An Introduction to Western Financial Markets by Stephen Valdez

By Stephen Valdez

Presents a creation to the critical Western monetary markets and associations, really these within the united states, Europe and Japan. The ebook comprises: advertisement and funding banking, cash and assurance, and strategies and futures. moment version: "An advent to worldwide monetary Markets".

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The banks are very conscious of the new capital ratio rules . Not only will some US (and possibly Japanese) banks have problems meeting the new standards, but banks have tightened up the discipline regarding profit as a return on capital. If a transaction needs capital backing under the new rules, then the profit on the transaction must meet the bank's target for profit on capital employed. Some consultants call this 'RORAC' - 'return on risk adjusted capital'. While there is a capital requirement for off-balance sheet items, it is not as onerous as for on -balance sheet items and thus adds to the attraction of these transactions.

All this assumes that the bank has not made things worse by an excessive exposure to a fewkey borrowers. In 1984, for example, it was found that Johnson Matthey Bank in the UK had lent the equivalent of 115% of its own capital to just twoborrowers. This loophole waspluggedin the 1987Banking Act. If exposure to oneborrowerexceeds10% ofcapital,theBankofEnglandmustbe informed. Before exposure canexceed25%, BankofEngland permissionmustbe obtained. Allcentral bankshave 'large exposure' controls. Theolderideaof relating capitalto lending has to be extended tocapital to assets Banking (I) - Background 25 in the modem age.

We shall meet the word 'securitisation' again in Chapter 6. In that context it means thechange in emphasisin internationalbankingmarketsfrom 1982,bywhich borrowers began to borrow on the capital markets by issuing bonds rather than by having a bank loan. Thebest and most common example is selling off mortgage loans as mortgage bonds (pioneered by Salomon Bros in the US). Other examplesincludeconvertingcar loansintonotesor bonds and converting credit card receivables into bonds (frequent issues by Citicorp).

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