The quality of bank assets
Category: Concept of the Bank and the Banking System
Asset quality is determined by their liquidity, the volume of risky assets, a specific gravity of the critical and substandard assets in assets that yield income.
To ensure the daily bank’s ability to meet its obligations asset structure of commercial bank shall comply with quality requirements of liquidity. To this end, all the bank’s assets are divided into groups according to the degree of liquidity, depending on maturity. The bank’s assets are divided into highly liquid assets (i.e. assets that provide instant liquidity): liquid assets, the assets of long-term liquidity, overall liquidity and liquidity arising from metals.
For instant liquidity assets (highly liquid) include:
— Cash, precious metals funds in correspondent counts of credit institutions at the Central Bank, other banks, for payments made by check, money lending institutions to cash service branches; means of settlement participants in the distribution of even non-banking credit organizations, the securities market, the means of participants securities market to ensure that the calculations and results of operations on the securities market deposits with the Central Bank, demand deposits placed with credit institutions and non-resident banks, the funds for payments using plastic cards with credit institutions and non-resident banks , advances to demand the bank’s clients — legal entities, investments in government bonds and bonds of domestic and foreign currency loans that are not received as collateral for bank loans, investments in bonds of the Central Bank, not burdened by obligations, funds on correspondent accounts with banks resident countries from among the «group of developed countries’ net funds on correspondent accounts in the amounts of the frozen assets and funds debited from client accounts, but held on correspondent accounts of credit institutions due to lack of funds.
The composition of liquid assets, other than those listed liquid assets include natural stones, the funds on correspondent accounts with credit institutions — a correspondent and non-resident banks, funds on correspondent accounts with nonresident banks in foreign currencies with limited convertibility and precious metals, money market participants securities deposited in a design center for collateral settlement of transactions in the sectors of the securities market, and all credits granted by a credit institution in rubles and foreign currencies (excluding prolonged at least once and reiterates its loans in repayment of previously issued loans), deposits and other placements, funds provided by the credit institution, Promissory notes and other bank debt maturing over the next 30 days.
By assets include all long-term liquidity loans to the bank, including outstanding (except for loans guaranteed by the government, loans secured by government securities and securities of local authorities, the precious metals in bars) of deposits and advances, including precious metals with a remaining maturity of over one year and 50% of guarantees and sureties issued by the bank for over year.
Liquidity ratio of precious metals is calculated as the ratio of liquid assets in precious metals in physical form to the commitments in the precious metals demand deposits and demand deposits with maturity over the next 30 days. The minimum value of standard set at 10%.
These standards applied in the process of asset management. But most importantly for the construction of a rational structure of the assets of the bank — to sustain the relationship between liquid and total assets.
Almost all the banking assets are subject to certain risks. The risk level of assets the bank must identify and support at a level consistent with current legislation and policy of the Bank in this regard. Based on the results of studying the structure of bank assets can analyze various types of risks. Thus, interest rate risk can be determined based on the structuring of assets based on profitability. However, the main risk in the banking industry is the potential loss of bank funds for specific operations. It is the determination of this kind of risk we use the results of studying the structure of assets. With a specific weight of each group of assets in their total and giving each group the coefficient of risk, we can determine the degree of risk in the whole jar. We construct a sequence of groups of banking assets in order of increasing risk and assign each group a number, this number will determine the risk ratio.
Group the assets of banks depending on the degree of risk and determine their relative importance in total.
However, analysis of assets at risk requires the analysis of not only the volume and proportion of assets weighted by risk, not only finding the weights of each risk group, but analysis of volumes of critical and substandard assets, as well as their variability. Particular attention is paid to the credit of the bank as it continues to occupy a significant place in the bank, dating back to the operations of the highest, fifth risk group.
To carry out this analysis, we need further to consider the following indicators:
1. Total loans, calculated as the sum of the balances of loan accounts of enterprises, individuals and banks.
2. Volumes and densities of the total loan portfolio of long-term, medium-, short-term loans and loans on demand, and the size and proportions of loans in various sectors of the economy or to individual borrowers. This analysis can detail, for example, by comparing the short-term loans to individual economic counterparts, and total short-term loans.
3. Average interest rates on groups of loans.
4. Overdue debt and its ratio to total loans granted.
5. Large volume of loans granted by banks.
6. The volume of loans, risk-weighted in accordance with the requirements of the Central Bank, and 50% of the borrower’s obligations in relation to the bank’s capital.
7. The same for insiders and groups of related borrowers.
8. Volumes and densities of groups of loans with varying degrees of risk, and calculated in accordance with the requirements of the Central Bank.
9. Indicators of movement balances of factoring and leasing operations.
This will give the opportunity to describe the dynamics of factoring and leasing operations.
In addition to credit investments in commercial bank assets there other items that represent assets that produce income. These include investments in securities (public and private) investments in foreign currency transactions. Accordingly, to determine the amounts of these assets and structure them using the same criteria as the credit investments. It is also useful to calculate the ratio of loan investments with other investments, income generation, and compare with data from other banks. However, despite the high profitability, cost efficiency and profitability and share of working assets, the bank has the threat of non-compliance with a measure of liquidity because of the low proportion of non-performing assets. The latter include:
1. Cash:
a) cash;
b) Other funds.
2. Correspondent accounts.
3. Reserves at the Central Bank.
4. Interest-free loans and overdue, for which no interest is paid.
5. Capital expenditures:
a) The fixed assets;
b) capital costs.
6. Other debtors.
7. Other assets.
Given all these factors, namely the requirements of liquidity, profitability and riskiness of assets in international practice, a rating system to assess the quality of assets, which includes as one of the main requirements of critical size and low-quality assets.
When calculating the volume of critical and substandard assets taken into account:
— Weighted classification rate;
— Classification and rate trends (changes).
Weighted classification indicator is used in world practice to calculate the expected losses on loans and publications issued by the reserve for possible losses on credit transactions. He is recognized as a product of the annual write-off rate for losses on loans and interest groups on risk related group of loans.
The value of the weighted classification rate is calculated by multiplying the amount of the relevant group of assets by a factor of risk. Classification rates (hazard ratios) determine the amount of required reserves for the group of critical and low-quality assets. If calculated on the basis of their reserves equal or exceed the total capital of the bank, this bank belongs to the group unreliable. However, the ratio of weighted classifications to the total capital is the main indicator that determines the quality of assets. Rate includes 5 types of evaluations:
Rating 1 (strong)
This is usually valued assets, when the average classification does not exceed 5% of total capital. Small excess of 5% is consistent with rating 1, if the economic situation is good and management has demonstrated its ability to effectively deal with problem assets. But if the case in question is beyond the scope of the above, or if there are additional problems with the concentration of investments or loans, the problems associated with a high degree of «idle» assets, and other «specifically mentioned, or with a major investment in fixed (fixed) assets, then uses a different , a lower rating, even if the weighted classification does not exceed 5% of total capital.
Rating 2 (Satisfactory)
In the application of positive or negative evaluation should be guided by the same motives, and instructions as before, but given the fact that the weighted classification should not exceed 15% of total capital.
Rating 3 (mediocre)
Guided by the same motives that are listed above, taking into account the fact that the weighted classification should not exceed 30% of total capital.
Rating 4 (Critical)
Given the fact that the weighted classification should not exceed 50% of total capital.
Rating 5 (unsatisfactory)
Since assets are valued, when weighted classification greater than 50% of total capital.
Along with the above estimates are allocated critical financial factors in asset quality.
1) The volume of classifications:
weighted classification rate;
overall classification rate;
trend of relations and the number of dollars.
2) Specially mentioned loans — the level and trend.
3) Level, trend and structure of loans on which accrual of interest is not made, and loans with the revised conditions.
4) The efficiency of loan administration:
loan and investment policies;
volume and trend of loans and overdue loans;
adequacy of the review and analysis of the loans.
5) The volume concentration of loans exceeding 25% of the capital.
6) The extent and nature of transactions with insiders.
7) Reduce evaluation of the securities portfolio.