Corporate Finance and Banking Operations

Corporate Finance and Banking

Companies are linked with customers and suppliers, selling and buying goods and services in exchange for funds management (dinero). This allows better allocation of financial resources, improved future planning of objectives, and the ability to adapt to the changing environment (entorno). Money comes from external sources, such as banks. Companies must be aware of the costs of returns for different products and services.

Bank Management

Bank management is a system responsible for the measurement and valuation of a bank’s internal movements. The most relevant financial institutions access the bank, a commercial institution whose function is to operate with money rather than goods. It accepts deposits from savers and lends to investors. The bank pays depositors a passive interest rate and charges investors an active interest rate. The difference between the two is the bank’s profit arising from investments.

Maximizing Profits and Managing Risks

Banks aim to maximize profits by reducing reserves to the minimum possible, leading to risky investments and granting loans with high interest rates. The art of business banking is to achieve a balance between attractive benefits and security needs. All banks must manage risks:

  • Credit Risk: Large losses due to a customer’s failure to meet credit obligations.
  • Liquidity Risk: Potential losses from decisions made on available resources quickly.
  • Exchange Risk: Losses due to changes in exchange rates.
  • Interest Rate Risk: Decrease in the value of assets due to changes in interest rates.
Liquidity, Profitability, and Solvency

Banks must take care of their liquidity, profitability, and solvency. Liquidity means always being able to convert deposits into cash upon customer request. Banks try to maintain a set of assets and rights over their debts. They must keep some money for deposits in the central bank, known as “wash activos.”

Central Bank and Monetary Policy

The Central Bank is a financial institution owned by the state. Its roles include:

  • Administrator and custodian of gold and currency reserves.
  • Financial agent of the state, operating the collection and payment of government accounts.
  • Money service provider, putting notes and coins into circulation, removing damaged ones, and ensuring cash supply.
  • Lender to banks in temporary situations to correct illiquidity.
  • Responsible for monetary policy.

Monetary Policy involves analyzing the state’s economy and designing strategies to ensure monetary stability.

  • Expansive Policy: Reducing reserve requirements (e.g., from 20% to 10%) allows banks to lend more money. For example, if a bank had deposited $100 and could lend $80, it can now lend $90. This can benefit specific economic sectors.
  • Contractive Policy: Seeks to reduce money growth and increase interest rates to curb excessive economic growth that leads to inflation. High interest rates can hinder companies’ ability to finance production.

Bank Deposits

Bank deposits are the funds people place in a bank.

  • Savings Account: Keeps customers’ money available with minimal interest, settled in arrears not less than 30 days. The bank must provide proof of deposit (constancia).
  • Fixed-Term Deposit: The customer delivers money to a financial institution, which issues a certificate of deposit for a fixed term. This generates interest between the deposit and maturity dates. The minimum period is 30 days for fixed rates and 120-180 days for variable rates.
  • No-Interest Account: Funds are permanently customer deposits. Allows overdrafts if agreed upon with the bank (Line of Credit). Interest is agreed upon with the client.