AMERICAN COLLEGE

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• AMERICAN COLLEGE
• S K O P J E
•   PRINCIPLES OF BANKING
• Chapter 6
•  Instructror Tome Nenovski, Ph. D.
•   

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6.1. BANKING PRINCIPLES

• 6.1.1. Principle of liquidity
• - Bank deals with outside fund sources
• - Banks are bearers of country payment system
• - Banks have obligation to return the collected
  funds in
• accordance with the conditions
  agreed
• - Bank liquidity definition Bank capability to
  pay its all
• matured obligations
• - Bank directs the collected funds in different
  types of assets

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• 6.1.1. Principle of liquidity/2
• - Different kinds of assets have different
  levels of liquidity
• - Assets conversion in cash mainly depends on
  two factors
• a) Needed time (speed) some assets to be
  converted in cash
• b) Possibility for particular assets to be
  sold or particular debt to be collected (cashed)
  on its accounting value.

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• 6.1.1. Principle of liquidity/3
• - Three categories of liquidity assets
• Primary reserve (super liquidity assets) money
  in cash within the bank treasure and money on
  bank account
• Secondary reserve primary reserve assets that
  could easily be converted in cash (bank deposits
  at other banks, securities that could easily be
  sold i.e. very easily converted in cash
  Government bonds, Central bank bills,
  certificates of deposits, commercial bills)
• Money market or Central bank credits.

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• 6.1.1. Principle of liquidity/4
• - Bank has to contunualy analyze, follow and
  adjust fund resources with its placements
• - Classic rule
• Short-term placements have to be covered by
  short-term liquidity resources
• Long-term placements have to be covered by
  long-term liquidity resources
• - Assets and Liabilities term transformation
  (deposits stability core deposits)

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• 6.1.1. Principle of liquidity/5
• - Each bank is obliged
• - To respect written liquidity standards and
  rules (reserve requirements, minimum reserve
  liquidity..)
• - To determine internally the acceptable
  deposits coverage with
• liquid assets
• - To follow term adjustment between assets and
  liabilities
• - To follow expected sash inflows and
  outflows
• - To determine and to follow so called stabile
  deposits etc.
• - Bank liquidity has wider social importance.

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• 6.1.2. Principle of security and efficiency in
  bank
• investments
• - Investment security versus bank liquidity
• - Bank measures and activities for estimating
  client creditworthness ability
• - The method of 6Cs Character Capacity
  Capital Condition Colateral Control.

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• 6.1.2. Principle of security and efficiency in
  bank investments/2
• - Bank efficiency Directing bank investments
  towards subjects that are expected to reach best
  economic results
• - Need for taking over measures and activities
  for client creditworthness ability.

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• 6.1.3. Principle of profitability
• - One of two basic bank goals
• - Bank has to invest funds in most profitable
  projects (with high rates of return)
• - Risk protection Profitability versus
  security
• - The bank is as risky as the Central bank and
  bank shareholders are the more unsatisfied
• - Banks prefer stabile and secure profits.

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• 6.1.4. Principle of transparency
• - Transparency of data for bank activity main
  shareholders managing team types of bank
  financial activities basic bank financial
  reports and data
• - Presenting auditing findings in daily
  newspapers and bank webside.

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• KEY WORDS/TERMS
• Liquidity
• Security
• Efficiency
• Profitability
• Transparency
• Primary reserve
• Secondary reserve

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• CHECKING QUESTIONS
• How do we define bank liquidity?
• What does two factor assets conversion in cash,
  mainly depend on?
• How do you understand primary bank reserve?
• How do you understand secondary bank reserve?
• Why is bank liquidity of a wide social
  importance?
• How can banks estimate their investment (project)
  security?
• Define bank efficiency principle.
• What do banks prefer stabile and secure profits
  or maximum profit with risky investments?
• How can bank be estimated as transparent?