Formation of funding sources

Total sources = financial potential

Credit potential = financial potential – liquidity reserves

Deposits
a) a vista deposits – very small interest rate, unlimited access to funds
b) term deposits – bigger interest rate, access the funds after the period of expiry
can be : s-t, l-t, without purpose – owner receives only the int. rate,
with purpose – in order to get credit or coverage of some liability (letter of credit)

Non-deposits
a) interbank credits
- s-t liquidity credits -> no specific purpose
- purpose loans
- CB credits
-> liquidity credits under special conditions
-> those based on pledged securities at CNB
- credits from specialized banks of funds
-> export loans from CBRD
-> other purpose loans
b) foreign borrowings
c) issuance of the securities
d) capital and reserves
- funds raised by selling regular and preferential shares
- reserves
- other funds included in capital

S-t liquidity credits from CB

- amount determined by governor
- 6-12 months maturity
- purpose = improve bank liquidity if its lack of liquidity affects
financial system and economy
- BANK must be solvent to use credit
- CNB can cancel it

Lombard credits based on pledged securities at CNB

- approved loans in the amount of 90% of nominal value of securities pledged for this purpose
- pledged securities : treasury bills of the CRO ministry of finance
- during the day usage and returning it the following day
FUNCTIONS OF CAPITAL
1. Founding of the bank
- min. 40 mln HRK in cash
2. Sources of funds for business performance for :
- investment in material asset, credit/non-credit placements to get profit
3. Protection of clients in the case of bankruptcy
- banks with more share of own capital = easier return of funds
4. Coverage in case of unexpected losses (unpaid loans)
- if can’t cover from current income then covering by capital
- losses covered from all the reserves then from capital
5. Regulatory function
- different parameters that regulate banking business, capital adequacy, exposures

DIRECTING OF BANK FUNDS

1.) Liquid funds = necessary for regular banking operations of settlement matured liabilities
towards the deponents and creditors
- giro-account in HRK
- currency account (in country or abroad) in foreign currency
- treasury in foreign currency
- vaults
2.) Non-credit placement
Mandatory/voluntary investments
- reserve requirements = 12% and special RR
- treasury bills
- commercial bills of clients
- bills of exchange
- state bonds

HRK part
- deposits/credits in HRK
- issued securities
- liquid/subordinate instruments

NOT INCLUDED IN RESERVE REQUIREMENTS IN HRK :

- funds from CNB
- credits/deposits from financial institutions that already have reserve requirements
- credits/deposits from HBOR (CRO bank for reconstruction & development)

Foreign currency part

- regular and special foreign currency accounts
- deposits/credits in foreign currency
- liabilities from issued securities in foreign currency
- liquid/subordinate instruments in foreign currency
NOT INCLUDED IN RESERVE REQUIREMENTS IN FOREIGN CURRENCY :
- credits/deposits from financial institutions that already have reserve requirements
- blocked old foreign currency savings of population
- taken deposits for helping the areas suffered from natural disasters
- foreign currency funds from HBOR (CRO bank for reconstruction & development)

Calculation of required reserve :

- average daily balance from 1st to the last in the month
- RR rate from 12% - 15% -> changing by the CNB

Special RR by CB when :
- big growth placements
- big foreign borrowings

Treasury bills
- s-t
- voluntary/obligatory
- from CNB
- only CRO banks&savings banks can subscribe them (their own name and account)
- sold on auctions, interbanking market or direct offers
- CNB sells them with discounts
- payed at maturity date (CNB can repurchase before mat. Date )
- sell them before mat. Date to another bank/legal entity but must inform CNB
- nominated in EUR, USD, HRK

Credit placements
- loan = transfer of certain amount of money from the bank that is creditor to the individual
as a borrower, with returning obligation in due period with charging interest
- credit = borrowed buying power

a) single return credit – return of the total amount at maturity

- best for client
b) installment – returning certain parts of credit in contractual repayments terms
- best for bank
c) annuity – payments done evenly, yearly or semi-annually
- debtor pays principal and interest in shape of annuity

Client creditworthiness
a) character = status, personal/economic characteristics
expertise of board/senior management
quality of plans/programs based on which bank issues the loan
b) capital level the borrower has – share in balance sheet
c) debtor’s asset strength
d) debtors liquidity/profitability
e) cash flows of previous/expected period
f) condition under which borrower operates and debtors perspective
g) debtors exposure to currency risk

aval credit
- warrant by the bank that they will pay the amount stated in bill of exchange in case the
issuer of the bill does not pay it

reimbursement credit
- international trade credit
- bank of importer accept his bill of exchange and then gives to the exporter
- exporter gets funds from reimbursement bank based on bill and export documents

REGISTER OF CREDIT OBLIGATIONS AND INTERETS RATES

CRO register of Credit Obligation = HROK

- 2004
- 20 CRO banks for the reasons of organization/management CRCO
- collecting/processing/exchange the information about all the credit obligations of clients of
financial institutions that use HROK
- in the summer of 2006 banks began to send data to HROK
- since May 2007 HROK credit reports available to banks
- since 2010 institutions expanded to leasing companies, credit card companies and
companies in consumer lending

Calculation of Interest Rates

Fluctuations due to the :

- reference interest rates EURIBOR, LIBOR
- Consumer price index
- premium on the credit risk

Banks calculate their interest rates based on the :

-> LIBOR (London Interbank Offered Rate)

- reference int. rates that certain banks in London charge each other for s-t loans
- to calculate variable int. rates
- based on 5 currencies (USD, EUR, GBP, JPY, CHF) with 7-maturtiy (overnight, 1 week,
1/2/3/6/12 months)
- 35 different LIBOR rates daily
- the most common 3 months USD
-> Euribor (Euro Interbank Offered Rate)
- rate offered to primary banks in the Euro interbank market
- based on the average of interest rates of 50 banks (lending to each other)
- weeks to years maturity
- most important and most commonly used reference rate in EU
-> NRS (National Reference Rate)
- average cost of sources of funds of the CRO banking sector with respect to the past
period, the type of sources and the relevant currency
- average interest rate paid by the banking sector in order to obtain funds needed for the
credit business
a) NRS 1 = for physical person deposits in HRK/EUR
b) NRS 2 = for physical persons and non-financial sector HRK/EUR
c) NRS 3 = for all major sources of funds from NRS 1 and NRS 2 + financial sector
- for periods od 3/6/12 months
- NRS 2%

BANKING REGULATIONS IN CRO

Basel committee
- 1974. Under the Bank for international settlements
- founded by G-10 central bank governors
- regulates standard for bank regulation/capital adequacy/ risk management
- 2010. Latest standard = Basel III introduced but in 2013 started to operate
- 2011. EU commission published legislature suggestion “Capital Requirements Directive IV”
based on Basel III
a) EU directive act (CRD) – establishment, supervision etc.
b) EU regulation act (CRR, capital requirements regul.) – capital adequacy, quantitative
demands, liquidity

EU regulations in CRO regulate :

- HNB operations
- Foreign currency activities
- credit activities with foreign countries
- money/capital market
- securities issuance/trade
- bankruptcy
- accounting standards

ALSO
a) Regulatory capital and min. capital adequacy
b) Loan satisfaction by risk
c) Special reserves for risk coverage
d) Limitations of bank exposures
Types of capital
a) Regulatory capital
- Common equity TIER 1 – ordinary shares, retained earnings/loss, reserves
no obligation to return/no maturity, last in line for payment
- Additional equity TIER 1 – preferred shares
no return obli.
- TIER 2 capital – hybrid instruments, subordinate loans
maturity 5 or more years
to cover losses
last in the line for payment
Credit institutions obliged to reduce this type of capital for :
- losses of last year
- own shares
- non-material asset
b) Basic capital – invested in the bank establishment with increase of the basic capital
c) Initial – ZOKI law on credit institutions says that initial capital has to be 40 MLN. HRK
- established by TIER 1
Both of b) and c) :
-
d) Internal
e) Recognized
f) Required