Featured Mind map
Sources of Capital and Characteristics of Commercial Banks (CB)
Commercial banks secure capital primarily through three channels: mobilized deposits (transaction, savings, and time deposits), short-term borrowed funds (interbank loans, central bank borrowing, and repos), and long-term sources like bond issuance and owner's equity. These diverse sources ensure liquidity, fund lending activities, and provide a buffer against losses, defining the bank's operational capacity and stability.
Key Takeaways
Deposits are the primary source, categorized by liquidity and interest rates.
Interbank borrowing manages short-term capital imbalances efficiently.
Time deposits (CDs) require fixed amounts and specific maturity periods.
Bank equity acts as a crucial buffer against unexpected financial losses.
Repos offer secured, short-term funding, typically using government securities.
What are the primary mobilized capital sources for commercial banks?
Commercial banks rely heavily on mobilized capital, primarily through various deposit accounts, to fund their operations and lending activities. These deposits are categorized based on their liquidity, usage, and interest characteristics. Transaction deposits offer high liquidity for payments but typically yield low or no interest. Savings deposits provide moderate returns and flexibility, while time deposits (CDs) require funds to be locked up for fixed periods in exchange for higher, predetermined interest rates. Managing this mix is crucial for maintaining liquidity and profitability.
- Transaction Deposits (Tiền Gửi Giao Dịch): Used for transactions like payments through bank accounts and check issuance.
- Characteristics of Transaction Deposits: Requires a low minimum balance and typically pays low or no interest (non-term).
- Savings Deposits (Tiền Gửi Tiết Kiệm): Often managed via passbook savings accounts.
- Characteristics of Savings Deposits: Pays interest, does not permit check issuance, and usually has no minimum balance requirement.
- Time Deposits (Tiền Gửi Có Kỳ Hạn):
- Retail CDs: Require fixed deposit amounts and time periods; interest rates vary between banks; lack a secondary market; early withdrawal results in interest penalties or is prohibited.
- Negotiable CDs (NCDs): Similar to Retail CDs but require a minimum balance; characterized by short maturities and the existence of a secondary market.
How do commercial banks utilize borrowed capital to manage short-term liquidity?
Commercial banks frequently use borrowed capital to address short-term liquidity needs and manage temporary capital imbalances. These sources include interbank market transactions, borrowing from the Central Bank, and Repurchase Agreements (Repos). Interbank borrowing is typically used for very short periods (1 to 7 days) to adjust capital deficits, while Central Bank borrowing (discount window) serves as a short-term source when other options are limited, requiring Central Bank approval. Repos provide secured funding, often at lower rates than interbank loans, by selling securities with an agreement to repurchase them later.
- Interbank Borrowing (LNH): Used on the Interbank Market (TT LNH).
- Purpose of Interbank Borrowing: To adjust short-term capital imbalances.
- Term of Interbank Borrowing: Typically 1 to 7 days, with the possibility of rollover.
- Nature of Interbank Transactions: Represents a liability for the borrowing bank and an asset for the lending bank.
- Interest Rate: Interbank rate (LNH), which increases if the borrowing bank's risk rises.
- Central Bank Borrowing (NHTW):
- Purpose of Central Bank Borrowing: Provides short-term capital when facing shortages (discount borrowing).
- Term: Short-term, ranging from 1 day to 1 week.
- Requirement: Must receive approval from the Central Bank.
- Note: The Central Bank may not permit continuous borrowing, except for financial advisory cases.
- Repurchase Agreements (Repo):
- Definition: Selling securities with an agreement to repurchase them on a specific date at a specific price.
- Characteristics: Short-term maturity; uses government-issued securities as collateral; interest rate is lower than the LNH rate because the transaction is asset-backed.
What constitutes the long-term capital structure and owner's equity of a commercial bank?
Long-term capital sources provide stability and funding for fixed assets, consisting primarily of bond issuance and owner's equity (bank capital). Issuing bonds allows banks to raise substantial long-term funds, often purchased by households and institutional investors like pension funds or life insurance companies. Owner's equity, though a small proportion of total capital, is vital as it absorbs losses and maintains solvency. Equity originates from issuing stock and retaining profits, forming the bank's regulatory capital base, which includes primary capital (common stock, retained earnings) and secondary capital (reserve funds).
- Issuing Bonds (Phát hành Trái phiếu):
- Purpose: Primarily used to finance fixed assets (TSCĐ).
- Common Buyers: Households and financial institutions (life insurance companies, pension funds).
- Bank Capital (Vốn Chủ Sở Hữu):
- Source: Issuing shares (stock) and retained earnings.
- Role: Constitutes a small proportion of total capital but is essential for compensating for losses and capital impairment.
- Regulatory Capital (VTC): Includes Primary Capital (common stock, preferred stock, retained earnings) and Secondary Capital (reserve funds, other liabilities).
Frequently Asked Questions
What is the difference between Retail CDs and Negotiable CDs?
Retail CDs require fixed deposits and time periods, lack a secondary market, and penalize early withdrawal. Negotiable CDs are similar but have shorter terms, require a minimum balance, and can be traded in a secondary market.
Why is the interest rate on Repurchase Agreements (Repos) lower than the interbank rate?
Repo interest rates are typically lower because the transaction is secured. The bank provides collateral, usually government securities, which reduces the risk for the lender compared to unsecured interbank loans.
What is the primary role of owner's equity in a commercial bank's capital structure?
Although owner's equity is a small percentage of total funds, its primary role is crucial for stability. It serves as the ultimate buffer to absorb unexpected losses and capital impairment, ensuring the bank remains solvent during financial stress.
