Commercial BANK - PHAN THỊ TÚ QUYÊN - 312010 22620 - END-OF-TERM Examination PDF

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SCHOOL OF BANKINGUEH UNIVERSITYEND-OF-TERM EXAMINATIONCourse: Commercial BankingClass: 22D1BANINSTRUCTOR: NGUYỄN THỊ HỒNG NHUNGSTUDENTS: PHAN THỊ TÚ QUYÊNID: 31201022620-2022-1. What is the difference between commercial banks and other financial institutions? Describe the core business activities of...

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SCHOOL OF BANKING UEH UNIVERSITY

END-OF-TERM EXAMINATION Course: Commercial Banking Class: 22D1BAN50604903

INSTRUCTOR: NGUYỄN THỊ HỒNG NHUNG STUDENTS:

PHAN THỊ TÚ QUYÊN

ID:

31201022620

-2022-

1. What is the difference between commercial banks and other financial institutions? Describe the core business activities of commercial banks. a. The difference between commercial banks and other financial institutions The term commercial bank refers to a financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses. Commercial banks make money by providing and earning interest from loans such as mortgages, auto loans, business loans, and personal loans. Customer deposits provide banks with the capital to make these loans. A financial institution is an intermediary between consumers and the capital or the debt markets providing banking and investment services. The major categories of financial institutions include central banks, retail and commercial banks, internet banks, credit unions, savings, and loans associations, investment banks, investment companies, brokerage firms, insurance companies, and mortgage companies. Except for banks, they are all classified as non-banking financial entities that provide financial services to the public but are not banks. Other financial institutions, on the other hand, are unable to accept deposits into savings and demand deposit accounts which are commercial bank routinely activities. Commercial banks are also protected and funded by central banks, making them less hazardous to invest in than other financial organizations. However, a reduced interest rate is frequently associated with this. Finally, the lending and borrowing operations of commercial banks supply a large quantity of credit. As a result, they play a crucial role in supporting and boosting the country's economy. They have a stronger impact on central banks' monetary policies than other financial institutions. b. The core business activities of commercial banks Overall, the core business activities of commercial banks include capital mobilization, using capital activities, and intermediary activities enjoying commercial commission.

Capital mobilization in commercial banks is the process of planning, organizing and directing the implementation and control of the activities of mobilizing capital in order to achieve the set objectives.

The capital using activities of commercial banks are the second way for commercial banks to earn their profit. Some of the activities are listed below: -

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Commercial banks must engage in treasury activities as part of their day-to-day operations. Treasury initiatives help to ensure the liquidity of commercial banks. Treasury operations include cash reserves in commercial bank warehouses, deposits at the central bank, and deposits at other commercial banks. Credit-granting activities: Credit-granting operations make up the majority of commercial banks' capital-use activities. When commercial banks offer credit, they enter into agreements or obligations with consumers, such as the right to utilize a specific amount of money within a specific time frame, which is tied to the return principle. Lending, discounts, rediscounting valuable documents, Bank guarantees, and financial leasing is all examples of commercial banks' credit extension activities. The majority of commercial banks' credit extension activities are in the form of lending. Investment activities: Commercial banks mix lending and investing operations in order to earn profits while preserving financial security. This diversifies capital use operations, minimizing operational risks. Commercial banks engage in capital contributions to joint ventures and associations, on the stock market (debt securities, government and economic organization capital securities, and so on), and in other investment industries. Successful investment operations will assist commercial banks in terms of growing liquidity and lowering losses. They should take more risks with their money and diversify their investments. Other activities: In addition to the aforementioned operations, commercial banks engage in a variety of other activities that can be classified as receivables but have yet to be collected. capital spent on equipment purchases; The bank is forced to pay expenditures due to a business loss and so on.

Furthermore, intermediary activities that enjoy commercial commissions also are bank services. Commercial banks now offer banking services to their consumers, integrating their traditional operations to suit market demands for economic integration and development while also contributing to your income growth. Commercial banks provide payment and treasury services, guarantee services (in credit, bidding, import, and export, among other things), foreign currency trading services, entrustment services, agency services, and securities trading, among other

things.... Finally, as science and technology improve, commercial banks will be able to provide new money and credit services, such as card services, Internet banking, and so on.

2. Describe the similarities and differences between Certificate of deposit (CD), Money Market Deposit Accounts (MMDAs), and Saving accounts? Certificates of Deposit A CD is a timed savings account. In exchange for a fixed interest rate that may be higher than you would get from a regular savings account or MMDA, you agree to deposit a set amount for a set term—three, six, nine, or 12 months or multiple years up to 10. Interest on your CD is compounded daily, weekly, monthly, or annually, according to the terms of your agreement with the bank or credit union. Money Market Deposit Accounts A money market deposit account (MMDAs), also known as a money market account (MMA), is a special type of bank or credit union savings account with some features not found in regular savings accounts. Most money market deposit accounts pay a higher interest rate than regular passbook savings accounts and often include check-writing and debit card privileges. MMDAs also come with restrictions that make them less flexible than regular checking or savings accounts. Saving accounts A savings account is an interest-bearing deposit account held at a bank or other financial institution. Though these accounts typically pay a modest interest rate, their safety and reliability make them a great option for parking cash you want available for short-term needs. They are similar in properties that all of them are interest-bearing savings accounts and the Federal Deposit Insurance Corporation insures your money (FDIC).

There are some aspects that are different between them: 1. Interest rate CD: Certificates of deposit usually have higher and more stable interest rates than savings accounts, and depending on the length of the deposit (long or medium term), the highest interest rate is close to 9%. MMDAs: Higher interest rates than savings. Saving Accounts: Depending on the term and each bank, the current highest savings interest rate is about 6-7%. 2. Period CD: Longer-term Certificates of Deposit (CDs). Depending on the bank and the issuance, it could be 6 months, 9 months, 12 months, 18 months, 24 months, 36 months, or 84 months. MMDAs: There is no time limit. Saving Accounts: Savings deposits usually have terms of one month, two months, three months, six months, twelve months, and twenty-four months, ect. 3. Liquidity CD: In theory, customers whose buy a certificate of deposit cannot withdraw before maturity, if any, they also have to wait after half the term (depending on the bank), so the liquidity will be worse than the savings deposit form. MMDAs: Best Liquidity Saving Accounts: Customers can withdraw money when it is due and also before maturity, but they must pay a very low demand interest rate. Savings accounts are a channel with high liquidity; customers can withdraw money when it is due and also before maturity, but they must pay a very low demand interest rate. 4. Accessible CD: You cannot withdraw money from a CD at an ATM or by writing a check. The money is not accessible unless you withdraw it early. no access to your money until a term ends. MMDAs: typically give you access to deposits in the form of written checks, debit

cards, and the ability to make an electronic transfer. Saving Account: You can usually withdraw money from your savings account using an ATM, making it easy to get cash when you need it. 5. Withdrawals MMDAs: You can't write as many checks as you want or make as many electronic transfers as you want. Saving Accounts: You are limited to a certain number of withdrawals per month. 6. Fees CDs: There are no fees: You will not be charged any additional fees if you do not withdraw your funds early. 3. According to Basel II and Basel III, what is the safety ratio of risk-weighted assets to the capital mobilization of a commercial bank? How Vietnamese commercial banks apply Basel standards? The safety ratio of risk-weighted assets to capital mobilization of a commercial bank In a globalized and internationalized world, businesses, particularly commercial banks, must compete with other corporations and financial institutions. The Basel Committee on Banking Supervision designed Basel I, II, and III with the primary goal of assisting banks in coping with possible risks and improving their ability to absorb losses. Minimum capital adequacy ratios (CAR) of 8% and 10.5 percent are required under Basel II and III, respectively. Banks have two main silos of capital that are qualitatively different from one another. Tier 1 refers to a bank’s core capital, equity, and the disclosed reserves that appear on the bank’s financial statements. If a bank experiences significant losses, Tier 1 capital provides a cushion that can allow it to weather stress and maintain a continuity of operations. By contrast, Tier 2 refers to a bank’s supplementary capital, such as undisclosed reserves and unsecured subordinated debt instruments. Building on Basel I, Basel II provided guidelines for the calculation of minimum regulatory capital ratios and confirmed the requirement that banks maintain a capital reserve equal to at least 8% of their risk-weighted assets.

A bank’s total capital is calculated by adding both tiers together. Under Basel III, the minimum total capital ratio that a bank must maintain is 8% of its risk-weighted assets (RWAs), with a minimum Tier 1 capital ratio of 6%. The rest can be Tier 2. Vietnamese commercial banks apply Basel standards Applying Basel standards is an indispensable requirement for Vietnamese banks to ensure the safety of business operations against unpredictable fluctuations of the financial market. If banks around the world have applied Basel II standards many years ago, and are currently completing Basel III standards, most banks in Vietnam have not yet officially announced the application of Basel II standards. Basel II, except Joint Stock Commercial Bank for Foreign Trade (Vietcombank), International Commercial Joint Stock Bank (VIB) and Orient Commercial Joint Stock Bank (OCB). -

Capital adequacy ratio abbreviated as CAR - this is considered an economic indicator that reflects the relationship between a bank's risk-adjusted assets and equity. Vietnam has issued many internal regulations on credit granting and quality assessment. Asset volume and CAR ratio compliance, liquidity management. The requirement to issue these internal regulations is to improve risk management capacity and ensure the safety of business activities of banks.

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Regarding debt classification, commercial banks implement two ways of classifying debts: According to Article 6 (quantitative method) and Article 7 (qualitative method), they are classified into 5 groups of debts. Regarding the provisioning ratio, the Commercial banks must make two types of provisions, namely specific provisions and general provisions. This regulation shows that the State Bank has gradually applied Basel II in allowing commercial banks to choose an internal credit rating method for debt classification and provisioning, and also sets requirements for debt management and control. higher risk for commercial banks. However, each commercial bank builds its own internal credit rating system in its own way, so it will create inconsistencies in risk measurement, debt classification and provisioning, making it difficult to monitor and manage.

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Credit rating - The basis for assessing the debt repayment ability of the subjects wishing to extend credit, contributing to the credit granting decision (to grant or not to grant credit, determine the credit limit, term,

interest rate, loan security measures…) and credit management. Currently, in Vietnam, there is still a shortage of independent credit rating agencies and weak information quality. Most Vietnamese commercial banks still apply the traditional risk measurement method and very few commercial banks have built and perfected their internal credit rating system according to Basel I recommendations. -

Inspection and supervision activities: On the side of the State Bank and other management agencies: the State Bank has assessed the organizational models, operations, and infrastructure in support of banking inspection and supervision; promulgate a legal framework for inspection and supervision activities according to the principles of the Basel Committee such as: supervision is carried out by both methods: remote supervision (through compliance with the CAR coefficient and the standards). safety margin) and on-site inspection according to Basel's supervisory principles (principle 20).

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There is still a big gap between Basel II's requirements for pillar III in terms of information disclosure and market principles (including qualitative and quantitative information disclosure on capital adequacy, publish risk levels and risk measurement techniques, announce internal assessment process on capital adequacy, publish criteria for determining materiality, etc.

4. Why do banks pay low interest rate for current accounts? Why the interest rate of longterm loans is usually higher than the interest rate of short-term loans? Because earning interest is the major motivation for putting money in a checking account, most current account providers either do not pay interest on credit balances or pay it at a lesser rate. Long-term loans are more risky than short-term loans because they involve market volatility, client default, and other factors. Long-term loans will therefore be more expensive than short-term loans.

5. What is the difference between Open-end Credit and Close-end Credit? Give the examples and application for these credit methods. In your opinion, how many credit cards are too many? Explain your reasoning. A consumer credit line that may be added to or paid off at any time up to a set credit limit is known as open-end credit. The consumer has the option of paying in full to avoid penalties or paying in installments. Bank credit cards and check overdraft lines of credit are two of the most frequent kinds of open credit. The polar opposite of open credit is closed credit. Close-end credit is a form of credit that must be returned in full at the conclusion of the loan period, including principle, interest, and any pre-agreed financing costs. In terms of Open-end Credit, when compared to an installment loan, interest is usually not charged on the portion of the line of credit that is not used, which can result in interest savings for the borrower. To Close-end Credit, a mortgage can offer a fixed or variable rate if you have a fixed rate of interest. Open-end Credit ● Example: Overdraft Protection, VISA credit cards, Personal Lines of Credit and Home Equity Lines of Credit. ● Applications: a loan or a credit card. Close-end Credit ● Example: a home mortgage loan, a car loan, or a loan for appliances. ● Applications: buy expensive items–such as a house, a car, a boat, furniture, or appliances–and then pay for those items in the future. How many cards are too many? In my opinion, the amount of credit cards should depend on each person. There is no specific number of credit cards considered right for all consumers. By distributing charges over many credit cards, you may be able to maintain your credit line use ratio per card below the required 30 percent. Having numerous cards can have advantages, such as combining different types of rewards cards to maximize earnings across all categories of expenditure. There's a good case to be made for carrying at least one credit card to take advantage of the ease, security, and other perks that come with it. Whether you need the extra credit lines to meet your monthly discretionary budget or want to use your regular

shopping to gain various sorts of incentives like cash back, points, or airline miles might help you justify carrying several credit cards. Customers have too much credit cards when they can not afford to pay their bills, do not need them, or do not plan to use them for some purpose. 6. How do loans affect a bank’s income? Why is liquidity risk considerable inportance to a bank’s loan policy? According to Vietnamese Law on credit institutions, can commercial banks use short-term deposits for long-term loans? a. How do loans affect a bank’s income? The bank creates an account for the consumer, complete with repayment conditions and the current loan interest rate. The lending interest rate refers to the cost of a bank loan to a consumer. The supply-demand relationship of credit in the market and the level of credit risk based on time, loan size, implementation cost, capital usage environment, loan guarantee relationship, and other elements; Mandatory regulatory environment changes. Commercial bank rivalry has affected and caused a progressive fall in lending rates. There are many various interest rates utilized for different borrowers, which is a disadvantage for banks with small size and low financial ability. b. Why is liquidity risk considerable inportance to a bank’s loan policy Liquidity risk is critical to a bank's credit strategy because of the following reasons: - Liquidity in banking refers to the ability of a bank to meet its financial obligations as they come due. It can come from direct cash holdings in currency or on account at the Federal Reserve or other central bank. More frequently, it comes from acquiring securities that can be sold quickly with minimal loss. The failure of a bank to satisfy its debts poses a danger to its financial position or survival. - Liquidity risk may spin out of control, compounding other risks including credit risk and market risk. As a result, liquidity risk has emerged as one of the most critical components of an enterprise-wide risk management strategy. The liquidity framework of a bank should retain sufficient liquidity to resist all types of stress situations. A regular review of the bank's liquidity risk management framework and liquidity status is an important supervisory step that ensures the bank's proper operation. A company's ability to satisfy its commitments and even go out of business might be jeopardized if it lacks sufficient liquidity. c. According to Vietnamese Law on credit institutions, commercial bank should use what type of loan?

According to Vietnamese Law on credit institutions, commercial banks can use short-term deposits for long-term loans. 7. What is the difference between prime rate and subprime rate and how they are applied? Describe the five Cs credit criteria in lending process. Why might underwriting standards vary at different banks? a. The difference between prime rate and subprime rate The prime rate is the interest rate that commercial banks charge their most creditworthy corporate customers. Subprime rate is interest rates that commercial banks charge to subprime borrowers. In terms of type of customers...