what is the difference between commercial banks and other financial institutions describe the core business activities of commercial banks

SCHOOL OF BANKING UEH UNIVERSITY END-OF-TERM EXAMINATION Course: Commercial Banking Class: 22D1BAN50604903 INSTRUCTOR: NGUYỄN THỊ HỒNG NHUNG STUDENTS: PHAN THỊ TÚ QUYÊN ID: 31201022620 -2022- What is the difference between commercial banks and other financial institutions? Describe the core business activities of commercial banks a The difference between commercial banks and other financial institutions The term commercial bank refers to a financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses Commercial banks make money by providing and earning interest from loans such as mortgages, auto loans, business loans, and personal loans Customer deposits provide banks with the capital to make these loans A financial institution is an intermediary between consumers and the capital or the debt markets providing banking and investment services The major categories of financial institutions include central banks, retail and commercial banks, internet banks, credit unions, savings, and loans associations, investment banks, investment companies, brokerage firms, insurance companies, and mortgage companies Except for banks, they are all classified as non-banking financial entities that provide financial services to the public but are not banks Other financial institutions, on the other hand, are unable to accept deposits into savings and demand deposit accounts which are commercial bank routinely activities Commercial banks are also protected and funded by central banks, making them less hazardous to invest in than other financial organizations However, a reduced interest rate is frequently associated with this Finally, the lending and borrowing operations of commercial banks supply a large quantity of credit As a result, they play a crucial role in supporting and boosting the country's economy They have a stronger impact on central banks' monetary policies than other financial institutions b The core business activities of commercial banks Overall, the core business activities of commercial banks include capital mobilization, using capital activities, and intermediary activities enjoying commercial commission Capital mobilization in commercial banks is the process of planning, organizing and directing the implementation and control of the activities of mobilizing capital in order to achieve the set objectives The capital using activities of commercial banks are the second way for commercial banks to earn their profit Some of the activities are listed below: - - - - Commercial banks must engage in treasury activities as part of their day-to-day operations Treasury initiatives help to ensure the liquidity of commercial banks Treasury operations include cash reserves in commercial bank warehouses, deposits at the central bank, and deposits at other commercial banks Credit-granting activities: Credit-granting operations make up the majority of commercial banks' capital-use activities When commercial banks offer credit, they enter into agreements or obligations with consumers, such as the right to utilize a specific amount of money within a specific time frame, which is tied to the return principle Lending, discounts, rediscounting valuable documents, Bank guarantees, and financial leasing is all examples of commercial banks' credit extension activities The majority of commercial banks' credit extension activities are in the form of lending Investment activities: Commercial banks mix lending and investing operations in order to earn profits while preserving financial security This diversifies capital use operations, minimizing operational risks Commercial banks engage in capital contributions to joint ventures and associations, on the stock market (debt securities, government and economic organization capital securities, and so on), and in other investment industries Successful investment operations will assist commercial banks in terms of growing liquidity and lowering losses They should take more risks with their money and diversify their investments Other activities: In addition to the aforementioned operations, commercial banks engage in a variety of other activities that can be classified as receivables but have yet to be collected capital spent on equipment purchases; The bank is forced to pay expenditures due to a business loss and so on Furthermore, intermediary activities that enjoy commercial commissions also are bank services Commercial banks now offer banking services to their consumers, integrating their traditional operations to suit market demands for economic integration and development while also contributing to your income growth Commercial banks provide payment and treasury services, guarantee services (in credit, bidding, import, and export, among other things), foreign currency trading services, entrustment services, agency services, and securities trading, among other things Finally, as science and technology improve, commercial banks will be able to provide new money and credit services, such as card services, Internet banking, and so on Describe the similarities and differences between Certificate of deposit (CD), Money Market Deposit Accounts (MMDAs), and Saving accounts? Certificates of Deposit A CD is a timed savings account In exchange for a fixed interest rate that may be higher than you would get from a regular savings account or MMDA, you agree to deposit a set amount for a set term—three, six, nine, or 12 months or multiple years up to 10 Interest on your CD is compounded daily, weekly, monthly, or annually, according to the terms of your agreement with the bank or credit union Money Market Deposit Accounts A money market deposit account (MMDAs), also known as a money market account (MMA), is a special type of bank or credit union savings account with some features not found in regular savings accounts Most money market deposit accounts pay a higher interest rate than regular passbook savings accounts and often include check-writing and debit card privileges MMDAs also come with restrictions that make them less flexible than regular checking or savings accounts Saving accounts A savings account is an interest-bearing deposit account held at a bank or other financial institution Though these accounts typically pay a modest interest rate, their safety and reliability make them a great option for parking cash you want available for short-term needs They are similar in properties that all of them are interest-bearing savings accounts and the Federal Deposit Insurance Corporation insures your money (FDIC) There are some aspects that are different between them: Interest rate CD: Certificates of deposit usually have higher and more stable interest rates than savings accounts, and depending on the length of the deposit (long or medium term), the highest interest rate is close to 9% MMDAs: Higher interest rates than savings Saving Accounts: Depending on the term and each bank, the current highest savings interest rate is about 6-7% Period CD: Longer-term Certificates of Deposit (CDs) Depending on the bank and the issuance, it could be months, months, 12 months, 18 months, 24 months, 36 months, or 84 months MMDAs: There is no time limit Saving Accounts: Savings deposits usually have terms of one month, two months, three months, six months, twelve months, and twenty-four months, ect Liquidity CD: In theory, customers whose buy a certificate of deposit cannot withdraw before maturity, if any, they also have to wait after half the term (depending on the bank), so the liquidity will be worse than the savings deposit form MMDAs: Best Liquidity Saving Accounts: Customers can withdraw money when it is due and also before maturity, but they must pay a very low demand interest rate Savings accounts are a channel with high liquidity; customers can withdraw money when it is due and also before maturity, but they must pay a very low demand interest rate Accessible CD: You cannot withdraw money from a CD at an ATM or by writing a check The money is not accessible unless you withdraw it early no access to your money until a term ends MMDAs: typically give you access to deposits in the form of written checks, debit cards, and the ability to make an electronic transfer Saving Account: You can usually withdraw money from your savings account using an ATM, making it easy to get cash when you need it Withdrawals MMDAs: You can't write as many checks as you want or make as many electronic transfers as you want Saving Accounts: You are limited to a certain number of withdrawals per month Fees CDs: There are no fees: You will not be charged any additional fees if you not withdraw your funds early According to Basel II and Basel III, what is the safety ratio of risk-weighted assets to the capital mobilization of a commercial bank? How Vietnamese commercial banks apply Basel standards? The safety ratio of risk-weighted assets to capital mobilization of a commercial bank In a globalized and internationalized world, businesses, particularly commercial banks, must compete with other corporations and financial institutions The Basel Committee on Banking Supervision designed Basel I, II, and III with the primary goal of assisting banks in coping with possible risks and improving their ability to absorb losses Minimum capital adequacy ratios (CAR) of 8% and 10.5 percent are required under Basel II and III, respectively Banks have two main silos of capital that are qualitatively different from one another Tier refers to a bank’s core capital, equity, and the disclosed reserves that appear on the bank’s financial statements If a bank experiences significant losses, Tier capital provides a cushion that can allow it to weather stress and maintain a continuity of operations By contrast, Tier refers to a bank’s supplementary capital, such as undisclosed reserves and unsecured subordinated debt instruments Building on Basel I, Basel II provided guidelines for the calculation of minimum regulatory capital ratios and confirmed the requirement that banks maintain a capital reserve equal to at least 8% of their risk-weighted assets A bank’s total capital is calculated by adding both tiers together Under Basel III, the minimum total capital ratio that a bank must maintain is 8% of its risk-weighted assets (RWAs), with a minimum Tier capital ratio of 6% The rest can be Tier Vietnamese commercial banks apply Basel standards Applying Basel standards is an indispensable requirement for Vietnamese banks to ensure the safety of business operations against unpredictable fluctuations of the financial market If banks around the world have applied Basel II standards many years ago, and are currently completing Basel III standards, most banks in Vietnam have not yet officially announced the application of Basel II standards Basel II, except Joint Stock Commercial Bank for Foreign Trade (Vietcombank), International Commercial Joint Stock Bank (VIB) and Orient Commercial Joint Stock Bank (OCB) - Capital adequacy ratio abbreviated as CAR - this is considered an economic indicator that reflects the relationship between a bank's risk-adjusted assets and equity Vietnam has issued many internal regulations on credit granting and quality assessment Asset volume and CAR ratio compliance, liquidity management The requirement to issue these internal regulations is to improve risk management capacity and ensure the safety of business activities of banks - Regarding debt classification, commercial banks implement two ways of classifying debts: According to Article (quantitative method) and Article (qualitative method), they are classified into groups of debts Regarding the provisioning ratio, the Commercial banks must make two types of provisions, namely specific provisions and general provisions This regulation shows that the State Bank has gradually applied Basel II in allowing commercial banks to choose an internal credit rating method for debt classification and provisioning, and also sets requirements for debt management and control higher risk for commercial banks However, each commercial bank builds its own internal credit rating system in its own way, so it will create inconsistencies in risk measurement, debt classification and provisioning, making it difficult to monitor and manage - Credit rating - The basis for assessing the debt repayment ability of the subjects wishing to extend credit, contributing to the credit granting decision (to grant or not to grant credit, determine the credit limit, term, interest rate, loan security measures…) and credit management Currently, in Vietnam, there is still a shortage of independent credit rating agencies and weak information quality Most Vietnamese commercial banks still apply the traditional risk measurement method and very few commercial banks have built and perfected their internal credit rating system according to Basel I recommendations - Inspection and supervision activities: On the side of the State Bank and other management agencies: the State Bank has assessed the organizational models, operations, and infrastructure in support of banking inspection and supervision; promulgate a legal framework for inspection and supervision activities according to the principles of the Basel Committee such as: supervision is carried out by both methods: remote supervision (through compliance with the CAR coefficient and the standards) safety margin) and on-site inspection according to Basel's supervisory principles (principle 20) - There is still a big gap between Basel II's requirements for pillar III in terms of information disclosure and market principles (including qualitative and quantitative information disclosure on capital adequacy, publish risk levels and risk measurement techniques, announce internal assessment process on capital adequacy, publish criteria for determining materiality, etc Why banks pay low interest rate for current accounts? Why the interest rate of longterm loans is usually higher than the interest rate of short-term loans? Because earning interest is the major motivation for putting money in a checking account, most current account providers either not pay interest on credit balances or pay it at a lesser rate Long-term loans are more risky than short-term loans because they involve market volatility, client default, and other factors Long-term loans will therefore be more expensive than short-term loans 5 What is the difference between Open-end Credit and Close-end Credit? Give the examples and application for these credit methods In your opinion, how many credit cards are too many? Explain your reasoning A consumer credit line that may be added to or paid off at any time up to a set credit limit is known as open-end credit The consumer has the option of paying in full to avoid penalties or paying in installments Bank credit cards and check overdraft lines of credit are two of the most frequent kinds of open credit The polar opposite of open credit is closed credit Close-end credit is a form of credit that must be returned in full at the conclusion of the loan period, including principle, interest, and any pre-agreed financing costs In terms of Open-end Credit, when compared to an installment loan, interest is usually not charged on the portion of the line of credit that is not used, which can result in interest savings for the borrower To Close-end Credit, a mortgage can offer a fixed or variable rate if you have a fixed rate of interest Open-end Credit ● Example: Overdraft Protection, VISA credit cards, Personal Lines of Credit and Home Equity Lines of Credit ● Applications: a loan or a credit card Close-end Credit ● Example: a home mortgage loan, a car loan, or a loan for appliances ● Applications: buy expensive items–such as a house, a car, a boat, furniture, or appliances–and then pay for those items in the future How many cards are too many? In my opinion, the amount of credit cards should depend on each person There is no specific number of credit cards considered right for all consumers By distributing charges over many credit cards, you may be able to maintain your credit line use ratio per card below the required 30 percent Having numerous cards can have advantages, such as combining different types of rewards cards to maximize earnings across all categories of expenditure There's a good case to be made for carrying at least one credit card to take advantage of the ease, security, and other perks that come with it Whether you need the extra credit lines to meet your monthly discretionary budget or want to use your regular shopping to gain various sorts of incentives like cash back, points, or airline miles might help you justify carrying several credit cards Customers have too much credit cards when they can not afford to pay their bills, not need them, or not plan to use them for some purpose How loans affect a bank’s income? Why is liquidity risk considerable inportance to a bank’s loan policy? According to Vietnamese Law on credit institutions, can commercial banks use short-term deposits for long-term loans? a How loans affect a bank’s income? The bank creates an account for the consumer, complete with repayment conditions and the current loan interest rate The lending interest rate refers to the cost of a bank loan to a consumer The supply-demand relationship of credit in the market and the level of credit risk based on time, loan size, implementation cost, capital usage environment, loan guarantee relationship, and other elements; Mandatory regulatory environment changes Commercial bank rivalry has affected and caused a progressive fall in lending rates There are many various interest rates utilized for different borrowers, which is a disadvantage for banks with small size and low financial ability b Why is liquidity risk considerable inportance to a bank’s loan policy Liquidity risk is critical to a bank's credit strategy because of the following reasons: - Liquidity in banking refers to the ability of a bank to meet its financial obligations as they come due It can come from direct cash holdings in currency or on account at the Federal Reserve or other central bank More frequently, it comes from acquiring securities that can be sold quickly with minimal loss The failure of a bank to satisfy its debts poses a danger to its financial position or survival - Liquidity risk may spin out of control, compounding other risks including credit risk and market risk As a result, liquidity risk has emerged as one of the most critical components of an enterprise-wide risk management strategy The liquidity framework of a bank should retain sufficient liquidity to resist all types of stress situations A regular review of the bank's liquidity risk management framework and liquidity status is an important supervisory step that ensures the bank's proper operation A company's ability to satisfy its commitments and even go out of business might be jeopardized if it lacks sufficient liquidity c According to Vietnamese Law on credit institutions, commercial bank should use what type of loan? According to Vietnamese Law on credit institutions, commercial banks can use short-term deposits for long-term loans What is the difference between prime rate and subprime rate and how they are applied? Describe the five Cs credit criteria in lending process Why might underwriting standards vary at different banks? a The difference between prime rate and subprime rate The prime rate is the interest rate that commercial banks charge their most creditworthy corporate customers Subprime rate is interest rates that commercial banks charge to subprime borrowers In terms of type of customers being charged, prime rate has high credit history (prime) customers On the contract, subprime rate has low or “thin” credit history (subprime) customers Prime rate has a very low Default risk which is opposite with subprime rate - very high default risk The federal funds rate determines the prime rate The prime rate published daily by the Wall Street Journal is the most important and widely utilized The size of the loan, the individual's income, the amount of delinquent accounts on the borrower's credit record, and other factors all have an impact on the subprime rate In terms of applications, the prime rate is only used as a benchmark and a foundation for a variety of other interest rates Subprime refers to mortgages, auto loans, and leases that are offered with no money down or to buyers with limited or poor credit histories The interest rates charged on prime and subprime loans are generally the most significant difference Lending to consumers with poor or limited credit histories is often considered riskier, thus lenders charge higher rates to compensate for the risk b The five Cs credit criteria in lending process The five C's of credit are used to convey the creditworthiness of potential borrowers: - The first C is character—the applicant's credit history This information shows on the credit records of the borrower Credit reports, which are generated by the three major credit agencies (Experian, TransUnion, and Equifax), contain precise information about how much money an applicant has borrowed in the past and whether or not they have paid back loans on time These reports also include information on collection accounts and bankruptcies, with the majority of data being kept for seven to ten years - The second C is capacity—the applicant's debt-to-income ratio By comparing income to recurrent obligations and calculating the borrower's debt-to-income (DTI) ratio, capacity determines a borrower's ability to repay a loan Lenders compute DTI by dividing a borrower's gross monthly income by the sum of the borrower's total monthly debt payments The lower an applicant's DTI, the more likely they are to be approved for a new loan - The third C is capital—the amount of money an applicant has Lenders also take into account any money invested into a possible investment by the borrower The likelihood of default is reduced when the borrower contributes a significant amount Borrowers who can make a down payment on a property, for example, are more likely to get approved for a mortgage - The fourth C is collateral—an asset that can back or act as security for the loan Borrowers can use collateral to help them acquire loans It ensures the lender that if the borrower fails on the loan, the lender will be able to recover some of the loan's value by repossessing the collateral The collateral is frequently the item for which the money is being borrowed: auto loans, for example, are secured by car, while mortgages are secured by home - The fifth C is conditions—the purpose of the loan, the amount involved, and prevailing interest rates Lenders look at the length of time an applicant has been employed at their current job and future job stability which is influence the lender's desire to finance the borrower Conditions might refer to how the money will be used by the borrower Consider a borrower seeking a vehicle loan or a loan for house improvements Because of the precise aim of those loans, lenders may be more inclined to accept them than a signature loan, which might be used for anything Lenders may also take into account factors outside the borrower's control, such as the current status of the economy, industry trends, or potential legislative changes c The reasons why might underwriting standards vary at different banks Because various banks have varied risk tolerances and interest rates for lending, there would be disparities in underwriting criteria If you fulfill specific conditions, such as having a minimum credit score, certain banks may offer cheap interest rates In terms of standards, certain banks will be more simpler to work with, but they will offer higher interest rates 8 What is the difference between APR and Financial Charge? How can a consumer find the best deals on credit? a Differences between APR and Financial Charge The Annual Percentage Rate (APR) is the cost you pay each year to borrow money, including fees, expressed as a percentage The APR is a broader measure of the cost to you of borrowing money since it reflects not only the interest rate but also the fees that you have to pay to get the loan Finance charges are a form of compensation to the lender for providing the funds, or extending credit, to a borrower These charges can include one-time fees, such as an origination fee on a loan, or interest payments, which can amortize on a monthly or daily basis A finance charge is a total cost that includes the cost of debt as well as any lender-paid transaction charges, such as account management fees or late payment fees The lender charges the borrower interest as a proportion of the principle - the amount lent An annual percentage rate (APR) is a typical way to describe the interest on a loan (APR) One of the most common financial expenses is interest This allows the lender to benefit on the present amount being offered to the borrower, expressed as a percentage Interest rates vary based on the type of loan and the creditworthiness of the borrower Secured credit, such as a mortgage or a vehicle loan, often has a lower interest rate than unsecured credit, such as a credit card This is due to the lower risk associated with an asset-backed loan Each payment cycle's financing charges are calculated using the current prime interest rate A fixed-rate loan's financing cost is less likely to fluctuate, yet it might still fluctuate based on factors such as your payment history and punctuality b How can a consumer find the best deals on credit? Consumers must understand the cost of credit and how it is calculated in order to select the finest credit card Banks want and need to make money on loans, but they have little interest in battling debt collectors or losing money on loans that are not paid back As a result, banks have an incentive in encouraging consumer education in some instances Then they provide advice on how to make the best use of credit and are obligated by law to disclose all charges In which consumers are less aware of the negative aspects of credit and focus instead on the positive aspects As a result, they must exercise extreme caution while deciding on the finest credit Calculating interest for customer's current deposit account in May and June 2020, knowing the interest rate of TT deposit is 1.5%/year, one-year interest calculation days are 365 days The bank calculates interest on the 25th of every month and the transactions arising on the account are as follows: Number of date Date Transaction (N) 4/25/ 2020 Debit Credit 14 Balance (B) BxN 128,000,000.00 1,792,000,000.00 681,000,000.00 2,043,000,000.00 158,600,000.00 522,400,000.00 0.00 5/12/ 2020 Payment for 13 raw materials 282,800,000.00 239,600,000.00 3,114,800,000.00 5/25/ 2020 Interest 22 recieve 285,608.22 239,885,608.22 5,277,483,380.82 329,000,000.00 568,885,608.22 1,137,771,216.44 543,496,608.22 3,804,476,257.53 573,496,608.22 0.00 5/9/2 020 Receiving sales revenue 5/12/ 2020 Payment for staff salary 6/16/ 2020 Receiving sales revenue 6/18/ 2020 Payment for electricity 6/25/ 2020 Cash deposit 6/25/ 2020 Interest received 553,000,000.00 25,389,000.00 30,000,000.00 419,988.94 0.00 Interest amount of May = total BxN (May)*1,5%/365 = 285,608.22 VND Interest amount of June = total BxN (June)*1,5%/365 = 419,988.94 VND 10 A customer applied for a 2-year consumer loan to buy a new car The information in the loan contract is as follows: – Car price (loan amount): 580.000.000 VND – Interest rate: is 12,3%/annum – Monthly payment: in equal amount that includes interest and a portion of the principal Question: a What is the monthly installment? b Create a payment schedule for the customer a What is the monthly installment? Interest rate (Annual) 12.30% NPER 24 Loan amount 580000000 Monthly Installment 27,383,941.58 đ b Create a payment schedule for the customer Number of period Begining Balance Principle Interest amount Monthly installment Ending balance 580,000,000 ₫ 21,438,942 ₫ 5,945,000 ₫ 27,383,942 ₫ 558,561,058 ₫ 558,561,058 ₫ 21,658,691 ₫ 5,725,251 ₫ 27,383,942 ₫ 536,902,368 ₫ 536,902,368 ₫ 21,880,692 ₫ 5,503,249 ₫ 27,383,942 ₫ 515,021,675 ₫ 515,021,675 ₫ 22,104,969 ₫ 5,278,972 ₫ 27,383,942 ₫ 492,916,706 ₫ 492,916,706 ₫ 22,331,545 ₫ 5,052,396 ₫ 27,383,942 ₫ 470,585,161 ₫ 470,585,161 ₫ 22,560,444 ₫ 4,823,498 ₫ 27,383,942 ₫ 448,024,717 ₫ 448,024,717 ₫ 22,791,688 ₫ 4,592,253 ₫ 27,383,942 ₫ 425,233,029 ₫ 425,233,029 ₫ 23,025,303 ₫ 4,358,639 ₫ 27,383,942 ₫ 402,207,726 ₫ 402,207,726 ₫ 23,261,312 ₫ 4,122,629 ₫ 27,383,942 ₫ 378,946,413 ₫ 10 378,946,413 ₫ 23,499,741 ₫ 3,884,201 ₫ 27,383,942 ₫ 355,446,672 ₫ 11 355,446,672 ₫ 23,740,613 ₫ 3,643,328 ₫ 27,383,942 ₫ 331,706,059 ₫ 12 331,706,059 ₫ 23,983,954 ₫ 3,399,987 ₫ 27,383,942 ₫ 307,722,105 ₫ 13 307,722,105 ₫ 24,229,790 ₫ 3,154,152 ₫ 27,383,942 ₫ 283,492,315 ₫ 14 283,492,315 ₫ 24,478,145 ₫ 2,905,796 ₫ 27,383,942 ₫ 259,014,169 ₫ 15 259,014,169 ₫ 24,729,046 ₫ 2,654,895 ₫ 27,383,942 ₫ 234,285,123 ₫ 16 234,285,123 ₫ 24,982,519 ₫ 2,401,423 ₫ 27,383,942 ₫ 209,302,604 ₫ 17 209,302,604 ₫ 25,238,590 ₫ 2,145,352 ₫ 27,383,942 ₫ 184,064,014 ₫ 18 184,064,014 ₫ 25,497,285 ₫ 1,886,656 ₫ 27,383,942 ₫ 158,566,729 ₫ 19 158,566,729 ₫ 25,758,633 ₫ 1,625,309 ₫ 27,383,942 ₫ 132,808,096 ₫ 20 132,808,096 ₫ 26,022,659 ₫ 1,361,283 ₫ 27,383,942 ₫ 106,785,437 ₫ 21 106,785,437 ₫ 26,289,391 ₫ 1,094,551 ₫ 27,383,942 ₫ 80,496,047 ₫ 22 80,496,047 ₫ 26,558,857 ₫ 825,084 ₫ 27,383,942 ₫ 53,937,189 ₫ 23 53,937,189 ₫ 26,831,085 ₫ 552,856 ₫ 27,383,942 ₫ 27,106,104 ₫ 0₫ 24 27,106,104 ₫ 27,106,104 ₫ 277,838 ₫ 27,383,942 ₫ Thank you so much Source: https://www.investopedia.com/terms/c/commercialbank.asp https://www.bis.org/bcbs/history.htm https://www.investopedia.com/ ...1 What is the difference between commercial banks and other financial institutions? Describe the core business activities of commercial banks a The difference between commercial banks and other. .. impact on central banks' monetary policies than other financial institutions b The core business activities of commercial banks Overall, the core business activities of commercial banks include capital... control of the activities of mobilizing capital in order to achieve the set objectives The capital using activities of commercial banks are the second way for commercial banks to earn their profit