Q36. What are the differences between market value and book value of capital
Q37. Why banks and other financial institutions sell loan
Q38. What are the sources of revenue and areas of expenses for a bank & insurance company?
Q39. Define different capital requirement
Q40. Point out the major guidelines regarding management of capital according to Basel-II
Q36. What are the differences between market value and book value of capital
Sl. Book Value Market Value
1 Book value is the price paid for a Market value is the current price at
particular asset. which you can sell an asset.
2 This price never changes The price may be changed
3 useful to help track profits and It indicates the profit (or loss)
losses incurred.
4 The need for book value also It is not raises from generally
arises when it comes to generally
accepted accounting principles
accepted accounting principles
5 Sometimes creates problems for It generates the appropriate price
assets price being fixed
Q37. Why banks and other financial institutions sell loan
The banks and FIs sell loan due to profits and reduce the some capital expenditures are mentioned below:
1. Reserve Requirement: Regulatory authority imposes non-interest bearing requirements, are a form of tax that adds to the cost of funding the loan portfolio. Regulatory taxes such as reserve requirements create an incentive for banks to remove loans from the balance sheet by loan selling.
2. Fee Income: Banks and financial institutions often report any income earned from selling loans. As a result, originating and quickly selling loans can boost banks and financial institutions reported income under current accounting rules.
3. Capital Costs: The reserve requirements imposed as a burden as long as required capital exceeds the amount that they struggle to meet adequate capital requirements holding more debt capital rather than equity capital.
4. Liquidity Risk: the liquidity is a major problem due to liabilities tends to be highly liquid. To resolve it, some of its loans sales to outside investors and significantly reduced the liquidity as assets on the balance sheet.
Q38. What are the sources of revenue and areas of expenses for a bank & insurance company?Sources of revenue of a Bank:
1. Interest Earned
- Discount bills
- Income on investments
- Balances with other banks & FIs
2. Other Income
- Commission, exchange, brokerage
- Sale of investments
- Revaluation of investments
- Sale of land building and other assets
- Exchange transactions
Areas of expenses of a bank:
1. Interest Expense
- Interest on deposits
- Interest on borrowings to other banks & FIs
- Others
2. Operating Expenses
- Provisions
- Rent, taxes
- Printing, stationery, advertising, publicity
- Depreciation
- Fees of auditors & advocacy
- Utility bill
- Repairs and maintenance
- Insurance
Sources of revenue of a Insurance Company:
- Premiums paid by Policy owners
- Income from investments
Areas of expenses of a Insurance Company:
- Commissions paid to agents
- Expenses to investigate, litigate, settle claims
- Advertising
- Computerized racing and policy issuance systems
- Postage and telephone charges
- Travel expenses
- Salaries
Q39. Define different capital requirement
Capital requirement is categorized in three tiers:
1. Tier-1 capital called ‘Core Capital’ comprises of highest quality of capital elements:
a) Paid up capital
b) Non-repayable share premium account
c) Statutory reserve
d) General reserve
e) Retained earnings
f) Minority interest in subsidiaries
g) Non-cumulative irredeemable preference shares
h) Dividend equalization account
2. Tier-2 capital called ‘Supplementary Capital’ represents other elements, which fall short of some of the characteristics of the core capital but contribute to the overall strength of a bank:
a) General provision
b) Revaluation reserves
- Fixed assets
- Securities
- Equity instrument
c) All other preference shares
d) Subordinated debt
3. Tier-3 capital called ‘Additional Supplementary Capital’, consists of short-term subordinated debt (original maturity 2 to 5 years) would be solely for the purpose of meeting a proportion of the capital requirements for market risk.
Q40. Point out the major guidelines regarding management of capital according to Basel-IIThe major guidelines regarding capital management are as pointed below:
1. Tier-1 Core Capital:
a) Paid up capital
b) Non-repayable share premium account
c) Statutory reserve
d) General reserve
e) Retained earnings
f) Minority interest in subsidiaries
g) Non-cumulative irredeemable preference shares
h) Dividend equalization account
2. Tier-2 Supplementary Capital:
a) General provision
b) Revaluation reserves - Fixed assets
- Securities
- Equity instrument
c) All other preference shares
d) Subordinated debt
3. Tier-3 Additional Supplementary Capital: Short-term subordinated debt that original maturity 2 to 5 years.
4. Foreign banks operating:
a) Tier-1 consists-
- Funds from head office
- Remittable profit retained
- Other items approved by BB
b) Tier-2 consists-
- General provision
- Borrowing from head office in foreign currency
- Revaluation of securities
- Other items approved by BB
5. Conditions pf maintaining capital:
a) Tier-2 will be limited to 100% of amount of Tier-1
b) 50% of revaluation reserves for fixed assets & securities eligible for Tier-2
c) 10% of revaluation reserves for equity instruments eligible for Tier-2
d) Subordinated debt should limited up to 30% of the amount of Tier-1
e) Limitation of Tier 3: 28.5% market risk needs to support by Tier-1. Market Risk support from Tier-3 should up to 250% of Tier-1
Sl. Book Value Market Value
1 Book value is the price paid for a Market value is the current price at
particular asset. which you can sell an asset.
2 This price never changes The price may be changed
3 useful to help track profits and It indicates the profit (or loss)
losses incurred.
4 The need for book value also It is not raises from generally
arises when it comes to generally
accepted accounting principles
accepted accounting principles
5 Sometimes creates problems for It generates the appropriate price
assets price being fixed
Q37. Why banks and other financial institutions sell loan
The banks and FIs sell loan due to profits and reduce the some capital expenditures are mentioned below:
1. Reserve Requirement: Regulatory authority imposes non-interest bearing requirements, are a form of tax that adds to the cost of funding the loan portfolio. Regulatory taxes such as reserve requirements create an incentive for banks to remove loans from the balance sheet by loan selling.
2. Fee Income: Banks and financial institutions often report any income earned from selling loans. As a result, originating and quickly selling loans can boost banks and financial institutions reported income under current accounting rules.
3. Capital Costs: The reserve requirements imposed as a burden as long as required capital exceeds the amount that they struggle to meet adequate capital requirements holding more debt capital rather than equity capital.
4. Liquidity Risk: the liquidity is a major problem due to liabilities tends to be highly liquid. To resolve it, some of its loans sales to outside investors and significantly reduced the liquidity as assets on the balance sheet.
Q38. What are the sources of revenue and areas of expenses for a bank & insurance company?Sources of revenue of a Bank:
1. Interest Earned
- Discount bills
- Income on investments
- Balances with other banks & FIs
2. Other Income
- Commission, exchange, brokerage
- Sale of investments
- Revaluation of investments
- Sale of land building and other assets
- Exchange transactions
Areas of expenses of a bank:
1. Interest Expense
- Interest on deposits
- Interest on borrowings to other banks & FIs
- Others
2. Operating Expenses
- Provisions
- Rent, taxes
- Printing, stationery, advertising, publicity
- Depreciation
- Fees of auditors & advocacy
- Utility bill
- Repairs and maintenance
- Insurance
Sources of revenue of a Insurance Company:
- Premiums paid by Policy owners
- Income from investments
Areas of expenses of a Insurance Company:
- Commissions paid to agents
- Expenses to investigate, litigate, settle claims
- Advertising
- Computerized racing and policy issuance systems
- Postage and telephone charges
- Travel expenses
- Salaries
Q39. Define different capital requirement
Capital requirement is categorized in three tiers:
1. Tier-1 capital called ‘Core Capital’ comprises of highest quality of capital elements:
a) Paid up capital
b) Non-repayable share premium account
c) Statutory reserve
d) General reserve
e) Retained earnings
f) Minority interest in subsidiaries
g) Non-cumulative irredeemable preference shares
h) Dividend equalization account
2. Tier-2 capital called ‘Supplementary Capital’ represents other elements, which fall short of some of the characteristics of the core capital but contribute to the overall strength of a bank:
a) General provision
b) Revaluation reserves
- Fixed assets
- Securities
- Equity instrument
c) All other preference shares
d) Subordinated debt
3. Tier-3 capital called ‘Additional Supplementary Capital’, consists of short-term subordinated debt (original maturity 2 to 5 years) would be solely for the purpose of meeting a proportion of the capital requirements for market risk.
Q40. Point out the major guidelines regarding management of capital according to Basel-IIThe major guidelines regarding capital management are as pointed below:
1. Tier-1 Core Capital:
a) Paid up capital
b) Non-repayable share premium account
c) Statutory reserve
d) General reserve
e) Retained earnings
f) Minority interest in subsidiaries
g) Non-cumulative irredeemable preference shares
h) Dividend equalization account
2. Tier-2 Supplementary Capital:
a) General provision
b) Revaluation reserves - Fixed assets
- Securities
- Equity instrument
c) All other preference shares
d) Subordinated debt
3. Tier-3 Additional Supplementary Capital: Short-term subordinated debt that original maturity 2 to 5 years.
4. Foreign banks operating:
a) Tier-1 consists-
- Funds from head office
- Remittable profit retained
- Other items approved by BB
b) Tier-2 consists-
- General provision
- Borrowing from head office in foreign currency
- Revaluation of securities
- Other items approved by BB
5. Conditions pf maintaining capital:
a) Tier-2 will be limited to 100% of amount of Tier-1
b) 50% of revaluation reserves for fixed assets & securities eligible for Tier-2
c) 10% of revaluation reserves for equity instruments eligible for Tier-2
d) Subordinated debt should limited up to 30% of the amount of Tier-1
e) Limitation of Tier 3: 28.5% market risk needs to support by Tier-1. Market Risk support from Tier-3 should up to 250% of Tier-1
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