1. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-1 Chapter 2 Commercial Banks Websites: www.apra.gov.au www.asic.gov.au www.accc.gov.au

2. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-2 Learning Objectives Evaluate the functions and activities of commercial banks Identify the main sources and uses of funds for commercial banks Outline the nature and importance of banks’ off- balance-sheet business Examine the main risk exposures and consider related issues of regulation and prudential supervision of banks

3. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-3 Chapter Organisation 2.1Main Activities of Commercial Banking 2.2Sources of Funds 2.3Uses of Funds 2.4Off-balance-sheet Business 2.5Regulation and Prudential Supervision 2.6Background to Capital Adequacy Standards 2.7Basel II Capital Accord 2.8Liquidity Management and Other Supervisory Controls 2.9Summary

4. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-4 2.1Main Activities of Commercial Banking Three categories of banks –Incorporated banks—domestic and foreign –Unincorporated foreign bank branches –Foreign bank representative offices Importance of banks –High level of regulation prior to the mid-1980s constrained their development and led to growth of non- bank financial institutions –Largest share of assets of all institutions, but understated without considering off-balance-sheet transactions, managed funds, superannuation and subsidiary finance, insurance and companies

5. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-5 2.1Main Activities of Commercial Banking (cont.) Asset management (−1980s) –Loans portfolio is tailored to match the available deposit base Liability management (1980s−) –Deposit base and other funding sources are managed to fund loan demand  Commercial bill market  Provision of other financial services  Off-balance-sheet (OBS) business

6. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-6 Chapter Organisation 2.1Main Activities of Commercial Banking 2.2Sources of Funds 2.3Uses of Funds 2.4Off-balance-sheet Business 2.5Regulation and Prudential Supervision 2.6Background to Capital Adequacy Standards 2.7Basel II Capital Accord 2.8Liquidity Management and Other Supervisory Controls 2.9Summary

7. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-7 2.2Sources of Funds Sources of funds appear in the balance sheet as either liabilities or shareholders’ funds Banks offer a range of deposit and investment products with different mixes of liquidity, return, maturity and cash flow structure to attract the savings of surplus entities

8. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-8 2.2Sources of Funds (cont.) Current deposits –Funds held in a cheque account –Highly liquid –May be interest or non-interest bearing Call or demand deposits –Funds held in savings accounts that can be withdrawn on demand –e.g. passbook account, electronic statement account with ATM and EFTPOS

9. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-9 2.2Sources of Funds (cont.) Term deposits –Funds lodged in an account for a predetermined period at a specified interest rate  Term: one month to five years  Loss of liquidity due to fixed maturity  Higher interest rate than current or call accounts  Generally fixed interest rate

10. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-10 2.2Sources of Funds (cont.) Negotiable certificates of deposit (CDs) –Paper issued by a bank in its own name –Issued at a discount to face value –Specifies repayment of the face value of the CD at maturity –Highly negotiable security –Short term (30 to 180 days)

11. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-11 2.2Sources of Funds (cont.) Bill acceptance liabilities –Bill of exchange  A security issued into the money market at a discount to the face value. The face value is repaid to the holder at maturity –Acceptance  Bank accepts primary liability to repay face value of bill to holder  Issuer of bill agrees to pay bank face value of bill, plus a fee, at maturity date  Acceptance by bank guarantees flow of funds to its customers without using its own funds

12. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-12 2.2Sources of Funds (cont.) Debt liabilities –Medium- to-longer-term debt instruments issued by a bank  Debenture A bond supported by a form of security, being a charge over the assets of the issuer (e.g. collateralised floating charge)  Unsecured note A bond issued with no supporting security

13. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-13 2.2Sources of Funds (cont.) Foreign currency liabilities –Debt instruments issued into the international capital markets that are denominated in a foreign currency  Allows diversification of funding sources into international markets  Facilitates matching of foreign exchange denominated assets  Meets demand of corporate customers for foreign exchange products

14. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-14 2.2Sources of Funds (cont.) Loan capital and shareholders’ equity –Sources of funds that have the characteristic of both debt and equity (e.g. subordinated debentures and subordinated notes)  Subordinated means the holder of the security has a claim on interest payments or the assets of the issuer, after all other creditors have been paid (excluding ordinary shareholders)

15. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-15 Chapter Organisation 2.1Main Activities of Commercial Banking 2.2Sources of Funds 2.3Uses of Funds 2.4Off-balance-sheet Business 2.5Regulation and Prudential Supervision 2.6Background to Capital Adequacy Standards 2.7Basel II Capital Accord 2.8Liquidity Management and Other Supervisory Controls 2.9Summary

16. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-16 2.3Uses of Funds Uses of funds appear in the balance sheet as assets The majority of bank assets are loans that give rise to an entitlement to future cash flows, i.e. interest and repayment of principal –Personal and housing finance –Commercial lending –Lending to government

17. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-17 2.3Uses of Funds (cont.) Personal and housing finance –Housing finance  Mortgage  Amortised loan –Investment property –Fixed-term loan –Credit card

18. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-18 2.3Uses of Funds (cont.) Commercial lending (business sector and other financial intermediaries) –Fixed-term loan  A loan with negotiated terms and conditions Period of the loan Interest rates –Fixed or variable rates set to a specified reference rate (e.g. BBSW) Timing of interest payment Repayment of principal

19. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-19 2.3Uses of Funds (cont.) Commercial lending (business sector and other financial intermediaries) (cont.) –Overdraft  A facility allowing a business to take its operating account into debit up to an agreed limit –Bank bills held  Bills of exchange (see slide 11) accepted and discounted by a bank and held as assets  A rollover facility is where a bank agrees to discount new bills over a specified period as existing bills mature –Leasing

20. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-20 2.3Uses of Funds (cont.) Lending to government –Treasury notes  Short-term discount securities issued by the Commonwealth Government –Treasury bonds  Medium- to-longer-term securities issued by the Commonwealth Government that pay a specified interest coupon stream –State government debt securities –Low risk and low return Other bank assets (e.g. electronic network infrastructure and shares in controlled entities)

21. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-21 Chapter Organisation 2.1Main Activities of Commercial Banking 2.2Sources of Funds 2.3Uses of Funds 2.4Off-balance-sheet Business 2.5Regulation and Prudential Supervision 2.6Background to Capital Adequacy Standards 2.7Basel II Capital Accord 2.8Liquidity Management and Other Supervisory Controls 2.9Summary

22. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-22 2.4Off-balance-sheet Business OBS transactions are a significant part of a bank’s business OBS transactions include –Direct credit substitutes –Trade and performance-related items –Commitments –Foreign exchange, interest rate- and other market rate- related contracts

23. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-23 2.4Off-balance-sheet Business (cont.) Direct credit substitutes –An undertaking by a bank to support the financial obligations of a client (e.g. ‘stand-by letter of credit’)  The bank acts as guarantor on behalf of a client for a fee  Client has a financial obligation to a third party  Bank is only required to make a payment if the client defaults on a payment to a third party

24. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-24 2.4Off-balance-sheet Business (cont.) Trade and performance-related items –A form of guarantee provided by a bank to a third party, promising financial compensation for non-performance of commercial contract by a bank client, e.g.  Documentary letters of credit  Performance guarantees

25. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-25 2.4Off-balance-sheet Business (cont.) Commitments –The contractual financial obligations of a bank that are yet to be completed or delivered  Bank undertakes to advance funds or make a purchase of assets at some time in the future, e.g. Forward purchases Underwriting

26. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-26 2.4Off-balance-sheet Business (cont.) Foreign exchange, interest rate- and other market rate-related contracts –The use of derivative products to manage exposures to foreign exchange risk, interest rate risk, equity price risk and commodity risk (i.e. hedging), e.g.  Futures, options, foreign exchange contracts, currency swaps, forward rate agreements (FRAs) –Also used for speculating

27. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-27 2.4Off-balance-sheet Business (cont.) Volume of OBS business –At June 2005, the notional face value of OBS business undertaken by banks in Australia was almost six times the level of total assets –Major commercial banks have largest share of OBS business –Over 93% of OBS business is based on market rate- related transactions  Nature and size of contracts combined with the volatility and speed of contract repricing has resulted in extraordinary losses

28. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-28 Chapter Organisation 2.1Main Activities of Commercial Banking 2.2Sources of Funds 2.3Uses of Funds 2.4Off-balance-sheet Business 2.5Regulation and Prudential Supervision 2.6Background to Capital Adequacy Standards 2.7Basel II Capital Accord 2.8Liquidity Management and Other Supervisory Controls 2.9Summary

29. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-29 2.5Regulation and Prudential Supervision Reasons for regulation of banks –Importance of the banking sector for health of the economy Prudential supervision –The imposition and monitoring of standards designed to ensure the soundness and stability of a financial system

30. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-30 2.5Regulation and Prudential Supervision (cont.) Australian regulatory structure –Reserve Bank of Australia (RBA)  System stability and payments system –Australian Prudential Regulation Authority (APRA)  Prudential regulation and supervision of deposit-taking institutions –Australian Securities and Investments Commission (ASIC)  Market integrity and consumer protection –Australian Competition and Consumer Commission (ACCC)  Competition policy

31. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-31 Chapter Organisation 2.1Main Activities of Commercial Banking 2.2Sources of Funds 2.3Uses of Funds 2.4Off-balance-sheet Business 2.5Regulation and Prudential Supervision 2.6Background to Capital Adequacy Standards 2.7Basel II Capital Accord 2.8Liquidity Management and Other Supervisory Controls 2.9Summary

32. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-32 2.6Background to Capital Adequacy Standards Functions of capital –The source of equity funds for a corporation –Provides equity funding for growth –A source of profits –Write-off periodic loan losses of defaulting borrowers that exceed profits Latter function and the evolution of the international financial system lead to development of international capital adequacy standards –1988 Basel I capital accord and Basel II (2008) capital capital adequacy guidelines

33. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-33 Chapter Organisation 2.1Main Activities of Commercial Banking 2.2Sources of Funds 2.3Uses of Funds 2.4Off-balance-sheet Business 2.5Regulation and Prudential Supervision 2.6Background to Capital Adequacy Standards 2.7Basel II Capital Accord 2.8Liquidity Management and Other Supervisory Controls 2.9Summary

34. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-34 2.7Basel II Capital Accord Basel II extends Basel I to increase sensitivity to different levels of asset and OBS business risk Main elements of Basel II –Credit risk of bank’s assets and OBS business –Market risks of bank’s trading activities –Operational risks of bank’s business operations –Form and quality of capital held to support these exposures –Risk identification, measurement and management processes adopted –Transparency through accumulation and reporting of information

35. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-35 Capital adequacy standard Minimum capital adequacy requirement applies to commercial banks and other institutions specified by prudential regulator Capital adequacy standard –Minimum risk-based capital ratio of 8%  Minimum 4% held as Tier 1 capital Highest quality core capital  Remainder can be held as Tier 2 (supplementary) capital Upper – specified permanent hybrid instruments Lower – specified non-permanent instruments –Regulator can require an institution to hold a capital ratio above 8%

36. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-36 Definition of capital

37. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-37 Basel II structural framework

38. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-38 Basel II structural framework (cont.) Pillar 1—Capital adequacy –Credit risk—risk that borrower will not meet commitments when due. Three measures:  Standardised approach Risk weights applied to balance-sheet and OBS items to calculate minimum capital requirement Risk weights derived from external rating grade or supervisor (see www.apra.gov.au APS112)www.apra.gov.au For residential housing loans risk weight relates to loan-to- valuation ratio (LTVR) and level of mortgage insurance

39. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-39 Basel II structural framework (cont.) Pillar 1—Capital adequacy (cont.) –Credit risk (cont.)  Standardised approach (cont.) OBS items converted to balance-sheet equivalents by determining the credit conversion factor and multiplying by the applicable risk weighting –Non-market related OBS transactions, e.g. documentary letter of credit –Market-related OBS transactions—credit conversion factor can be determined by: Current exposure method—current and potential credit exposures mark-to-market (contract revalued by its current quoted price) Original exposure method—notional contract value multiplied by a credit conversion factor

40. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-40 Basel II structural framework (cont.) Pillar 1—Capital adequacy (cont.) –Credit risk (cont.)  Internal ratings-based approach involves banks using some or all of their own risk measurement model factors, subject to supervisor approval. Two approaches available: Foundation internal ratings-based approach (FIRB) –Bank determines probability of default and effective maturity but relies on supervisor estimates for other credit risk components Advanced internal ratings-based approach (AIRB) –Bank provides estimates of all credit risk components

41. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-41 Basel II structural framework (cont.) Pillar 1—Capital adequacy (cont.) –Operational risk—risk of loss from inadequate or failed internal processes, people and systems, or from external events  e.g. internal/external fraud, workplace safety, business practices, damage to physical assets, systems failure  Main operational risk management objectives: Operational objectives—impact of loss of business function integrity and capability Financial objectives—losses due to operational risk exposure, cost of recovering operations and ongoing financial losses Regulatory objectives—prudential standards of bank supervisors  Business continuity management and additional capital

42. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-42 Basel II structural framework (cont.) Pillar 1—Capital adequacy (cont.) –Market risk—risk of losses resulting from changes in market rates in FOREX, interest rates, equities and commodities  General market risk—changes in the overall market for interest rates, equities, FOREX and commodities  Specific market risk—changes in the value of a security due to issuer-specific factors. Affects only interest rate and equity positions of institutions  Two approaches to market risk capital requirements Internal model—requires a statistical probability model that measures financial risk exposures, i.e. value at risk (VaR) Standardised approach

43. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-43 Basel II structural framework (cont.) Pillar 2—Supervisory review –Intended to ensure banks have sufficient capital to support all risks and encourage improved risk- management policies and practices in identifying, measuring and managing risk exposures such as:  Risks incompletely/not captured in Pillar 1 and factors external to the bank like a changing business cycle  Additional risk management practices such as education/ training; internal responsibilities, delegation and exposure limits; increase provisions and reserves; and improve internal controls and reporting practices  Four key principles of supervisory review

44. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-44 Basel II structural framework (cont.) Pillar 3—Market discipline –Aim is to develop disclosure requirements that allow the market to assess information on the capital adequacy of an institution, i.e increase the transparency of an institution’s risk exposure, risk management and capital adequacy  Prudential supervisors to determine minimum disclosure requirements and frequency  Basel II recommends a range of qualitative and quantitative information disclosure relating to principal parts of Pillars I and II

45. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-45 Chapter Organisation 2.1Main Activities of Commercial Banking 2.2Sources of Funds 2.3Uses of Funds 2.4Off-balance-sheet Business 2.5Regulation and Prudential Supervision 2.6Background to Capital Adequacy Standards 2.7Basel II Capital Accord 2.8Liquidity Management and Other Supervisory Controls 2.9Summary

46. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-46 2.8Liquidity Management and Other Supervisory Controls Liquidity—access to sources of funds to meet day- to-day expenses and commitments –Banks have special liquidity problems due to:  Mismatch in maturity structure of balance sheet assets and liabilities and associated cash flows  Role of banks in the payments system –Liquidity prudential standard APS210  The board of directors and management must implement a liquidity management strategy, which is reviewed annually  Must immediately advise APRA of any liquidity concerns  Strategy must include a contingency plan  Emphasis on bank’s internal liquidity management practices  APRA reserves right to specify minimum level of liquid assets

47. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-47 2.8Liquidity Management and Other Supervisory Controls (cont.) Other regulatory and supervisory controls –Risk management systems certification –Business continuity management –Audit –Disclosure and transparency –Large exposures –Foreign currency exposures –Ownership and control

48. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-48 Chapter Organisation 2.1Main Activities of Commercial Banking 2.2Sources of Funds 2.3Uses of Funds 2.4Off-balance-sheet Business 2.5Regulation and Prudential Supervision 2.6Background to Capital Adequacy Standards 2.7Basel II Capital Accord 2.8Liquidity Management and Other Supervisory Controls 2.9Summary

49. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-49 2.9Summary Banks are the dominant institution and have moved to liability management Sources of funds include deposits (current, call and term deposits) and non-deposit sources (bill acceptances, debt and foreign currency liabilities, OBS business and other services) Uses of funds include government, commercial and personal lending

50. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a McGrath’s Financial Institutions, Instruments and Markets 5e by Viney Slides prepared by Anthony Stanger 2-50 2.9Summary (cont.) OBS transactions are a major part of a bank’s business and include –direct credit substitutes –trade and performance-related items –commitments –market rate-related transactions APRA’s bank prudential supervision requirements include capital adequacy, liquidity management and other controls