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B A N K P R O F I T A B I L I T Y. PROPOSALS FOR A REVISION OF OECD BANKING STATISTICS AND INDICATORS Working Party on Financial Statistics 13-14 October 2008 By Hakan Atasoy, Consultant. PURPOSE.

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b a n k p r o f i t a b i l i t y
B A N K P R O F I T A B I L I T Y

PROPOSALS FOR A REVISION

OF OECD BANKING STATISTICS

AND INDICATORS

Working Party on Financial Statistics

13-14 October 2008

By Hakan Atasoy, Consultant

slide2

PURPOSE

  • Review the list of financial statement items included in “OECD-Bank Profitability” publication in accordance with the IMF’s “Financial Soundness Indicators (FSI)” for deposit takers
  • Take into account evolving international accounting standards and their impact on banking statistics. Vast implementation of these standards among the member countries (25 over 30 and 2 from 2011 for listed companies)
  • This document has been presented after taking into account the discussions of the countries’ volunteer experts in electronic discussion group (EDG)
slide4

ASSETS

  • Cash and balances with central bank
  • Loans and receivables due from banks
  • Loans and receivables due from customers
  • Financial assets at fair value through profit or loss
  • Available for sale financial assets
  • Held to maturity investments
  • Derivatives-hedge accounting
  • Tangible and intangible assets
  • Interest in associates and joint ventures
  • Other assets
slide5

ACCOUNTING FOR ASSETS

  • Loans and receivables: Amortized cost (IAS 39)
  • Held to maturity investments: Amortized cost (IAS 39)
  • Financial assets at fair value through profit or loss: Fair value (IAS 39)
  • Available for sale financial assets: Fair value. Unrealized gains and losses disclosed in total equity (IAS 39)
  • Derivatives-Hedge accounting: Fair value (IAS 39)
  • Tangible and intangible assets: Cost model or Revaluation model (IAS 16, 38, 40)
  • Interest in associates and Joint ventures: Equity method (IAS 28, 31)
slide6

MODIFICATIONS-ASSETS

  • Classification based on intentions of management. Similar classification in US GAAP (FASB 115, FASB 159).
  • Not instrument based approach. However, subdivisions by instruments added (Debt, Equity instrument etc).
  • Loans and receivables cover both loans and deposit placements in line with bank reporting practices.
  • Tradable loans or loans that have active market classified as trading, available for sale or held to maturity. Loans can be designated as fair value after initial recognition.
  • Financial derivatives divided as trading and hedging. Trading derivatives disclosed in Fair Value through Profit or Loss.
slide7

LIABILITIES

  • Financial liabilities at fair value through profit or loss
  • Due to banks
  • Due to customers
  • Debt certificates
  • Subordinated liabilities
  • Derivatives-hedge accounting
  • Provisions
  • Other liabilities
  • Total equity
slide8

ACCOUNTING FOR LIABILITIES

  • Financial liabilities measured at fair value (IAS 39)
    • Financial liabilities at fair value through profit or loss (trading derivatives, short selling, liabilities intended for repurchase in the short term, liabilities designated at fair value)
    • Derivatives-hedge accounting
  • Financial liabilities measured at amortized cost (IAS 39)
    • Due to banks
    • Due to customers
    • Debt certificates
    • Subordinated liabilities
    • Provisions (IAS 19, 37)
slide9

MODIFICATIONS-LIABILITIES

  • Due to banks and due to customers cover both loan borrowings and deposits in line with bank reporting practices.
  • Provision for contingencies and charges and subordinated liabilities disclosed separately.
  • Negative values from trading derivatives disclosed in financial liabilities at fair value through profit or loss; negative values from hedging derivatives disclosed in derivatives-hedge accounting.
  • Detailed breakdown of total equity: Capital & reserves, Revaluation changes, Net profit or loss and Minority interest.
  • Goodwill not deducted from total equity but an asset of the acquirer.
slide11

INCOME STATEMENT

  • Total profit or loss from continuing operations
    • Net interest income: (Interest income – Interest expense)
    • Net non-interest income: (Dividend income + Net fees & commissions + Gains / Losses on financial instruments + Share of earnings of associates & Joint ventures + Other income)
    • Operating expenses: (Staff expenses + Administrative expenses + Other expenses)
    • Impairment losses on financial assets: (Loans + Other)
    • Tax expense
  • Total profit or loss from discontinued operations after tax
  • Net profit
slide12

MODIFICATIONS-INCOME STATEMENT

  • Seperation of income statement as continuing and discontinued operations in accordance with IFRS 7. Similar seperation in US GAAP (SFAS 144).
  • No extraordinary item in accordance with IAS 1.
  • Fees and commissions shown on a net basis.
  • New added items
    • Dividend income
    • Share of earnings of associates & joint ventures
    • Administrative expenses.
slide14

FSI – Capital Adequacy

  • Regulatory capital to risk weighted assets (ECB + IMF-core)
  • Regulatory tier 1 capital to risk weighted assets (ECB + IMF-core)
  • Tier 1 capital to assets (IMF-encouraged; Tier 1 used as numerator for cross-border consolidated data)
  • Required memorandum items: Regulatory capital, Risk weighted assets, Tier 1 capital
  • Defer to Basel I and Basel II as the standards for compiling supervisory-based underlying series, acknowledging national variations in implementation.
slide15

FSI – Asset Quality-I

  • Nonperforming loans to gross loans (ECB, IMF-core)
  • Nonperforming loans net of specific provisions to regulatory capital (ECB, IMF-core)
  • Sectoral distribution of loans to gross loans (ECB, IMF-core)
  • Residential real estate loans to gross loans (ECB, IMF-encouraged)
  • Commercial real estate loans to gross loans (IMF-encouraged)
  • Foreign currency denominated loans to gross loans (IMF-encouraged)
  • Foreign currency denominated liabilities to total liabilities (IMF-encouraged)
  • Gross asset/liability position in financial derivatives to tier 1 capital (IMF-encouraged, tier 1 used as denominator for cross-border consolidated data)
  • Large exposures to regulatory capital (IMF-encouraged)
slide16

FSI – Asset Quality-II

  • Required memorandum items:
    • Gross loans (Gross loans ≠ Loans and receivables)
    • Non-performing loans (Non-performing loans ≠ Impaired loans)
    • Specific provisions (Specific provisions ≠ Allowances for impairment)
    • Sectoral distribution of gross loans
    • Residential/Commercial real estate loans
    • Foreign currency denominated loans/liabilities
    • Large exposures
  • Definitions of the memorandum items in line with IMF Guide.
slide17

FSI – Earnings & Profitability-I

  • Return on equity-Net income to average tier 1 capital (ECB, IMF-core, tier 1 used as denominator for cross-border consolidated data)
  • Return on assets-Net income to average assets (ECB, IMF-core)
  • Return on risk weighted assets-Net income to average RWA (ECB)
  • Total profit or loss before tax from continuing operations to average assets (ECB)
  • Net interest income to average assets (ECB)
  • Net non-interest income to average assets (ECB)
  • Operating expenses to average assets (ECB)
  • Net impairment losses on financial assets to average assets (ECB)
slide18

FSI – Earnings & Profitability-II

  • Net interest income to total income (ECB, IMF-core but a slight difference in definition)
  • Net non-interest income to total income (ECB)
  • Net fees and commissions income to total income
  • Gains (losses) on financial instruments to total income (ECB, IMF-encouraged but a slight difference in definition)
  • Operating expenses to total income (ECB, IMF-core but a slight difference in definition)
  • Staff expenses to operating expenses (ECB, IMF-encouraged but a slight difference in definition)
slide19

FSI – Earnings & Profitability-III

  • Required memorandum items:
    • Average assets
    • Average tier 1 capital
    • Average risk weighted assets
  • Slight differences for some ratios:
    • Total income includes fees and commissions on net basis
    • Fees and commissions expense not classified as operating expenses in line with reporting practices
    • Total income and expense excludes profit from discontinued operations.
slide20

FSI – Liquidity and Sensitivity to Market Risk-I

  • Core liquid assets to total assets (IMF-core)
  • Broad liquid assets to total assets (IMF-core)
  • Core liquid assets to short-term liabilities (ECB, IMF-core)
  • Broad liquid assets to short-term liabilities (ECB, IMF-core)
  • Customer deposits to gross non-interbank loans (IMF-encouraged)
  • Cash and loans to banks to amounts due to banks (ECB)
  • Net open position in foreign exchange to regulatory capital (IMF-core)
  • Net open position in equities to regulatory capital (IMF-encouraged)
slide21

FSI – Liquidity and Sensitivity to Market Risk-II

  • Required memorandum items:
    • Core/Broad liquid assets
    • Short-term liabilities
    • Customer deposits (Customer deposits ≠ Due to customers)
    • Net open position in foreign exchange
    • Net open position in equities
  • Definitions of the memorandum items in line with IMF Guide.
slide22

Consolidation and Coverage

  • IMF : DCCBCS and/or CBCSDI
  • ECB: CBCSDI excluding insurance sector
  • IAS 27: Cross sector consolidation basis irrespective of sector
  • OECD: Proposal in line with IMF
  • Current Coverage:
    • Commercial banks, Cooperative banks, Savings banks
  • Possible Extension of the coverage, in line with IMF:
    • Development banks, Credit unions, investment banks, mortgage banks, building societies, micro-finance institutions and any other financial institutions that take deposits
    • Institutions that are banks in legal sense but not deposit takers