Operations of Commercial Banks

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					CHAPTER 2

Depository Institutions

   Financial intermediaries that operate in a
    highly regulated environment.
   They accept deposits (liabilities), make direct
    loans to various entities and invest in

   Depository institutions try to earn positive
    spread (spread income, margin): Btw the
    ave. Yield on the assets in which it invests
    and the ave. Cost of acquiring these funds.
   It must earn enough to meet its operating
    expenses and provide a fair return on its
    invested capital.
   The risks that a depository institution faces
    –   Credit Risk (Default Risk)
    –   Regulatory Risk
    –   Funding Risk
    –   Liquidity Risk
–   Credit Risk (Default risk): The risk that a borrower
    default on a loan obligation, or that the issuer of
    the security will default.
–   Regulatory Risk: The risk of changes in
    regulations that will effect earnings negatively.
–   Funding Risk: It is a result of mismatching of A&L
    with respect to their maturities. The typical
    problem faced is lending for a longer term than
    the maturity of the liabilities. This results in a
    decrease in spread income when interest rates
–   Liquidity Risk: It must be prepared to satisfy
    withdrawals of funds by depositors and it must
    keep on hand sufficient funds to meet lending
   Options available to manage the liquidity involve;
    –   attracting additional deposits,
    –   using securities owned as collateral for borrowing from
        central bank or from other financial institutions,
    –   liquidating securities that it currently holds in its portfolio,
    –   holding secondary reserves: amount of securities held for
        the purpose of satisfying withdrawals and customer loan
    –   raising short-term funds in the money market.

In 1930 the main duties of the Central Bank
  were outlined in the Act (Act No 1715) as
  follows ;
 to determine rediscount rates, and to
  regulate the money markets,
 to carry out Treasury functions,
 to set the stage for protecting the value of
  Turkish Lira in cooperation with the

In 1970, the Act for the Central Bank was
  amended (Act No 1211) whereby the basic
  duties of the CBT were re-defined as;
 to carry out money and credit policies
 to intervene to protect the value of Turkish
 to supply money
 to regulate the credit markets

   In 1986, the Act No 1211 was again
    amended and “open market transactions”
    was given as a priory task to the Central
    Bank of Turkey (Law No 3291).

And finally, the Turkish Parliament amended
  the Central Bank Act No 1211 in the year
  2001 with the Law No 4551;
 defining the basic duty of the Bank as
  achieving monetary stability.
  (If inflation exists, there will be no savings,
  investments. Unemployment will increase,
  national income will decrease.)

The main role of the commercial banks is taking
  deposits and making loans. Others;
 Carrying out currency exchanges
 Providing credits by discounting commercial loans
 Safekeeping of customer valuables such as gold,
  securities etc.
 Supporting government activities with credit
 Purchasing government securities

In today’s world, banks increase their services and activities, such
    as providing;
 financial advising to customers who use credits and have
 equipment leasing services through which the bank buys the
    equipment and rent it to customers,
 selling insurance policies such as life and non-life,
 security brokerage services to their customers through buying
    bonds and other securities
 mutual funds, which usually provide higher returns than that on
    bank deposits.
The Nature of Banking Services

   Broad classification of services:
    –   Individual banking
    –   Institutional banking
    –   Global banking
   Individual Banking Services: Consumer credits,
    credit card services, brokerage services,
    automobile and home financing.
   Institutional Banking Services: Involves loans to
    non-financial corporations, financial corporations
    such as insurance companies, leasing, factoring
    activities and government entities.
   Global Banking Services: Cover a broad range
    of activities such as corporate financing, capital
    markets, foreign exchange products and
Operations of Commercial Banks

   Sources of Funds
    - Depository Funds
    - Non-depository Funds
    - Equity
Operations of Commercial Banks

   Depository Funds: Deposits are the main
    source of funding. They can be categorized
    based on;
    –   Maturity
    –   Depositors
    –   Negotiability
Operations of Commercial Banks

Accoring to maturity, bank deposits are
  categorized as;
 Demand deposits (Checking Account)
 Time deposits
  –   One month
  –   Three-month
  –   Six-month
  –   One year
   Demand Deposit: Customers can write checks
    ordering the bank to pay to others from their demand
    deposit. It is a source until its withdrawal by
    customers. It provides easier, faster and safer fund
   Time deposits: They require funds to be deposited
    for a specific time period. They have a maturity and
    do not permit check writing.
Operations of Commercial Banks

According to depositors (who makes the deposits);
 Saving deposits: made by individuals with no
  commercial links benefit from SDIF (Savings Deposit
  Insurance Fund)
 Commercial deposits
 Interbank deposits
 Official deposits
 Certificate of Deposits (CDs)
   According to the negotiability;
    –   Negotiable deposits (CDs: Certificates of
        deposits): To the bearer.
    –   Non-negotiable deposits (All Others): They are
        evidenced through passbooks. Pass books must
        be to the name.
   CDs emerged in Turkey in the 1980’s. They
    were seen by some people as tax heaven
    instruments because of their bearer nature.
    So that they were banned.
Operations of Commercial Banks

   Non Depository Funds (Borrowed Funds):
    –   Interbank funds borrowed
    –   Borrowing from;
            Central bank (at discount rate)
            Other banks
            Abroad.
Operations of Commercial Banks

   Bank Capital (Shareholders’ Equity)
    - share-in capital,
    - reserves,
    - revaluation funds
    - net current year income.
   Bank capital must be enough to compensate looses.
    High level of capital increase the banks’ safety and
    people’s confidence to the banking system.
   Bank of International Settlements’ (BIS) regulations
    which inspire Turkish capital adequacy ratio of 8%.
    The greater the ratio, the greater the protection to
    depositor and greater confidence of the people.
Operations of Commercial Banks

   Uses of Funds
    –   Liquid Assets
            – Cash
            – Due from Banks
            – Central Bank
            – Securities

    –   Bank Loans (Working Cap. Loan- Term Loan)
            – Commercial Loans
            – Consumer Loans
            – Real Estate Loans etc.

    –   Permanent Assets
   Liquid Assets:
    –   Cash; Banks are required to hold some cash to
        maintain liquidity and realize any withdrawal
        request by depositors.
    –   Due from banks; Any deposits the bank has
        placed with other banks.
    –   Central Bank; The banks reserve account holds
        with the central bank.
    –   Securities; Contains T-bills and Government
   Bank Loans: They are primary activity of the
    commercial banks. Bank loans given to
    business for investment purposes and to
    individuals for purchases of durable goods.
    In both ways business activity increaes.
–   Commercial loans; S-T, M-T financing activities,
    A/R, inventory, W.C., Plant and equipment etc.
–   Consumer Loans: Financing personal
    expenditures; car, durable goods, credit card
–   Real Estate: Temporary construction financing, L-
    T loans to finance residences, office building,
    factories, outlets.
   Loans are also;
    –   W.C Loan: S-T for support activities of
    –   Term Loan: To finance the purchase of fixed
        assets, macninery for a period exceeding one
   Permanent Assets: Fixed assets owned by
    the banks as plant and equipment.
Operations of Commercial Banks

Off- Balance-Sheet Items
 Guarantee Letters
 Endorsements
 Commercial Papers
 Bank Guaranteed Notes
 Real Estate Certificates
 Guaranteed Pre-financing Transactions
 Guaranteed Documentary Credits
 Avalized Bills of Exchange (Drafts)
 Commitments for repurchase agreements
 Commitments on forward and swap deals
Guarantee Letters

   Large scale works such as construction of highways,
    bridges and buildings etc are put to tender by both
    public and prive enterprices.
   The participants of the bidding are required to
    provide “bid bonds” (geçici teminat mektubu) of
    commercial banks.
   If the bidders won the contract, they have to supply
    “performance bonds” (kati teminat mektubu) of
   The enterprices make advance payments to
    the contractors up to the value of 15% of the
    contracts. They purchase equipment,
    contraction materials.
   In exchange for the advance payments, the
    enterprices asked for guarantee letters from
    the banks.

   Promisory notes are the negotiable
    instruments whose title is transfered by
    endorsement and delivery.
   Main debtor signiture is on the face of
    promisory note. Endorser signs on the back
    side of the note and the endorser is
    responsible for the payment on the due date
    as much as the main debtor.
   The holder of the note can recource for
    payment to either debtor or any of the
   The paying endorser has the right to
    recourse for reimbursement to debtor and/or
    the endorsers whose signitures precede his
    on the back side of the promisory note.
Commercial Banks in Turkey

   Commercial Banks                  33
    –   State Owned          3
    –   Privately Owned 11
    –   Foreign Banks 18
    –   Banks under DIF 1
   Non-Depository Banks         13
    –   State Owned          3
    –   Privately Owned 6
    –   Foreign Banks        4

   Sector Total                      46
Commercial Banks in Turkey

                       Assets              Deposits             Loans
                                                                (Milion YTL)

                       2003      2004      2003       2004      2003           2004

Sector                 249.693   306.464   155.312    191.065   66.221         99.397

Com.Banks              239.423   295.138   155.312    191.065   61.281         94.089

State Owned            83.134    83.134    59.862     81.086    12.100         20.926

Privately Owned        142.270   175.910   88.180     105.195   45.7           68.487

Banks Under DIF        7.075     1.940     4.133      69        70             7 11

Foreign Banks          6.944     10.356    3.137      4.714     2.711          4.665

Non-Depository Banks   10.270    10.270    -          -         4.940          5.308

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