Tài liệu Thị trường tài chính và các định chế tài chính_ Chapter 21 pdf

Chapter Outline Background on savings institutions  Sources and uses of funds  Exposure to risk  Management of interest rate risk  Valuation of a savings institution  Interaction w

Chapter 21

Thrift Operations

Chapter Outline

 Background on savings institutions

 Sources and uses of funds

 Exposure to risk

 Management of interest rate risk

 Valuation of a savings institution

 Interaction with other financial institutions

Chapter Outline (cont’d)

 Participation in financial markets

 Performance of savings institutions

 Savings institution crisis

 Background on credit unions

 Sources and uses of credit union funds

 Credit union exposure to risk

 Regulation of credit unions

Background on Savings Institutions

 Savings institutions include savings banks and S&Ls

 S&Ls are the most dominant type

 Savings institutions are mainly concentrated in the

Northeast

 The insuring agency for S&Ls is the Savings

Association Insurance Fund (SAIF)

 The insuring agency for savings banks is the Bank

Insurance Fund (BIF)

 Both agencies are administered by the FDIC

 Savings banks and S&Ls are very similar in their

Background on Savings Institutions (cont’d)

20%

78%

2%

More than $1 billion

Between $100 million and $1 billion

Less than $100 million

Background on Savings Institutions (cont’d)

 Most SIs are mutual (owned by depositors)

 Many SIs have shifted their ownership structure from

depositors to shareholders through

mutual-to-stock-conversions

 Allow SIs to obtain additional capital by issuing stock

 Provide owners with greater potential to benefit from performance

 Make SIs more susceptible to hostile takeovers

Background on Savings Institutions (cont’d)

Background on Savings Institutions (cont’d)

 Regulation of savings institutions

 Regulated at both the state and federal level

 Federally chartered SIs are regulated by the Office of Thrift

Supervision (OTS)

 State-chartered SIs are regulated by the state that has

chartered them

 Regulatory assessment of SIs

 Regulators conduct periodic onsite examinations of capital and risk

 Monitoring is conducted using the CAMELS rating

 Deregulation of services

 Recently, SIs have been granted more flexibility to diversify products

Sources of Funds

 Most funds come from savings and time deposits

such as passbook savings, CDs, and MMDAs

 Since 1981, SIs are allowed to offer NOW accounts

as a result of DIDMCA

 Since 1982, SIs are allowed to offer MMDAs as a

result of the Garn-St Germain Act

 Since 1978, SIs are allowed to offer retail CDs with rates tied to Treasury bills

Sources of Funds (cont’d)

 SIs can borrow from other depository institutions in the federal funds market

 SIs can borrow at the Fed’s discount window

 SIs can borrow through repos

 Capital

 The capital (net worth) of SIs is composed of retained earnings

and funds obtained from issuing stock

 SIs are required to maintain a minimum level of capital

Uses of Funds

 Cash

 SIs maintain cash to satisfy reserve requirements

and accommodate withdrawal requests

 Are the primary asset of SIs

 Typically have long-term maturities and can be

prepaid by borrowers

 Are mostly for homes or multifamily dwellings

 Are subject to interest rate risk and default risk

Uses of Funds (cont’d)

 SIs issue securities backed by mortgages

 Cash flows to holders of these securities may not be steady because of prepayment

 Other securities

 All SIs invest insecurities such as Treasury bonds

and corporate bonds

 Provide liquidity

 Some thrifts invested in junk bonds prior to 1989

Uses of Funds (cont’d)

 Federally chartered SIs are allowed to invest up to 30 percent of their assets in nonmortgage loans and securities

 10 percent can be used to provide non-real estate commercial loans

 Maturities typically range from one to four years

 Substituting loans for mortgages reduces interest rate risk but increases credit risk

 Other uses of funds

 Lending in the federal funds market

Uses of Funds (cont’d)

Mortgage-Backed Securities

Other Securities Other Assets

 SIs can obtain temporary funds through repurchase agreements

or in the federal funds market

 Credit risk

 Conventional mortgages are the primary source of credit risk

 SIs often carry the risk rather than paying for insurance

 Many SIs were adversely affected by the weak economy in

2001–2002

Exposure to Risk (cont’d)

 Interest rate risk

 Many SIs were hurt by rising interest rates in the

1980s because of their heavy concentration on rate mortgages

fixed- Many SIs benefited from their exposure to interest

rate risk in the 2001–2002 period when interest rates declined

Exposure to Risk (cont’d)

 Interest rate risk (cont’d)

 Measurement of interest rate risk

 SIs commonly measure the gap between rate-sensitive assets and liabilities to determine interest rate risk exposure

 Gap measurement is dependent on the criteria used to classify an asset or liability as rate sensitive

 Some SIs measure the duration of assets and liabilities to determine the imbalance in sensitivity of interest revenue versus expenses

Management of Interest Rate Risk

 The interest rate on ARMs is tied to

market-determined rates and are periodically adjusted

 ARMs enable an SI to maintain a more stable spread between interest revenue and interest expenses

 ARMs reduce the adverse impact of rising interest

rates and the favorable impact of declining interest rates

Management of Interest Rate Risk (cont’d)

 Interest rate futures contracts

 Allows for the purchase of a specific amount of a particular

financial security for a specified price at a future point in time

 Some SIs use T-bond futures because they resemble fixed-rate mortgages

 Selling T-bond futures effective hedges fixed-rate mortgages

 If interest rates rise, the market value of the securities represented

by the futures contract will decrease

 SIs benefit from the difference between the market value at which they purchase the securities in the future and the futures price

Management of Interest Rate Risk (cont’d)

 Interest rate swaps

 Allows an SI to swap fixed-rate payments (outflow) for variable-rate payments (inflow)

 Fixed-rate outflows can be matched against

fixed-rate mortgages held

 Variable-rate inflows can be matched against the

variable cost of funds

 Beneficial in a rising rate environment

Management of Interest Rate Risk (cont’d)

 Conclusions about interest rate risk

 Although strategies are useful, it is virtually

impossible to completely eliminate interest rate risk

Valuation of a Savings Institution

 The value should change in response to

changes in its expected cash flows and to

changes in the required rate of return:

), (

Valuation of a Savings Institution

(cont’d)

 Factors that affect cash flows

 Change in economic growth

 During periods of strong economic growth:

 Consumer loan and mortgage loan demand is higher

 Loan defaults are reduced

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(CF f ECON R INDUS MANAB

Valuation of a Savings Institution

(cont’d)

 Factors that affect cash flows (cont’d)

Change in the risk-free interest rate

 SIs’ cash flows are inversely related to interest rate movements

 SIs rely heavily on short-term deposits

 SIs’ assets commonly have fixed rates

 Change in industry conditions

 SIs are exposed to regulatory constraints, technology, and competition

Valuation of a Savings Institution

(cont’d)

 Factors that affect cash flows (cont’d)

 Managers can attempt to make internal decisions that will capitalize on the external forces that the bank cannot control

 Skillful managers will recognize how to revise the composition of the SI’s assets and liabilities to capitalize on existing economic or regulatory conditions

Valuation of a Savings Institution

(cont’d)

 Factors that affect the required rate of

return by investors

 Change in the risk-free rate

 When the risk-free rate increases, so does the return required by investors:

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( INF ECON MS DEF f

R f

Valuation of a Savings Institution

(cont’d)

 Factors that affect the required rate of

return by investors (cont’d)

 Change in the risk premium

 When the risk premium increases, so does the return required by investors:

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Interaction with Other Financial

Institutions

Type of Financial

and commercial loans

commercial loans

deposits Investment companies and

brokerage firms

and caps

Participation in Financial Markets

Type of

securities

futures

Performance of Savings Institutions

 The difference between interest income

and interest expenses has fluctuated in

recent years

 The loan loss provision has declined since 2001

 Noninterest income has increased

 Noninterest expenses have increased

Performance of Savings Institutions (cont’d)

 Comparison of factors that affect the

performance of SIs and commercial banks

Loan loss provisions are typically much lower for SIs than for commercial banks

SIs earn substantially less noninterest income than commercial banks

Noninterest expenses are lower for SIs than for commercial banks

Savings Institution Crisis

 Numerous SIs became insolvent during

the late 1980s

 Reasons for failure

Increase in interest expenses

 Interest rates increased in the late 1980s, affecting SIs with long-term mortgages negatively

Savings Institution Crisis (cont’d)

 Reasons for failure (cont’d)

Losses on loans and securities

 Crisis was precipitated by unpaid loans

 Major loan losses were in commercial real estate

 SIs were forced to assume real estate holdings that were sometimes worth less than half the loan amount originally provided

 Most commonly, managers used depositors’ funds for purchases of personal assets

Savings Institution Crisis (cont’d)

 Reasons for failure (cont’d)

Savings Institution Crisis (cont’d)

 Provisions of the FIRREA

 The FSLIC was terminated

 SIs were required to have $1.50 in tangible capital per

$100 of deposits

 The RTC was created to deal with insolvent SIs

 The penalties for officers of SIs and other institutions were increased for fraud

 SIs were required to use 70 percent of their assets for

Savings Institution Crisis (cont’d)

 Creation of the RTC

 The RTC was formed to deal with insolvent SIs

 Liquidated assets and reimbursed depositors or sold the SI to another institution

 SIs were processed based on their size, health, and sales potential

 The most popular method for handling failures was the deposit transfer

 Deposits of failed SIs were transferred to an acquiring firm for a fee

Savings Institution Crisis (cont’d)

 Impact of the bailout

Stronger capital positions

 Many SIs are now required to maintain a higher minimum level of capital

Higher asset quality

 SIs have been forced to maintain more conservative asset portfolios

More consolidation

 FIRREA allows commercial banks and other

Savings Institution Crisis (cont’d)

 Performance since the FIRREA

increased since then

Capital ratio has increased substantially since 1989

The number of SI failures has declined to less than 12 in each of the last several years

Background on Credit Unions

 Credit unions are nonprofit organizations composed of members with a common

bond

e.g., labor union, church, university

 CUs accept deposits from members and channel funds to those members who

want to finance the purchase of assets

Background on Credit Unions

(cont’d)

 Ownership of credit unions

CUs are technically owned by depositors

Deposits are called shares, which pay

dividends

CUs’ income is not taxed

CUs can be federally or state chartered

 Federal CUs are growing at a faster rate

Most CUs are very small

Background on Credit Unions

(cont’d)

 Can offer attractive rates to their members

 Noninterest expenses are relatively low because

much of their assets is donated

 Volunteer labor may not have the incentive to manage operations efficiently

 Common bond requirements restrict a given CU’s

growth

 Many CUs are unable to diversify geographically

Sources and Uses of Credit Union Funds

 Mostly from share deposits by members

 Either share deposits, share certificates, or share drafts

 For temporary funds, CUs can borrow from other CUs

or from the Central Liquidity Facility (CLF)

 Acts as a lender similar to the Fed’s discount window

 CUs maintain capital, primarily in the form of retained earnings

 Uses of funds

 The majority of funds is used for loans to members

 Some CUs offer long-term mortgage loans

Credit Union Exposure to Risk

 Liquidity risk

 CUs can experience liquidity problems when an

unanticipated wave of withdrawal occurs without an offsetting amount of new deposits

 Credit risk

 CUs concentrate on personal loans to members

 Most loans are secured

 CUs with very lenient loan policies could experience losses

Credit Union Exposure to Risk

(cont’d)

 Interest rate risk

Maturities on consumer loans are short term, causing assets to be rate sensitive

Movements in interest revenues and interest expenses are highly correlated

The spread between interest revenues and

interest expenses remains stable over time

Regulation of Credit Unions

 Supervised and regulated y the National Credit Union Administration (NCUA)

Employs a staff of examiners to monitor CUs

CUs complete a semiannual call report that provides financial information

NCUA examiners derive financial ratios that measure the financial condition of the CU

Criteria used to assess risk are CAMELS

Regulation of Credit Unions (cont’d)

 Regulation of state-chartered credit unions

Regulated by their respective states

Products offered are influenced by the type of charter and their location

 Insurance for credit unions

90 percent of CUs are insured by the National Credit Union Share Insurance Fund (NCUSIF)

Some states require their CUs to be federally insured