[ACTFMKT] Comprehensive Exam

1. Character

2. Capacity

3. Capital

4. Conditions

5. Collateral

5 C’s of Credit

1. working capital / total assets

2. retained earnings / total assets

3. earnings before interest and tax / total assets

4. market value of equity / total liabilities

5. sales / total assets

Components of Altman Z-score

Credit risk

risk that financial obligations are not paid when they fall due because the borrower or counterparty (“obligor”) is either unable, or unwilling, to pay

Financial institutions

transforms financial claims of household savers efficiently into claims issued to corporations, individuals, and governments

Financial institutions

has the ability to process and evaluate information and control and monitor borrowers

Credit allocation

an important type of financial claim transformation for commercial banks

Credit allocation

FIs accept the risks of loans in return for interest that (hopefully) covers the costs of funding net of defaults and, as a result, are exposed to credit risk

Credit quality

a measurement of an individual's or company's creditworthiness

Creditworthiness

the ability to repay debt

Credit analysis

the process of determining the ability of a company or a person to repay their debt obligations.

Credit analysis

contains both qualitative and quantitative factors such as amounts owed, character, and capacity to make payments

Credit analysis

used to determine whether a company or individual qualifies for a loan or mortgage

Credit analysis

used to determine the quality of a bond

Gross debt service ratio

total accommodation expenses (mortgage, lease, condominium, management fees, real estate taxes, etc.) / gross income

Total debt service ratio

(total accommodation expenses + all other debt service payments) / gross income

Credit scoring systems

mathematical models that use observed loan applicant’s characteristics to calculate a score that represents the applicant’s probability of default

Liquidity risk

risk of incurring losses resulting from the inability to meet payment obligations in a timely manner when they become due or from being unable to do so at a sustainable cost

Liquidity risk

a normal aspect of the everyday management of financial institutions (Fis); the fundamental role of banks in the maturity transformation of short-term deposits into long-term loans makes banks inherently vulnerable to liquidity risk, both of an institution-specific nature and that which affects markets as a whole

Net deposit drains

the amount by which cash withdrawals exceed additions

Stored liquidity

maintaining liquid assets to meet cash needs

Purchased liquidity

rely on the ability to acquire funds from brokered deposits and borrowings

Purchased liquidity

used primarily by the largest banks with access to the money market and other non-deposit sources of funds

Purchased liquidity

can be expensive for the FI, however, since it must pay market rates for funds to offset net drains on low interest rate deposits

Net liquidity statement

lists sources and uses of liquidity

Peer group ratio comparisons

used to compare a bank’s liquidity position against its competitors

Financing gap

difference between a bank’s average loans and average (core) deposits

Financing requirement

financing gap + a bank’s liquid assets

Liquidity Coverage Ratio

ratio of the stock of high-quality assets that can be liquidated at short notice to the total net cash outflow over the next 30 days

Net Stable Fund Ratio

amount of available stable funding over 1 year divided by the required amount of stable funding over the year

100%

net stable fund ratio should be above ___ at all times

Interest rate risk

the potential for investment losses that result from a change in interest rates

Repricing model

funding gap model; examines the impact of interest rate changes on net interest income

Repricing gap

difference between those assets whose interest rates will be repriced or changed over some future period and liabilities whose interest rates will be repriced or changed over some future period

Duration model

examines the impact of interest rate changes on the overall market value of an FI and thus on net worth

Insolvency risk

bankruptcy risk; the real possibility that a company may be unable to meet its payment obligations in a defined period of time

Capital

primary protection against the risk of insolvency

Capital

a source of funds for FIs

Capital

a necessary requirement for growth under existing minimum capital-to-asset ratios set by regulators

Net worth

the economic meaning of capital

Net worth

market value (MV) of

an FI’s assets - market value of its liabilities

Market value basis

uses balance sheet values that reflect current rather than historical prices

Regulatory and accounting-defined capital

based in whole or in part on historical or book values

1. Universal

2. Commercial

3. Thrift

4. Rural

5. Cooperative

6. Islamic

7. Digital

Types of Banks (7)

1. Deposits

2. Borrowings from BSP and other banks

3. Share capital

4. Reserves

Sources of Funds (4)

1. Savings

2. Demand

3. Time

Deposits (3)

1. Loans and Credits

2. Deposits to BSP and to other banks

3. Money Market Investments

4. Equity Investments

5. Bond Investments

Uses of Funds (5)

Loans and Credits

1. Salary-Based General-Purpose Consumption

2. Mortgage

3. Agricultural

4. Microfinance

5. Credit Card Operations

6. Interbank

Universal Banks

have the broadest powers among all types of banks in the Philippines

Universal Banks

they can perform the functions of commercial banks and also engage in investment and other specialized financial activities.

Universal Banks

accepts deposits and provide loans

Universal Banks

engages in investment banking activities

Universal Banks

underwrites securities and deal in capital markets

Universal Banks

invests in equities of other companies

Universal Banks

typically the largest and most complex banks in the country

Commercial Banks

provide a wide range of traditional banking services to individuals,

businesses, and corporations.

Commercial Banks

accepts deposits (savings, current accounts, time deposits)

Commercial Banks

lends to businesses and individuals

Commercial Banks

provides payment and credit services

Commercial Banks

finances trade and commerce

Commercial Banks have slightly more limited powers compared with universal banks, particularly in investment activities

Thrift Banks

focus mainly on savings mobilization and consumer lending, especially for households and small businesses.

Thrift Banks

issues savings and time deposit accounts

Thrift Banks

issues housing loans and consumer loans

Thrift Banks

financing for small and medium enterprises (SMEs)

Thrift Banks

sometimes referred to as savings banks, mortgage banks, or private development banks.

Rural Banks

established to promote financial access in rural and agricultural communities.

Rural Banks

provide credit to farmers and rural entrepreneurs

Rural Banks

support agricultural and small-scale industries

Rural Banks

expand banking services in underserved areas

Rural Banks

play an important role in financial inclusion and countryside development.

Cooperative Banks

banks owned and operated by cooperatives or cooperative members.

Cooperative Banks

members are both owners and customers

Cooperative Banks

services focus on cooperative organizations and their members

Cooperative Banks

promote savings, credit access, and financial assistance among cooperatives

Cooperative Banks

their main goal is community development rather than profit maximization

Islamic Banks

operate based on Shariah (Islamic law) principles.

Islamic Banks

prohibit the charging of interest (riba)

Islamic Banks

use profit-sharing or asset-based financing structures

Islamic Banks

offer financial products compliant with Islamic principles

Islamic Banks

help expand inclusive financial services for Muslim communities.

Digital Banks

provide financial services entirely through digital platforms without physical branches.

Digital Banks

end-to-end online banking services

Digital Banks

mobile apps or online platforms for transactions

Digital Banks

lower operating costs due to absence of physical branches

Digital Banks

intended to expand financial access and promote digital payments in the

Philippines

Digital Banking

combines online and mobile banking services under one umbrella

Online banking

accessing banking features and services via your bank’s website from your computer

Mobile banking

using an app to access many of those same banking features via mobile devices such as smartphones or tablets

Digital Banks

will be required to have a minimum capitalization of 1 billion pesos Digital Banks

Digital Banks

will not be allowed to establish physical branches

Digital Banks

will need to maintain a head office in the Philippines

Savings deposits

include all interest-bearing deposits which are withdrawable upon presentation of an accomplished withdrawal slip.

Demand deposits

subject to withdrawal by checks and are non-interest bearing

Time deposits

interest-bearing, with specific maturity dates and evidenced by certificates/advices issued by the bank in the name of the depositor.

Off-balance-sheet assets

When an event occurs, this item moves onto asset side of balance sheet or income is realized on income statement

Off-balance-sheet liabilities

When an event occurs, this item moves onto liability side of balance sheet or an expense is realized on income statement

1. Capital Adequacy

2. Asset Quality

3. Management Capability

4. Earnings

5. Liquidity

6. Sensitivity

CAMELS Rating System (6)