One of the largest #loans #restructuring exercises in Indian banking history will kick off in Sept 2020 till March 2021
Let’s see how Modern banking system actually works
#Banking is all about lending activities, if they practise good lending via various advances methods
Let’s see how Modern banking system actually works
#Banking is all about lending activities, if they practise good lending via various advances methods
as approved by the #Regulators they are good businesses or else they can go bust
modern banking system is based on the fractional reserve system
What does fractional reserve means
1) People deposit their savings in the bank in the hopes of earning #interest rates
modern banking system is based on the fractional reserve system
What does fractional reserve means
1) People deposit their savings in the bank in the hopes of earning #interest rates
2) The bank turns around and lends out the vast majority of that deposited money or the bank invests it in other financial instruments (sometimes sound, more often reckless or even toxic) in an effort to make a profit
In other words, banks keep only a small fraction of depositors
In other words, banks keep only a small fraction of depositors
money in “reserve” to hand back to their clients when they want to make a withdrawal or transfer money elsewhere
Banks, therefore, rely on the statistical probability that their depositors won’t all show up at once and demand their money back
Banks, therefore, rely on the statistical probability that their depositors won’t all show up at once and demand their money back
That’s why it’s important to examine a bank’s liquidity
We have to look into “conservative liquidity”
conservative liquidity is the bank’s cash held in their own in-house accounts, plus all its cash held at the country’s Central Bank (mandatorily or voluntarily),
We have to look into “conservative liquidity”
conservative liquidity is the bank’s cash held in their own in-house accounts, plus all its cash held at the country’s Central Bank (mandatorily or voluntarily),
plus some of the bank’s other highly liquid cash-like instruments
What makes a good, sound Bank
A healthy bank should have a high capitalization, or solvency, ratio, so that if some of its assets go bad and become unrecoverable, the bank still has enough funds to cover its
What makes a good, sound Bank
A healthy bank should have a high capitalization, or solvency, ratio, so that if some of its assets go bad and become unrecoverable, the bank still has enough funds to cover its
depositors and creditors
We should look at total assets and the bank’s equity
By dividing a bank’s equity by total assets, we can determine its solvency, or capital ratio
The higher the ratio, the safer the bank
The total assets of the bank include cash, financial instruments,
We should look at total assets and the bank’s equity
By dividing a bank’s equity by total assets, we can determine its solvency, or capital ratio
The higher the ratio, the safer the bank
The total assets of the bank include cash, financial instruments,
loans it has made to individuals and to companies
The total equity of bank represents what the bank is really worth. Equity equals the bank’s assets minus all of its liabilities, and it generally includes the banks share and paid-up capital, its reserves and its retained earning
The total equity of bank represents what the bank is really worth. Equity equals the bank’s assets minus all of its liabilities, and it generally includes the banks share and paid-up capital, its reserves and its retained earning
A healthy bank holds a high percentage of its customers’ deposits in cash, or in assets that can be redeemed instantly, without major price fluctuations. Liquidity is key
A liquid bank is able to honor all withdrawal requests without delay, because it has the available funds on
A liquid bank is able to honor all withdrawal requests without delay, because it has the available funds on
on hand. This requires the bank to maintain a high cash balance. It also requires that the investments it makes are liquid.
Generally speaking, loans (mortgages, car loans, etc.) are much less liquid than, say, 3-month government bonds.
Generally speaking, loans (mortgages, car loans, etc.) are much less liquid than, say, 3-month government bonds.
It will take a bank about a nanosecond to liquidate a government bond.
Loans, on the other hand, need to be recalled or collateralized in complicated transactions. They are very much NOT liquid... especially if everyone else is selling at the same time.
Loans, on the other hand, need to be recalled or collateralized in complicated transactions. They are very much NOT liquid... especially if everyone else is selling at the same time.
A low loan-to-deposit ratio indicates that a bank has plenty of high-quality liquid assets to withstand a bank run
A healthy bank doesn’t engage in excessively risky lending
A good way to check for this is to look at the bank’s “non-performing loan (NPL) ratio
A healthy bank doesn’t engage in excessively risky lending
A good way to check for this is to look at the bank’s “non-performing loan (NPL) ratio
both current and historical. (A non-performing loan - NPL - is one that is close to being in default, where the debtor has not made his scheduled payments for at least 90 days.) The ratio we’re looking at, in this case, is the number of NPLs over total loans.
Clearly, you want that percentage to be low.
Banks should not engage in reporting and accounting tricks
There are all sorts of regulatory and prudential supervision standards that banks around the world have to follow
Banks should not engage in reporting and accounting tricks
There are all sorts of regulatory and prudential supervision standards that banks around the world have to follow
The Bank for International Settlements in Basel, Switzerland is the de facto central bank of the world’s central banks. It publishes detailed rules on capital adequacy requirements, known as the Basel Accords
But each individual country’s central bank will also mandate its own rules and regulations regarding reserve, liquidity, and capital adequacy ratios
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