BALANCE SHEET EXERCISE

AM | @MackinlayEuruni


QUESTION. READ FIRST AND ‘LOCATE’ PROBLEMS IN THE BALANCE SHEET: DOES IT AFFECT ASSETS? DOES IT AFFECT LIABILTIES? DOES IT AFFECT BOTH?. AS YOU PROVIDE ANSWERS, WE PLOT THE POINTS INTO THE BALANCE SHEET.

(1) “Many banks are struggling to fund themselves as Europe’s debt crisis deepens” (David Oakley: “CDS highlights funding worries”, Financial Times, October 5 2011).

(2) “Austrian banking supervisors have instructed the country’s banks to limit future lending in their eastern European subsidiaries … The government is concerned about losses in eastern Europe –where they are the biggest lenders- and their exposure to Italy … Erste Bank, Raiffesen Bank and Bank Austria have a CEE exposure that exceeds Austria’s GDP”. (Eric Frey: “Austrian banks ordered to limit central and east Europe exposure”, Financial Times, November 22 2011).

(3) “Many European banks have been shut out of traditional funding markets in recent months, forcing them to rely on central banks for liquidity or to become more creative in obtaining new financing amid market turmoil. Accordingly, some of the strongest UK banks are providing strained European lenders shut out of global funding markets with large amounts of financing. The deals average €200-€500m in size, with maturity dates of two to 10 years. However, amounts of up to €1bn have also been heard. ‘Haircuts’, or collateral taken to protect the lender from adverse movements, were very high, at 15 to 25 per cent or more”. (“Tracy Alloway: “Europe’s banks strike funding deals”, Financial Times, November 24 2011).

(4) “Some banks in countries such as Spain and Italy are finding it harder to secure euro funding from conventional sources amid concerns about a possible Greek sovereign debt default, and in the face of deep skepticism from foreign banks. One measure of the pressure on Spanish banks in particular was their net borrowing from the European Central Bank, which increased sharply to average €6992bn in August, from €52.05 in August, according to figures from the Bank of Spain” (Victor Mallet: “Small banks remain in need of funding”, Financial Times, October 5 2011).

(5) “The onslaught on European banks is unremitting. In the latest setback for banks in Europe, Moody’s Investors Service has put the subordinated debt of nearly 90 per cent of them under review for a possible downgrade. No surprises here: European sovereigns have limited appetite or ability to support them, let alone bondholders. But the warning highlights the risk of a European credit crunch as banks shrink assets and as they struggle to fund those assets”. FROM THE CHART: Italy’s Unicredit pays a 700 basis point spread in the interbank market; Santander is at 480 bps, while Barclays stands at 201 bps. (Lex: “Euro bunch of losers”, Financial Times, December 1 2011).

(6) “Mario Draghi, ECB president, told the European Parliament last week: We have observed serious credit crunch tightening which, combined with a weakening in the business cycle, does not bode at all well for months to come. Small and medium-sized companies are being the hardest hit. The most important thing for the ECB is to repair the credit channel” (Ralph Atkins: “ECB sets sights on shoring up banks”, Financial Times, December 5 2011).
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BONDS

Bonds. Like any other type of investment vehicle, bonds provide investors with two kinds of income: (1) They provide current income, and (2) they can often used to generate varying amounts of capital gains. The current income is derived from the periodic receipt of interest payments. Capital gains, in contrast, are earned whenever market interest rates fall. 

VIDEO. The basics of bonds [see].

Pricing. A very basic rule in the market for fixed income securities is that interest rates and security prices move in opposite directions.

Key features. Type of issuer (governments, corporations), maturity, coupon and principal. 

Tenor / Maturity. In the US, 3-month to 1-year Treasury paper is called T-Bills; from 2 to 10 years, T-Notes; and T-bonds beyond that (30 years).

Balance sheet. Assets and liabilities! 

Size of the market. Government Bonds of US Commercial Banks, March 7 2012: $ 459.7 billion. Corporate Bonds. Corporate Bonds of US Commercial Banks, March 7 2012: $ 824.2 billion. Mortgage-Backed Securities. MBS of US Commercial Banks, March 7 2012: $ 1297.2 billion.

Case: UBS. From UBS's balance sheet [see, p. 43]. Exposure to French bonds: CHF 3525, of which CHF 2009 in corporate bonds, CHF 785 in sovereing bonds and CHF 730 in bank bonds. Bonds issued: CHF 158.
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CERTIFICATES OF DEPOSITS

Certificate of deposit. A certificate of deposit (CD) is a promissory note issued by a bank. It is a time deposit that restricts holders from withdrawing funds on demand. Although it is still possible to withdraw the money, this action will often incur a penalty. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination.

CDs are generally issued by commercial banks and are insured by the FDIC (in the US). The term of a CD generally can range from one week to ten years. Retail certificates of deposit are defined as those under $100,000. Large time deposits are defined as deposits larger than $100,000.

Case. Sun Trust retail CDs [see].

Pricing. See Bankrate.com

Tenor / Maturity. 7 days to 10 years.

Balance sheet. Liabilities. Depositary sources of funds (non-depositary sources: bonds, borrowing from other banks, discount borrowing from the central bank).

Type of banking. Retail / corporate.

Size of the market. Retail deposits at US Commercial Banks, March 7 2012: $ 7.088.0 billion. Large time deposits at US Commercial Banks, March 7 2012: $ 1.499.0 billion. Source: US Federal Reserve.

See Adam Satariano: “Apple Seen Paying Some of $97.6 Billion in Cash as Dividend”, Bloomberg. Corporations are active players in the CD market!
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SAVINGS ACCOUNTS

Savings accounts. A deposit account held at a bank or other financial institution that provides principal security and a modest interest. Savings accounts are generally for money that you don't intend to use for daily expenses. Because savings accounts almost always pay lower interest rates than Treasury bills and certificates of deposit, they should not be used for long-term holding periods. Their main advantages are liquidity and superior rates compared to checking accounts.

VIDEO. HSBC paying an extra-high interest rate: lool at the date! [see]

Pricing I. Short-term interest rates. See Bankrate.com

Pricing II. Maintenance fees: Sun Trust [see]. "Tiered interest rates": a pre-set scale of interest which is based on the premise that higher sums of money earn higher rates of interest.

Type of banking. Retail / Corporate.

Balance sheet. Liabilities. Depositary sources of funds (non-depositary sources: bonds, borrowing from other banks, discount borrowing from the central bank).
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DEMAND DEPOSITS

Checking accounts. A transactional deposit account held at a financial institution that allows for withdrawals and deposits. Money held in a checking account is very liquid, and can be withdrawn using checks, automated cash machines and electronic debits, among other methods. A checking account differs from other bank accounts in that it often allows for numerous withdrawals and unlimited deposits, whereas savings accounts sometimes limit both. Checking accounts can include business accounts, student accounts and joint accounts along with many other types of accounts which offer similar features. In exchange for the liquidity, checking accounts typically do not offer a high interest rate. A checking account may also be called a "demand account" or "transactional account" [see].

Case. Excellent HSBC product description (retail) [see]. Note the attached product features.

VIDEO. Business Checking Account Comparison [see]; Citibank Mobile Check Deposit [see].

Pricing I. There may be some monthly maintenance fees in the case of large checking accounts [see].

Pricing II. There is a price to pay for overdraft protection! SunTrust [see]: "It’s not uncommon to occasionally get caught short of funds in your checking, savings, or money market account. When that happens, it’s helpful to have a backup plan to avoid bouncing a check or getting stranded at the ATM. Overdraft Protection: Sign up for this service and we’ll link your checking, savings, or money market account to your other SunTrust accounts and transfer the necessary funds to cover any shortfalls. As long as you have sufficient funds in your linked accounts, you’ll pay only a single $12.50 transfer fee on the day the overdraft occurs.

Balance sheet. Liabilities. Depositary sources of funds (non-depositary sources: bonds, borrowing from other banks, discount borrowing from the central bank).

Type of banking. Retail / Corporate.

Size of the market. Retail deposits at US Commercial Banks, March 7 2012: $ 1.872.3 billion.
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TRADE FINANCE

Trade finance. See Deutsche Bank information on Flow Prodcuts and Structured Trade and Export Finance.

Balance sheet. Assets.

Type of banking. Corporate banking.
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COMMERCIAL & INDUSTRIAL LOANS

Commercial & industrial loans. Any type of loan made to a business or corporation and not to an individual. Commercial and industrial loans can be made in order to provide either working capital or to finance major capital expenditures. More info.

Case. Sun Trust lines of credit [see].

Balance sheet. Assets.

Type. In most cases a line of credit is secured by business assets, but an unsecured option may be available if certain credit conditions are met.

Maturity. Short-term (working capital); long-term (major capital expenditures)

Type of banking. Retail (small businesses lines of credit); Corporate (project financie, etc.)

Pricing. Variable interest rates (lines of credit: revolving credit, short term); Fixed interest rates (major financial capital expenditures: non-revolving credit, ling-term)..

Size of the market. Commercial & Industrial loans of US Commercial Banks, March 7 2012: $ 1379.3 billion.

Financial Times. "The UK offshore wind industry is heavily dependant on banks for project finance. This is not always easy in an inmature industry where the risks are often deemed complex and big. But now bank finance is not as easy as it was. 'Project finance is tight', says John Wood, a partner at the Norton Rose law firm. Traditionally, on project finance you would get a 15-yeaer repayment schedule for your debt. This has fallen to six or seven years, wich adds pressure when it is time to refinance. At the end of 2011, the UK had 636 turbines in 18 wind farms, accounting for more than 2 gigawatts of installed capacity -- the Saudi Arabia of offshore wind". Pilita Clark: "Financing woes pose a threat to 2020 target date", FT, June 4, 2012.
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CONSUMER LOANS

Consumer loans. Consumer loans are loans for purchasing automobiles and mobile homes, student loans, loans for medical expenses and vacations, and loans for other personal expenditures. They come in a variety of sizes and shapes. The following examples are all products offered by Sun Trust in the USA [see]. Equity loans: put your home’s equity to work for you with a range of home equity lending solutions. Auto Loans: explore the benefits of refinancing or get approved before you shop for a new or used vehicle). Physician Loans: cover a wide range of personal and business expenses with our physician loans. Personal Loans: obtain the funds you need with our affordable and flexible personal loans and lines of credit. Marine and Boat Loans: finance the purchase of a new or used boat or explore the benefits of refinancing. Education Loans: meet your college financing needs with private student loans.

See also Banco Santander (UK) Personal loans [see].

VIDEO. HSBC Personal loans [see; language unknown] (0:36); City Bank Texas home improvement loans (0.33) [see]; auto loans (0.32) [see].

Tenor. Medium to long-term.

Balance sheet. Assets.

Type. Unsecured (except auto loans, boat loans).

Pricing. Variable interest rates. See Bankrate.com

Type of banking. Retail.

Size of the market. March 7 2012: $ 1093.4 billion in the US.

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BANKS: SIX GERMAN BANKS SUFFER RATING CUTS

Six German banks have had their credit ratings downgraded because of the risk of further shocks from the eurozone debt crisis. Moody's, the rating agency, cut ratings for Commerzbank, Germany's second-largest bank by assets, and five other banks in the eurozone's largest economy. Moody's also downgraded Austria's three largest banks, all with heavy exposure to economies in central and eastern Europe. The downgrades were less severe than those suffered by other European banks; the German economy has held up well in the crisis, driving down unemployment and reducing the risk to banks of loan default by private and corporate customers. [From James Wilson: "Six German banks suffer rating cuts", Financial Times, 7 June 2012]
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