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Burmistrov V. V. Bachelor of Economics, master student of International Finance Faculty Financial University under the Government of the Russian
Federation Russia, Moscow THE CONCEPT AND ELEMENTS OF THE INVESTMENT POLICY OF BANKS IN CONDITIONS OF UNCERTAINTY AND RISK Summary. This article provides an analysis of concepts and elements of Investment policies of banks, Central Bank authority and main possible directions of a bank investment.
Keywords: CONCEPT, INVESTMENT POLICY, BANKS, RISK, PORTFOLIO MANAGEMENT.
Usually investment refers to a long-term capital invested in an enterprise, business, project, but should be considered more correct the following definition. Investment banking - is an investment banking resources in long-term securities in order to obtain direct and indirect revenues. Direct income from investments in securities of the bank receives in the form of dividends, interest or profits from the resale. Indirect revenues generated by expanding the influence of banks on customers through ownership of a majority of their securities.
The investment policy of banks - is making investments and collection of practical actions to implement them. Investment activity entities serve investors , including banks, investment activities and objects are newly created and modernized fixed and current assets, securities, trust cash deposits , scientific and technical products , other objects of property .
Investment banks are considered as a business to provide two types of services: an increase of cash or by the issue of placement of securities on their primary market; Connect buyers and sellers of existing securities in the secondary market during execution of brokers and / or dealers. Brokers are companies that provide services on the international financial market; dealers in securities market - legal entities, professional participants of the securities market, having the right to make transactions with securities on its own behalf and for its own account. Dealer and broker activities are licensed activities. In the Russian Federation the license issued by the Federal Service for Financial Markets.
As indicators of investment banks, the following indicators can be used:
- Investment resources of commercial banks;
- The volume of investment banking;
- The share of investment in total assets of banks;
- Performance indicators of investment banks, in particular, growth in assets, based on the amount of investment;
Classification of forms of investments of commercial banks in the economic literature and banking practice is based on the common criteria ordering forms and types of investments.
In accordance with an investment can be identified investment in real economic assets (real investment) and investments in financial assets (financial investments). Real investments usually represent a small share of the total investment banking. More typical of banks as financial and credit institutions are financial investments.
Financial investment banks include investments in securities, fast time deposits with other banks, investment loans, shares and equity participation. With the development of the stock market are becoming increasingly important investments in securities: Debt securities (bills, depositary certificates, government and municipal securities), equity securities (shares) and derivatives.
Depending on the purpose of investment, banking investments may be direct, aimed at providing direct control of investee portfolio and implemented based on the receipt of income in the form of a flow of interest and dividends, or because of the increasing market value of assets.
By purpose of investment can be identified investments in other business activities of enterprises and investing in their own bank's activities. Bank's investments in the economic activities of other organizations realized through participation in their capital expenditure, formation or expansion of the share capital. With participation in the authorized capital by buying shares, commercial banks become co-owners of the authorized capital and acquire all the rights provided by law.
Investing in your own bank's activities include investments in the development of the material and technical base and improving the organizational level. Depending on the direction of investment are:
- Investments to ensure efficiency of banking. They are aimed at creating conditions for reducing bank costs by improving the technical equipment , improving the organization of banking activity , working conditions, training, implementation of research and development;
- Investment-oriented extension of banking services. Such investments involve expanding the resource and customer base , increase range of banking operations , the creation of new units , capable of producing new types of banking services ;
- Investments related to compliance with the requirements of regulatory agencies. These investments are made where necessary to meet the regulatory requirements regarding the establishment of certain conditions of banking.
Source of funds for investment distinguish own investment bank committed at his expense, and the client, the bank carried out by and on behalf of their clients.
Maturity investments may be short (up to one year), medium term (three
years) and long term (over three years).
Effectiveness of investments in the development of the bank achieved if cost improvement provided its financial condition. Determination of the volume and structure of investments in its own activities, carried out during the development of the bank's investment plan should be based on accurate technical and economic calculations. Exceeding the necessary amount of investments can lead to an imbalance of liquidity, reduce the revenue base of the bank and falling efficiency of banking operations.
The most important characteristic is the investment banking positions with their assessment of the combined investment criterion, the so-called magic triangle «yield - risk liquidity. »
There are strong relationship between profitability, liquidity and investment risk as the qualities of investment objects. They are expressed in the fact that, as a rule, by increasing the liquidity and reduced yield increases the risk of attachment.
Investment returns of commercial banks depends on a number of economic factors and organizational conditions , including determining role belongs to, such as : a steadily growing economy of the state ; oiled and well-functioning structure of the financial and credit system; a developed and civilized market securities; the existence of market securities institutions ( investment companies, funds , etc.); established system of laws and regulations governing the issuance and circulation of securities and the activities of the participants of the securities market , and others.
Yield securities and certain types of classes depends on the market value of the portfolio of investments, which in turn varies depending on changes in interest rates on bonds and certificates , credentials per cent , interest on promissory notes , dividends on shares and accordingly the supply and demand for these securities in the securities market .
The main goal of investment management is to obtain the maximum income for a given level of risk or minimize risk for a given level of income. Income from the investment portfolio consists of the following components:
- Proceeds in the form of interest payments;
- Revenue from increased capital value of the securities held in the portfolio of the bank;
- Commission for the provision of investment services - spread (the difference between buying and selling rates at the dealership operations) .
Central Bank of the Russian Federation can control the operation of the bank, but he did not have the right to interfere in the activities of other undertakings that are not credit institutions, and therefore, unable to determine the degree of commercial risk.
Here are the main types of risk on investment:
- Credit risk;
- The risk of exchange rate;
- Liquidity risk;
- Risk of early withdrawal;
- Business risk.
Credit risk is that the repayment of principal and interest on a security will not be implemented at the appropriate time. Assessment of credit risk for different types and individual securities issues give specialized agencies. They appropriate securities rating gives an indication of the probability of timely repayment of obligations.
Risk of changes in equity prices associated with an inverse relationship between the rate of interest and the tough-rate securities: when interest rates increase the market value of securities decreases and vice versa. This creates a big problem for the investment departments of banks, as when changing economic environment it is often necessary to mobilize liquidity and force to sell securities at a loss. Rising interest rates reduce the market price of previously issued securities, and issues with maximum maturities typically undergo the largest drop in prices. Moreover, periods of rising interest rates usually marked buildup of demand for loans. Moreover, because the main priority of the Bank is to issue credit, many securities must be sold in order to generate cash for lending.
Contradiction between liquidity and profitability and determines the investment risk, which is considered in the investment bank's activities as probable options dispersion of income with minimal damage, providing liquidity of the bank as a whole.
Banks should always consider the possibility that they will need to sell securities prior to their maturity. In this regard, the question arises about the width and depth of the corresponding secondary market for this type of securities.
Regarding the risk of early withdrawal of securities, many corporations and some governments that issue securities investment reserve the right to early reviews of these instruments and their redemption. Such redemption is permitted if the minimum allowable period has passed and if the market price of the bond is not below its initial market value.
Since these «reviews " usually occur after a decline in market interest rates , the bank faces the risk of loss of income, as it should be returned to reinvest funds at lower interest rates prevailing at the moment. Banks usually try to minimize this risk reviews , buying bonds, review of which cannot be made within a few years, or just avoiding the purchase of securities with the possibility of review .
Since the bank that holds a portfolio of «callable» bonds, loses some of the proceeds after the revocation, he receives compensation in the form of callable premium, which is higher than previously announced early repayment. Furthermore, since the possibility of early redemption of the bond introduces an element of uncertainty in the bank's policies on issues that paid a higher percentage.
All banks face a considerable risk that the market economy, they serve may come into decline with declining sales and an increase in bankruptcy and unemployment. These adverse events are referred to as business risk. They very quickly reflected in the Bank's loan portfolio, where the growth of the financial
difficulties of borrowers increases the amount of bad loans. Since the probability of business risk is high enough, many banks to offset the impact of the risk of the loan portfolio largely based on the securities of other regions.
Egorycheva M.L., Bachelor of Economics MA student at International Finance Faculty Financial University under the Government of the Russian Federation
Russia, Moscow
ESSENCE OF CORPORATE MANAGEMENT IN A BANK, ITS ROLE AND VALUE IN MARKET CONDITIONS
Abstract. Corporate governance must be industry specific in order to deal with the peculiarities of those industries, such as banks. In this financial institutions power is not associated with the ownership of physical assets but rather with access to the use of critical resources. Moreover, as banks and other financial institutions are important operators in capital markets, governance in financial institutions is a relevant factor in the context of effectiveness of capital markets.
Keywords: ECONOMICS, CORPORATE GOVERNANCE, CORPORATE MANAGEMENT, BANKS.
Corporate governance (CG) has become an extensively researched and debated topic, unique corporate governance issues that arise in the context of banks and financial institutions (financial intermediaries) have been generally discarded. This is a bit surprising as an extensive survey on corporate governance considers that corporate governance "deals with the ways in which suppliers of finance to corporations assures themselves of getting return on investment". Thus, the potential role of financial institutions in maintaining good corporate governance standards among their borrower clients is considered significant. and they are suited to monitor corporate and managerial performance due to their high (debt or equity) stake in a large number of companies. Also in times of financial crisis or irregularities, the macro issue of stability and efficient working of the financial system does come to the fore, but the micro issue of governance standards in banks (and more generally financial institutions) themselves is rarely discussed. This could partly be due to the fact that financial institutions, and banks in particular, are heavily regulated This leads to questions about whether regulation is a substitute for or complimentary to governance standards. But as good governance is likely to facilitate regulation and supervision, a case may be made for the explicit analysis of corporate governance in financial institutions Moreover, regulators themselves are emphasizing the need to maintain good corporate governance standards in the entities they are regulating supervising. While the market for corporate control and regulatory restrictions are external mechanisms of corporate governance, standards prescribed for responsibilities of different constituents of a corporation, remuneration and performance monitoring of executives and the audit function are internal mechanisms. These two
