Financial Intermediaries and their Risk
What is Financial Intermediaries? a business that interacts with deficit spending individuals and institutions and surplus spending individuals and institutions.
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Types of Financial Intermediaries?
Banks Mutual Funds Pension Funds Credit Unions etc
Why many people use Financial Intermediaries?
There are transaction or search costs for lenders and borrowers before they can meet. The intermediary provides a 'trading post' where depositors know they can find a willing borrower at all times and borrowers know they can find a willing lender.
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Why many people use Financial Intermediaries?
Lending through an intermediary is usually less risky than lending directly. Financial Intermediary can diversify. Banks spread their risk by making loans to many different borrowers. Hence minimizing overall risk is a central part of any financial intermediary's raisond'être.
Why many people use Financial Intermediaries? By making many loans, they learn how to better predict which of the people who want to borrow money will be able to repay. They have better information about the creditworthiness of a potential borrower than any other potential lender could have.
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Why many people use Financial Intermediaries?
Give savers / borrowers liquidity. A typical saver may want to get her money back at short notice; a typical house buyer will want to borrow money for twenty or twentyfive years. The building society can make long-term loans by taking in a whole series of different short-term deposits. Banks also make long-term loans funded by deposits that can be withdrawn at short notice.
Risk of Financial Intermediaries in the Economy
Bank debt serves as money, so disruptions to banks can affect the amount of money in circulation Financial intermediaries are tied together through chains of debts and assets Domino effects
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Deposit Insurance (pages 24-25)
Most countries have deposit insurance programs that insure depositors against losses up to a certain level FDIC (Federal Deposit Insurance Corporation) The amount insured was $2,500 in 1933 It has been increased several times Following the credit crisis it was increased from $100,000 to $250,000 in October 2008. In Indonesia? Why might deposit insurance encourage a bank to take risks? 9
www.lps.go.id
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Investment Banking
Public offering Private placement Best efforts Firm / Full commitment / Underwritten
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Best Efforts vs Firm Commitment (pages 25-26)
50 million shares are to be issued and target price is $30 per share Best efforts would lead to a fee of 30 cents per share; firm commitment leads to bank buying at $30 per share Best efforts
Firm Commitment
Can sell at $29
+$15 million
−$50 million
Can sell at $32
+$15 million
+$100 million 12
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Dutch Auction IPO
Individuals and companies bid by indicating the number of shares they want and the price they are prepared to pay The price paid is the lowest bid that leads to all the shares being sold
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Example: How are 1 million shares allocated in this situation? (page 27, Example 2.2) Bidder
Number of Shares
Price
A
100,000
$30.00
B
200,000
$28.00
C
50,000
$33.00
D
300,000
$29.00
E
50,000
$30.50
F
300,000
$31.50
G
400,000
$25.00
H
200,000
$30.25
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Google’s IPO in 2004 (Business Snapshot 2.1, page 28)
A Dutch Auction where Google retained the right to change the number of shares that would be issued and the percentage allocated to each bidder Investors who bid $85 or more obtained 74.2% of the shares they had bid for 15
Risk of Financial Intermediaries
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Risk of Financial Intermediaries Case of Bank Central Asia (BCA) Risiko Kredit Mitigasi - Pemisahan yang jelas antara unit kredit dan pengelolaan risiko. - Debitur korporasi dan komersial dianalisa secara individual oleh analis kredit independen dan terlatih. - Debitur konsumer dan usaha kecil dikelola secara statistik berbasis portfolio dengan menggunakan model penilaian kredit yang dibuat khusus.
Risk of Financial Intermediaries Case of Bank Central Asia (BCA) Risiko Tingkat Bunga Mitigasi - Menerapkan metode VaR untuk mengestimasi, memantau dan mengkaji risiko suku bunga. - Melakukan analisa repricing gap dan multiple scenario - Melakukan pemisahan untuk aktiva dan pasiva Bank dalam Rupiah dan mata uang asing.
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Risk of Financial Intermediaries Case of Bank Central Asia (BCA) Risiko Likuiditas Mitigasi -
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ALCO bertanggungjawab untuk pengelolaan risiko ini. Memantau, mengevaluasi serta mengkaji untuk penyempurnaan kebijakan dan prosedur. Pengelolaan risiko likuiditas Rupiah yang proaktif. Manajemen risiko likuiditas yang terpisah antara aktiva dan passiva Bank pada mata uang yang berbeda.
Risk of Financial Intermediaries Case of Bank Central Asia (BCA) Risiko Operasional Mitigasi -
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Menerapkan kebijakan Risk Control Self Assessment agar unit operasional mampu untuk mengidentifikasi dan mengukur risiko operasional secara independen. Memperbaharui Loss Event Database untuk mengantisipasi jika terjadi kegagalan operasional atau kehilangan data. Risiko operasional termasuk back office, fasilitas fisik, kejahatan dan skenario penanggulangan bencana.
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Risk of Financial Intermediaries Case of Bank Central Asia (BCA) Risiko Reputasi Mitigasi -
Diterapkan kebijakan utama yang berkaitan dengan persepsi negatif masyarakat melalui Prosedur Komunikasi dan Panduan Penyelesaian Pengaduan
Risk of Financial Intermediaries Case of Bank Central Asia (BCA) Risiko Strategis Mitigasi - Mengidentifikasi dan mengelola risiko yang terkait dengan kurang efektif dan kurang tanggap terhadap perubahan eksternal - Keputusan strategis didukung dengan model keuangan, stress testing dsb. - Komisaris Independen yang kompeten.
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