Theoretical basis of formation and management of second tier banks’ resources

CONTENT

 

Introduction................................................................................................................... 3

1 Theoretical basis of formation and management of second tier banks’ resources………………………………………………………………………….…... 6

1.1The concept, structure and management of the bank’s own capital…...……....….. 6

1.2Essence, classification and role of deposits……………………………….....….. 15

1.3Bonds and syndicated loans as the main sources of non-deposit funds….......….. 19

1.4Assets Liability Management………………………………………………....…. 24

2. Analysis of the current practice of formation and management of resources of JSC Kazkommertsbank……………………………………………………….…..……… 31

2.1Analysis of the formation, management and evaluation of the capital adequacy of JSC Kazkommertsbank…………………………………………………..……… 31

2.2Analysis of activity of Kazkommertsbank in formation of deposit market and implementation of deposit policy………………………………………………... 37

2.3 Analysis of non-deposits sources of funding in Kazkommertsbank RK…………………………………………………...........…....…......................... 47

2.4 Analysis of assets and liabilities management of JSC Kazkommertsbank…………….....…………………………………………….. 52

3 The ways of improvement in funding of banking operations and asset management of the bank……………………………………………….…….….. 60

3.1 The implementation of Basel III……………………………………….…...…… 60

3.2 The implementation of certificate of deposit………………………..………...… 77

Conclusion……………………………………………………………….………..… 83

List of used literature……………………………………………………………...… 86

Appendixes………………………………………………………………………..… 88

Appendix 1. Consolidated statements of financial position as of December 31, 2012, 2011, 2010…………………………………………………………………………... 88

Appendix 2. Interest rates of banks on attracted deposits (by maturity and types of currency) % for the month ……………………………….…………………………. 89

Appendix 3. Loans and advances from banks and other financial institutions……... 90

 

 

INTRODUCTION

The actuality of diploma work lies in the following:

- The banking sector of Kazakhstan is in a post-crisis state. Despite economic growth and favorable monetary policy, there is still concern about the cost of assets and quality of capital of most banks.

- Nowadays the most important sources of funding for the commercial banks of Kazakhstan are the deposits of customers. The stability and growth of the deposit base is one of the main pledges of stability in the Kazakh banking system. However, according to conducted study by Ulagat Business Group, only 3% of deposits of commercial banks of Kazakhstan may not be withdrawn without loss of interest during the year. The experience of recent banking crises in developed countries (U.S., UK, etc.) showed that in the case of panic among depositors, the State has to send hundreds of billions of dollars to maintain the liquidity and stability of the banking system.

- On January 1, 2013 in Kazakhstan was planned to start a phased introduction of the new version of the document - Basel III - with the full transition to the new standards in 2015. However, it was postponed indefinitely. At the same time implementation of Basel III has strengths and weaknesses. Nobody knows what effect the implementation of Basel III will have on the economy of Kazakhstan.

To ensure its activities, commercial banks must have a certain amount of money, i.e. resources. The scope of their activities depends on the amount of the resources. With the building of two-tier banking system of the Republic of Kazakhstan and the change of ownership from the state to the Joint-commercial nature of banking resources has undergone significant changes and the concept of banking competition originated. It is explained by the following reasons:

Firstly, national fund of bank resources significantly narrowed. Secondly, creation of enterprises and organizations with different types of ownership means the emergence of the new owners of temporarily free funds, self -determining place and method of their storage that encourages creation of market of credit resources, organically included in the system of monetary relations. This situation exacerbates the competition between banks to attract resources. Thus, in the present conditions of economic development problem of the formation of resources has paramount importance.

Management of bank resources is a complex process of their formation and placement, which faces certain restrictions in the form of prudential standards developed by international and national supervisory authorities. The aim of these bodies is regulation of an activity of commercial banks provided by a certain level of equity.

Equity capital for a commercial bank, as for any other commercial structure is the core activity that defines its scope and volume of attraction of resources. In other words, the activity of commercial banks is largely determined by the size and structure of the equity.

In a market economy the resources of commercial banks have paramount importance. This is confirmed by the fact that they are an indispensable element of bank activity. Commercial bank, on the one hand, attracts free money resources of individuals and legal entities, thus forming its resource base, on the other hand, a bank places resource base on his behalf under the terms of return, maturity and payment. In this case, a commercial bank may conduct its operations only within the limits of available resources. The nature of these operations depends strongly on the quality resource base of the bank.

A commercial bank, whose resources have mainly short term nature, is unable to make long-term credit investments. Consequently, in the market conditions the amount and quality of resources that are owned by the commercial bank, determine the magnitude and direction of its activities. In connection with this question of the resource base, optimizing of its structure and stability become urgent in the work of a bank.

The aim of diploma work is to examine the state of the resource base of banks in the Republic of Kazakhstan, to reveal the main problems of funding of banking operations and asset management of the bank, barriers preventing the development of banks, what Government can make for supporting banks, find out solutions to existing problems.

Objectives of the study are:

To determine what are the resources of commercial banks, their essence and necessity;

To classify resources;

To consider the resources of commercial banks as a basis for their activities;

To consider the formation of resources of commercial banks;

To analyze the resource base of Kazkommertsbank;

To determine the ways of improvement in Kazkommertsbank’s conditions.

Object of the research is an activity of Kazkommertsbank in Kazakhstan.

The subject of the study is the problem of the formation of resource base of commercial banks.

In theoretical part such works were studied and used as: Larionova, Mishkin F.S., Beloglazova, Bertayev K.Zh.,Batrakova L.G., Maidyrova D.N.,Polfreman D., Ford R. and others.

In this project in practical part the statistics from official websites AFN, Kase, NationalBank, Centras Securities and the consolidated financial statements of Kazkommertsbank for the last 3 years were used and analyzed.

The scientific novelty of diploma work is presentation of solutions to the problems of banks. We’d like to underline that these solutions such as Basel III and certificate of deposit were not used before in Kazakhstan. We suppose that these ideas stimulate the development of banks as well as an economy of Kazakhstan.

Scientific and practical importance of the research is defined by the fact that formulated conclusions, suggestions can be applied in the banking system.

While working on diploma work the following research methods are used such as: logical, settlement and constructive methods of analysis and synthesis. The logic of the study and its content determined the structure of the final work, consisting of: introduction, three chapters, conclusion, list of used literature and appendixes. Diploma work consists of 90 pages which include 22 tables, 21 figures.

In the first chapter theoretical issues of assignment, the structure and the formation of resource base of banks are considered. In this chapter the following questions are considered:

-The concept, structure and management of the bank’s own capital;

-Essence, classification and role of deposits;

-Bonds and syndicated loans as the main sources of non-deposit funds;

-Assets Liability Management;

This chapter is devoted to the analysis of the current practice of formation and management of resources of and asset liability management of Kazkommertsbank.

It includes:

-Analysis of the formation, management and evaluation of the capital adequacy of JSC Kazkommertsbank;

-Analysis of activity of Kazkommertsbank in formation of deposit market and implementation of deposit policy;

-Analysis of non-deposits sources of funding in Kazkommertsbank RK;

-Analysis of assets and liabilities of JSC Kazkommertsbank.

The third chapter contains description of existing problems in banks and ways of improvement. In this chapter Basel III and certificate of deposit are considered as ways of improvement in funding of banking operations.

 

Bank’s own funds.

(A) Banks Own Funds. Bank’s own paid up capital. The amount with which a banking company is registered is called nominal or authorized capital.

2. Reserve fund. Reserve is another source of fund which is maintained by all commercial banks.

3. Profit. Profit is another source to a bank for the purpose of business. Profits signify the credit balance of the profit and loss account which has not been distributed.

(B) Borrowed Funds. The borrowed capital is a major and an important source of fund for any banking business. It mainly comes from deposits which are accepted on varying terms in different accounts.

1. Borrowing from central bank. The commercial banks in times of emergency borrow loans from the central bank of the country. The central bank extends help as and when financial help is required by the commercial banks.

2. Other sources. Bank also raise funds by issuing bonds, debentures, cash certificates etc. etc. Though it is not common but is a dependable source of borrowing.

3. Deposits. Public deposits are a powerful source of funds to a bank. There are’ three types of bank deposits (i) current deposits (ii) saving deposits and (iii) time deposits. Due to the spread of literacy, banking habits and growth in the volume of business operations, there is a marked increase in deposit money with banks. /1, p.154/

Borrowed funds

The borrowed capital is a major and an important source of fund for any banking business. It mainly comes from deposits which are accepted on varying terms in different accounts.

Federal funds

In the United States, federal funds are overnight borrowings by banks to maintain their bank reserves at the Federal Reserve. Banks keep reserves at Federal Reserve Banks to meet their reserve requirements and to clear financial transactions.

Federal Reserve borrowing

When countries issue currency, especially fiat currency that is not specifically backed by any commodity, it is necessary to have a central bank whose job it is to monitor and regulate the supply, distribution, and transacting of currency.

Repos

A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate. The party that originally buys the securities effectively acts as a lender. The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest. A repo is equivalent to a spot sale combined with a forward contract. The spot sale results in transfer of money to the borrower in exchange for legal transfer of the security to the lender, while the forward contract ensures repayment of the loan to the lender and return of the collateral of the borrower. The difference between the forward price and the spot price is effectively the interest on the loan, while the settlement date of the forward contract is the maturity date of the loan.

There are three types of repo maturities: overnight, term, and open repo. Overnight refers to a one-day maturity transaction. Term refers to a repo with a specified end date. Open simply has no end date. Although repos are typically short-term, it is not unusual to see repos with a maturity as long as two years. [App.3]

Eurodollar borrowing

Many foreign banks as well as foreign branches of U.S. banks accept deposits of U.S. dollars and grant the depositor an account denominated in dollars. Those dollars are called Eurodollars. As we will see, they exist under quite different constraints from domestic dollars. While Eurodollar banking got its start in Europe, such banking is now active in major financial centers around the world. /2, p.144/

Bonds and syndicated loans as the main sources of non-deposit funds

Bond - a debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.

The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date). Interest on bonds is usually paid every six months (semi-annually). The main categories of bonds are corporate bonds, municipal bonds, and U.S. Treasury bonds, notes and bills, which are collectively referred to as simply "Treasuries." Two features of a bond - credit quality and duration are the principal determinants of a bond's interest rate. Bond maturities range from a 90-day Treasury bill to a 30-year government bond. Corporate and municipals are typically in the three to 10-year range.

Issuance

Bonds are issued by public authorities, credit institutions, companies and supranational institutions in the primary markets. The most common process for issuing bonds is through underwriting. When a bond issue is underwritten, one or more securities firms or banks, forming a syndicate, buy the entire issue of bonds from the issuer and re-sell them to investors. The security firm takes the risk of being unable to sell on the issue to end investors. Primary issuance is arranged by book runners who arrange the bond issue, have direct contact with investors and act as advisers to the bond issuer in terms of timing and price of the bond issue. The book runners' willingness to underwrite must be discussed prior to any decision on the terms of the bond issue as there may be limited demand for the bonds.

In contrast, government bonds are usually issued in an auction. In some cases both members of the public and banks may bid for bonds. In other cases only market makers may bid for bonds. The overall rate of return on the bond depends on both the terms of the bond and the price paid. The terms of the bond, such as the coupon, are fixed in advance and the price is determined by the market.

Nominal, principal, par or face amount the amount on which the issuer pays interest, and which, most commonly, has to be repaid at the end of the term. Some structured bonds can have a redemption amount which is different from the face amount and can be linked to performance of particular assets such as a stock or commodity index, foreign exchange rate or a fund. This can result in an investor receiving less or more than his original investment at maturity. The issuer has to repay the nominal amount on the maturity date. Most bonds have a term of up to 30 years. Some bonds have been issued with terms of 50 years or more, and historically there have been some issues with no maturity date (irredeemable). In the market for United States Treasury securities, there are three categories of bond maturities:

- short term (bills): maturities between one to five year; (instruments with maturities less than one year are called Money Market Instruments)

- medium term (notes): maturities between six to twelve years;

- long term (bonds): maturities greater than twelve years.

The coupon is the interest rate that the issuer pays to the bond holders. Usually this rate is fixed throughout the life of the bond. It can also vary with a money market index, such as LIBOR, or it can be even more exotic. The name "coupon" arose because in the past, paper bond certificates were issued which coupons had attached to them, one for each interest payment. On the due dates the bondholder would hand in the coupon to a bank in exchange for the interest payment. Interest can be paid at different frequencies: generally semi-annual, i.e. every 6 months, or annual. The yield is the rate of return received from investing in the bond. It usually refers either to:

- the current yield, or running yield, which is simply the annual interest payment divided by the current market price of the bond (often the clean price), or to

- the yield to maturity or redemption yield, which is a more useful measure of the return of the bond, taking into account the current market price, and the amount and timing of all remaining coupon payments and of the repayment due on maturity. It is equivalent to the internal rate of return of a bond.

Optionality: Occasionally a bond may contain an embedded option; that is, it grants option-like features to the holder or the issuer:

Call ability some bonds give the issuer the right to repay the bond before the maturity date on the call dates; see call option. These bonds are referred to as callable bonds. Most callable bonds allow the issuer to repay the bond at par. With some bonds, the issuer has to pay a premium, the so-called call premium. This is mainly the case for high-yield bonds. These have very strict covenants, restricting the issuer in its operations. To be free from these covenants, the issuer can repay the bonds early, but only at a high cost.

Put ability - some bonds give the holder the right to force the issuer to repay the bond before the maturity date on the put dates; see put option. These are referred to as retractable or put able bonds.

Bond indices

A number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks. The most common American benchmarks are the Barclays Capital Aggregate, Citigroup BIG and Merrill Lynch Domestic Master. Most indices are parts of families of broader indices that can be used to measure global bond portfolios, or may be further subdivided by maturity or sector for managing specialized portfolios.

Syndicated loans

A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers.

At the most basic level, arrangers serve the investment-banking role of raising investor funding for an issuer in need of capital. The issuer pays the arranger a fee for this service, and this fee increases with the complexity and risk factors of the loan. As a result, the most profitable loans are those to leveraged borrowers—issuers whose credit ratings are speculative grade and who are paying spreads (premiums or margins above the relevant LIBOR in the U.S. and UK, Euribor in Europe or another base rate) sufficient to attract the interest of non-bank term loan investors. Though, this threshold moves up and down depending on market conditions.

Types of syndications.

Globally, there are three types of underwriting for syndications: an underwritten deal, best-efforts syndication, and a club deal. The European leveraged syndicated loan market almost exclusively consists of underwritten deals, whereas the U.S. market contains mostly best-efforts.

Underwritten deal.

An underwritten deal is one for which the arrangers guarantee the entire commitment, and then syndicate the loan. If the arrangers cannot fully subscribe the loan, they are forced to absorb the difference, which they may later try to sell to investors. This is easy, of course, if market conditions, or the credit’s fundamentals, improve. If not, the arranger may be forced to sell at a discount and, potentially, even take a loss on the paper. Or the arranger may just be left above its desired hold level of the credit. Arrangers underwrite loans for several reasons. First, offering an underwritten loan can be a competitive tool to win mandates. Second, underwritten loans usually require more lucrative fees because the agent is on the hook if potential lenders balk. Of course, with flex-language now common, underwriting a deal does not carry the same risk it once did when the pricing was set in stone prior to syndication.

Best-efforts syndication.

A best-efforts syndication is one for which the arranger group commits to underwrite less than or equal to the entire amount of the loan, leaving the credit to the vicissitudes of the market. If the loan is undersubscribed, the credit may not close or may need major surgery to clear the market. Traditionally, best-efforts syndications were used for risky borrowers or for complex transactions. Since the late 1990s, however, the rapid acceptance of market-flex language has made best-efforts loans the rule even for investment-grade transactions.

Club deal.

A club deal is a smaller loan usually $25-100 million, but as high as $150 million that is premarket to a group of relationship lenders. The arranger is generally a first among equals, and each lender gets a full cut, or nearly a full cut, of the fees.

The Syndications Process.

Leveraged transactions fund a number of purposes. They provide support for general corporate purposes, including capital expenditures, working capital, and expansion. They refinance the existing capital structure or support a full recapitalization including, not infrequently, the payment of a dividend to the equity holders. They provide funding to corporations undergoing restructurings, including bankruptcy, in the form of super senior loans also known as debtor in possession (DIP) loans. Their primary purpose, however, is to fund M&A activity, specifically leveraged buyouts, where the buyer uses the debt markets to acquire the acquisition target’s equity.

Loan Market Participant

There are three primary-investor constituencies: banks, finance companies, and institutional investors; in Europe, only the banks and institutional investors are active.

Credit Facilities

Syndicated loans facilities (Credit Facilities) are basically financial assistance programs that are designed to help financial institutions and other institutional investors to draw notional amount as per the requirement.

There are four main types of syndicated loan facilities: a revolving credit; a term loan; an L/C; and an acquisition or equipment line (a delayed-draw term loan).

A term loan is simply an installment loan, such as a loan one would use to buy a car. The borrower may draw on the loan during a short commitment period and repay it based on either a scheduled series of repayments or a one-time lump-sum payment at maturity (bullet payment). There are two principal types of term loans: an amortizing term loan and an institutional term loan.

An amortizing term loan (A-term loan or TLA) is a term loan with a progressive repayment schedule that typically runs six years or less. These loans are normally syndicated to banks along with revolving credits as part of a larger syndication. In the U.S., A-term loans have become increasingly rare over the years as issuers bypassed the bank market and tapped institutional investors for all or most of their funded loans.

An institutional term loan (B-term, C-term or D-term loan) is a term-loan facility with a portion carved out for nonbank, institutional investors. These loans became more common as the institutional loan investor base grew in the U.S. and Europe. These loans are priced higher than amortizing term loans because they have longer maturities and bullet repayment schedules. This institutional category also includes second-lien loans and covenant-lite loans.

Syndicated loans are credits granted by a group of banks to a borrower. They are hybrid instruments combining features of relationship lending and publicly traded debt. They allow the sharing of credit risk between various financial institutions without the disclosure and marketing burden that bond issuers face. Syndicated credits are a very significant source of international financing, with signings of international syndicated loan facilities accounting for no less than a

third of all international financing, including bond, commercial paper and equity issues.

This special feature presents a historical review of the development of this increasingly global market and describes its functioning, focusing on participants, pricing mechanisms, primary origination and secondary trading. It also gauges its degree of geographical integration. We find that large US and European banks tend to originate loans for emerging market borrowers and allocate them to local banks. Euro area banks seem to have expanded pan European lending and have found funding outside the euro area.

The syndicated loan market has advantages for junior and senior lenders. It provides an opportunity to senior banks to earn fees from their expertise in risk origination and manage their balance sheet exposures. It allows junior lenders to acquire new exposures without incurring screening costs in countries or sectors where they may not have the required expertise or established presence. Primary loan syndications and the associated secondary market therefore allow a more efficient geographical and institutional sharing of risk origination and risk-taking. For instance, loan syndications for emerging market borrowers tend to be originated by large US and European banks, which subsequently allocate the risk to local banks. Euro area banks have strengthened their pan-European loan origination activities since the advent of the single currency and have found funding for the resulting risk outside the euro area./4, p.125/

 

 

Assets Liability Management

In the system of financial management an important area is the effective management of assets and liabilities of the bank. Asset and liability management as a concept used in the banking industry began in the U.S. in the 60's of the last century, and refers to the regulation of the level of risk when interest rates rise and fall. Up to this time money managers have used some methods of management of assets, liabilities and spread (spread - the difference between the rates, prices. Difference between the weighted average deposit rate and the weighted average rate of their placement), as in the 1940s and 1950s, the banks were in abundance cheaper sources of funding in the form of demand deposits and savings deposits. The main management problem was this distribution of assets, which would ensure the liquidity of the commercial bank and the maximum income, therefore, based on the asset management. In this case, asset management has two main areas: the distribution of assets (pool of funds approach.) and the conversion of assets (assets allocation or conversion funds approach.).

Under the asset management understand the ways and procedures in own funds and borrowings. In relation to commercial banks - the distribution for cash, investments, loans and other assets. Particular attention is given to the allocation of resources in investments in securities and loan operations, including the composition of the securities portfolio and outstanding loans.

Fund management in commercial banks is complicated by several factors:

- Banks are the most regulated industry and business has been placing funds in strict accordance with the laws and regulations of control;

- The relationship between the bank and its customers on loans and deposits are based on trust and support;

- The holders of shares of a commercial bank, like all other investors expect the rate of return, the appropriate investment risk and comparable in magnitude to profit from those investments.

Most of the attracted funds are payable on customer's demand or with very short term of notice. Therefore, the first condition of good governance is to enable the bank to meet the demands of depositors. The second condition - it is the availability of funds, sufficient to meet the reasonable needs of a loan.

Commercial banks are private business entities, whose activities should be quite profitable with help of certain liquidity maintenance. Customers should not have a reason to doubt the solvency, liquidity and stability of the banking system, investors must have full confidence in any bank. In some way goals of depositors and holders of its shares are not compatible. This inconsistency is reflected in the inevitable conflict between the requirements of liquidity and desired profitability, which is exhibited in every financial transaction. The conflict between liquidity and profitability is a main problem to be solved by placing the pot of funds.

The main objectives of asset and liability management are: management of short-and long-term bank liquidity, maintaining and developing the profitability of the bank, management and adequacy of the capital structure of the bank, the bank's cost management, especially related to the payment of interest, management of asset quality, optimizing and reducing the tax burden, stabilization and an increase in the market value of the bank.

The purpose of asset and liability management - is preventing or correcting imbalances and avoiding of banking risks by analyzing the general strategy of the bank on the balance sheet structure and profitability.

Asset and liability management requires accurate and sufficient information from both internal and external sources. The external information is needed to predict the economic development and the formulation of the strategy, and internal - to monitor the implementation of policies to manage assets and liabilities, assessing the need for change in the policy and making new deals. All of the information used by the banks could be relevant, reliable and timely.

This information is necessary to ensure that the appropriate unit of the bank that manages assets and liabilities could:

- Set the current and future risks;

- Identify the quantity of the risk with help of sensitivity analysis of assets and liabilities to changes in interest rates, exchange rates, and inflation and growth rates;

- Analyze the results and determine the actions necessary to maintain the desired position on the balance sheet (positive, negative, neutral to the movement of interest rates);

- Develop further scenario to determine the value of the measure needed to maintain the desired position, i.e. assess the potential costs or losses and to take appropriate action, including changes in the strategies developed.

Thus, management of assets and liabilities is provided by all the financial policy and strategy of the bank, and the complexity of its activities, the rapid rise in interest rates and exchange rate changes have intensified the impact of market risk on the final results, which led to a special function of asset and liability management.

With the right choice of strategy asset and liability management is an integral part of the financial and banking management used to minimize the financial risk of credit institutions, optimizing the structure of balance in order to ensure a high level of efficiency of banking operations and reducing costs./18, p.199/

Historically there are following strategies in the management of assets and liabilities:

a) Asset management strategy (60's.) - This strategy has prevailed in international banking practice in the 60s of this century. In this approach, the bankers perceived sources of resources - equity and liabilities which are not dependent on banking, but determined mainly by opportunities and needs of customers and shareholders. It was assumed that the size, type and structure of liabilities, that the bank might attract, were attributed to the population. If the latter is itself determined the quantitative relationship between deposits and checking account. The advantages of asset management strategy is relatively easy to use, because decisions are made only on one aspect of the banking business - asset allocation, and for the management of liquidity it apply simple techniques that do not require significant resource costs. The bank does not make sense to attract highly qualified staff, which helps reduce the cost of training and labor experts. This approach does not maximize profit. Indeed, on the one hand, the bank refuses liability management, and consequently, on the impact on their value. On the other hand, a significant part of bank assets must be in the form of highly liquid to maintain a sufficient level of liquidity, which leads to a decrease in revenue.

b) Liability management strategy (in the 60's and 70's.) - liability management strategy was developed in the international banking business in the 60 - 70 years of this century. During this period, banks are faced with the rapid growth of interest rates and intense competition in the field of fundraising. Bankers began to focus the search for new sources of funding, as well as control over the structure and the cost of deposits and deposit liabilities, which gave impetus to the formation of the strategy through the management of the bank liability management. Bank liability management strategy does not preclude parallel asset management, but the problem is the delimitation and autonomy of each of these approaches. In this case, the structural units of the bank which are responsible for raising funds are separated from lending and investment divisions and have no information on possible areas of resources. The main drawback of liability management strategy is that it is usually applied on the principle of "more is better", the funds are raised without effective lines of their placement. During the recovery period, when the demand for credit increases, this approach may be appropriate and useful. But during a recession, when demand for loans is limited, unbalanced approach to the management of the bank's assets and liabilities may lead to a significant reduction in profits and even cause damage. The advantage of this approach to the management of the bank is the ability to increase revenues, controlling operating costs and accurately predicting the bank needs for liquidity.

c) Asset and liability management strategy (modern approach) - The main feature of the international financial markets in the 80's was the volatility of interest rates and, consequently, an increase in the interest rate risk of banks. Before this time the main risk banks was a credit risk, starting with the 80's the number one risk in the banking sector was interest rate risk. This led to the development of a balanced approach to the simultaneous management of assets and liabilities, which is prevalent now in the global banking practice. The essence of a balanced management strategy is that banks consider their portfolios of assets and liabilities integrally, defining the role of the aggregate portfolio of high returns for an acceptable level of risk. Joint management of assets and liabilities gives the bank the tools to create the optimal balance sheet structure and a protection against the risks caused by extreme changes the parameters of the financial markets. The main idea of a balanced strategy is to understand that both revenues and expenses relate to both sides of the bank balance. The price of each transaction or service should cover the costs of the bank for its provision.

Commercial banks have to allocate funds raised to various types of active operations. The banks may be guided by the two following methods of placement:

1) Pool of funds approach. The basis of the method is the idea of combining all of the resources. Then the total funds are allocated among the types of assets (loans, government securities, cash balances, etc.) that are considered appropriate. In the pool of funds approach it does not matter from what source funds are received for a particular active operation, as long as their placement help achieve the objectives of the bank.

This method requires management to the principles of equal liquidity and profitability. Therefore, funds are placed in these types of active operations, which fully comply with these principles. At the same time, this method does not contain clear criteria for the allocation of funds by category of assets, does not solve the dilemma of "liquidity-profitability" and depends on the experience and intuition of bank management.

2) Assets allocation or conversion funds approach. In managing the assets by the pool of funds approach too much attention is given to liquidity and are not considered different liquidity requirements with respect to demand deposits, savings deposits, time deposits and fixed assets. According to many bankers this deficiency is the cause of the increasing reduction in the rate of profit. Over time, time and savings deposits require less liquidity than demand deposits, and are growing more rapidly. The approach of assets allocation, known as well as the approach of conversion funds can overcome the limitations of the pool of funds approach./17, p.201/

The main advantage of this method is to reduce the share of liquid assets and investing additional funds into loans and investments, thus increasing profit margins. This model involves the creation of several "profit centers" (or "liquidity facilities") within the bank because placement of each of these centers is realized independently of the location of other centers.

However, this method has drawbacks reducing its effectiveness. The basis of allocation of the various "profit centers" put the velocity of the different types of deposits, but it may not be a close link between the rate of treatment of contributions of a group and fluctuations in the total deposits of the group.

Other deficiencies relate to the both methods: the pool of funds approach and the method of assets allocation. Both methods have focused on the liquidity reserve requirements and the possible seizure of deposits, paying less attention to the need to meet the demands of customers for credit. But it is well known that as both deposits and loans grow.

From the position of interest rate risk management method of assets allocation is cautious. In this case, the passive side is still considered to be constant and to avoid interest rate risk is provided by linking more closely the terms of asset allocation with their funding on terms, i.e. liabilities. With fast variability of interest rates using the method of assets allocation does not help optimize profits.

Since banks are considered as subjects who buy funds and lend them on the basis of percentage difference between the interest rates of purchase and sale, the term "management spread" is becoming more popular in banking practice.

In order to manage interest rate risk asset allocation method is most useful in a stable environment, as its successful use depends on three things:

- A relatively small variation in interest rates;

- The composition of liabilities is quite stable and easy to predict;

- Most of the raised funds consist of interest bearing demand deposits, i.e. balances on the settlement and current accounts of enterprises, organizations and individuals.

With realizing of both of these conditions the bank's managers could consider the passive side of the balance as a stable specified value and give more value to assets. In the method of asset allocation increase in liquidity is ensured by adjusting the structure of assets and the level of profitability of the bank is maintained at a given level of control over the spread.

Disadvantages of the method of asset allocation revealed a more frequent fluctuation in interest rates, so that the value of assets is potential subject to change. This situation led to the loss of revenues from lower asset prices and the emergence of liquidity risk.

Theory of liability management, developing and complementing the policy of liquidity management of commercial banks, based on the following two statements: The first - a commercial bank can solve the problem of liquidity by attracting new money by buying them in the capital market. The second - a commercial bank can provide its liquidity by resorting to extensive borrowing of funds from the Central Bank or a correspondent bank, as well as to loans obtained on the Eurocurrency market.

In the 60 years of the last century, funding sources have become less stable, the amount of free cash flow decreased with an increase in the demand for loans. In these circumstances, bank managers have to save on cash balances, i.e. maximize their cut, and in order to meet the growing demand for credit banks appealed to the management of its obligations, i.e. liabilities.

However, in the 1970s, due to rising inflation and the decline in production banks have started to pay more attention to the management of both sides of the balance sheet.

Technology co-regulatory assets and liabilities is called asset and liability management (ALM). The meaning of ALM is that it combines used for decades certain management practices (assets, liabilities and spread) in a single coordinated process. Thus, the main task of ALM - is coordinated management of all bank statements, and not its individual parts./14/

Also the following two methods should be noted:

1) A balanced approach of the asset-liability management. In recent years, many banks have moved to an integrated strategy that includes methods of separating and combining sources of funds to provide more flexibility. This approach combines the advantages of the previously mentioned methods, while smoothing out a number of shortcomings.

The methods considered are the verbal model. They provide an understanding of the problems of planning, relationship factors, portfolios and their parameters (indicators), but do not provide the computational procedure that allows the planner to calculate indicators of the plan portfolios: The total of investments, risk, liquidity, income, expenses, etc. But these models are useful in one way, it provides material and contains a statement of the problem for the development of constructive econometric models and computer programs as tools for managers.

3) Management with scientific methods and operations research. This method involves a scientific approach to solving management problems using advanced mathematical methods and computers to study the interaction of elements in complex models. This approach requires setting goals, establishing links between different elements of the problem, identify the variables under and beyond the control of management, evaluation of possible behavior of uncontrollable variables and identifying the internal and external constraints that govern the actions of management. The method of scientific management attempts to answer three questions: "what is the problem?", "What are the options to solve it?", "What is the best option?".

Bank management should consider this method as a way of improving decision-making, which brings the management of assets and liabilities to a new, more efficient level.

We should note that the high efficiency of the chosen strategy is only achieved in the way of proper selection of method of the asset and liability management.

 

Table 1

Table 2

CONCLUSION

 

Carried out research of the study of the formation and strengthening the resource base of banks in a market economy has shown that the formation of the resource base, which includes not only the attraction of new customers, but also the constant change in the structure of sources of resource mobilization, is an integral part of flexible management of assets and liabilities of commercial bank. Effective liability management suggests the implementation of a competent deposit policy, which is based on maintaining the required level of diversification, providing opportunities to attract financial resources from various sources and maintenance of balance with the assets on timing, amount and interest rate.

In addition, the scope of activities of banks, defined by the object of its active operations, depends on the total amount of resources available to them, and especially the amount of borrowed funds.

Management of bank resources is a complex process of their formation and placement, which faces certain restrictions in the form of prudential standards developed by international and national supervisory authorities.

Equity capital for a commercial bank, as for any other commercial structure is the core activities that define its scope and volume of resource mobilization. In other words, the activity of commercial banks is largely determined by the size and structure of the equity.

The analysis allowed us to draw the following conclusions:

The share of capital in total equity of the bank shows the extent of forming its own capital through equity. The share capital as compared to 2010 decreased, but not by much: in the period 2010-2012, its share has decreased by 0,25%.

Analyzing the dynamics of the bank's own funds it can be concluded that the observed downward trend of total equity by reducing the share premium 0,16 % and retained earnings 55,49 %.

Other provisions in 2012 compared with 2010 have a positive trend and increased by 52,18%. However, the increase of this indicator is negative and may be associated with increased risks of banking (credit risk, interest rate risk).

LIST OF USED LITERATURE

[1] Лаврушин О.И. Банк и банковское дело. - М., 2012 г;

[2] Полушкин В.Ю. Анализ достаточности капитала коммерческого банка, 2009 г;

[3] Закон Республики Казахстан от 31 августа 1995 г. " О банках и банковской деятельности в Республике Казахстан";

[4] Батракова Л.Г. Экономический анализ деятельности коммерческого банка: Учебник для вузов. М.: Издательство Корпорация Логос, 2002 год. - 344с;

[5] Смирнов А.В. Управление ресурсами и финансово-аналитическая работа в коммерческом банке. М. 2008 год. - 362с;

[6] Сейткасимов Г.С. Деньги, кредит, банки: Учебник. - Алматы: экономика, 2006 год.-187с;

[7] Сейткасимов Г.С. Деньги, кредит, банки: Учебник. - Алматы: экономика, 2006 год.-209с;

[8] Regulation of the Republic of Kazakhstan on Regulation and Supervision of Financial Market and Financial Organizations on December 24, 2012 № 383

[ 9] ^”Isvestiya”, 08.12.95, “Diengy”, “Commersant-Daily”

[10] Stephen G. C. Money, Banking and Financial Markets, 2007 y;

[11] Bertaeva K. Zh. Foreign exchange market and foreign exchange transactions. Almaty, Economics, 2000, 18 p.

[12] Maidyrova D.N. Foreign exchange operations of bank..Almaty: ASU them. Abay, 2002, page 51.

[13] Rules of conducting exchange operations in the Republic ofKazakhstan

[14] BertayevK.Zh. Foreign exchange market and foreign exchange operations: the manual. - Almaty: Economics, 2011, page 62.

[15] Organizations. Financial Structure: An Investigation of Sectoral Balance Sheets in the G-7(Social Studies) By: E. Philip Davis, Joseph P. Byrne, Joseph P., PH.D. Byrne

[16] The consolidated financial statements of JSC "Kazkommertsbank" for the years2011, 2012 and 2013.

[17] Mishkin F. S. The economics of money, banking and financial markets, 2012, (p.201-213)

[18] Ларионова "Управление активами и пассивами в коммерческом банке" (p.39-58, p199-214.)

[19] Lectures from the site http://gendocs.ru

[20] Белоглазова, Г. Н. Банковское дело: организация деятельности коммерческого банка, 2010. - (p. 116)

[21] www.kase.kz

[22] www.afn.kz

[23] www.kapital.kz;

[24] www.nationalbank.kz

[25] www.kazpravda.kz archive - 29.01.2012

[26] www.cesec.kz

[27] www.fingazeta.ru

[28] www.kkb.kz

[29] Статистический бюллетень – ежемесячное издание на русском и английском языках, содержащее статистическую информацию о денежно-кредитных отношениях и деятельности банков РК.

 

 

Appendix 1

	(mln. tenge)	(mln. tenge)	(mln. tenge)	(mln. tenge)
Assets
Money and accounts in national (central) banks	106,497	105,067	61.216	90,533
Precious metals	3,823	3,280	1,345	1,209
The financial assets estimated at fair value through profit or a loss	118,822	188,313	223,231	114,203
Loans and the means provided to banks and other financial institutions	146,703	53,968	146,331	148,375
The loans provided to clients	1,917,692	2,079,661	2,174,760	2,160,767
Investments available for sale	15,682	15,419	16,822	16,696
The investments withheld before repayment	6,937	4,026	1,996
Business reputation	2,405	2,405	2,405	2,405
Fixed assets and intangible assets	32,520	33,028	31,857	33,971
Other assets	89,511	80,522	28,145	18,771
Total assets	2,444,812	2,565,689	2,688,108	2,587,873
Liabilities
Loans and means to banks and other financial institutions	110,477	92,215	147,139	209,122
Means of clients	1,553,576	1,463,077	1,506,800	1,276,464
The financial liabilities estimated at fair value through profit or a loss	8,877	37,771	36,047	35,991
The issued debt securities	297,247	324,087	375,199	463,656
The other raised funds	18,631	26,359	23,943	31,172
Reserves	15,549	10,724	10,190	11,945
Liabilities for a deferred income tax	-	29,131	30,035	24,519
Dividends to payment
Other liabilities	10,296	7,647	7,868	8,990
The subordinated loan	122,150	138,040	137,137	136,411
Total liabilities	2,136,843	2,129,057	2,274,362	2,198,285
Capital
Equity attributable to equity holders of the parent:
authorized capital	9,008	9,023	9,031	9,031
share premium	194,721	194,924	195,024	195,006
Revaluation reserve	5,808	5,488	5,508	4,935
other provisions	97,117	226,085	203,109	180,839
Total equity attributable to shareholders of the Parent Bank	306,654	435,520	412,672	389,811
Non-controlling interests	1,315	1,112	1,074	-223
Total equity	307,969	436,632	413,746	389,588
Total liabilities and equity	2,444,812	2,565,689	2,688,108	2,587,873

Consolidated statements of financial position as of December 31, 2012, 2011, 2010

 

Appendix 2

Interest rates of banks on attracted deposits (by maturity and types of currency) % for the month

 

	12.11	12.12	01.13	02.13
	KZT	СКВ	KZT	СКВ	KZT	СКВ	KZT	СКВ
Deposits of non-banking legal entities	2,6	1,4	3,5	1,9	3,0	2,4	2,4	1,9
including:
Demand deposits	1,3	1,5	2,0	0,1	3,2	0,0	1,5	0,2
conditional	4,8	1,6	4,0	2,0	1,0	0,7	2,6	1,5
Time deposits, total	2,7	1,4	3,6	1,9	3,0	2,4	2,5	1,9
ofwhichwithmaturity:
upto 1 month	1,7	0,3	2,6	0,6	1,5	2,1	1,1	3,5
from 1 to 3 month	1,7	0,9	3,1	2,0	2,4	3,5	2,3	0,9
from 3 monthto 1 year	2,5	2,6	3,9	2,7	3,8	1,6	3,8	0,6
from 1 to 3 years	-	-	-	-	-	-	-	-
from 1 to 5 years	5,3	3,3	6,1	1,4	5,6	3,6	5,6	4,3
over 3 years	-	-	-	-	-	-	-	-
over 5 years	10,0	5,7	7,0	2,9	10,3	2,8	6,4	1,0
Deposits of individuals	6,4	6,1	6,7	4,7	6,7	5,1	6,4	5,2
including:
Demand deposits	0,0	0,1	0,0	0,0	0,0	0,0	0,1	0,0
conditional	7,4	4,0	4,4	5,9	4,9	0,1	1,2	5,8
Time deposits, total	8,4	6,4	8,3	5,1	7,9	5,5	7,9	5,4
Of which with maturity:
Up to 1 month	1,0	0,5	5,7	1,3	0,2	1,1	1,2	1,6
from 1 to 3 month	6,5	1,7	6,5	3,0	4,3	2,6	4,4	2,5
from 3 month to 1 year	8,4	4,9	8,0	4,5	8,0	5,3	8,1	4,3
from 1 to 3 years	-	-	-	-	-	-	-	-
from 1 to 5 years	9,3	7,3	8,8	6,1	8,8	6,0	8,7	6,8
over 3 years	-	-	-	-	-	-	-	-
over 5 years	3,5	7,8	5,4	6,4	3,4	4,6	3,7	5,8

Source www.nationalbank.kz

 

Appendix 3

Loans and advances from banks and other financial institutions

 

Recorded at amortized cost:	December 31, 2012 (mln. tenge)	December 31, 2011 (mln. tenge)	December 31, 2010 (mln. tenge)
Correspondent accounts of other banks	2,348	3,322	1,940
Correspondent accounts of organizations that serve certain types of banking operations
Loans from banks and other financial institutions, including:
Loan with maturity of June 2014	8,378	14,960	23,037
Loan with maturity of December 2013	3,302	-	-
Loan with maturity of December 2012	-	1,045	-
Loan with maturity of August 2011	-	-
Loans from other banks and financial institutions	24,289	44,433	121,760
Loans under repurchase agreements	71,486	27,937
In total	109,974	91,877	147,138
Note – source website www.kkb.kz

 

 

CONTENT

 

Introduction................................................................................................................... 3

1 Theoretical basis of formation and management of second tier banks’ resources………………………………………………………………………….…... 6

1.1The concept, structure and management of the bank’s own capital…...……....….. 6

1.2Essence, classification and role of deposits……………………………….....….. 15

1.3Bonds and syndicated loans as the main sources of non-deposit funds….......….. 19

1.4Assets Liability Management………………………………………………....…. 24

2. Analysis of the current practice of formation and management of resources of JSC Kazkommertsbank……………………………………………………….…..……… 31