Asset & Liability Management in Banking: A Comprehensive Guide
Item 6: Application of Bank Funds
Asset Management
Bank liabilities, the source of funds, are invested in various assets. These assets include loans granted to customers. Banks aim to ensure repayment and assess customer solvency.
Factors Influencing Asset Operations
Security Operation
Banks require security to ensure loan repayment with interest. A high volume of bad debts can lead to bankruptcy. Material and personal guarantees help recover awarded funds.
Transaction Term
Banks consider the correlation between loan recovery and client repayment deadlines. Short-term lending offers advantages:
- Serving more customers
- Increased profitability through fees
- Risk distribution among borrowers
- Increased market penetration
- Higher profitability due to quicker reinvestment
Short-term loans typically have higher interest rates. When money prices decrease, long-term loans with fixed interest become more attractive. Loans exceeding 10 years often require special guarantees.
Compensation from Customers
Loans must generate sufficient profit to reward customers and achieve bank objectives. Compensation often involves additional transactions that generate further income for the bank.
Information on Asset Operations
Information Provided by the Customer
Customers provide data on assets and revenues when applying for funding.
External Information Sources
Registries: Record real estate transactions, revealing property ownership and location.
Commercial Registry: Provides details about companies, verifying client information.
Central Risk Information Bank of Spain (CIRBE): Contains credit risk information, allowing banks to assess customer debt.
AsnefEquifax: Shares information on unpaid debts for individuals and legal entities.
Express Acceptance Delinquent (RAI): Shares similar information but is exclusive to banks.
Discount Shopping
Banks purchase payment documents (e.g., letters of credit) at a discounted price, anticipating the payment amount minus interest and fees.
Letters of Exchange
A written order by the drawer (issuer) instructing the drawee (payer) to pay a specific amount to the payee (beneficiary) at maturity.
Guarantees
A written agreement to pay a third party, either generally or for a specific person, in case of default.
Item 7: Lending and Credit
Concepts and Differences
Loan: A contract where a bank provides a sum of money to a customer, who agrees to repay it with interest.
Credit: An agreement allowing the customer access to funds up to an agreed limit.
Risk in Loans and Credits
Scoring
Computer models evaluate potential borrowers and assign a score to assess risk, especially for high-volume, short-term loans.
Unsecured Loans
The debtor is responsible for repayment with all present and future assets. Personal guarantees reinforce this responsibility without specific collateral. Unsecured loans carry higher risk for banks.
Secured Loans
Long-term operations often require collateral. Examples include mortgages and pledges.
- Pledge with Displacement: The debtor gives the collateral to the creditor.
- Pledge without Displacement: The debtor retains the collateral, but the creditor has the right to seize it in case of default.
Mortgages: Real estate or movable property is used as collateral.
Mortgage Loans
Used for real estate purchases, with terms between 10 and 30 years. Types include:
- New Construction: The buyer subrogates a part of the developer’s mortgage.
- Second-hand: The buyer obtains a new mortgage after verifying the property’s status.
Maximum Mortgage
Used for high-risk customers when a personal guarantee is insufficient.
Loan Settlement
Uses mathematical financial calculations. Interest rates can be fixed or variable (e.g., Euribor, IRPH).
Credit Accounts
Credits are often linked to current accounts. Borrowers have a credit limit and can make payments and withdrawals. Overdraft situations are penalized with high interest and fees.
Signature Loans: Bank Guarantees
Banks guarantee customer obligations without initially providing funds. Types include:
- Economic Trade Guarantees: Ensure the quality of supplied materials.
- Economic Financial Guarantees: Guarantee credits or loans from other entities.
- Cheap Cigar Guarantees: Cover customer payment obligations.