- Funds held in the settlement and current accounts of public joint-stock enterprises, and various small commercial structures;

- Funds of funds for various purposes during the period of their use;

- Means in the calculations;

- Local budgets and local budgets;

- Balances on correspondent accounts with other banks;

- Call deposits.

The advantage of demand deposit accounts for their owners is their high liquidity. Money into such accounts are credited and removed with the implementation of economic and other operations, reflected in terms of money in those accounts. The main drawback – the lack of payment of interest on the account or a very low percentage. Thus, the features of a deposit account demand can be summarized as follows:

- Depositing and withdrawing money made at any time without any restrictions;

- The account holder pays the bank a fee for use of the account in the form of a solid monthly rate or a percentage of debits;

- A bank for deposit funds in call deposit accounts pay lower interest rates or do not pay (funds in the calculations);

- The bank on Call deposits allocates higher rates to fund the required reserves at the Central Bank.

In the world of banking practice, along with the regular deposit account at call widely developed these types of deposit accounts on demand, as the now-account and certified checks (USA).

NOW-account – a deposit account demand, which can prescribe the settlement documents to third parties. These accounts combine the principle of liquidity with the ability to generate revenue as a percentage. These accounts are open only to individuals and nonprofit firms.

Accounts certified checks – this demand deposit accounts, which are isolated funds to pay for certified checks. The latter are checks on which the bank makes a special note about the availability of funds to pay for them. In domestic practice, this kind of settlement checks had the name “settlement checks, accepted by the Bank.” Currently, the analog of these accounts can be considered as accounts on which stores cash checks for payment of limited checkbooks.

In countries with developed market economies, the share of Call deposits accounted for about 30% in the amount of borrowed resources.

In the world of banking practice, all the involved resources in the way of their accumulation are grouped as follows:

- Deposits;

- Non-deposit borrowings.

The main part of attracted funds of commercial banks are deposits, ie funds deposited in bank customers – both individuals and legal persons, ie venture, partnership, joint stock companies on certain accounts, and used by them in accordance with the regime of invoices and banking legislation.

Non-deposit borrowings – it means that the bank receives in the form of loans or by selling its own debt in the money market. Non-deposit sources of bank resources differ from deposits that they have, firstly, nonpersonal nature, ie not associated with a particular customer of the bank, and sold on the market on a competitive basis and, secondly, an initiative to attract these funds belongs to the bank.

Non-deposit of attracted resources used primarily large banks. Acquired by non-deposit funds with large amounts, and they are considered the wholesale nature of the operations.

Modern banking practices has a great diversity of deposits deposits and deposit accounts. This is due to the desire of banks in a competitive market segmented best meet the demands of different groups of customers for banking services and to attract their savings and free cash capital to the bank accounts. The economic content of deposits can be divided into groups:

- call deposit, including balances in settlement and current accounts;

- deposit with fixed period;

- Savings;

- Securities.

Deposits can be categorized as on other grounds: by age, by type of depositors, the conditions of deposit and withdrawal of funds, pay interest, the possibility of obtaining benefits for active operations of the bank, etc.

The main source of funding for active operations of commercial banks are leveraging resources, which requires that commercial banks conduct active deposit policy and expansion of deposit operations. In organizing the deposit transactions, commercial banks must comply with the liquidity balance and take into account the following requirements:

- Deposit resources must be coordinated through the term and amount financed with active operations, which is especially important in an unstable economy and high inflation;

- Deposit operations should contribute to maximizing bank profits or to create conditions for a profit in the future;

- In the organization of deposit operations special attention should be given to raising funds to time deposits and savings deposits with a fixed term;

- To expand the types of deposit transactions, provide additional services or benefits in order to increase the number of depositors.

The structure of the bank’s equity base is heterogeneous in composition and quality vary throughout the year depending on several factors and in particular on the quality of the assets of its own profits, the bank’s policy to ensure the sustainability of its capital base.

Statutory fund (capital) creates the economic basis of existence and is a prerequisite for formation of the bank as a legal entity. Its value is governed by legislative acts of the central banks and, moreover, is subject to agreement of the European Economic Community (EEC), which in 1989 regulated its minimum value of $ 5 million ECU.

Reserve capital (fund) is created from net profit (after tax) in an amount not less than 15% of the paid amount of the share capital and is designed to absorb unexpected losses in the bank’s activities and ensure the stability of its functioning.

The second group of funds formed as a result of the distribution of net profits, remaining at the disposal of the bank (funds for special purposes), and also reflects the use of net profit for certain purposes.

The third group of funds, the combined name of “additional capital, consists of:

- Proceeds from the sale of shares of the first holder at a price above face value – “seigniorage.” These funds increase the initial capital of the bank and its stable part;

- Capital gains, formed by the revaluation of fixed assets. The presence and magnitude of this fund is a reflection of inflation in the country and, therefore, do not act the qualitative characteristic of its activities. In its economic essence and nature of use of this fund can be regarded as a provision for impairment of fixed assets (fixed assets);

- The value of donated property received. The volume of the fund shows a source of growth of tangible assets of the bank, and the rules of use (to cover possible losses) can take it to a group of reserve funds.

The fourth group of funds established to cover the risks of certain banking operations and thus achieve the stability of banks by absorbing the losses due to the accumulated reserves. These include: provisions for losses on loans, securities and other assets. The value of these reserves suggests, on the one hand, the qualitative structure of bank assets, and on the other – on the margin of safety of the bank, especially with regard to reserve funds created from net profit (for example, reserves for possible losses on loans first group).

The funds the second, part the third and fourth groups according to their intended purpose are very mobile, as they are used for current expenses or capital investment bank associated with the development of its own facilities (eg, payment of premiums, benefits, equipment, costs, ongoing in excess of the limits, classification of them on the operating costs, the provision of charity care, etc.), ie the use of these funds due to the decrease of the bank property.

Therefore, the funds of such funds or their equivalent can not be left in the bank and use them for other purposes, ie act as a bank’s capital.

Thus, the theory of banking distinguishes the concept of equity and equity of the bank. The concept of “own funds” – the most common include all liabilities, formed during the bank’s activities: the charter, reserve and other funds of the bank, all the reserves by the bank, and retained earnings from previous years and current year. Bank’s own capital – a value determined by calculation. It includes the articles of their own funds (and even borrowed funds), which on the economic meaning can serve as the bank’s capital. The main elements of its own funds, ie underlying funds established in accordance with the law, and reserves established by domestic sources in order to maintain the bank’s activities are included in the bank’s capital if they meet the following principles:

- Stability;

- Subordination to the rights of creditors;

- The absence of fixed charges of income.

Under the bank’s own capital should be understood specially created funds and reserves that are intended to ensure its economic stability, absorption and possible losses are to use the bank for the entire period of its operation. The bank’s capital includes statutory, reserve capital, other funds that do not have the period of use, promoter’s profit (the result of the emission), undistributed profits of the current and previous years, left at the disposal of the bank and confirmed by the auditors, the reserves to cover various risks and performs a number of important functions in the activity Bank.

Functions performed by the bank capital, ambiguously defined as a domestic and Western literature. There are three main functions: protective, operational and regulatory. Since a large proportion of bank assets financed by investors, the main function of a very limited amount of equity capital is protecting the interests of depositors. In addition, the capital of the bank reduces the risk of the bank’s shareholders. Protective function means that you can compensate depositors in the event of liquidation of the bank, as well as the preservation of solvency by creating a pool of assets, allowing the bank to work despite the threat of damages. In this case, however, it is assumed that most of the loss is covered by the expense of capital and current income of the bank. Unlike most companies preserve the solvency of the commercial bank to cover only part of equity. Typically, the bank is solvent, remains intact equity, ie while the value of assets is not less total liabilities (net of unsecured) issued by the bank and its shareholders’ equity.

Capital plays the role of a protective “cushion” and allows the bank to continue operations in case of large unexpected losses or expenses. To finance these expenditures, there are various reserve funds are included in shareholders’ equity, and for mass non-payment customers on loans to cover losses, you may want to use a portion of equity.

Operational function of bank capital is of secondary importance compared to the defensive. It includes the allocation of own funds to purchase land, buildings, equipment, and the establishment of a financial reserve for unexpected losses. This source of funding is indispensable in the initial stages of the bank, when the founders engaged in a number of priority spending. At subsequent stages of development bank role of equity capital is not less important part of the funds invested in long-term assets, the establishment of various reserves. Although the main source of financing for the expansion of operations is the accumulated profit, the banks often resort to new issues of shares or long-term loans for events of a structural nature – the opening of branches, merges.

Implementation of the regulatory function of capital is linked to the special public interest in the successful functioning of banks. With the index the bank’s capital by public authorities assess and monitor the activities of banks. Typically, rules relating to equity of the bank, include requirements to its minimum size restrictions on assets and conditions of purchase of assets of another bank. Prudential standards set by the central bank, mainly based on the size of the bank’s own capital. In terms of the classification of the functions attributed to the regulatory function and use the capital to curb lending and investment operations (to the extent that bank loans and investments are limited to available equity).

Other sources, recognizing that the primary purpose of bank capital is to reduce risk, emphasize the following features:

- Capital serves as a buffer to absorb losses and preserve solvency;

- Provides access to capital markets, financial resources and protect banks from liquidity problems;

- Inhibits the growth of capital and reduces risks.

All these features help to reduce capital risk. Such an approach is more practical and suited for management purposes, a commercial bank.

The role of capital as a buffer against loan losses evident when considered in the context of cash flow. If bank customers fail to fulfill their obligations under the loan, instantly reduced cash flow from interest and principal payments. Outflow does not change. Bank remains solvent, while the amount of inflow exceeds the outflow. Here, capital serves as a buffer, because it reduces the induced outflows.

The Bank may postpone the dividend but shares not being able to pay. Interest payments on bank debt, by contrast, are mandatory. Banks with sufficient capital release new bonds or shares to replace the lost cash inflows of new and buy time until they solved the problem with the assets. Thus, the higher bank capital, the more assets may be unpaid, before the bank becomes insolvent, and the less the risk of the bank.

Adequate bank capital reduces the operational problems by providing free access to financial markets. Capital gives the bank to make loans from traditional sources at normal rates. Large shareholders ‘equity provides a stable reputation of the bank depositors’ confidence in him.

Capital inhibits growth and reduces the risk of restriction of new assets that the bank can purchase through financing with debt. This function is closely related to the norm established by the state authorities of capital to assets. So, if banks decide to increase the size of loans or buy other assets, they should support growth through additional equity financing. This prevents speculative asset growth, as banks must always remain within its capacity a successful asset management.

These functions of bank capital show that equity – the basis of commercial bank activities. It ensures its independence and ensure its financial sustainability as a source to offset the negative impact of various risks, which are borne by the bank.

In addition, the scope of activities of banks, defined by the object of its active operations, depend on the totality of resources available to them, especially the amount of borrowed resources. This situation aggravates the competition between banks to attract resources.

Simultaneously with the market credit starts functioning securities market, where banks are the sellers or buyers of their own government and corporate securities. Availability of insurance, financial and other lending institutions will intensify competition in the market of credit resources and exacerbates the accumulation of banks temporarily idle cash.

Resources of commercial banks or bank resources, represent a set of own and borrowed funds at his disposal and used to carry out active operations.

By way of education, all commercial banks’ resources are divided into equity and debt (borrowed).

The main source of commercial banks’ resources are borrowed funds, constituting about 70-80% of total bank resources. The share of own funds of banks to between 22 and 30%, which is broadly in line with the existing structure of the global banking practice. As part of its own funds the bulk of the bank accounts for different funds. The second part of its own funds – profits this year.

For the structure of attracted funds of commercial banks is characteristic of a high proportion of funds held in the settlement and other accounts that make up the deposits. Share of this resource category is 64.3%. The share of fixed deposits account for only 23.5% of them on deposit with commercial structures and deposits of the population – 5%, the banks – more than 18%.

The structure of the banking resources of individual commercial banks is very varied, because of its individual features.

1. Human resources management pays

Human resources are considered by Western banks as a resource among others. And here is an example of the estimated profitability of HR management, which by far outperformed financial and industrial investments in a sample of industries.

2. What is found as HR management

HR is most of the time ill managed. According to local cultures, hiring and managing people is mostly based on criteria not linked with the adequacy of the person to the job.

3. What should be HR management

HR management is among the most delicate tasks that exists, so it is difficult to summarise it in a few slides. Main elements here to remind are:

To assess skills and their adequacy to the jobs

To assess the future changes in requirements, determining a career path. The objective in doing this is to ensure that an individual’s future is understandable and motivating. The risk to avoid in doing so is to prevent that skills leave the bank to competition. As it is said with humor at Citibank, the large US bank: “Train the best, keep the rest”.

Also schemes need to be developed to ensure that compensations and other “retainers” offered to bank employees match the individual’ real performance.

Explaining main organisational issues: Branch manager in connection with both front and back office.

Identify responsibility for back office, front office and the overall management of the head of the branch.

2. A branch’s business relies on IT systems

All transactions, all activity of a branch needs to be monitored for coordination either at regional level, or at head office level. Products sold, volumes, client profiles, etc. are all crucial information for the management of the entire network and the evolution of the commercial policy.

IT systems are the only tools that allow a correct management of all this. This explains why the banking and finance industry is the first consumer of information technology.

3. Pitfalls in IT systems

Flawed IT systems can lead to catastrophic bank management. Here are cited a few reasons why systems can’t fulfill their duty.

Stress that the main threat is when decision makers in selecting / implementing IT systems do not have a clear understanding of habits and needs of operational personnel.

Associating branch staff (managers at least) is the key for a successful implementation.

4. Need to have a clear idea of business, challenges and requirements

The analysis of business, needs and local developments as well as strategic issues for the future of branch business is the first stage is assessing requirements for branches’ IT systems.

Reversely, branch staff must understand that a new computer system will not do everything. They will not have something that will work and thing at their place and prepare coffee also.

5. A few key rules, and be pragmatic

“Garbage in, garbage out’ is the most important thing to remember in IT. A system will only be as good as what is in it. This means that reliability, timeliness of data is as important as the processing a parameter setting itself.

Also, in a moving business, it is important to ensure the adaptability of systems to changes. Possibilities of parameter changes, without having to rewrite the entire code, is very important.

6. Choosing a system

In house systems against standard packages

Forwarding key decision elements

Every choice has its own advantages and inconveniences.

Generally the smaller the bank, the better it is to buy a package of simple management tools.

For a larger bank, with its own IT development division, the question can be more acute. There is a balance to find between management requirements, the political power of the IT Division Manager himself, and the business profile of the bank. The more standard operations there are in the bank, the more logical a standard package would be.

Remember that buying an oversized system, where just a small portion of the functionalities will be used by the bank, or requiring heavy changes to match your business, could be a catastrophic operation.

Discuss briefly how are financed branches in trainees’ banks.

Make sure that allocation of responsibilities between branches and head office is consistent with the business that branches are expected to do, and what they are not supposed to do.

This means there must be a clear awareness of this at both levels. If this is not clear, a deep thinking effort and clear decisions need to be made in the first place.

Basically, the business of a branch is unique: sell products. In fact, all banking services can be accounted for as products.

Branches are not suited to manage a number of risks that naturally arise from their commercial activity: interest rate, currency and liquidity risks. They are generated from branches’ lending and deposit business, broken down by currency, maturity and type/level of interest rate.

This management belongs to the field of responsibility of the Asset & Liability Management team of the head office.

Asset & Liability Management (ALM): defined as the unit at head office that centrally monitors the equilibrium of the overall balance sheet, and who is in charge of issuing directives on the financial policy. ALM is most often steered by an ALM Committee (ALCO) and the Treasury Department is its most logical executive arm.

2. Branches are salespoints

Repeat that branch have a unique job: selling.

Deposits collected by branches belong to the entire bank: they make up the total deposit amount that the bank collects and their use has no connection, at branch level, with the level of credit.

This means that branches are not limited by their total deposit in their ability to sell credit. The overall lending level has no upper limit in absolute terms. The only limitation in credit is linked with the client’s borrowing profile and credit pricing. If lending exceeds deposits, it is the duty of the Treasury Department to raise extra resources.

3. Physical and notional circulation of money

Make sure that everybody understands the difference between scriptural money circulation (notional), by bookwriting, and physical money transfer.

Choice between physical and notional money transfer is a matter of internal policy for every bank. It mainly depends on the distance between the branch and the regional or the head office, especially if money transfer has to be done in cash.

The notional money transfer to head office should anyway be systematic, on a periodicity that depends on the business volume.

4. The money wasting scenario

This describes what often happens in banks in Russia and other countries. The treasury function in each branch can negotiate assets and liabilities with other branches, or headquarters, upon their own choice.

This model is based on the assumption that a branch is unable to grant more credit than it has obtained as savings, and funding is not always centralised at head office level. Therefore branches with excess savings may deal with others with excess credit. This is at the origin of a vicious circle since treasury deals between branches may develop without any customer transactions.

If no counterpart wishes to deal with a branch which is short on savings, it may suspend lending if no counterpart is found.

5. The virtuous circle to implement

Branches have to eliminate funding problems by only dealing with one counterpart: bank’s Treasury Department.

Treasury Department must keep in control of refinancing conditions. There we will depict how Treasury Department operates with branches and any profit center.

Note that the notion of profit center will be examined in the “efficiency management” module.

6. Various treasury management methods

Single treasury pool method

The simplest way: all types of liabilities fund all types of assets, all together. It can consist of gross money flows  or net flows .

Multiple treasury pool method

Explain that there is a possibility of improving the adequacy of treasury flows by this method. It consists in matching similar types of assets and liabilities. This is under the responsibility of the Treasury Department.

The choice among treasury procedures by each individual bank depends on how active the Treasury department wants to be in funding the bank, and how well organised and how well equipped they are in terms of treasury management tools. It also depends on the quality of the people at treasury level.

Managing gross or net flows

Similarly to the previous, this one emphasises the role the treasury wants to plays and the level of detail that the bank wishes to manage.

7. Constituents of pricing

Examine all components that make up a price

The previous examination leads to introduce the components of pricing by a branch. On this the components of the interest rate of a loan is detailed:

The refinancing rate is the gross cost of the resource. It is increased by the “risk premium” on the liability (financial risk)

The quote-part of general expenses allocated to the profit center is added

The cost of embedded options and the financial risk on assets is then added. The cost of embedded options is the hidden cost for the bank of possibilities given to customers. For example, prepaying a loan before maturity has a cost in interest that the bank will not receive.

Finally, the commercial margin is the added value of the branch and is set by the branch itself.

Often, banks that have an orderly cost breakdown end up with a total interest rate, which may be higher than that from competition. The final price, which will be applied to the customer, can then be a compromise to avoid showing too much difference with competition.

What to do when decision is made to price below cost?

A matter of responsibility in fixing interest rates needs to be clearly expressed. The adjustment of interest rate (the commercial compromise) which is negotiated between the branch and the customer has an impact on the branch’s profit & loss account.

However a branch may be required to operate in an area where business is not profitable. It can be the case when opening one in a place to be in touch with one single large customer. In such a case, the head office is responsible for this situation and it therefore has to bear the cost of the situation on its own profit & loss account. This means the branch is funded by an adequate transfer from the head office.

The introduction of the seminar will be done with a quick view of the main elements to take care of in financing a branch’s current activity, regardless the banking business.

Ask trainees what a branch needs to operate. Compare with the next after discussion.

Focus by topic

5 M

Men

Management

Machines

Methods

Money

Men and Management

This focuses on the personnel in the branch. It includes all the employees, with the range of skills needed.

Concerning management, the problem is similar but more acute since it is more difficult to find managerial talent than commercial or sectoral capabilities.

Machines

This focuses on the need to operate systems in the branch. It must take into account all automated tools, including ATMs, computer systems (software and hardware), and all technical tools commonly used.

Methods

This deals with all the managerial framework of operations in the branch. This means significant workload, to include: procedures, organisation, schedule, skills backups, etc.

The definition of people’s jobs is crucial. Men need to know what they are supposed to do, and how it impacts the branch’s business.

Money

This concern the budget that branch management has. It should be sufficient to include:

Ability to face day to day expenses, buying stationary, etc.

Maintenance and all external services: heating, cleaning, security, etc.

Marketing and promotional actions, sponsoring, etc

Possibilities of offering rewards to outstanding personnel in case of exceptional performance

Allocation of responsibilities

What should be managed by the branch alone or by head office?

Doing business in a remote area requires high amount of autonomy most of the time but it generates perversions. In fact, priorities for branch people are not always the same as those perceived by headquarters and this requires regular monitoring.

Development of low-cost communication possibilities make this always easier to achieve and improve.

Initiate a debate: centralisation / decentralisation.