg
bisa menyalurkan lebih banyak
Cust relation: personal touch, special rate, special pricing
Window Banking
usaha yang dilakukan oleh bank komerasial untuk melakukan penetrasi pasar
dengan memberikan layanan perbankan dan keuangan kepada nasabah yang
tidak bisa dilayani oleh operasional bank komersial yang ada sekarang misalnya
terbentur oleh peraturan dan prinsip-prinsip yang dianut oleh nasabah.
Ex: UUS oleh BU untuk melayani produk syariah
Linkage Banking
Linkage dari bank komersial untuk dapat memberikan layanan keuangan
kepada neglected section of the population (poor dan unbankanble) melalui
Microfinance Institution (MFIs) dan Rural Saving and Credit Cooperatives
(RUSACCOs) untuk mencapai target MDGs.
Mereka unbankable karena tidak memenuhi persyaratan seperti
jaminan/collateral, credit rationing, preferensi mereka terhadap nasabah
berpenghasilan tinggi dan meminjam dalam jumlah besar, prosedur birokrasi dan
lamanya prosedur dalam pencairan pinjaman.
Branchless Banking
konsep penyediaan layanan perbankan di luar bentuk konvensional bank pada
umumnya baik dengan menggunakan layanan ICT maupun melalui keterlibatan
pihak ketiga Business Correspondents.
Ex: Easypaisa di Pakistan, EKO di India, Vodaphone M-Pesa di Tanzania.
Desember 2008, operator terbesar kedua Pakistan, Telenor (22% market share)
membeli 51% saham Tameer Microfinance Bank. Kedua institusi tersebut
membentuk joint venture untuk dan mendirikan branchless bank easypaisa.
Easypaisa menawarkan baik Over The Counter (OTC) bill payment dan layanan
transfer uang sebaik mobile wallet dimana nasabah dapat melakukan berbagai
macam transaksi termasuk deposit, transfer, bill payment, airtime top-ups dan
penarikan. Telenor meng-handle kampanye marketing dari easy paisa. Pertama
yang dilakukan,EasyPaisaTC menggunakan tool umum untuk membangun
brand dilengkapi dengan fungsional adevertising yang menerangkan tentang
produk.
International Banking
Rapid growth
Growth in international trade and multinational corporations
Global investment banking is very profitable
Ability to tap into the Eurodollar market
Reason the growth of international bank
1. The general relaxation of controls on international capital movements permit
banks to engage in overseas business.
2. Banks seek to maximize profits, so it is quite natural for them to seek
additional profit opportunities through dealing in foreign currency deposits and
overseas transactions.
3. Some banks may themselves have superior techniques, so that expansion in
multinational business offers them the chance to exploit their comparative
advantage in other countries. oversea sacquisitions, increasing their
competitive edge in domestic markets.
4. Banks desire to follow their clients, so that if important clients have overseas
business the banks will also engage in such business. by establishing its own
overseas operations, a bank may be able to monitor more thoroughly the
overseas operations of clients.
5. long-run cost curve of banks is relatively flat and that economies of scale are
quite quickly eliminated. This reduces or eliminates the advantage of having one
large o/ce as against dispersed o/ces. This is reinforced by the relatively low
salaries accompanied by satisfactory levels of expertise in certain overseas
countries. The migration of banking services to Asia and India
6. Regulation. Basle agreements once a centre has attracted banking
facilities, they will tend to remain in that centre even after the initial bene¢t has
been eliminated because of the acquired advantages, such as expertise,
quali¢ed staff, etc.
7. Portfolio theory diversification leads to lower risk suggests that banks
should diversify their operations both as to currency type and geographical area.
Pertemuan 3 - Teori dan Perilaku Perusahaan Perbankan
The SCP hypothesis
the level of concentration in a banking market influences banks‘ conduct (bearing
on loan and deposit quantities, qualities, interest rates, and other market
outcomes) that determine consumer welfare.
greater concentration gives banks more market power, which in turn leads to
fewer loans and deposits and higher loan rates and lower deposit rates, all of
which reduce consumer welfare
cost conditions faced by banks play a crucial role in determining the optimal
scale of individual banking organizations and the appropriate scope of banking
activities.
Efficient-Structure Theory
costs efficiencies resulting from expansions of scale and/or scope expansions
in loans and deposits lower loan rates and higher deposit rates
regulators contemplating applications for new banking licenses or, proposed
bank mergers and acquisitions have focused considerable attention on a
perceived trade-off between resulting increases in market power vs cost-
efficiency gains.
The SCP Hypothesis with Identical Banks
suggests that a reduction in the number of loan and deposit-market
competitors—that is, a rise in concentration in bank loan and deposit markets—
generates imperfectly competitive conduct that results in higher market loan rates
and lower market deposit rates.
Loan and deposit quantities decline with greater concentration, which results in
decreases in consumer and producer surpluses obtained by banks‘ customers
and increases in deadweight losses.
Consequently, increased concentration ultimately results in poorer market
performance.
Structural Asymmetry, Dominant Banks, and the SCP Paradigm
symmetric market environment doesnt real
banks with differing costs compete side by side and operate at different scales
The identical-bank SCP hypothesis: dominant-bank model takes into the
potential for more cost-efficient, larger banks to engage in market rivalry with less
efficient.
A Dominant-Bank Model
Strategic Entry Deterrence / Barriers
If fringe entry costs are relatively low fundamental danger faced by bank i
one or more of its fringe rivals may, in the process of learning by doing,
discover how to replicate the technology that provides bank i with its
market edge.
Bank i might engage in strategies aimed at raising the costs of its potential
fringe rivals
bank i could utilize its existing technological edge to engage in predatory (or limit)
pricing.
bank i could set its loan rate just below rDL.
As long as this loan rate > ACL profit-maximizing quantity of loans
the expected discounted stream of profits under this entry-deterrence
strategy > the discounted profit stream from pursuing a loan-pricing policy
that permits entry (Rdl)
This strategy maximizes short-term profits at the expense of future
economic profits.
the SCP Paradigm to the Banking Industry
The SCP hypothesis suggests that
in more concentrated banking markets, ceteris paribus, observed industry
quantities of loans and deposits should be smaller.
In addition, market loan rates should be higher, and market deposit rates should
be lower.
These quantity and interest-rate adjustments, of course, imply higher industry
profits, reduced levels of consumer surplus received by borrowers in loan
markets, and lower accruals to depositors of producer surplus in deposit markets.
The Conduct and Relative Performances of Large and Small Banks
The dominant-bank model utilized by proponents of the SCP paradigm offers:
1. asymmetric competition cannot exist unless a dominant bank possesses a
technological edge over its fringe rivals.
dominant banks operating at lower costs than smaller rivals.
large banks tend to be more efficient than smaller competitors.
2. if entry costs faced by fringe banks are substantial, then the existence of a cost
advantage enables dominant banks to set their loan rate independently and experience
positive economic profits even when some fringe entry occurs.
If fringe entry cost low dominant bank must respond by expanding its
lending and reducing its loan rate markup
3. fringe banks that enter a dominant bank‘s loan market should charge the same loan
rate as dominant banks.
If fringe banks‘ loan rates > their ACL positive economic profits.
fringe bank‘s profitability < the profitability of dominant banks smaller
scale of lending and the higher AC faces by a fringe bank
4. dominant bank can prevent entry by fringe competitors by setting its loan rate lower
than the minimum LRAC of potential fringe entrants.
This reduces the dominant bank‘s short run profits
enable the bank to maintain the technological edge that it possesses over
potential entrants.
the bank might be able to maintain a steady stream of positive economic
profits over a longer horizon
Market Structure and Bank–Customer Relationships
Potential barriers to entry in banking:
leverage — assets capitalization—advantage
absolute cost advantage produce at lower cost/unit than other
product differentiation barrier
Customer relationship:
close and continued interaction
may provide a lender with sufficient information
overcome adverse selection problems by maintain relationships
with successful borrowers
Basic Market-Structure Implications of Bank–Customer Relationships
the bank will set a lower loan rate and higher deposit rate in the first period
reduces the bank‘s profits but enables it to attract more loans and deposits in the
first period, which through its customer relationships will, ceteris paribus,
generate higher loan demand and deposit supply in the second period.
in the second period, the bank can set a higher loan rate and a lower deposit,
thereby boosting its second-period profits bank–customer relationship.
the bank will be more willing to trade off fewer profits in the present for greater
profits in the future
Current profits of incumbents will be lower, reducing the incentive for entry to
occur and resulting in a more concentrated banking industry, ceteris paribus.
Evidence on Bank–Borrowers Relationships
banks develop reputations through implicit contracts.
Maintaining these contracts enables banks to acquire private information
about borrowers and thereby take advantage of captive customers in
order to earn rents
Impacts
reduce monitoring cost lower loan rates to customers with which banks
have close relationships
Evidence on Bank–Depositor Relationships
banks tend to offer higher deposit rates within areas and over times in which
there was greater market inmigration, presumably reflecting a greater incentive to
offer more appealing deposit rates in an effort to attract new depositors
In contrast, in areas and times in which there was greater out-migration,
consistent with the hypothesis that banks in such markets anticipate less durable
relationships, evidence of lower deposit rates.
Competition & relationship lending
Relationship lending as barrier to entry: access to inelastically supplied core
transaction and savings deposits that enable a bank to provide borrowers with
insurance against exogenous shocks.
the length of tenure of lending, Lower of loan rate
Loan rates increase with the duration of the bank‘s lending relationships.
Highly concentrated markets, less competition fosters relationship lending
Competition in lending because the absence of relationship lending
The Efficient Structure (ES) Theory
the basis for the ES: economies of scale and scope could have implications for
the relationship between bank market structure, conduct, and performance for
the existence of relatively large banking organizations.
contrast to the SCP hypothesis, the ES theory proposes that a consequence of
cost advantages due to scale or scope is lower.
higher profits observed at larger institutions would result from the efficiency
advantages they possess rather than from predatory conduct aimed at precluding
entry
the intensity of market competition and market concentration are not necessarily
negatively related
Banking Efficiency and Costs
Concentrated attention to new developments in financial IT improved technical
efficiency in banking.
cost efficiency improvements from technological change rather than changes in
output scale or convergence to an efficient production frontier.
main source of cost inefficiencies derived from failure to utilize the least-cost
production technology or the least-cost mix of inputs—X-inefficiencies—> gap
between efficient behave by theory with observed behave in practice
Others inefficiencies: organizational form, market characteristics, and regulation
ES Theory and Bank Performance
higher profits accrue to the more cost-efficient banks.
support of the SCP dominant-bank model‘s prediction that large banks are able
to boost their profits through exercise of market power as well as cost-efficiency
advantages
decreases in banks‘ costs lower market loan rates
more efficient banks grow and prosper at the expense of less efficient banks.
greater efficiency of larger banks allows them to act as dominant market
participants along lines of the SCP dominant-bank model but that observed
higher profits earned by the larger banks result from greater efficiency rather than
market power.
Pertemuan 4 - Credit Rationing and Securitization
The availability doctrine
The doctrine the price of credit was not the important determinant of credit but
the availability of credit.
Background the doctrine:
regulatory restrictions (BMPK),
usury laws (regulations governing the amount of interest that can be
charged on loan)
asset management methods
weak relationship between the r and the ADL
Government and central banks were able to effectively control the flow of
credit through OMO at the prevailing rate of interest.
When OMO, Bank do asset mgt Gov‘t bond over, private loan under
tightening or loosening of monetary policy by OMO increased or
decreased gov‘t bond increase or decrease in bank lending to the
private sector.
microeconomic perspective of the doctrine the role of non price factors in the
determination of a loan contract.
Theories of credit rationing
expected profit for the bank increases as the rate of interest rises, because 2
effects of rising rate of interest
1. expected revenue increases because of the increase in price (assuming
loan demand is interest-inelastic r rise, Loan decrease insignificant)
2. a fall in expected revenue as the risk of default increases.
1>2 total expected revenue/profits will incline.
theory of endogenous credit rationing Hodgman (1960)
The bank‘s risk of loss (risk of default) is positively related to loan exposure
Components bank‘s expected return:
minimum return in the event of default
in the absence of default, the full return given by the loan rate less the cost
of raising deposits on the money market.
For very small loans the probability of default is virtually zero.
As the loan size increases after a certain point the probability of default
rises so that the profit on the loan starts to decrease such that the loan
offer curve bends backwards.
ASYMMETRIC INFORMATION AND ADVERSE SELECTION
Elements of endogenous rationing models:
Asymmetric information the possibility that both sides to the transaction
do not possess the same amount/quality of info.
the borrower have more information about the project than the
bank.
Adverse selection When the bank may select the wrong candidate, in
the sense of the person more likely to default out of a series of loan
applications.
Adverse incentives When the contracted interest rate creates an
incentive for the borrower to take on greater risk than they otherwise
would, so that the higher interest rate can be paid.
Moral hazard A situation when one of the parties to an agreement has
an incentive to behave in a way that brings benefits to them but at the
expense of the counterparty.
ADVERSE INCENTIVE
The negative effect of interest rate:
the interest rate charged affects the riskiness of the loan, which is the
adverse selection effect.
the higher the rate of interest charged, the greater the incentive to take on
riskier projects, which is the adverse incentive effect.
SCREENING vs RATIONING
Type of borrowers:
Honest borrowers will not borrow if they cannot repay,
dishonest borrowers will borrow knowing they would not repay.
Screening them with: collateral & interest rate
National Economic Research Associates (1990) shows that collateral is a
good signal/the riskiness of project success
The default rate for borrowers who had not offerred collateral was 40%
compared with 14% for those who had.
Assume both are risk-averse:
the safe borrowers: high collateral-low interest rate combination.
The risky borrowers: low collateral-high interest rate combination.
Rationing
focused on the customer-loan relationship
Banks will favor them over others because the granting of favorable loan
conditions is expected to generate demand for other bank services in the future.
Overcome Principal-agent problem with equilibrium risk-sharing arrangement by
offerring fixed rate (or slowly adjusting) rates than spot market rates.
SECURITIZATION
as the process of ‗matching up of borrowers and savers wholly or partly by way
of financial markets:
(i) the issuing of financial securities by firms as opposed to raising loans;
(ii) deposits organized via the banking system; and
(iii) asset-backed securities -i.e., sales of financial securities- which are
themselves backed by financial securities.
Cost of Holding Loans (CHL)
bank the lending rate must cover the sum of
(i) the deposit rate plus any insurance premium,
(ii) the return on the capital required by that loan,
(iii) administrative costs involved in making and monitoring the loan,
(iv) regulatory costs and
(v) the expected default rate on loans.
TYPES OF SECURITIZATION
Direct replacement of debt claims
the replacement of bank loans by the sale of securities such as bonds or
equity on the financial markets.
Underwritten replacement
long-term securities, such as bond and new issues of equity
deposit replacement
Certificates of Deposit (CDs)
Retail savers tend to hold claims on banks in the form of deposits and
institutional savers in a wide range of bank claims including subordinated
debt and equity as well as deposits.
ASSET BACKED SECURITIZATION (ABS)
a process whereby illiquid assets are pooled together and sold off to investors as
a composite financial security which includes the future cash proceeds.
Sold by banks financial institutions and private individuals
include Collateralized Debt Obligations (CDOs):
Collateralized Loan Obligations (CLOs)
Collateralized Bond Obligations (CBOs);
credit card obligations;
auto loans;
consumer loans;
mortgages.
THE PROCESS OF ABS
forming by the originator
A special entity is set up specifically for the transaction Special Purpose
Vehicle (SPV), or Special Purpose Entity (SPE) or, if the special entity is a
company, a Special Purpose Company (SPC).
This entity is completely separate from the bank and is set up with capital
provided by the loan originator, though the SPV may raise capital on its
own behalf.
The SPV then buys the ABS tranche from the originator and then sells securities
(typically Floating Rate Notes/FRNs) to finance the purchase of the securities,
which it holds in trust on their behalf.
These securities receive credit enhancement in the form of a guarantee from a
bank (this may be the originator) or insurance company.
the marketability of the financial claims issued by the SPV.
If the claims are not marketable the whole process fails as the banks will
not be able to remove the assets from their balance sheet.
The securitization process
THE GAINS FROM ABS
they remove assets from their balance sheet, thus easing pressure from capital
regulations.
issuing ABS is equivalent to raising additional funds. The decision: cost of issuing
ABS lower than attracting deposits or issuing bonds.
CP: cash proceeds from ABS,
CH: credit enhancement costs,
CR: credit rating agency fees,
rD: cost of attracting deposits
rB: cost of raising finance through bond issues.
ABS permits the raising of returns for banks by securitizing high-grade loans with
relatively low returns and retaining lower grade loans with higher returns.
a means for a bank to manage its risk by removing some loans from its portfolio
through the issue of an ABS.
Dis/Advantages
the possible requirement of the borrower‘s permission
the relationship between the bank and the customer may be damaged by
the transfer of the loan
the costs incurred in the time and expenses involved in designing the issues
unattractive for banks with low funding costs.
the process of ABS connects the financial markets with the capital market
reduce agency and intermediary costs by providing investors with a wider
range of securities and enabling cheaper raising of funds.
Credit facilities have been increased.
This is beneficial during periods of faster growth of an economy
could lead to increased financial distress once a downturn occurs.
the volatility of the economy may have been increased.
Pertemuan 5- Struktur Perbankan
Structure-Conduct-Performance
(market) structure interaction D & S
Conduct number of competing firms and customers, and barriers to entry
performance/output combination of these two factors
MEASUREMENT OF OUTPUT
Output of bank? Difficult to measure
Ex: ATM improve quality of services
2 sides of ATM: operating cost reduction per transaction but rise in total costs if
the number of withdrawals increases
2 sides of closure of branches increased costs and inconvenience for
customers but lower costs for the banks.
measuring output: intermediation methods
the bank as an intermediary
output = the value of loans and investments + off-balance-sheet income +
payments made to factors of production (interest)
deposits may be treated as inputs or outputs
point of view of bank managers, deposits are inputs essential to obtain
profits through the purchase of earning assets such as loans and
investments.
point of view of the customer, are outputs since they create value for the
customer in the form of payment, record-keeping and security facilities.
focus on income with net interest income and noninterest income being declined
as output with the corresponding expenses declined as input.
measuring output: production methods
regard banks as firms that use factors of production (labour and capital) to
produce different categories of loans and deposit accounts.
The number of transactions, either in total or per account, are treated as a flow.
One problem interest costs are ignored.
Merger & Akuisisi (PP No. 28/99)
Merger penggabungan dari 2 (dua) Bank/lebih, dengan cara tetap
mempertahankan berdirinya salah satu Bank dan membubarkan Bank-bank
lainnya tanpa melikuidasi terlebih dahulu;
Lippo-Niaga CIMB-Niaga
Konsolidasi penggabungan dari 2 (dua) Bank atau lebih, dengan cara
mendirikan Bank baru dan membubarkan Bank-bank tersebut tanpa melikuidasi
terlebih dahulu;
BBD, Bank Bapindo, Bank Dagang Negara, Bank Exim Bank Mandiri.
Akuisisi pengambilalihan (take-over) kepemilikan suatu Bank yang
mengakibatkan beralihnya pengendalian terhadap Bank;
Bank Agroniaga diakuisisi BRI
REASONS FOR THE GROWTH OF MERGERS AND ACQUISITIONS
(i) increased technical progress,
increased the scope for economies of scale.
Ex: use of IT & fonancial innovation derivative contracts and off-
balance-sheet business, ATMs and online banking
increasing competition from other FIs.
(ii) improvements in financial conditions increase profitability extra funds to
finance acquisitions.
(iii) excess capacity because there are competition from Fis incentive to
rationalize via mergers
Financing from capital market n nonbank, saving from investment trust
(iv) international consolidation of financial markets increased globalization of
financial services
(v) enhance shareholder value
(vi) deregulation
PP No 28/1999 merger, konsolidasi dan akuisisi
Landasan Hukum Merger antar Bank Umum di Indonesia
UU No. 7 Th. 1992 tentang Perbankan jo UU No. 10 Th. 1998
UU No. 21 Th. 2008 tentang Perbankan Syariah
PP No. 28 Th. 1999 tentang Merger, Konsolidasi dan Akuisisi Bank
PP No. 29 Tahun 1999 tanggal 7 Mei 1999 tentang Pembelian Saham Bank
Umum.
SK Direksi BI No.32/50/KEP/DIR tgl.14 Mei 1999 tentang Persyaratan & Tata
Cara Merger Pembelian Saham Bank Umum
SK Direksi BI No.32/51/KEP/DIR tgl.14 Mei 1999 tentang Persyaratan & Tata
Cara Merger, Konsolidasi & Akuisisi Bank Umum
SK Direksi BI No.32/52/KEP/DIR tgl.14 Mei 1999 tentang Persyaratan & Tata
Cara Merger, Konsolidasi & Akuisisi Bank Perkreditan Rakyat
PBI No.2/27/PBI/2000 tanggal 15 Desember 2000 tentang Bank Umum.
SK Dir BI No. 32/34/KEP/DIR tgl 12 Mei 1999 tentang Bank Umum Syariah.
SK Dir BI No. 32/35/KEP/DIR tanggal 12 Mei 1999 tentang BPR;
SK Dir BI No. 32/36/KEP/DIR tanggal 12 Mei 1999 tentang BPR Syariah
Prioritas pembagian Aset Bersih hasil Likuidasi
1. Pajak (Pasal 21 : 7 UU No. 9/1994 tentang Pajak Penghasilan)
2. Upah buruh (pasal 110 UU No. 25/1997 tentang Perburuhan)
3. Biaya perkara sebagaimana diatur dalam Pasal 1139 butir 1 dan Pasal 1149
butir 1 Kitab Undang-Undang Hukum Perdata
4. Pemegang Hak Tanggungan dan Gadai
5. Para Berpiutang yang diistimewakan sebagaimana yang tercantum dalam
Pasal 1139 dan Pasal 1149 Kitab Undang-Undang Hukum Perdata (kecuali
yang disebutkan dalam butir 2 dan 3 di atas)
6. Para kreditur yang tidak memiliki jaminan.
ALASAN M & A
Pertumbuhan cepat atau diversifikasi usaha
•Mengurangi persaingan
Sinergi (esp dlm bisnis yg sama efisiensi labor)
•EOS OHC tetap, Income naik
Meningkatkan dana dgn low cost
•Joint with high liquidity firm Leverage naik, liabilities turun
Menambah ketrampilan manajemen atau teknologi
•Niaga with CIMB
Pertimbangan pajak
•Menutupi kerugian pajak
Meningkatkan likuiditas pemilik
•Big company more liquid than small one IPO, listing in capital mkt
Melindungi diri dari pengambilalihan
Dis / advantage M&A
Empirical Evidence M & A in the banking industry, based on 5 different types of
analysis
+ low cost
- Take time to get agreement from stock holder
Merger + no need RUPS
+ tender offer dgn stock holder tanpa persetujuan mgt/komisaris perusahaan
+ hostile takeover
- Cancel if majority stockholder dont agree (67%)
- Untuk akuisisi aset high legal cost balik nama
Akuisisi
saham
The analysis to evaluate M&A
static studies do not consider the behaviour of the merged firms before and
after the merger
production functions,
cost functions,
the efficient frontier
approach
dynamic studiesconsider the behaviour of the firms before & after the merger
use of accounting
data,
event studies
PRODUCTION FUNCTION APPROACH
output as a function of inputs
Cobb-Douglas
Q = book value of commercial assets
L = labour input (number of full-time employees)
K1, K2 = fixed and liquid assets
Merger = years 1 to 5 after the merger
Problem = differ form of prod function different result
THE COST FUNCTION APPROACH
estimating a cost function for the banks and, then, examining how the cost
function behaves over time.
single output (Q) with two inputs (L and K), the translog cost function:
only assesses the efficacy of mergers by examining scope for economies of
scale banking firms grow larger through mergers
Question:
potential economies of scale (cost per output decreasing) ambiguous from
the point of view of cost studies.
the translog cost function is the best vehicle for analysing the behaviour of
costs?
THE ACCOUNTING APPROACH
• domestic mergers between equal-sized
partners increase the efficiency of the merged banks.
• Cross-border acquisitions slight but insigni¢cant improvement in
performance
another factor: defensive motives & managerial preferences.
use of key financial ratios ROA/ROE (net income before/after tax), loans/OHC
to total asset cash flows.
Others variable: bank size, the ratio of loans to assets, asset utilization
THE EFFICIENT FRONTIER APPROACH
Data Envelopment Analysis (DEA) by Charnes, Cooper, Rhodes (1978)
pengukuran efisiensi
teknik pemrograman matematis untuk mengevaluasi efisiensi relatif dari decision
making unit/DMUs dlmmengelola input menjadi output.
nonparametric approach:
Stochastic Frontier Analysis (SFA)
function for cost, profit or production so as to determine the frontier
and treats the residual as a composite error comprising Random
error & Inefficiency
Distribution Free Approach (DFA)
Inefficiency=Average residual of the individual firm -Average
residual for the firm on the frontier
8
ROE Breakdown
ROE
xROA EM
• Return on equity depends on
– Asset Utilization (AU)
– Profit Margin (PM)
– Equity Multiplier (EM)43
xAU PM x EM
ROE Breakdown Over Time
Variable 2010 2009 2008
ROE 8.02% 7.69% 7.52%
EM 7 71 7 18 6 71
44
EM 7.71 7.18 6.71
ROA 1.04% 1.07% 1.12%
AU 7.31% 7.33% 7.37%
PM 14.23% 14.60% 15.20%
ROE Breakdown Over Time
Variable 2010 2009 2008
ROE 8.02% 7.69% 7.52%
EM 7 71 7 18 6 71
45
EM 7.71 7.18 6.71
ROA 1.04% 1.07% 1.12%
AU 6.85% 7.00% 7.37%
PM 15.18% 15.29% 15.20%
ROA Breakdown Versus Peer Group
Case 1 Bank PG
ROA 1.04% 0.87%
AU 7.31% 5.73%
PM 14.23% 15.18%
46
Case 2 Bank PG
ROA 1.04% 0.87%
AU 7.31% 7.55%
PM 14.23% 11.52%
What are different implications?
Income Statement
Interest Income
- Interest Expense
Net Interest Income
Revenue − ExpenseNet Income =
Net Interest Income
- Provision for Loan Losses
+ Noninterest Income
- Noninterest Expense
+ Gains/Losses on Secs
Pretax Earnings
- Taxes
Net income
47
Asset Utilization
AU
48
Int Inc
TA
G/L
TA+ +
Non Int Inc
TA
Thick Frontier Approach (TFA)
A functional form is specified to determine the frontier based on the
performance of the best firms
Pertemuan 6 - Makroekonomi Perbankan
INTRODUCTION
domain of a central bank: the control of the macroeconomy through the operation
of monetary policy.
The modern central bank maintaining the value of the currency by maintaining a
low rate of inflation, stabilizing the macroeconomy (debt, r, trade balance) and
ensuring the stability of the financial system.
The conduct of monetary policy also has effects on the banking system itself in
its role of the provision of finance and the money supply.
the relationship between monetary policy is a two-way one with the banks
affecting the conduct of monetary policy and the conduct of monetary policy
affecting the banks.
THE ECONOMICS OF CENTRAL BANKING: A HISTORY..
oldest central banks: Bank of England (1694)
as a joint stock company following a loan of 12m pounds by a syndicate of
wealthy individuals to the government of King William and Queen Mary
1688-1815 Britain need funding war by issue bank notes
A rise in gold prices at the beginning of the 19th century sparked a debate about
the role of the Bank
two schools of thought the role of Bank to stabilization currency
The Currency School
precursor of modern-day monetarists
stabilization of the value of the currency can only be ensured by strictly
linking note issue to the Bank‘s gold deposits
The Banking School
precursor of the Keynesian-Radcliffe view
Currency stability depended on all of the Bank‘s liabilities and not just its
gold deposits.
The 1844 Bank Charter Act: split the Bank into
The issue department
Role: to ensure convertibility by backing currency issue by gold
The banking department
Normal commercial bank
The Act also gave the Bank of England de facto monopoly of the note issuethe
Bank of England became the bank to the banks lender of last resort to the
banking system.
The Bank of England Act of 1946
Bank become public ownership
important issue under the Bretton Woods System.
dual goal:
assisting the target of full employment
maintaining the exchange rate to the US dollar by imposing quantitative
controls on bank lending.
i naik/turun Loan turun/naik MS turun/naik ER
apresiasi/depresiasi
system of fixed exchange rates broke down in the early 1970s, the Bank was
pushed into an even closer relationship with the government.
The Bank of England Act of 1998
gave the Bank operational independence in meeting the inflation targets set by
the government.
upper bound of 2.5% and a lower bound of 1%.
MONETARY POLICY
the central bank controls the supply of base money
central banks can alter the required reserve ratio to control bank lending and the
money supply
Required reserve ratio rise CB creates a shortage of reserves for the banking
system banks raise interest rates to reduce loan demand.
CB use the discount rate to control MS
discount rate is the rate of interest at which the central bank is willing to
lend reserves to the commercial banks
The CB exercises control on the banking system by exploiting the scarcity of
reserves
One simple way for the commercial banks to meet their liquidity needs is
to run down any excess reserves they hold.
CENTRAL BANK INDEPENDENCE
argument: monetary policy is cushioned from political interference and is
removed from the temptation to cheat on a low-inflation environment by
engineering some unexpected inflation prior to an election.
An independent central bank gives credibility to an announced monetary policy
that underpins low inflation.
Goal independence CB sets the goals of monetary policy.
Operational independence CB that has freedom to achieve the ends which are
themselves set by the government.
WHAT TYPE OF CENTRAL BANK?
The theory of central banking the central bank should have policy aims - i.e.,
an objective function- that includes output stabilization, but gives output stability a
lower weight than what the government would wish and inflation a higher weight
than what the government would want.
Therefore, the central bank should be conservative in the sense that it places a
high priority on low inflation, but not completely to the detriment of output
output down
FINANCIAL INNOVATION AND MONETARY POLICY
financial innovation weaken the effectiveness of monetary policy
switch from asset management to liability management the
development of interest-bearing sight deposits.
the conventional money demand function with the development of interest-
bearing sight deposits:
substitution between money and nonmoney liquid assets will depend on
the margin between the interest on nonmoney liquid assets and deposits
FINANCIAL INNOVATION AND MONETARY POLICY
Interest rates risebanks will also raise interest rates on deposits the rate of
interest on liquid assets will have to rise even more to generate a unit substitution
from money to nonmoney liquid assets.
The implication for monetary policy
The relationship between income and money is changed.
Control of the MS becomes difficult for CB if banks compete with
the government for savings, so that banks will raise interest rates
on deposits in response to a general rise in interest rates caused by
a rise in the CB rate of interest.
The reduction in the response of MD to a change in the rate of
interest on nonmoney liquid assets can be thought of as a fall in the
interest elasticity of MD
Financial-innovation-induced fall in the interest elasticity of demand for money
Poole (1970) an economy that is dominated by IS shocks should target the
money supply and an economy dominated by monetary shocks should target the
rate of interest.
also explain why central banks have gradually moved away from monetary
targets to inflation targets using the rate of interest as the primary instrument of
control.
Conclusion
The Bank for International Settlements report on Financial Innovation (BIS, 1985)
as a result of financial innovation:
the money supply would be an unreliable guide to monetary conditions.
the effectiveness of the rate of interest as the instrument of monetary
policy is greatly increased.
INFLATION TARGETING
Combined with a higher frequency of monetary shocks than real shocks, central
banks have abandoned monetary targets and adopted inflation targets
monetary policy can do to support long-term growth of the economy is to
maintain price stability
using the central bank rate of interest as short-term monetary instrument
raising interest rates usually cools the economy to reign in inflation; lowering
interest rates usually accelerates the economy, thereby boosting inflation.
BANK CREDIT AND THE TRANSMISSION MECHANISM
monetary transmission mechanism separates the effect of monetary policy on the
economy into an indirect route and a direct route.
The direct route: the direct effect of money on spending, through:
the real balance effect of Patinkin (1965): determinants of consumption by
the real value of money (i.e., real balance)
the wealth effect of Pigou (1947): real value of money+weatlh
MS increase (in excess of the level demanded), as implied by some
equilibrium level of real balances, generates an increase in
spending
The indirect route through the effect of interest rates and asset prices on the
real economy.
A fall in the rate of interest (both real and nominal) and/or an increase in
asset price inflation results in a fall in the cost of capital (Tobin‘s q) and an
increase in investment and consumer durables spending (including real
estate purchases)
asset price inflation: rise in price financial asset such as bonds,
shares, derivatives
further transmission effect of monetary policy
Comes from the ‗expectations effect‘ rational expectations make choices
based on rational outlook, available info, past experiences
An anticipated tightening of monetary policy (r naik / MS turun) faster ultimate
effects on the economy than an unanticipated tightening of monetary policy
r riseincrease of borrowing reduce its attractivenes
The real effects are weaker in the case of an anticipated change in monetary
policy than an unanticipated one.
credit channel
alternative to the orthodox transmission mechanism
is a mechanism for enhancing and amplifying (memperkuat) the effects of the
textbook monetary channel.
The credit channel works by amplifying the effects of interest rate changes by
endogenous changes in the external finance premium.
The external finance premium is the gap between the cost of funds raised
externally (equity or debt) and the cost of funds raised internally (retained
earnings).
Changes in monetary policy change the external finance premium. It works
through two channels:
1. The balance sheet channel.
2. Bank lending channel.
The balance sheet channel
based on the notion that the external finance premium facing a borrower should
depend on the borrower‘s net worth (liquid assets less short-term liabilities).
In the face of asymmetric information, the supply of capital is sensitive to shocks
that have persistence on output.
Bernanke and Gertler (1989) show that the net worth of entrepreneurs is an
important factor in the transmission mechanism.
A strong financial position translates to higher net worth and enables a borrower
to reduce dependence on the lender.
A borrower is more able to meet collateral requirements and or self-finance
The bank lending channel
recognizes that monetary policy also alters the supply of bank credit.
If bank credit supply is withdrawn, medium or small businesses incur costs in
trying to find new lenders
Thus shutting of bank credit increases the external finance premium.
The implication of the two channels
the availability of credit or otherwise has short-term real effects.
For example, a negative monetary shock to the economy can reduce the net
worth of businesses and reduce corporate spending, shifting the IS curve to the
left.
In the context of the macroeconomic IS=LM model, Bernanke and Blinder (1988)
argue that negative shocks to net worth caused by adverse monetary shocks
cause reinforcing shifts in the IS curve.
Blinder (1987) suggests that this also causes additional constraints on supply,
which leads to a reinforcing contraction in aggregate supply.
the effect of a positive monetary shock in the credit channel framework
A positive monetary shock (a relaxation in monetary policy) results in a strengthening of
corporate balance sheets which causes a reinforcing rightward shift of the IS curve.
Pertemuan 7 - Analisis Ekonomi Regulasi Perbankan
a “need” for bank regulation
the justification for any regulation usually stems from a market failure such as
externalities, market power, or asymmetry of information between buyers and
sellers.‖
―in the case of banking, there is still no consensus on whether banks need to be
regulated‖
Regulation need if banking failure has a large impact incentives to take risks
are high, and the social cost of failure is high
the fundamental rationales behind regulation the potential instability of the
banking system and the need for consumer protection
So, the analysis the implication of regulation include public interest rationale
Public Choice Motivations for Bank Regulation, in a real world..
motivations for regulating firms nothing to do with aiming to correct market
failures.
Stigler (1971) ―capturing‖ regulatory officials who will have the power to protect
firms from competition from prospective new entrants.
Viscussi (2005) ―the key reason why normative analysis as positive theory has
lacked supporters...‖ because ―many industries have been regulated for which
there is no efficiency rationale‖ and ―in many cases, firms supported or even
lobbied for regulation.‖ ex: IIA
Viscusi et al. also contend that even a common reformulation of theory of
regulation purely in the public interest—that regulation initially is established to
correct a market failure but then often is mismanaged by the agency charged
with performing such regulation—still fails to square with the evidence.
Posner (1974), ―theoretical and empirical research...[has] demonstrated that
regulation is not positively correlated with the presence of external economies or
diseconomies or with monopolistic market structure.‖
Applying the Economic Theory of Regulation to the Banking Industry
A regulatory optimum
The preferences of the regulator depend on industry profits and on the loan rate.
Higher profits = healthier/more satisfied firms and positive utility to
the regulator.
A lower loan rate increased level of credit at better terms
(approval by consumers, non financial firms, DPR/pemerintah)
banking industry structure desire by regulator between the extremes of perfect
competition and monopoly
If equil at point near R*: little incentive to regulate
If equil at point near M: incentive to press for industry regulation because
R* closer their preference point C: lowest loan rate and the level of credit
greatest.
If equil at point near C: industry has incentive to lobby for regulation,
because R * is closer to banks‘ preferred, M
Assessing the Implications of the Economic Theory of Regulation
The economic theory of regulation:
once a bank regulatory regime is put into place, actual profit and loan rate
(and aggregate credit) outcomes will depend on the preferences of the
regulator (figure)
But based on some theories and a limited empirical evidence suggesting that
risks of banking failure may rise with increased competition, so regulator choose
panel b by assuring bank profitability that helps limit the scope for failures
It should be real evidence relationship between bank competition & risk
Differences in regulator preferences
U steep: regulator accept significant swings in bank profits in exchange for slight
changes in the loan rate regulatory optimum R* must be close to the competitive limit
public interest need
U flat: the regulator desires to maintain industry profits, wide variations in the loan rate
(and aggregate credit) regulatory optimum is nearer to the monopoly limit industry
wants
The Political Economy of Banking Supervision
Bank face problem: risky project, bank run, adverse selection, moral hazard
so poorly designed or improperly managed regulatory frameworks can
deliver social welfare losses even more
The public choice perspective on regulation of industry emphasizes that the
preferences of regulators are crucial in shaping the structure of an industry
supervisory regime
regulator‘s preferences influence its supervisory actions
Regulatory Preferences and Bank Closure Policies
Boot and Thakor (1993): a two-period game-theoretic model in which the private
payoff of the regulator depends on his monitoring reputation.
A regulator charged with monitoring and closing banks can either respond
to a sub-optimal first-period risk choice by requesting a better risk choice
the next period or closing the bank.
Result: equilibrium policy that emerges from this principal (society)-agent
(regulator) problem is socially sub-optimal, because imperfectly informed agents
view a bank‘s closure as a signal that the regulator may have poorly monitored
the closed institution.
So regulator need effort to avoid developing a reputation as a poor monitor with:
redoubling efforts to prevent industry capture of bank regulators,
placing strict limits on the allowable scope
limiting the riskiness of bank asset choices
Its all make it easier for society to judge the quality of supervisory monitoring by
regulators.
The Supervisory Review Process Pillar of Basel II
Principle 1: capital requirements adequately, or inadequately capitalized in
relation to the minimum ratios
Principle 2: periodic review of banks‘ internal assessments and strategies
Principle 3: encourage banks to operate with a buffer, over and above the Pillar 1
standard
Principle 4: intervence at an early stage to prevent capital from falling below the
minimum levels
The Supervisory Review Process Pillar: Conceptual Issues
Discretion Versus Rules
Regulation can be inefficient create greater moral hazard
Regulators can be slow to adjust to institutional and market innovations.
Hard to adapt to complexities of large and multifaceted financial
institutions
Mishkin (2006) policymaker with discretion faces a time-inconsistency problem
society focused on the overall policy objective of a safe and sound banking
industry are more likely to succeed by developing a mechanism for commitment,
typically an institutional structure involving clear ex ante supervisory rules that
banks know will be followed ex post.
Is International Coordination of Bank Regulation Appropriate?
potential problems associated with jurisdictional disputes among national
regulators confronting insolvencies of large, multinational financial holding
companies, social welfare, divergent interest of regulator
environments in which international interactions are important, the socially
optimal policy is either to assign bank supervisory decisions to
a supranational regulator or
to base supervisory policies on those pursued by the national regulator
with the highest standards.
Discretionary on Basel II?
―Supervisors should have the discretion to use the tools suited to the
circumstances of the bank and its operating environment.”
Barth et al. (2004, 2006): regulatory discretion is counterproductive nations
that have granted greater discretion to bank supervisors have tended
to have banking systems that exhibit less development,
more corruption, and
poorer overall operating performance and
to the extent detrimental to global banking development and stability
Do Basel II Compliance Costs “Matter”? Depends on:
Total Implementation Costs
Based on available estimates, these costs equivalent of average annual
earnings of banks between 2.5-3.5 %.
Variable Costs and On-Going Effects of Basel II
estimates of the on-going costs to society generated by capital-regulation-
induced liquidity reductions is 0.1% of total consumption, or, based on
2006 data an annual decrease in consumption below $10 billion.
VC: labor cost, diversification cost of portofolio
Bank Regulation and Endogenous Fixed Costs
regulatory compliance costs are a component of endogenous sunk fixed cost
Incl: advertising, branch, ATM networks, technology to enhance product
quality
TC of compliance bank regulations estimated to be 12 to 13% of banks‘
total noninterest expenses.
role of endogenous sunk fixed regulatory costs
determining the equilibrium structure of the banking industry
may be regarded as essentially a type of ―natural oligopoly.‖