Bank as Intermediaries final

8/7/2019 Bank as Intermediaries final

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Bank as Intermediaries

Bank

A bankis a financial intermediary that accepts deposits and channels thosedeposits into lending activities. Banks are a fundamental component of the

financial system, and are also active players in financial markets. The essential role

of a bank is to connect those who have capital (such as investors or depositors),

with those who seekcapital (such as individuals wanting a loan, or businesses

wanting to grow).

Banking is generally a highly regulated industry, and government restrictions on

financial activities by banks have varied over time and location. The current sets of

global standards are called Basel II. In some countries such as Germany, banks

have historically owned major stakes in industrial corporations while in other

countries such as the United States banks are prohibited from owning non-financial

companies. In Japan, banks are usually the nexus of a cross-share holding entity

known as the keiretsu. In France, bancassurance is prevalent, as most banks offerinsurance services (and now real estate services) to their clients. The most recent

trend has been the advance of universal banks, which attempt to offer their

customers the full spectrum of financial services under the one roof.

A bank acts as a middleman between suppliers of funds and users of funds,

substituting its own credit judgment for that of the ultimate suppliers of funds,

collecting those funds from three sources: checking accounts, savings, and time

deposits; short-term borrowings from other banks; and equity capital.

A bank earns money by reinvesting these funds in longer-term assets.


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In addition to their role as credit intermediaries, banks act as agents for customers

in a number of bank-related functions: initiating payment orders to third parties,

either by check or electronic funds transfer; purchasing or selling securities, as for

a trust account customer; and operating cash management for corporate customers.

In addition to their role as credit intermediaries, banks act as agents for customers

in a number of bank-related functions: initiating payment orders to third parties,

either by check or electronic funds transfer; purchasing or selling securities, as for

a trust account customer; and operating cash management for corporate customers.

Banks also offer safe deposit boxes; manage trust accounts for individuals and

endowment funds; clear checks and drafts for other financial institutions;

underwrite securities through Securities Affiliates and, in general, perform other

bank related services as permitted by federal and state banking regulations.

Advances in the financial services industry occurring since the mid-1970s allow

consumers to get banking services from many different financial institutions, such

as Savings Banks, Federal Savings Banks, Savings and Loan Associations and

Credit Unions, in addition to commercial banks. Savings banks, S&Ls, and credit

unions (known collectively as Thrift Institutions) make auto loans, consumer loans,

and residential mortgages, and offer checking accounts and Negotiable Order of

Withdrawal (NOW) Accounts competing openly with commercial banks. Financial

modernization has also removed many of the key functional distinctions between

commercial banks and investment banking companies. Commercial banks are

permitted by the Gramm-Leach-Bliley Act to deal in securities, offer investment

advisory services, and perform other functions related to banking through

subsidiary companies.


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Intermediaries

Intermediary is a person or organization, which provides services related to

financial securities to investors such as a broker, dealer or custodian. These

services include facilitating trading on behalf of investors and providing

investment advice. Intermediaries dealing in securities must be licensed by the

Eastern Caribbean Securities Regulatory Commission (ECSRC).

What Is An Investment Bank?

An investment bankis a financial institution that assists individuals, corporations

and governments in raising capital by underwriting and/or acting as the client's

agent in the issuance ofsecurities. An investment bank may also assist companies

involved in mergers and acquisitions, and provides ancillary services such as

market making, trading ofderivatives, fixed income instruments, foreign exchange,

commodities, and equity securities. Unlike commercial banks and retail banks,

investment banks do not take deposits.

Despite the name, investment banking isn't 'banking' at all - at least not in the

traditional sense. Investment banks are organizations through which companies can

raise funds by selling stakes (stock) of the company in exchange for cash. In

simpler terms, investment banks 'take companies public' by acting as middlemen;

the investment bank provides cash from investors for the company, and in return

provides new shares of that company to those investors.

The process is also called underwriting. Therefore, investment bankers are

sometimes referred to as underwriters.


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Merchant bank

In banking, a merchant bankis a financial institution primarily engaged in

offering financial services and advice to corporations and to wealthy individuals.

The term can also be used to describe the private equity activities of banking. The

chief distinction between an investment bank and a merchant bank is that a

merchant bank invests its own capital in a client company whereas an investment

bank purely distributes (and trades) the securities of that company in its capital

raising role. Both merchant banks and investment banks provide fee based

corporate advisory services, including in relation to mergers and acquisitions.

Funds are tapped from the CAPITAL MARKET to finance various sources to mega

industrial projects. In attracting public savings, merchant bankers play a vitalrole

as specialised agencies.The resources raising functions remains to be the primary

business of a merchant banker. The primary market holds the key to rapid capital

formation, growth in industrial productions and exports. There has to be

accountability to the end use of funds raised from the market. The increase in the

number of issues and amount raised the number of merchant bankers. Therefore,

the field became highly competitive market where it requires a specialized skill in


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handling the situation. The merchant bankers have a social responsibility to in

building an industrial structure in India. Merchant bankers assist corporate in

raising capital. They assist in issue of

Shares, syndicating loans, public issue of debentures. They do not provide

funds.

They only assist. They also actively arrange working capital, appraisal

Projects scrutinize & persuade merger proposals.

In BRITAIN merchant bankers & investment bankers are synonymous.

In the U.S., Merchant bank means as investment bank which is well-

equipped to handle multinational corporations.

In INDIA merchant bankers is a body corporate who carries on any activity

of the issue management, which consist of preparing prospectus & other information relating to

the issue. Merchant banks in India are not allowed to conduct any business other than that related

to securities market. There is no official category in investment banking.

In banking, a merchant bankis a financial institution primarily engaged in

offering financial services and advice to corporations and to wealthy individuals.

The term can also be used to describe the private equity activities of banking. The

chief distinction between an investment bank and a merchant bank is that amerchant bank invests its own capital in a client company whereas an investment

bank purely distributes (and trades) the securities of that company in its capital

raising role. Both merchant banks and investment banks provide fee based

corporate advisory services, including in relation to mergers and acquisitions


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Client benefits for Merchant Banking

A unique service concept providing tailor-made services to large corporate,

medium-sized companies, public sector organizations, financial institutions and

intermediaries

High-value financial solutions in the field of transactions and treasury, long-term

financing, risk management, advisory and financial structuring

Our specialist expertise and guidance in sectors such as energy, commodities,

shipping, as well as specialised areas such as hedge funds, structured products,

clearing and custody, leasing

A dedicated Relationship Manager, present in every major market

Solutions designed for your specific needs ensuring the management for your

private and business wealth.

Examples of merchant banking

y Axis Banky Bank of Baroday Bank of Indiay Canara Banky Central Bank of India


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Venture Capital

The head of operations for the venture capital section of the bank is responsible forseveral aspects of managing the venture capital accounts including handling public

relations, managing staff as well as overseeing banking issues with regards to the

various accounts. Venture capital of a bank refers to an amount of money that the

bank sets aside to lend to new or less traditional businesses that may have

difficulty in going through traditional channels at a bank to receive a loan. Often

venture capital investments are riskier for the bank but may have a very high rate

of return on the investment if they are successful.

The head of operations for the venture capital funds must be a creative person with

a good understanding of basic business management and market trends. He or she

should be familiar with risk analysis and business assessment as well as be able to

work with bank customers that may not have a lot of experience in the business

field. As the manager for the fund the head of operations will oversee the various

loans and account managers and will provide guidelines and policies for various

loans.


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This position reports to the bank manager, bank president and the board of

directors. There are supervisory and management responsibilities and the head of

operations are required to prepared statements as to the funding of various loans

through the venture capital fund.

Common work activities include:

y Supervising staff within the venture capital department, hiring new staffand promoting staff as needed.

y Managing the accounts payable and receivable departments of the venturecapital fund.

y Preparing and presenting quarterly or monthly reports on the balances ofthe venture capital fund to the board of directors or governing body of the

bank.

y Preparing and presenting information to the media and handling publicrelations issues with regards to the venture capital fund.

y Managing the documentation and assessment of various loans and theirpotential risks and benefits to the bank.

y Supporting local businesses and new and unique businesses within thecommunity.

Check out all of the online finance degrees offered by a variety of schools offering

programs online in finance.


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Examples

1. State Bank of India2. ICICI Bank3. HDFC Bank4. Punjab National Bank5. Bank of India6. Canara Bank7. Bank of Baroda8. Axis Bank9. Kotak Bank10.Union Bank of India


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Role of banks in export-import

Export-Import BankofIndia is the premier export finance institution of the

country, set up in 1982 under the Export-Import Bank of India Act 1981.

Government of India launched the institution with a mandate, not just to enhance

exports from India, but to integrate the countrys foreign trade and investment with

the overall economic growth. Since its inception, Exim Bank of India has been

both a catalyst and a key player in the promotion of cross border trade and

investment. Commencing operations as a purveyor of export credit, like other

Export Credit Agencies in the world, Exim Bank of India has, over the period,

evolved into an institution that plays a major role in partnering Indian industries,

particularly the Small and Medium Enterprises, in their globalisation efforts,

through a wide range of products and services offered at all stages of the business

cycle, starting from import of technology and export product development to

export production, export marketing, pre-shipment and post-shipment and overseas

investment.

Exim Banks Facilities:

Pre-shipment credit: Exim Banks Pre-shipment Credit facility in Indian Rupees

and foreign currency provides access to finance at the manufacturing stage

enabling exporters to purchase raw materials and other inputs.

Suppliers Credit: This facility enables Indian exporters to extend term credit to

importers (overseas) of eligible goods at the post shipment stage.

For Project Exporters:Inidan project exporters incur Rupee expenditure while

executing overseas project export contracts i.e. costs of mobilization /acquisition of


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materials ,personnel and equipment etc.Exim Banks facility helps them meet these

expenses.

For Exporters ofConsultancy and Technological Services: Exim Bank offers a

special credit facility helps to Indian exporters of consultancy and technology

services, so that they can, in turn, extend term credit to overseas importers.

Guarantee Facilities: Indian companies can avail of these to furnish requisite

guarantees to facilitate execution of export contracts and import transactions.

For Commercial Banks: Exim Bank offers Rediscounting Facility to commercial

banks, enabling them to rediscount export bills of their SSI customers with usance

not exceeding 90 days.

For Film Finance: Exim Bank provides funds for film production, for distribution

and exhibition in overseas markets, for export market development. Kabul Express,

Dhoom 1 & 2, Fanaa, Salaam Namaste, Veer Zara, The Rising and Bunty Aur

Babli are some of the films funded by Exim bank.

Role of Banks in International Lending

International Banking has significant role in lending or credit creation.International

lending is grossly similar to domestic lending but it has some significant

differences too. It mainly has cross currency risk, political-sovereign risk of

default, difference in interest rate structure and variation in banking regulations

across the countries.


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Lending beyond a particular value is not undertaken by a single bank. It is done in

the form of loan syndication.

Loan Syndication

A syndicated facility is a lending facility defined by a single loan agreement, in

which several or many banks participate.

Thus Syndicated Loan is extended by a group of banks to a corporate borrower. A

syndicated loan is provided by a group of lenders and is structured, arranged, and

administered by one or several commercial or investment banks known as

arrangers.

Parties And Their Roles Within The Syndication

Process

The lead bank & participating banks are the main parties involved in loan

syndication .In large loan amounts, sometimes, there are four parties involved,

other than the borrower in the syndication process. These are Arranger (Lead

Manager/Bank), Underwriting Bank, Participating Bank(s) and the facility

manager (agent).Their roles are defined as follows:

Arranger/leadmanager: It is a bank which is mandated by the prospective

borrower and is responsible for placing the syndicated loan with other banks and

ensuring that the syndication is fully subscribed. This bank charges arrangement

fee for undertaking the role of lead manager. Its reputation matters in the success

of syndication process as the participating banks would agree or disagree based on


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the credibility and assessment expertise of this bank. In other words since the

appraisal of the borrower and its proposed venture is primarily carried out by this

bank, onus of default is indirectly on this bank. Thus this bank carries reputation

risk in the syndication process

Underwritingbank: Syndication is a process of arranging loans, success of which

is not guaranteed. Arranger (Lead Manager) Bank may underwrite to supply the

entire remainder (unsubscribed) portion of the desired loan and in such case

arranger itself plays the role of underwriting bank. Alternatively a different bank

may underwrite (guarantee) the loan or portion (percentage) of the loan. This bank

would be called underwriting bank. It may be noted that all the syndicated loans

may not have this underwriting arrangement. Risk of underwriting bank is

obviously the underwriting risk. It means it will have to carry the credit risk of

the larger portion of the loan.

Participatingbank(s): These are the banks that participate in the syndication by

lending a portion of the total amount required. These banks(s) charge participation

fee. These banks carry mostly the normal credit risk i.e. risk of default by the

borrower, as like any normal loan. These banks may also be led into passive

approval and complacency risk. It means that these banks may not carry rigorous

appraisal of the borrower and his proposed project as it is done by the lead

manager and many other participating banks. It is this bankers trust that so many

high profile banks cannot be wrong! This may be seen in the light of reputation

risk of the lead manager.

Facility Manager/Agent: Facility manager takes care of the administrative

arrangements over the term of the loan (e.g. Disbursements, repayments,

compliance).It acts for and on behalf of the banks. In many cases the arranging


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/underwriting bank itself may undertake this role. In larger syndications co-

arranger and co-manager may be used.

Benefits to the lead banks and participating banks

(lenders):

Risk diversification with more loan assets: Loan Syndication enables lenders to

make more loans, while limiting individual exposures and spreading their risk

within portfolios more widely.

Easy Administration: Administration of the loan is extremely efficient with the

agent managing much of the process on behalf of the participants.

Benefits to the Lead Banks:

Fee based income: Lead banks earn fund arrangement fee and other fees without

committing capital. This gives them a risk-free source of revenue.

Enhancement ofbanks reputation: LeadingSyndication process increase

banks credibility and its network with other banks.

Enhancement ofbanks relationship with the client: Client relationship is

strengthened because of single window it offers to arrange the loan. It is an

obvious boost to trust and confidence.

Benefits to the participating banks:


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More lending Opportunities: Access to lending opportunities with low

marketing/processing costs.

Continuingfuture business because ofrelationship: It triggers more

opportunities to participate in future syndications as network of the banks

establishes a level of comfort with each other.

Pari passu charge advantage: In case the borrower runs into difficulties,

participant banks have equal treatment and equal charge (pari passu charge) on

liquidated asset

Profitability of International Lending:

International lending as discussed earlier has many risk factors. Hence profitability

is uncertain and volatile. Profitability depends on the following factors:

Exchange Rate: Exchange Rate fluctuations affect profitability of loans. Effective

rate of interest earned by the bank in lending changes when exchange rate changes.

Weakening currency of loan is a loss while strengthening is a gain.

Interest Rate: Interest rate should govern exchange rate as per interest rate parity

theory. But if the interest rates or exchange rates or both are governed by the local

government and if they thus do not move as per parity theory, there is arbitrage.

For the loans disbursed, such stickiness in rates may be favorable or adverse.

Legal System ofthe country: Lending is through contractual agreements. All the

defaults have recourse through legal machinery. Sound, matured and stable legal

and judicial systems are seen as an advantage.


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Political Decisions: Policy decisions about industry concessions, subsides, ban,

tax issues change profitability of the projects. Also, policy decisions about

international (foreign) banks may hamper profits of the banks.

ForexRegulations: Change in forex regulations may affect lending banks

significantly. More liberal policies are a definite ease on transactions and ban or

stringent regulations brought in may hamper profitability.

Bank as Underwriters

1. The procedure by which an underwriter brings a new security issue to theinvesting public in an offering. In such a case, the underwriter will guarantee a

certain price for a certain number of securities to the party that is issuing the

security (in exchange for a fee). Thus, the issuer is secure that they will raise a

certain minimum from the issue, while the underwriter bears the risk of the

issue.

2. The process of insuring someone or something.

3. The process by which a lender decides whether a potential creditor is

creditworthy and should receive a loan.

Banks in Insurance Sector

Bancassurance simply means selling of insurance products by banks. In this

arrangement, insurance companies and banks undergo a tie-up, thereby allowing

banks to sell the insurance products to its customers. This is a system in which a

bank has a corporate agency with one insurance company to sell its products. By

selling insurance policies bank earns a revenue stream apart from interest. It is


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called as fee-based income. This income is purely risk free for the bank since the

bank simply plays the role of an intermediary for sourcing business to the

insurance company.

Bancassurance in Indian scenario:

Banking is fully governed by RBI &Insurance sector is by IRDA And bank assurance

being the combination of two sectors comes under the purview of both theregulators.

Each of the regulators has given out detailed guidelines for banks getting into

insurance sector. Coming to India, bancassurance is a new buzzword in India. It

originated in India in the year 2000 when the Government issued notification

under Banking Regulation Act, which allowed Indian Banks to do insurance

distribution. It started picking up after Insurance Regulatory and Development

Authority (IRDA) passed a notification in

October 2002 on 'Corporate Agency' regulations. As per the concept of Corporate

Agency, banks can act as an agent of one life and one non-life insurer. Currently

bancassurance accounts for a share of almost 25-30% of the premium income

amongst the private players in India.

Benefits: -

From the viewpoint of Bankers: -


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Bankers have power; existing structure to relate to the customers needs why

bank will enter in this area the reasons behind it are given below: -

(A) By selling the insurance product by their own channel the banker can increase

their income.

(B) Banks have face-to-face contract with their customers. They can directly ask

them to take a policy. And the banks need not to go any where for customers.

(C) The Bankers have extensive experience in marketing. They can easily attract

Customers & non-customers because the customer & non-customers also bank on

banks.

(D) Banks are using different value added services life-E. Banking tele banking,

direct mail & so on they can also use all the above-mentioned facility for

Bancassurance purpose with customers & non-customers.

European banks have more than doubled the conversion rates of insurance leads

into Sales and have increased sales productivity to a ratio, which is more than

enough to make

Bancassurance a highly profitable proposition.


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BANK REFFERAL:

There is also another method called 'Bank Referral'. Here the banks do not issue

the policies; they only give the database to the insurance companies. The

companies issue the policies and pay the commission to them. That is called

referral basis.

Banks in Foreign Exchange Market

The foreign exchange market (forex, FX, orcurrency market) is a worldwidedecentralized over-the-counter financial market for the trading of currencies.

Financial centers around the world function as anchors of trading between a wide

range of different types of buyers and sellers around the clock, with the exception

of weekends. The foreign exchange market determines the relative values of

different currencies.

The primary purpose of the foreign exchange market is to assist international trade

and investment, by allowing businesses to convert one currency to another

currency. For example, it permits a US business to import British goods and pay

Pound Sterling, even though the business's income is in US dollars. It also supports

speculation, and facilitates the carry trade, in which investors borrow low-yielding

currencies and lend (invest in) high-yielding currencies, and which (it has been

claimed) may lead to loss of competitiveness in some countries.

Banks

The interbank market caters for both the majority of commercial turnover and large

amounts of speculative trading every day. A large bank may trade billions of


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dollars daily. Some of this trading is undertaken on behalf of customers, but much

is conducted by proprietary desks, trading for the bank's own account. Until

recently, foreign exchange brokers did large amounts of business, facilitating

interbank trading and matching anonymous counterparts for small fees. Today,

however, much of this business has moved on to more efficient electronic systems.

The broker squawk box lets traders listen in on ongoing interbank trading and is

heard in most trading rooms, but turnover is noticeably smaller than just a few

years ago.

Central banks

National central banks play an important role in the foreign exchange markets.

They try to control the money supply, inflation, and/or interest rates and often have

official or unofficial target rates for their currencies. They can use their often

substantial foreign exchange reserves to stabilize the market. Milton Friedman

argued that the best stabilization strategy would be for central banks to buy when

the exchange rate is too low, and to sell when the rate is too highthat is, to trade

for a profit based on their more precise information. Nevertheless, the effectiveness

of central bank "stabilizing speculation" is doubtful because central banks do not

go bankrupt if they make large losses, like other traders would, and there is no

convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank intervention might be enough to

stabilize a currency, but aggressive intervention might be used several times eachyear in countries with a dirty float currency regime. Central banks do not always

achieve their objectives. The combined resources of the market can easily

overwhelm any central bank.Several scenarios of this nature were seen in the

199293 ERM collapse and in more recent times in Southeast Asia.


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Top 10 currency traders

% of overall volume, May 2010

Rank Name Market Share

1 Deutsche Bank 18.06%

2 UBS AG 11.30%

3 Barclays Capital 11.08%

4 Citi 7.69%

5 Royal Bank of Scotland

6.50%

6 JPMorgan 6.35%

7 HSBC 4.55%

8 Credit Suisse 4.44%

9 Goldman Sachs 4.28%

10 Morgan Stanley 2.91%

Bank as Intermediaries final

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