02 Part UniversalBanking Part 2

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Participant Handbook Part II Initial Situation Version 1.4

TOPSIM Universal Banking P

TOPSIM - Universal Banking

Table of Contents 1 Overview 1

2 Balance Sheet 2 2.1 Customer Business 3 2.1.1 Receivables from Customers 3 2.1.2 Liabilities due to customers 3 2.2 Proprietary Trading 4 2.3 Holdings 4 2.4 Financial Management 4 2.4.1 Bridging Loan 4 2.4.2 Interbank Business 4 2.5 Miscellaneous / Others 5

3 Profit and Loss Account 7 3.1 Income from interest business 7 3.2 Income from commission and service provision business 8 3.3 Income from trading business 8 3.4 Income from holdings 8 3.5 Business Expenses 8 3.6 Gross Profit 9 3.7 Depreciation on fixed assets 9 3.8 Valuation adjustments, provisions, and losses 10 3.9 Extraordinary Expenses / Extraordinary Profits 10 3.10 Taxes 10

4 Starting key figures 11

5 Cash Flow Statement 12 5.1 Bridging Credit I 13 5.2 Surplus / Deficit of Cash Flow 13

6 Reference Rate System 14 6.1 Interest Rate Contribution 14 6.2 Structural Contribution 15

7 Calculation of the necessary equity capital 16

8 Liquidity Statement 18 8.1 Liquidity Statement I: Cash Liquidity 19 8.2 Liquidity Statement II 19 8.3 Liquidity Statement 19

9 Executive Summary 20

10 Securities Trading Business 21

11 Foreign Exchange / Bond Issue / Holdings 22

12 General Overview Asset Management 23

13 Market Data 24

14 Human Resources / Operation Service 25

15 Market and Competition Report 26


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1 Overview

After each simulated period of TOPSIM Universal Banking, each participant receives the following reports (based on the activated modules). These reports contain the results of the previous period.

1. Balance Sheet 2. Profit and Loss Account 3. Cash Flow Statement 4. Reference Rate System 5. Calculation of Regulatory Necessary Equity Capital 6. Liquidity Statement 7. Executive Summary 8. Securities Trading Business 9. Foreign exchange transactions / Issues / Holdings 10. General Overview Asset Management 11. Market Data 12. Human Resources/ Operating 13. Market and Competition Report

Each report will be discussed in more detail throughout this handbook.


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2 Balance Sheet

This is the balance sheet at the start of the standard-scenario. The balance sheet provides information about the source of funds (liabilities) and use of funds (assets). It gives you an overview of the financial situation in each period.

The balance sheet of your bank takes into account the decisions that have been made in the following areas:

Customer business: Dues from / to customers Proprietary trading (Nostro business): Securities trading portfolio Holdings (not part of the standard-scenario) Financial Management: Bridging credit, interbank business, long-term bonds Other: Cash holdings, physical assets, other physical assets, other assets, valuation adjustments

and provisions, share capital, legal reserves and other reserves.


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2.1 Customer Business

2.1.1 Receivables from Customers Loans secured by mortgage: These include property and construction loans as well as operating loans secured by a mortgage. Mortgage collateral means that the bank receives a mortgage claim or a mortgage title as a dead pledge. Otherwise secured loans: Otherwise secured loans are all loans that do not provide a real estate lien as collateral. These include securities, loan guarantees, and the assignment of debtor receivables.

Unsecured: This includes all funds granted without the usual guarantees.

Loans secured by a property: The loan is directly secured by a lien recorded in the title register. The banks finance their mortgages mainly through long-term deposits and medium term bonds. The interest margin on this business is quite low. With variable interest rate: Mortgages with a variable interest rate allow the banks to adjust the interest rate to the changed conditions of the money and capital market with a three months notice. With fixed interest rate: Mortgages with fixed interest rates keep the interest rate that was fixed at the closing for the entirety of their term. Fixed rate mortgages cannot be cancelled. Customers can usually choose terms ranging from 2 to 10 years. The banks refinance immediately on the capital market for the same term. For the purposes of this simulation, the term of fixed interest mortgages shall always be 5 years.

2.1.2 Liabilities due to customers In the form of savings: Savings enjoy a legal bankrupts protection, should be bank declare bankruptcy. A 3 month cancellation period exists. This account can not be used for payments. Savers receive a certificate for their deposit. In the form of money market deposits: Type of account deposits required for short term-money and private monetary transfers, such as salary and private accounts. The withdrawal conditions for these funds are less restrictive than those for savings deposits. In practice a minimum amount for the deposit is required. On demand: Current account deposits of commercial and private customers, available immediately, and therefore non-interest bearing or only minimally interest bearing. These accounts are primarily used by customers to effect payments. Fluctuations are often offset by the large amount of accounts, so that the average amount of demand deposits is usually quite constant (Deposit Base Theory). With a fixed term: Time deposits by commercial and private customers with a 1 - 360 day term. Since most banks required minimum deposits of more than 100,000 Euro or an equivalent value, these are usually higher amounts, invested by customers for profitability reasons. Thus, customers react sharply if the interest rates of your bank are favorable or unfavorable compared to the competing banks.

Medium term bonds: Medium term assets with a fixed term, continuously issued by banks. The medium term bonds issued by your bank have a term of only 5 years. Buyers of medium term bonds react sharply to changes in the interest rate. The summary of the medium term bonds shows the reporting period in which these were issued, their interest rate, volume, due dates and average interest rate.


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2.2 Proprietary Trading

Receivables from money market investments This line item includes money market certificates such as Bankers Acceptances, Commercial Papers and Certificates of Deposit, which the bank acquires through the outflow of liquid assets.

Securities Portfolio Securities and precious metal portfolios from the banks funds, invested in accordance with your investment decisions listed on Decision Form II. Its valuation is listed on the portfolio overview Stock / Bonds.

2.3 Holdings

Stocks from other firms, which the bank has bought for holding purposes, For holdings, stricter regulations than for your own shares apply. (See report: regulatory necessary capital resources). Holdings are not part of the standard-scenario.

2.4 Financial Management

2.4.1 Bridging Loan On demand: Foreign bank credits in USD, usually used to process payment transactions. Should your banks liquidity be too low, it will automatically receive a bridging loan at a higher interest rate from the SNB.

2.4.2 Interbank Business Receivables to your bank

On Demand: Credit balance (Nostro-Accounts) in other banks, which are available immediately. With a fixed term: Credits from other banks with a fixed term. Your banks volume solely depends on your interest rate decision. Interbank transactions are very interest rate sensitive. The investments of cash holdings in other banks can significantly increase your profitability.

Liabilities toward banks

On demand: Foreign bank credits in CHF, usually used to process payment transactions. Should your banks liquidity be too low, it will automatically receive a bridge loan at a higher interest rate from the SNB. With a fixed term: Credits from other banks with a fixed term. Your banks volume solely depends on your interest rate decision. Interbank transactions are very interest rate sensitive.

On Demand: Asset from other banks, which usually are used for settlements of monetary transfers or short term assets.

With a fixed term: Credits from other banks with a fixed term.

The position On demand and with a fixed term are newly distributed in each period (maturity and expected market growth: see Business News). The volume that your bank can acquire via this method is dependent on the interest rates offered by other banks. The interbank business is very interest sensitive.


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Bond Loans

Bonds are long-term funds used to finance the lending business. New bonds can be issued if the financial management module has been made available. (Area Long-term foreign financing). Of which, subordinate bonds: Subordinate means that if the bank were to declare bankruptcy, all other bond owners would have priority towards receiving any money. Subordinate bonds can be included in the owners capital up to a certain amount, to fulfill the regulatory liquidity laws (see explanation in Financial Management Module). The rate of interest for subordinate bonds is 0.5% higher than for normal bonds.

Information regarding the maturity date can be found on the balance sheet attachments.

2.5 Miscellaneous / Others

Liquid assets The liquid-assets refer to deposits with clearing banks and the SNB (Swiss National Bank). The liquidity provisions of the Swiss banking law dictate minimum deposits of at least several hundred million CHF ( refer to proof of liquidity "Cash liquidity"). Good cash management will allow you to keep these non-interest-bearing funds at a minimum.

Liquidity This balance sheet item illustrates the banks currently available cash. Sight deposits are the credits from clearing banks and the central bank. The Federal Labour Court determines, via liquidity regulation, a minimum liquidity balance of several hundred million Euros to be on hand at all times (see Liquidity Statement Cash liquidity. The cash manager, which can be used, always tries to invest the cash short-term. With this, you can at least receive a minimum liquidity interest payment.

Fixed Assets Property used by the bank itself or property leased to third parties. The book value of the fixed assets (bank building and ATMs) decreases with every reporting period by the amount of depreciation. The depreciation rate for TOPSIM Universal Banking will be 10% per reporting period and refers to the residual book value.

Real estate, i.e. property which the bank uses, can be rented to third parties. The physical assets (bank office and ATMs) decrease in value each period in the amount of depreciation. Depreciation per period is 10% and is taken from the current value of the asset each period.

Other Fixed Assets This item of the balance sheet includes movable assets, among other things. Any automation investments (logistics units) are included in this line item. The depreciation rate will be 20% per reporting period and refers to the residual book value.

Other Assets The line item Other Assets refers to coupon portfolios, foreign currencies, and the account balances of internal banking transactions. This line item remains unchanged.

Valuation Adjustments and Provisions This balance sheet item primarily includes provisions for loan items. Provisions are always 1% of the risk-weighted loan volume.


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Share Capital The share capital of the bank is 40,000,000 at the beginning of the simulation. It is made up of bearer shares with a nominal value of 20 EUR. Capital can be increased / decrease if the module financial management has been turned on.

Legally required reserves and other reserves Reserves, the establishment and utilization, are oriented to legal regulations. 5% of the profits will be placed into legal reserves until it is 10% of the nominal capital. Losses in a period are placed in the category Other reserves. The category, Annual Net Losses, is not used until Legal Reserves and Other Reserves are used up.


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3 Profit and Loss Account

In the Income statement (Profit and Loss Account) all incomes and expenses of a bank for a current period are compared.

3.1 Income from interest business

The interest business includes all transactions, for which the bank uses its own assets and passive capital to grant loans and to finance trading transactions with the purpose to achieve a positive interest balance from the difference between received and paid interest. The resulting calculated interest margin in % (Interest transactions total x 100/balance sheet total) is an important income parameter of the bank. Interest and discount income: Interest from the lending business and income the interbank business. Commission income from credit transactions: Lending commissions from the lending business are considered part of the interest business. Interest and dividend income from securities trading portfolio: Interest and dividends, paid to the bank for purchased securities (Nostro-positions). Interest expenses: Interest the bank must pay for deposits and interbank business.


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3.2 Income from commission and service provision business

This section summarizes all commission income from the Wealth Management area, inclusive, the total income from the bond issue business less commission expenses.

Commission income from securities and investment business: Here all the commission received from customers in the securities business are shown. Wealth management and depot fees as well as the stock exchange transaction of customers can be decided, as soon as the Wealth Management module has been activated.

Total Income from bond issue business: Booking of the bond issue business, if the bank is chosen for one of the obligatory bonds.

Commission Expenses: The commission costs for the bank consists of 0.40% of the volume from the wealth management and depot business.

3.3 Income from trading business

The trading business includes all bank transactions taken on at the banks own risk, buying and selling foreign currencies, precious metals, money market positions, securities and any type of derivative financial instruments.

In TOPSIM Universal Banking, all gains and losses from the exchange rate fluctuation from the investments and foreign currencies are shown. The foreign currency market is not part of the standard-scenario.

3.4 Income from holdings

This includes the profits and losses from holdings of the bank, as well as profits from dividends. In TOPSIM Universal Banking standard-scenario, no decisions have to be made in this area, therefore no values appear in this section.

3.5 Business Expenses

Employment Costs

of which salaries of regular employees: Includes the salaries for employees.

of which additional personnel costs: The additional costs are 10% of the salaries of regular employees and include required benefits as well as voluntary benefits.

of other personnel costs: cover the costs for hirings, dismissals, overtime, temporary personnel and further training.


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Operating Expenditure

Of which lease: This sections includes rent interest if the buildings are leases as well as the logistic units. Rent interest and leasing costs only occur if the complex module, Human Resource & Logistic, has been turned on. In the standard-scenario, no values appear in this section.

Of which costs for advertising: This includes all advertising expenditures for segment and customer advertising, as well as costs for market research reports (3 mEUR). Of which property, equipment and administrative costs: Operating costs and business expenses for the branches and logistics of your bank. Maintenance cost for setting up the office, supplies, travel expenses, insurance costs, etc are booked here. Expenses here are 0.25% of the balance sheet total from the previous period.

Of which costs for bond issuing business: If the bank takes part in bond issuance, fixed costs of 10 mEUR are calculated here. If the bank receives the bond, variable costs of 1% of the bond are also included here. Due to it not being possible to take part at a bond issue as a consortium bank in the standard-scenario, no costs appear in this section.

Of which costs for planning calculation and cash management: The costs per run-through of the planning calculation and the cash management can be found in the Business News from the specific period.

3.6 Gross Profit

The gross profit is calculated from the following:

Income from Interest business + Income from commission and service provision business + Income from trading business + Other ordinary profit - Business Expenses = GROSS PROFITS

3.7 Depreciation on fixed assets

Includes the depreciation from line items of fixed assets (10%) and other fixed assets (20%).


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3.8 Valuation adjustments, provisions, and losses

Provisions are formed for lending exposures and help provide sufficient capital to make up for any future lending losses. The provisions are 1% of the total of the risk-weighted line items as required by regulatory authorities. The lending losses depend on the default probability (probability that a customer does not fulfill its requirements within one year) and the loss ratio (amount of the loss in percentage of the exposed loan in the event of a default. With regard to the default probability and the loss ratio, TOPSIM Universal Banking applies the following scenario:

Default Probability Rating Default Prob. Borrower Rating +++ 0.01 % Rating ++ 0.05 % Rating + 1.00 % Rating - 2.50 % Rating -- 5.00 %

Verlustquoten

Loss Ratio Loans secured by mortgage 35 % Otherwise secured loans 10 % Unsecured loans 80 % Mortgage claims 35 %

3.9 Extraordinary Expenses / Extraordinary Profits

Gains and losses which do not occur due to the normal course of business.

3.10 Taxes

Tax rate on profits is 25 %.


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4 Starting key figures

Interest Margin (%): The interest margin is a bank's interest surplus in relation to the balance sheet total. The interest margin is calculated as follows:

Interest income x 100 / balance sheet total

Return on Equity (%): Profits as a percentage of the equity from the previous year.

Direct earnings per share (%)(after tax): (Paid out (Gross)Dividends ./. Income tax) x 100 / Stock price

Shareprice:

Explaination in Participants Handbook I.

p/e-Ratio:

The p/e-Ratio shows the relationship between the share price and the profit per share. A p/e-Ratio of 10 says that the price per share is 10 times higher than the profit per share.


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5 Cash Flow Statement

The cash flow statement shows the changes in cash (= additions and losses of liquid assets) from the previous period.

Each line has:

outward payments (loss of liquid assets) inward (additions in liquid assets) Balance I (Difference between inward and outward paymens) Balance II (Total Value)


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5.1 Bridging Credit I

If during the course of the simulation not enough deposits are going into the bank and therefore your bank becomes illiquid in accordance with the legal liquidity laws, then the system will automatically provide you with a bridging credit. The bridging credit has a higher interest rate.

5.2 Surplus / Deficit of Cash Flow

The starting value of liquid assets in addition to overlapping assets, minus underlapping assets gives the closing balance liquidity.


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6 Reference Rate System

6.1 Interest Rate Contribution

In the Interest Rate Contribution Report, the banks interest rate is compared to the market interest rate. When discussing the market interest rate, the market interest rate from the interbank market is meant (how much does one credit cost or what can I get for my savings in the interbank market?). The parameter gives information regarding the profit and loss account of the interest rates in comparison to the market interest rate. In the report, the contribution is expressed as a Margin (%) and Interest Contribution (in mEUR). Is the banks interest rate higher than the markets, then the bank, in comparison to other banks, is making a profit (the bank gets more out of the market than the market interest rate expects) This winning is listed as the interest rate contribution.


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In the deposit business, the following is the case: If your banks deposit interest rate is lower than the markets, then this is also considered a (positive) interest rate contribution. Therefore, even deposit interest rates can lead to interest rate earnings.

The Interest Rate Contribution can help management see in what financial position the most earnings are made and recognize the amount of margin is available to change the pricing (specification of the conditions).

6.2 Structural Contribution

With the help of the parameters of the Structural Contribution, it is easy to make decisions from the contribution which provides the deposit / credit structure of the bank.

To understand the deposit and credit structure of a bank, the composition of both balance sheet totals has to be separated to each side of the balance sheet in short and long term money.

The contribution total is determined through the return on interest from different funds. In the normal case, the short term funds have a lower rate of interest than long term fund. Therefore, if a bank refinances long-term credits with short term deposits, and then a positive structural contribution occurs. For calculation purposes of the the market interest rates are taken (like above). It must be noted that with short-term financing, significant risks are taken. One on hand, liquidity problems could arise. The golden rule is: deposit money should only be used to refinance short term credits. This rule is broken by the previously described situation. On the other hand, the bank enters the risk of a sudden interest rate change as the market could suddenly have an inverse interest structure.

The parameters structural contribution assists the management in recognizing the potential risks in the business policy, with an outlook on the future deposit / credit structure. It also introduces the participant to the countermeasures in terms of risk management.


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7 Calculation of the necessary equity capital

Die Ermittlung des regulatorischen Eigenkapitals (IRB-Ansatz) Die Basel II-Eigenmittelvorschriften fordern, dass die risikogewichteten Aktiva mit mindestens 8 % an regulatorischem Eigenkapital unterlegt werden.


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Balance Sheet Assets Rating

Book Value (mEUR)

Failure Probability % Loss Ratio %

Risk-weighted factor %

Risk-weighted positions (mEUR)

Credit Customer +++ 1000 0.01 % 35 % 2.5 % 25 Credit Customer ++ 1000 0.05 % 35 % 12.2 % 122 Credit Customer + 1000 1.00 % 35 % 70.0 % 700 Credit Customer - 1000 2.50 % 35 % 83.1 % 831 Credit Customer - - 1000 5.00 % 35 % 106.9 % 1069

Total risk-weighted position 2747

Required Equity Capital (mEUR): 8 % von Total risk-weighted position: 220 mEUR For the calculation of the risk-weighted-factor, each credit position (except for private customers) the following four components are determined:

1. Probability of Failure

2. Loss Quote

3. Outstanding claims in case of default

4. Remaining economic term

Probability of default is the likelihood that the customer is unable to meet his obligations within one year. The loss quote is the loss in percentage terms of the credit in case of default. It depends on the respective credit security.

To the regulatory liquid assets, the following components are included:

Share capital

Reserves

Legal Reserves

Hidden Reserves

Retained Earnings

Supplement and subordinated capital

The regulatory equity capital grows by raising capital, through raising the reserves (not paying out profits or premiums when raising capital) and through the bonds from subordinated liabilities.


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8 Liquidity Statement

Note: The liquidity statement is formatted to fit with Swiss regulations.

Liquidity is the basic component for long-term payment ability of a bank. The liquidity laws of the Federal Labour Department require a so-called cash liquidity and a overall liquidity.


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+

8.1 Liquidity Statement I: Cash Liquidity

8.2 Liquidity Statement II

8.3 Liquidity Statement

When looking at the overall liquidity, the liquid assets have to cover the short-term liabilities to a certain percent. The approaches are placed into a tier of short term liabilities from all liabilities. The higher the percentage of short-term liabilities, the higher the on-hand liquid assets must be. In TOPSIM Universal Banking, you can see on the liquidity statement the combination of easily obtained assets and short term liabilities.

If a shortage occurs, the model automatically take on a bridging credit, of which the amount is a negative liquidity. A shortage of liquid assets also as a negative impact on the stock price of your bank. The balance sheet item, bridging credit, is a combination of the following two values:

1. Bridging Credit I (for a shortage of cash flow, see the cash flow statement) 2. Bridging Credit II due to a negative liquidity in the liquidity statement.

If your liquidity statement has a shortage, then you must try to cover the shortage with a surplus in the following period. Otherwise, the seminar instructor can start to edit your decisions as a governing body.

Short-term Liquidity - Due to Banks < 3 Monate - Others Due to customers at term - 50% of other amounts due to customers

at term - 20% of due to customers, savings, and

personal accounts

Liquidity - Cash, endorsements, and cheques

Short-term Liquidity - Surplus short-term liabilities - 50% of other amounts due to customers

on demand - 15% of due to customers, savings and

personal accounts

-2.5 % of

Liquidity Cash, endorsements, and cheques

-33.3 % of

Easily Marketable Assets - Surplus easily marketable assets - Money market instruments - Central Bank pledgeable securities - 20% due from customers secured by other collateral


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9 Executive Summary

In the executive summary, the most important figures from the previous period are summarized. Among other things, the balance sheet total from the current period and the changes in comparison to the previous period are illustrated. Furthermore, information regarding the gross profit and its growth or loss compared to last year is shown. General warnings and hints can also be taken from the executive summary.


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10 Securities Trading Business

Note: The following example is based on fictitious data, specifically decisions. The economic influence also is based on data different to the standard-scenario.

The general overview summarizes all foreign exchange and currency profits, losses, and hedging costs in the middle section. In case the risk for the hedging was insured and a loss occurs, then a profit of the same amount will be booked under the sale of puts. The last line summarizes all interest, dividend, and coupon earnings together.

When considering the development of the bond business, the past period have to be observed from the perspective of the current period.


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11 Foreign Exchange / Bond Issue / Holdings

Depending on the selected module, it is possible to find reports of the foreign exchange business, bond issue business and /or holding business: The following report is not relevant the TOPSIM Universal Banking standard-scenario, because the topics are not part of the decision section. The illustration in period 1 shows arbitrarily made decisions.


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12 General Overview Asset Management

The following report is based on a fictional stock price performance.

Total Yield in the Wealth Management Business

The total yield is determined from the Depot performance index (DPI). More information can be found in participants manual 1.


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13 Market Data

This report is especially interesting for the evaluation of the decisions that have been made in the marketing business.


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14 Human Resources / Operation Service

Information regarding the individual figures can be found in participants handbook I.


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15 Market and Competition Report


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02 Part UniversalBanking Part 2

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Transcript of 02 Part UniversalBanking Part 2