Financial Institutions: Commercial Banks Assoc. Prof. Hülya Hazar

1.

BUS 362 Financial Institutions and
Markets
Week 12: Financial Institutions: Commercial Banks
Assoc. Prof. Hülya Hazar
Faculty of Economics and Administrative Sciences, Department of
Business Administration
[email protected]
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Financial Institutions and Markets
1. General Information on Commercial Banks
2. Loans
3. Letters of Guarantee
4. Regulations
5. International Commercial Banks
6. Loan Guarantees
7. Libor and Spread
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Financial Institutions and Markets
Commercial Banks
• Loans – variety of funds
• Loans easier and much quicker to receive
• The paperwork is minimal.
• Interest rates are higher
• Act as an intermediary for Eximbank and some international
funds
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Financial Institutions and Markets
Loans
• Term: short term and long term
• Type of loans: Turkish Lira, all convertible currencies (e.g.
US Dollar, Euro) and precious metals (e.g. gold)
• Needs: investments and working capital
• Type of interest: floating interest rates and fixed interest
rates .
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Financial Institutions and Markets
Letters of guarantee
• a type of loan
• included to the company’s risk limit
• no interest rates, only charges and some taxes
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Financial Institutions and Markets
Regulations
• The financial system is one of the most heavily regulated
industries in our economy.
• In Turkey, BDDK (Bankacılık Düzenleme ve Denetleme
Kurumu) is responsible for regulating the financial sector.
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Financial Institutions and Markets
International Commercial Banks
• provide medium and long term financing opportunities
• provide working capital or investment loans
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Financial Institutions and Markets
In the last twenty years these markets vastly changed mainly
in two ways:
1.
Sources increased:
There are considerable amounts of floating funds in the international financing system due to
the following reasons:
• Income in the Western countries and Japan increased, in return, increasing the savings.
The surpluses of these funds, i.e. the portion that cannot be used in the national markets,
are offered in the international markets. Since there is a surplus of funds in the international
markets, the interest rates are relatively low.
• In most Western countries, taxes on income are high. Therefore, investors prefer to invest
their savings in countries where there is relatively low or no tax. Accordingly, off-shore
banking becomes prominent.
• Off-shore banking has the following criteria:
- no tax
- no limitation or legal enforcement on money transfers
- no cash is involved.
• There is vast amount of money from black-market operations throughout the world. Those
individuals or companies, whose gains are due to illegal operations, cannot invest in their
own countries. They make investments in the international markets.
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Financial Institutions and Markets
2.
Modes of financing increased:
With the development of telecommunication and computerization, international transactions
became easier, and thus international funds and financial instruments are more quickly and
easily accessible.
International trade and bilateral agreements between the countries increased.
Financial instruments increased over the years.
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Financial Institutions and Markets
Loan Guarantees
• All of the sources of funding in the international monetary
system require loan guarantees.
• There is no source where one can receive a loan without a
guarantee.
• In certain cases, finding guarantees for the investment may
be more difficult than finding loans, especially if the
investment carries a country risk and/or credibility problem.
• Governments, financial institutions and investors
themselves are the sources of guarantees.
• An acceptable legal environment should exist in countries
where the investment is to be made. For instance, many
international sources require international arbitration to settle
disagreements.
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Financial Institutions and Markets
Who benefits from international sources of money?
1.
2.
3.
Governments and public authorities: funds are used
for infrastructure investments.
Banks and financial institutions
Companies
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Financial Institutions and Markets
Libor and Spread
• Most international sources charge libor + spread,
• Libor: the basic rate of interest used in lending between
banks on the London interbank market and also used as a
reference for setting the interest rate on other loans.
• Spread is the profit of the institution.
• Countries and companies have ratings regarding their
creditability.
• This rating and the risk of the investment determine the
spread.
• For instance, the spread is low if the rating of the country is
high.
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Subjects Covered
1. General Information on Commercial Banks
2. Loans
3. Letters of Guarantee
4. Regulations
5. International Commercial Banks
6. Loan Guarantees
7. Libor and Spread
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References
Readings:
Chapter 19
Reference Book:
Mishkin, Frederic S. Financial Markets and Institutions. Eighth Edition.
UK: Pearson, 2016.
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Financial Institutions and Markets
See you next week…
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