Bank Credit Analysis

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MBF 716
Course Developer Ayano D. A.

Course Wrier !eon I"pe
#aional Open Universiy o$ #i%eria
&ro%ra''e !ea(er Dr. O. ). On*e
#aional Open Universiy o$ #i%eria
Course Coor(inaor E''anuel U. A+ian%a
#aional Open Universiy o$ #i%eria

Inro([email protected]@@@@@@@@@@@@@@@@[email protected]@@@. 1
Course [email protected]@@@@@@@@@@@@@[email protected]@@@@.. 1
Course Ai's an( [email protected]@@@@@@@@@@@@@@ 1
Wor"in% 0rou%0 0is [email protected]@@@@@@@@[email protected]@@@@.. :
Course [email protected]@@@@@@@@@@@@[email protected]@@@@@ :
Su(y [email protected]@@@@@@@@@@@@@@@[email protected]@@@@@ :
AeB+oo"s an( Re$eren2es @@@@@@@@@@[email protected]@@@@.. >
&resenaion S20e([email protected]@@@@@@@@@@@[email protected]@@@@. >
[email protected]@@@@@@@@@@@@@@@@@@@@@ .
A0e pri'ary role o$ +an"s an( o0er $inan2ial insiuions is o 'o+iliCe
$un(s $ro' surplus uni o$ e2ono'y o 0e (e$i2i uni o$ 0e e2ono'y
$or 0e purpose o$ e$$i2ien an( pro(u2ive inves'en. A0ere$ore8 i is
i'poran $or any +an" see"in% eB2ellen2e in 0e in(usry o serve 0e
role o$ $inan2ial iner'e(iaion e$$e2ively an( e$$i2ienly in or(er o +e
a+le o re'ain in 0e +usiness. A0is 2oul( +e (one 0rou%0 a(e-uae
s"ills a2-uire( +y 0e 2re(i o$$i2ers an( all o0er personnel involve( in
loan a('inisraion an( 'ana%e'en.
"#$t You "!%% L&$rn !n t#& Cour'&
Durin% 0is 2ourse8 you *ill +e learnin% overvie* o$ 0e $inan2ial an(
+an"in% in(usry8 *0ere you are %oin% o +e a2-uaine( *i0 players in
0e $inan2ial in(usry8 ypes an( $un2ions o$ +an"s. Also8 0e 2ourse
*ill revie* 2auses an( e$$e2 o$ +an" (isress in #i%eria. In 0e 2ourse o$
0is su(y8 e'p0asis *ill +e upon 0e $ollo*in% viC4 +an" re%ulaory
au0oriies8 an( +an" 2onsoli(aion. Fur0er'ore8 0e 2ourse *ill (is2uss
0e 2re(i 'ar"e8 0e 0eory o$ +an" 2re(i8 pro2ess o$ 2re(i 2reaion8
2onsrains o 2re(i eBpansion8 $inan2ial sae'en analysis8 "ey raios8
ris" in +an"8 ris" analysis8 ris" 'ana%e'en8 ris" 'easure'en an(
2onrol8 2re(i or%aniCaion.
Cour'& A!(' $nd O)*&t!+&'
A0is 2ourse ai's a4
• Givin% you an un(ersan(in% o$ 0e 2on2ep o$ 2re(i an( 2re(i
'ana%e'en in +an"in% in(usry.
• Ma"in% you o +e a+le o (e$ine an( eBplain 0e 2on2eps
• Ena+lin% you o un(ersan( 0e appli2a+iliy o$ 2re(i 0eories in
+an" (e2ision 'a"in% on loans an( a(van2es o 2uso'ers
• Ma"in% you o appre2iae 0e role o$ +an" o$$i2ers in analyCin% 2re(i
an( ris" +e$ore %ranin% any loans an( a(van2es $or any spe2i$i2
• Ena+lin% you o un(ersan( 0e rain% o$ per$or'an2e o$ +an"s
0rou%0 0e use o$ $inan2ial raios
• Enu'erain% 0e 'a3or roles o$ reasury 'ana%e'en in +an"in%
in(usry *0en all 0e a+ove are 2onsi(ere(8 *e 2an 2on2lu(e 0a 0e
'a3or ai' o$ 0e 2ourse is o eBpose you o various ools8 'e0o(s
an( e20ni-ues o$ 2re(i analysis in +an"in% in(usry.
"or,!n- t#rou-# t#!' Cour'&
For you o 2o'plee 0is 2ourse su22ess$ully8 you are re-uire( o rea(
0e su(y unis8 re$eren2e +oo"s8 an( o0er resour2es 0a are relae( o
0e uni. Ea20 uni o$ 0e 2ourse 2onains Auor Mar"e( Assi%n'en.
A0e Auor6Mar"e( Assi%n'en EAMAF is o +e (one i''e(iaely an(
su+'ie( o your uorial 2ourse $a2iliaor $or assess'en.
A0e 'e(iu' o +e use( an( 0e i'e o su+'i 0e AMA *ill +e
spe2i$ie( o you laer. A0is 2ourse is a :62re(i 2ourse. As su20 you are
eBpe2e( o spen( a 'ini'u' o$ *o 0ours every *ee" su(yin% 0e
2ourse. Dou are eBpe2e( o 2o'plee 0e enire ouline *i0in a perio(
o$ 1=6:5 *ee"s.
Cour'& E+$%u$t!on
As sae( +e$ore8 every uni o$ 0is 2ourse 0as an assi%n'en aa20e( o
i. Dou are re-uire( o "eep an assi%n'en $ile. A$er every uni 0e
assi%n'en s0oul( +e (one. A 0e en( o$ 0e 2ourse8 0e evaluaion s0all
+e as $ollo*s4
• Assi%n'en G >;H
• EBa'inaion G 7;H
• Aoal I 1;;H
Ou o$ all 0e assi%n'en you *ill (o8 ea20 one s0all +e 'ar"e( an(
2onvere( o >H. A 0e en(8 0e +es 1; s0all +e sele2e( so as o 'a"e
up o >;H. A0e eBa'inaion a 0e en( o$ 0e 2ourse s0all 2over all
aspe2s o$ 0e 2ourse.
Stud. Un!t'
In 0is 2ourse8 2re(i an( ris" analysis s"ills as *ell as reasury
'ana%e'en an( a('inisraion o$ loans an( a(van2es e20ni-ues 0a
2oul( +e 0elp$ul o you as a +an"er s0all +e 2onsi(ere( un(er (i$$eren
opi2s. Base( on 0is8 0e $ollo*in% unis 0ave +een (esi%ne( $or 0e
Modu%&' 1
Uni 1 Overvie* o$ 0e Finan2ial an( Ban"in% In(usry
Uni : Revie* o$ Ban" Disress in #i%eria
Uni > Ban" Re%ulaory Au0oriies
Uni . Ban" Consoli(aion Uni
Uni 5 A0e Cre(i Mar"e
Modu%& /
Uni 1 A0eory o$ Ban" Cre(i
Uni : Finan2ial Sae'en Analysis
Uni > Ris"s in Ban"s
Uni . Ris" Analysis/Rain% o$ Ban"s
Uni 5 Measure'en an( Conrol o$ Ban" Ris"
Modu%& 0
Uni 1 Mana%in% 0e !en(in% &or$olio
Uni : Mana%in% In(ivi(uals Ris"
Uni > !en(in% &rin2iples an( Business Borro*ers
Uni . Ban" Cre(i Or%aniCaion
Uni 5 Areasury Mana%e'en
A0ese unis 'us +e reae( se-ueniallyJ as a lo%i2al lin" eBiss in 0e
arran%e'en. Every previous uni lays a $oun(aion $or su+se-uen ones.
A 'aBi'u' perio( o$ one *ee" is re-uire( $or every uni.
T&1t)oo,' $nd R&2&r&n&'
As *as earlier 'enione(8 'aerials relevan o 0e 2ourse in2lu(e no
only 0e ones +elo* +u also o0ers 0a you 2an lay your 0an( on. Bu
$or no*8 0e $ollo*in% re$eren2es are re2o''en(e(.
Cenral Ban" o$ #i%eria E2ono'i2 an( Finan2ial Revie*
#*an"*o G.O. E1<<1F. Bank Management (Principle and Practice).,
U.7. OB$or(4 Mal0ouse &u+lis0in% !(.
S0e"0ar 7.C. E1<<;F. Banking Theory and Practice. #e* Del0i8 In(ia4
1i"as &u+lis0in% ,ouse &1A!AA
1in2en B. E:;;>F. Bank Treasury Management. Insiue Finan2ial
Pr&'&nt$t!on S#&du%&
Spe2i$i2 (aes $or pari2ular a2iviies8 su20 as su+'ission o$
assi%n'en8 uorial s20e(ules an( eBa'inaion (aes s0all +e 'a(e
availa+le o you on a laer (ae. A0is *ill ena+le you plan your a2iviies
in 0e sa'e line. A0e 'e0o( o$ su+'iin% your assi%n'en an(
re2eivin% o0er 2ourse 'aerials s0all +e a%ree( upon on a laer (ae.
Dou s0oul( en(eavour no o +e $allin% +e0in( 0e s20e(ule *0enever i
is %iven.
By 0e i'e you eB0aus 0is 2ourse8 you *ill $in( i use$ul no only in
solvin% 2re(i analysis pro+le' in +an"in% in(usry +u also your (ay o
(ay 2re(i analysis pro+le'.
Course Co(e MBF 716
Course Aile Ban" Cre(i Analysis
Course Developer Ayano D. A.

Course Wrier !eon I"pe
#aional Open Universiy o$ #i%eria
&ro%ra''e !ea(er Dr. O. ). On*e
#aional Open Universiy o$ #i%eria
Course Coor(inaor E''anuel U. A+ian%a
#aional Open Universiy o$ #i%eria
Modu%& 1 333333333333333333334 1
Uni 1 Overvie* o$ 0e Finan2ial an( Ban"in% In([email protected]@ 1
Uni : Revie* o$ Ban" Disress in #i%[email protected]@@@@@... 1>
Uni > Ban" Re%ulaory [email protected]@@@@@@@@. ::
Uni . Ban" Consoli([email protected]@@@@@@@@@@@@ >;
Uni 5 A0e Cre(i Mar"[email protected]@@@@@@@@@@@@.. .1
Modu%& / 333333333333333333334 56
Uni 1 A0eory o$ Ban" Cre([email protected]@@@@@@@@@@ .5
Uni : Finan2ial Sae'en [email protected]@@@@@@@@ 56
Uni > Ris" Mana%e'en &oli2y an( Srae%[email protected]@@@@. 61
Uni . Ris" Analysis/Rain% o$ Ban"[email protected]@@@@@@@. 66
Uni 5 Measure'en an( Conrol o$ Ban" Ris"[email protected]@@@.. 7;
Modu%& 0 333333333333333333334 76
Uni 1 Mana%in% A0e !en(in% &[email protected]@@@@@.. 75
Uni : Mana%in% In(ivi(ual Ris"[email protected]@@@@@ @@@ =1
Uni > !en(in% an( Business Borro*@@@@@@@@. =6
Uni . Ban" Cre(i Or%[email protected]@@@@@@@@@. <:
Uni 5 Areasury Mana%e'[email protected]@@@@@@@@@@. <=
Uni 1 Overvie* o$ 0e Finan2ial an( Ban"in% In(usry
Uni : Revie* o$ Ban" Disress in #i%eria
Uni > Ban" Re%ulaory Au0oriies
Uni . Ban" Consoli(aion
Uni 5 A0e Cre(i Mar"e
1.; Inro(u2ion
:.; O+3e2ives
>.; Main Conen
>.1 &layers in Finan2ial In(usry
>.: Aypes o$ Ban"s in #i%eria
>.:.1 Ban"s *i0 Fe(eral Govern'en O*ners0ip
>.:.: Ban"s *i0 Sae Govern'en O*ners0ip
>.:.> !o2al &rivae Se2or Ban"s
>.:.. Universal Ban"in% in #i%eria
>.> Fun2ions/Roles o$ Ban" in #i%eria E2ono'y
..; Con2lusion
5.; Su''ary
6.; Auor6Mar"e( Assi%n'en
7.; Re$eren2es/Fur0er Rea(in%s
A $inan2ial syse' is a 2o'posiion o$ various insiuions8 'ar"es8
insru'ens an( operaors 0a inera2 *i0in an e2ono'y o provi(e
$inan2ial servi2es. I 2an also +e seen in 0e 2oneB o$ ses o$ rules an(
re%ulaions8 an( 0eap o$ $inan2ial arran%e'ens *i0in 0e $inan2ial
se2or. Su20 servi2es 'ay in2lu(e resour2e 'o+iliCaion an( allo2aionJ
$inan2ial iner'e(iaionJ an( $orei%n eB20an%e ransa2ion o en0an2e
inernaional ra(e8 a'on% o0ers. A0e $inan2ial syse' 0us plays
i'poran role in 0e pro2ess o$ e2ono'i2 %ro*0 an( (evelop'en in a
In #i%eria8 0e $inan2ial syse' 0as un(er%one re'ar"a+le 20an%es in
er's o$ o*ners0ip8 sru2ure8 0e (ep0 an( +rea(0 o$ insru'en
e'ploye(8 0e nu'+er o$ insiuions esa+lis0e(8 0e e2ono'i2
environ'en an( 0e re%ulaory $ra'e*or" *i0in *0i20 0e syse'
A0e #i%erian Finan2ial Syse' 0as *inesse( re'ar"a+le evoluion $or
pas *o (e2a(es.
By 0e en( o$ 0is uni8 you s0oul( +e a+le o4
• (es2ri+e various ypes o$ +an"s in #i%eria
• i(eni$y 'a3or players in #i%eria Ban"in% in(usry.
041 P%$.&r' !n 2!n$n!$% Indu'tr.
C&ntr$% B$n, o2 N!-&r!$ :CBN;
A0e Ban"s an( O0er Finan2ial Insiuions De2ree EBOFIDF +rou%0 0e
a2iviies o$ a 'yria( o$ $inan2ial insiuions un(er 0e supervision o$
0e Cenral Ban" o$ #i%eria ECB#F 0e De2ree e'po*ers 0e Ban" o
issue %ui(elines o persons an( insiuions en%a%e( in 0e provision o$
$inan2ial servi2es as *ell as 0avin% 0e las say in $or'ulain% operain%
rules an( 2o(es o$ 2on(u2. Also8 0e Ban" is e'po*ere( un(er BOFID
o un(era"e spe2ial invesi%aions o$ 0ese insiuions i$ 0e Governor
o$ CB# 2onsi(ers i ne2essary. A0ese provisions o$ 0e BOFID an( 0e
CB# De2rees8 0ere$ore8 %ive 0e Ban" 2lear an( su+sanial po*ers o
re%ulae 0e a2iviies o$ all $inan2ial insiuions operain% in 0e
N!-&r!$ D&<o'!t In'ur$n& Cor<or$t!on :NDIC;
De2ree #o. :: o$ 1<== o$ (eposi insuran2e an( relae( servi2es o
+an"s8 in or(er o pro'oe 2on$i(en2e in 0e +an"in% in(usry8
esa+lis0e( #DIC. A0is e'po*ere( #DIC o eBa'ine 0e +oo"s an(
a$$airs o$ insure( +an"s an( o0er (eposi6a"in% $inan2ial insiuions.
S&ur!t!&' $nd E1#$n-& Co((!''!on :SEC;
SEC *as se up in 1<7< +y an A2 as 0e apeB re%ulaory or%an o$ 0e
2ounryKs 2apial 'ar"e. A0e Co'panies an( Allie( Maers De2ree o$
1<<; $ur0er e'po*ers SEC o approve an( re%ulae 'er%ers an(
a2-uisiions an( au0oriCe 0e esa+lis0'en o$ uni rus.
N$t!on$% In'ur$n& Co((!''!on :NAICOM;
A0e #aional Insuran2e Co''ission E#AICOMF8 esa+lis0e( in 1<<78 is
0e re%ulaory au0oriy in 0e insuran2e in(usry. I repla2e( 0e
#aional Insuran2e Supervisory Boar( E#ISBF8 *0i20 *as esa+lis0e(
+y 0e Insuran2e Spe2ial Supervision Fun( EA'en('enF De2ree #o. 6:
o$ 1<<: o a"e over 0e re%ulaion an( supervision o$ insuran2e
+usiness $ro' 0e Fe(eral Minisry o$ Finan2e.
F&d&r$% Mort-$-& B$n, o2 N!-&r!$ :FMBN;
Fe(eral Mor%a%e Ban" o$ #i%eria *as se up +y De2ree 7 o$ 1<77. A0e
a(opion o$ #aional ,ousin% &oli2y in 1<<; an( su+se-uenly
pro'ul%aion o$ De2ree #o 7 o$ 1<<1 e'po*ere( 0e +an" o li2ense
an( re%ulae pri'ary 'or%a%e insiuions in #i%eria.
F!n$n!$% S&r+!&' R&-u%$t!on Coord!n$t!on Co((!tt&& :FSRCC;
FSRCC *as inau%urae( in 1<<. (ue o 0e e'er%en2e o$ 'any
re%ulaory +o(ies in 0e naionKs $inan2ial se2or. A0e o+3e2ive o$
FSRCC is o 2oor(inae an( san(ar(iCe 0e re%ulaory poli2ies o$ all
$inan2ial insiuions in 0e syse' un(er 0e 20air'ans0ip o$ 0e
Governor o$ 0e CB#8 *i0 a vie* o evolvin% so'e 2ooperaion a'on%
re%ulaory a%en2ies.
Mon&. M$r,&t'
A0e 'oney 'ar"e 2an +e (e$ine( as a 'ar"e $or s0or6er' (e+
insru'ens. A0e 'a3or $un2ion o$ 0is 'ar"e is o $a2iliae 0e raisin%
o$ s0or6er' $un(s $ro' surplus se2or o 0e (e$i2i se2or o$ 0e
S0or6er' se2uriies use( in ra(e are4
• Areasury Ceri$i2aes
• Call Money
• Ceri$i2aes o$ Deposi an(
• Co''er2ial &aper
A0e Cenral Ban" o$ #i%eria $ur0er (eepene( 0e 'ar"e *i0 0e
2o''en2e'en o$ is Open Mar"e Operaions a2iviies.
Mon&. M$r,&t In't!tut!on'
A0e 'oney 'ar"e insiuions are 0ose insiuions 0a pari2ipae
a2ively in 0e 'ar"es. A0ese in2lu(e( Dis2oun 0ouses8 Co''er2ial8
Mer20an an( Co''uniy Ban"s.
T#& C$<!t$% M$r,&t
A0e Capial Mar"e is a veria+le 20annel $or 'o+iliCin% lon%6er'
$un(s. A0e 'ain insiuions in 0e 'ar"e in2lu(e Se2uriies an(
EB20an%e Co''ission8 *0i20 is a 0e apeB an( serves as 0e re%ulaory
au0oriy o$ 0e 'ar"e8 0e #i%erian So2" EB20an%e8 0e Issuin%
,ouses an( 0e So2" Bro"in% Fir's. A0e Capial Mar"e is 2lassi$ie(
ino 0ree. A0ese are 0e &ri'ary Mar"e8 *0i20 are 'ar"es $or ne*
issues o$ se2uriies. A0e 'o(e o$ o$$er $or 0e se2uriies ra(e( in 0is
'ar"e in2lu(es o$$er $or su+s2ripion8 ri%0 issues. A0e se2on(ary
'ar"e is a 'ar"e $or ra(in% in eBisin% se2uriies. I 2onsiss o$
eB20an%es an( over60e62ouner 'ar"es *0ere se2uriies are +ou%0 an(
sol( a$er issuan2e in 0e pri'ary 'ar"e.
A0e 0ir( one is 0e uni rus s20e'e *0i20 is a 'e20anis' $or
'o+iliCin% 0e $inan2ial resour2es o$ s'all an( +i% savers an( 'ana%in%
su20 $un(s o a20ieve 'aBi'u' reurns *i0 'ini'u' ris"s8 0rou%0
e$$i2ien por$olio (iversi$i2aion. I o$$ers 0e a(vana%es o$ lo* 2os8
li-ui(iy an( 0i%0 reurns.
04/ T.<&' o2 B$n,' !n N!-&r!$
04/41 B$n,' =!t# F&d&r$% Go+&rn(&nt O=n&r'#!<
&u+li2 se2or o*ners0ip 0as +een a (o'inan $eaure o$ 0e +an"in%
syse' in #i%eria sin2e 0e 'i( 1<7;s8 al0ou%0 is i'poran2e 0as
(i'inis0e( *i0 0e %ro*0 o$ 0e lo2al privae se2or sin2e 0e 'i(
1<=;s an( 0e sale o$ Fe(eral Govern'en e-uiy o 0e privae se2or in
1<<:/<>. Durin% 0e 1<7;s 0e Fe(eral Govern'en a2-uire( 2onrollin%
e-uiy sa"es in 0e $irs an( se2on( %eneraion $orei%n +an"s in #i%eria.
Mos o$ 0ese *ere su+se-uenly operae( as 3oin venures *i0 0e
$orei%n s0are0ol(ers *0i20 reaine( 'inoriy sa"es8 *0i20 in2lu(e(
San(ar( C0arere(8 Bar2lays E*0i20 su+se-uenly (isinvese(F8 Ban-ue
#aionale (e &aris8 BIAO8 Ban" o$ A'eri2a an( Ban" o$ In(ia. A0e
Fe(eral Govern'en 0a( 'a3or s0are 0ol(in%s in ei%0 2o''er2ial an(
$ive 'er20an +an"s8 nine o$ *0i20 *ere 3oin venures *i0 $orei%n
invesors4 i also 0a( a 'inor sa"e in one o0er 'er20an +an". A0e
+an"s in *0i20 0e Fe(eral Govern'en 0a( a s0are 0ol(in% in2lu(e(
0e $our lar%es 2o''er2ial +an"s an( 0ree o$ 0e $ive lar%es 'er20an
+an"s ran"e( a22or(in% o oal asses in #i%eria. As par o$ 0e
privaiCaion pro%ra''e8 0e Fe(eral Govern'en sol( 'os o$ is
e-uiy 0ol(in%s in seven 2o''er2ial +an"s an( *o 'er20an +an"s o
#i%erian privae invesors in 1<<:/<>8 al0ou%0 i 0reaene( o re6
esa+lis0 2onrollin% sa"es in 0e $our lar%es 2o''er2ial +an"s in
1<<5. A0e 'oivaion $or Fe(eral Govern'en e-uiy pari2ipaion in
+an"in% *as 0e (esire o 2onrol srae%i2 in(usries an( o $ur0er 0e
poli2y o$ in(i%eniCaion. A0e Fe(eral Govern'enKs eBpli2i poli2y
o*ar(s 0e +an"s in *0i20 i 0el( e-uiy *as o appoin +oar(
'e'+ers8 in2lu(in% 0e 20air'an8 an( o se ou 0e +roa( oulines o$
poli2y *0ile leavin% (ay o (ay operaional (e2isions o 0e +an"sK
'ana%e'en8 *0i20 iniially *as lar%ely 2onrolle( +y 0e $orei%n
s0are0ol(ers. Fe(eral Govern'en o*ners0ip o$ +an"s 0ere$ore
rein$or2e( 0e 2onrols e'ploye( +y 0e CB# o in$luen2e resour2e
allo2aion +y 0e +an"in% in(usry8 'os noa+ly in 0ree (i$$eren
aspe2s o$ +an"in% poli2y.
Firs8 0e 'ana%e'en o$ 0e Fe(eral Govern'en +an"s *as al'os
enirely in(i%enise( +y 0e en( o$ 0e 1<=;s4 only a $e* spe2ialiCe(
poss *ere sill $ille( +y eBpariaes.
Se2on(8 0ese +an"s *ere in 0e $ore$ron o$ 0e pro%ra''e o esa+lis0
+ran20es in 0e rural areas.
A0ir(8 2re(i poli2ies *ere in$luen2e( +y Kpoli2y len(in%K8 i.e. eBen(in%
2re(i o 0e pu+li2 se2or8 o lo2ally o*ne( +usinesses an( o 0e
prioriy Lpro(u2ive se2orsM as se ou in 0e 2re(i %ui(elines. A0e
se2on( an( 0ir( o$ 0ese (evelop'ens a(versely a$$e2e( 0e +an"sK
$inan2ial per$or'an2e. Mos o$ 0e rural +ran20es esa+lis0e( un(er 0e
rural +an"in% pro%ra''e 0ave no +een pro$ia+le 'ainly +e2ause 0e
volu'e o$ +usiness %enerae( in 0e rural areas 0as +een insu$$i2ien o
2over over0ea(s. A0e +an"s a22u'ulae( su+sanial volu'es o$ non
per$or'in% (e+s as a resul o$ len(in% o 0e pu+li2 se2or or as a resul
o$ len(in% in line *i0 2re(i %ui(elines. A0e a22u'ulae( non6
per$or'in% loans o$ 0e $our lar%es 2o''er2ial +an"s a'oune( o an
avera%e o$ .; per 2en o$ ea20 +an"sK oal loan por$olio in 1<<.. A0e
$inan2ial per$or'an2e o$ 0e Fe(eral Govern'en +an"s (urin% 0e
1<7;s an( 1<=;s (i( no appear o 0ave +een very %oo( *0ile 0e
-ualiy an( e$$i2ien2y o$ 0eir servi2es *ere poor. A0e $our lar%es
2o''er2ial +an"s all re2or(e( pro$is (urin% 0is perio(8 al0ou%0 0eir
reurns on asses *ere lo* an( reurns o e-uiy no espe2ially
i'pressive *0en in$laion *as a"en ino a22oun. ,o*ever assess'en
o$ 0eir $inan2ial per$or'an2e *as i'pe(e( +e2ause8 unil 1<<; *0en
0e CB# issue( ne* pru(enial %ui(elines8 0ey *ere no re-uire( o
2lassi$y loans a22or(in% o -ualiy an( 'a"e provisions $or non6
per$or'in% loans8 or o suspen( 0e a22rual o$ in2o'e $ro' unpai(
ineres. ,en2e pu+lis0e( a22ouns are li"ely o 0ave oversae(
earnin%s. W0en 0e ne* pru(enial %ui(elines *ere inro(u2e( in 1<<;8
Firs Ban" re2or(e( lar%e losses as a resul o$ 0avin% o 'a"e provisions
$or +a( (e+s8 *0ile 0e pro$is o$ 0e o0er 0ree 'a3or +an"s *ere
s0arply re(u2e(. A0eir $inan2ial posiion *oul( 0ave +een less se2ure(
0a( 0ey no +een allo*e( o sprea( 0e ne2essary provisions over a
perio( o$ $our years. #ever0eless 0e $our 'a3or Fe(eral Govern'en
+an"s re'aine( solven an( avoi(e( 0e (isress *0i20 a$$li2e( 'any o$
0e sae %overn'en an( privae se2or +an"s in #i%eria8 as *ell as
pu+li2 se2or +an"s in so'e o0er A$ri2an 2ounries. A0ese +an"s 0ave
avoi(e( serious rou+le $or a nu'+er o$ reasons.

04/4/ B$n,' =!t# St$t& Go+&rn(&nt O=n&r'#!<
A0e involve'en o$ 0e re%ional an( sae %overn'ens in +an"in% (aes
+a2" o 0e 1<5;s. A*o o$ 0e earlies in(i%enous +an"s8 #aional Ban"
an( A$ri2an Coninenal Ban"8 0a( 2lose lin"s *i0 polii2ians in 0e
Wesern an( Easern Re%ional Govern'ens. A0e re%ional %overn'ens
a2-uire( e-uiy in 0ese +an"s *0en 0ey %o ino $inan2ial (i$$i2ulies
in 0e 'i( 1<5;s an( evenually +e2a'e 0e 'a3oriy s0are0ol(ers. In
1<5< 0e Ban" o$ 0e #or0 *as esa+lis0e( +y 0e #or0ern Re%ional
Govern'en in parners0ip *i0 !e+anese invesors.
Ano0er in(i%enous +an" EA%+on'a%+e Ban"8 sin2e rena'e( We'a
Ban"F *as a"en over in 1<6<. Durin% 0e 1<7;s 0e sae %overn'ens8
*0i20 0a( repla2e( 0e re%ional %overn'ens in 0e lae 1<6;s8 +e%an
sein% up 0eir o*n +an"s4 +y 1<=; 0ere *ere en +an"s in *0i20 sae
%overn'ens 0el( e-uiy an( 0is nu'+er 0a( risen o :5 +y 1<=<. A0e
pri'ary 'oivaion o$ 0e sae %overn'ens in sein% up 0ese +an"s
*as o a22ess $un(s $or (evelop'en pro3e2s in 0e saes an( o eBpan(
len(in% o in(i%enous +usinesses E#*an"*o 1<=;4 7.F.
Mos o$ 0e sae %overn'en +an"s are 3oin venures *i0 lo2al privae
invesors4 sae %overn'ens 0ol( 'a3oriy s0are 0ol(in%s in 11 o$ 0ese
+an"s an( 'inoriy s0are 0ol(in%s in 0e o0er 1.. A0e sae %overn'en
+an"s a22oune( $or :;.5 per 2en o$ oal 2o''er2ial +an" asses in
1<<.. Mos o$ 0ese +an"s are relaively s'all4 only *o EWe'a Ban"
an( Ban" o$ 0e #or0F are a'on% 0e lar%es en +an"s in er's o$
A0e $inan2ial per$or'an2e o$ 'os o$ 0e sae %overn'en +an"s 0as
+een very poor. Aen (isresse( sae %overn'en +an"s *ere a"en over
+y 0e CB# (urin% 1<<:6<58 an( i is very li"ely 0a several 'ore sae
%overn'en +an"s are a'on% 0e 'ore 0an 5; +an"s re%ar(e( as
(isresse( +y 0e re%ulaory au0oriies E*i0 0e eB2epion o$ 0ose
a"en over +y 0e CB#. A0e (isresse( +an"s 0ave no +een o$$i2ially
na'e(F. In a((iion o 0e +an"s a"en over +y 0e CB#8 a $ur0er 0ree
sae %overn'en +an"s 0ave no pu+lis0e( annual repors $or a leas
*o years. A0e +an"s *0i20 appear o 0ave re'aine( solven are 'ainly
0ose in *0i20 sae %overn'en pari2ipaion 0as +een li'ie( o
'inoriy s0are 0ol(in%s.
A0e $inan2ial pro+le's a$$li2in% 0e sae %overn'en +an"s are
ari+ua+le o a nu'+er o$ $a2ors. A0e -ualiy o$ 0eir 'ana%e'en 0as
+een very poor +e2ause o$ polii2al iner$eren2e in 0e appoin'en o$
(ire2ors8 'ana%ers an( sa$$. Appoin'ens *ere (eer'ine( +y
polii2al parona%e ra0er 0an 'eri *0ile +oar(roo' (ispues an( 0e
inse2ure enure o$ +oar( an( 'ana%e'en (ue o $re-uen 20an%es in 0e
polii2al 2onrol o$ sae %overn'ens $ur0er un(er'ine( 0e -ualiy o$
'ana%e'en EE+0o(a%0e 1<<.4 17F. Earnin%s 0ave +een ero(e( +y 0i%0
operain% eBpenses4 0e 1. sae %overn'en +an"s in 0e survey +y I+e
in2urre( operain% eBpenses a'ounin% o 76 per 2en o$ ne earnin%s
2o'pare( o .< per 2en $or o0er +an"s EI+e 1<<:4 :5;F. Many o$ 0e
+an"s *ere se up *i0ou a(e-uae 2apial an( *ere una+le o 'ee 0e
'ini'u' 2apial re-uire'ens *0en 0ese *ere raise( in 0e lae 1<=;s
an( early 1<<;s.

04/40 Lo$% Pr!+$t& S&tor B$n,'
Sin2e 0e 'i( 1<=;s 0e lo2ally o*ne( privae se2or +an"s E0en2e$or0
lo2al +an"sF 0ave %ro*n rapi(ly8 an( no* a22oun $or a su+sanial s0are
o$ 2o''er2ial an( espe2ially 'er20an +an"in% 'ar"es. !o2al +an"s
are (e$ine( 0ere as 0ose +an"s *0i20 *ere se up *i0 lo2al privae
se2or invesors as 0e 'a3or s0are0ol(ers8 ra0er 0an +y $orei%n
invesors or 0e pu+li2 se2or. In 1<<: 0ere *ere >> lo2al 2o''er2ial
+an"s an( .= lo2al 'er20an +an"s in operaion. Forei%n invesors 0el(
'inoriy sa"es in seven o$ 0e lo2al 2o''er2ial +an"s an( seven o$ 0e
'er20an +an"s4 0e res *ere *0olly o*ne( +y #i%erian privae
invesors. Mos o$ 0ese +an"s *ere se up +e*een 1<=68 *0en
$inan2ial 'ar"es *ere $irs li+eralise(8 an( 1<<18 *0en 0e CB#
suspen(e( issuin% ne* li2enses in response o 0e e'er%in% si%ns o$
(isress in 0e in(usry. A0e lo2al +an"s are very 0eero%eneous4
*0ereas a $e* +an"s 0ave %ro*n ino 'a3or 'ar"e pari2ipans8
esa+lis0in% a repuaion $or provi(in% e$$i2ien pro$essional servi2es
an( ara2in% a +lue 20ip 2orporae 2lienele8 'any o0ers 0ave +een
asso2iae( *i0 $rau( an( 'is'ana%e'en an( 0ave eBperien2e( severe
$inan2ial (isress in 0e 1<<;s. A0is se2ion eBa'ines 0e reasons $or 0e
%ro*0 o$ 0is se2or8 0e salien 20ara2erisi2s o$ 0ese +an"s8 an( 0e
2auses o$ 0e (isress *0i20 e'er%e( in 0e early 1<<;s. A0e $irs lo2al
+an"s *ere esa+lis0e( in #i%eria (urin% 0e lae 1<:;s an( 1<>;s a a
i'e *0en +an"in% *as e$$e2ively unre%ulae( an( enry unresri2e(.
A0e +an"s *ere se up +y lo2al +usiness'en8 'any o$ *0o' 0a(
en2ounere( (i$$i2ulies in o+ainin% 2re(i $ro' 0e eBpariae +an"s.
A$er 0e en( o$ 0e Se2on( Worl( War 0ere *as an in(i%enous +an"in%
+oo' *i0 1=5 so 2alle( K'us0roo' +an"sK re%isere( +e*een 1<.7 an(
1<5:8 al0ou%0 'os (i( no a2ually 2o''en2e operaions. Mos o$ 0e
+an"s 0a (i( sar operain% 2ollapse( *i0in a $e* years (ue o a
2o'+inaion o$ 'is'ana%e'en8 insi(er len(in% an( ina(e-uae
2apialisaion. Only $our o$ 0e +an"s se up +y lo2al invesors (urin% 0e
2olonial perio( survive( unil in(epen(en2e in 1<6;8 all *i0 0e ai( o$
su+sanial $inan2ial suppor $ro' 0e re%ional %overn'ens8 *0ose
eBpli2i poli2y *as o suppor 0e e$$ors o$ in(i%enous +an"s o $inan2e
lo2al +usinesses. A0ese +an"s *ere also use( o $inan2e polii2al a2iviy
an( o 20annel loans o pary supporers as *ell as 0e +an"sK (ire2ors.
A0e inro(u2ion o$ 0e 1<5: Ban"in% Or(inan2e8 *0i20 $or 0e $irs
i'e in #i%eria i'pose( enry 2on(iions $or +an"s su20 as 'ini'u'
2apial re-uire'ens8 an( 0e loss o$ pu+li2 2on$i(en2e in(u2e( +y 0e
$ailure o$ lo2al +an"s8 +rou%0 0e in(i%enous +an"in% +oo' o an en(
+y .0e 'i( 1<5;s E#*an"*o 1<=;4 .565>F. For a perio( o$ al'os :5
years unil 0e 'i( 1<7;s8 $e* ne* +an"s *ere se up +y #i%erian
privae invesors4 ne* inves'en in +an"in% *as lar%ely iniiae( +y
$orei%n +an"s an( 0e pu+li2 se2or. A0e #i%erian privae se2or +e%an o
reurn o +an"in% in 0e 'i( 1<7;s8 iniially in parners0ip *i0 $orei%n
invesors. Fro' 0e 'i( 1<7;s unil 1<=68 1> privae se2or +an"s *ere
se up in *0i20 #i%erian invesors *ere 'a3oriy s0are0ol(ers in en o$
0ese +an"s. Forei%n invesors 'osly esa+lis0e( $orei%n +an"s su20 as
So2iee Generale.
Follo*in% 0e inro(u2ion o$ 0e SA& in 1<=6 lo2al +an"s *ere se up
in 'u20 lar%er nu'+ers. Durin% 1<=76<:8 approBi'aely :7 lo2al
2o''er2ial +an"s an( .: lo2al 'er20an +an"s *ere esa+lis0e(. #o
only (i( 0e rae o$ ne* enry a22elerae s0arply in 0is perio(8 +u 0ere
*as also a -ualiaive s0i$ in 0e 2o'posiion o$ o*ners0ip8 *i0
$orei%n parners0ip li'ie( o only $our o$ 0ese +an"s. A0e res *ere
*0olly o*ne( +y 0e #i%erian privae se2or. A0e lae 1<=;s an( early
1<<;s also sa* 0e rapi( %ro*0 in 0e nu'+er o$ $inan2e 0ouses8 so'e
o$ *0i20 *ere a$$iliae( o +an"s. In 1<<:8 666 $inan2e 0ouses *ere
operain%8 +u 'any su+se-uenly 2ollapse(.
A0e %ro*0 in 0e lo2al +an"s 2an +e ari+ue( o several $a2ors. Firs8
0e ine$$i2ien2ies o$ 0e pu+li2 se2or +an"s provi(e( opporuniies $or
ne* enrans o ar%e 2orporae an( 0i%0 in2o'e ur+an 2uso'ers. A0e
lo2al +an"s *ere a+le o ara2 0ese 2uso'ers +y o$$erin% 0i%0er
ineres raes on (eposis $ollo*in% ineres rae (ere%ulaion in 1<=7. A
$e* o$ 0e lo2al +an"s 0ave ara2e( 2uso'ers +y provi(in% 'ore
e$$i2ien servi2es8 su20 as 'u20 $aser loan appraisals8 an( innovaive
pro(u2s. Se2on(8 'any o$ 0e +an"s *ere se up pri'arily so 0a 0eir
o*ners 2oul( o+ain $orei%n eB20an%e *0i20 2oul( +e resol( a a
pre'iu'. A0e $orei%n eB20an%e 'ar"e *as li+eraliCe( in 1<=68 *i0 0e
inro(u2ion o$ a $orei%n eB20an%e au2ion syse'. Al0ou%0 0e spe2i$i2
'e20anis' 20an%e( several i'es8 0e essen2e o$ 0e syse' involve(
0e CB# au2ionin% 0e availa+le $orei%n eB20an%e o 0e +an"s. Only
0e +an"s *ere au0oriCe( o +i( $or $orei%n eB20an%e8 *0i20 *ere 0en
eBpe2e( o supply 0eir 2uso'ers. Ao ensure 0a 0e availa+le $orei%n
eB20an%e *as (isri+ue( *i(ely a'on% 0e +an"s8 2eilin%s *ere pla2e(
on 0e a'oun *0i20 ea20 +an" 2oul( +i( $or. A0e au2ion syse' (i(
no eli'inae 0e parallel 'ar"e8 in *0i20 a pre'iu' over 0e au2ion
rae 2oul( +e o+aine( $ro' 0e sale o$ $orei%n eB20an%e. A0is pre'iu'
avera%e( >> per 2en (urin% 1<=76<; EOlisa(e+e 1<<14 17=F.
Conse-uenly 0ose *i0 a22ess o 0e $orei%n eB20an%e au2ion 2oul(
'a"e su+sanial pro$is +y resellin% 0e $orei%n eB20an%e a parallel
'ar"e raes. In 1<=< +ureauB (e 20an%e +e%an operain%8 in *0i20
eB20an%e raes approBi'ae( 0ose on 0e parallel 'ar"e. A0is provi(e(
ano0er oule $or 0e +an"s o resell $orei%n eB20an%e pur20ase( $ro'
0e au2ion.
04/45 Un!+&r'$% B$n,!n- !n N!-&r!$
Follo*in% 0e approval6in6prin2iple %rane( +y 0e CB# Mana%e'en in
1<<< $or 0e inro(u2ion o$ universal +an"in% EUBF8 an( is su+se-uen
pu+li2aion in 0e year :;;; Moneary &oli2y Cir2ular #o. >.8 a
2o''iee 2o'prisin% 'e'+ers $ro' 0e CB#8 #i%eria Deposi
Insuran2e Corporaion E#DICF8 Se2uriies an( EB20an%e Co''ission
ESECF8 #aional Insuran2e Co''ission E#AICOMF an( represenaives
o$ 2o''er2ial +an"s8 'er20an +an"s an( (is2oun 0ouses *as se up o
(ra$ 0e %ui(elines $or 0e pra2i2e o$ universal +an"in% in #i%eria. A0e
2o''iee 2o'plee( is assi%n'en +y 0e 'i((le o$ 0e year an(
su+'ie( is repor o 0e CB# 'ana%e'en. A0e CB# Governor8 in 0e
eBer2ise o$ 0e po*ers 2on$erre( on 0i' +y se2ion 61 o$ 0e Ban"s an(
O0er Finan2ial Insiuions A2 EBOFIAF 1<<1 Eas a'en(e(F8 pu+lis0e(
0e ne* (e$iniion o$ +an"in% +usiness in #i%eria8 0rou%0 an o$$i2ial
Govern'en GaCee #o. <1 1ol. =7 o$ De2e'+er >18 :;;;. A0e
Gui(elines $or 0e pra2i2e o$ UB in #i%eria *ere also issue( o a"e
e$$e2 $ro' )anuary 18 :;;1. A22or(in% o 0e %ui(elines8 all
2onvenional +an"s E2o''er2ial an( 'er20anF *ere o +e %rane(
uni$or' li2enses o pra2i2e UB. Wi0 su20 a li2ense8 0e (isin2ion
+e*een 2o''er2ial an( 'er20an +an"in% *oul( +e re'ove( an(
+an"s *oul( 0ave 0e li+ery o un(era"e8 in a((iion o ra(iional
+an"in% $un2ions8 2apial 'ar"e a2iviies as *ell as insuran2e
'ar"ein% servi2es8 ei0er (ire2ly or 0rou%0 su+si(iaries. Ea20 o$ 0ese
a2iviies is eBpe2e( o +e approve( +y 0e relevan re%ulaory +o(ies.
A0e 20allen%es o$ UB as 0i%0li%0e( in 0e 1<<< e(iion o$ 0e Ban"in%
Supervision Annual Repor *ere 2onsi(ere( in 0e $or'ulaion o$ 0e
Gui(elines. A22or(in%ly8 2ru2ial areas li"e 2onsoli(ae( supervision o$
$inan2ial 2on%lo'eraes8 *0i20 'i%0 e'er%e8 *ere a((resse(. In 0is
re%ar(8 *0ile 0e CB# *as a22or(e( 0e apeB re%ulaor saus in 0e
2ase o$ +an"s 0a *oul( en%a%e in o0er a2iviies8 0e nee( $or $ur0er
2o6operaion an( 2o6or(inaion o$ re%ulaory e$$ors8 0rou%0 0e
Finan2ial Servi2es Re%ulaion 2o6or(inain% Co''iee EFSRCCF8 *as
e'p0asiCe(. A0e i'peraive o$ a(e-uae rainin% an( eBposure o$ 0e
supervisory sa$$ o$ ea20 su+6se2oral re%ulaory a%en2y *as also %iven
Si'ilarly8 0e 2o6operaion o$ operaors in 0e +an"in% syse'8 0rou%0
0e a2iviies o$ Sel$ Re%ulaory Or%aniCaions ESROF an( o0er +o(ies
in 0e +an"in% syse' *as also soli2ie(8 o ensure 0e su22ess$ul
i'ple'enaion an( operaion o$ UB in #i%eria. A0e 2o''iee on 0e
%ui(elines $or UB noe( 0e nee( o revie* all 0e relevan la*s8 su20 as
BOFIA 1<<1 Eas a'en(e(F8 Se2uriies N Inves'en A2 an( 0e
Insuran2e A2. Conse-uenly8 i i(eni$ie( areas o$ 2on$li2 an( 'a(e
ne2essary re2o''en(aions $or 0eir a'en('en.

040 Funt!on'>Ro%&' o2 B$n,' !n N!-&r!$n Eono(.
Many (evelopin% 2ounries8 in2lu(in% #i%eria are 20ara2eriCe( +y lo*
level o$ 2apial in2o'e an( ine-ualiies in +o0 0e (isri+uion o$ 0e
'ea%er in2o'e as *ell as lo* propensiy o save a (i$$eren levels o$
in2o'e. I is *i(ely a2"no*le(%e( as posie( +y UCoa%a E1<=>F8 0a 0e
availa+iliy o$ $inan2ial 2apial is a pre6re-uisie $or 0e rapi(
(evelop'en an( rans$or'aion o$ any 2ounryKs e2ono'y. A0is 2an
only +e $a2iliae( +y 0e eBisen2e o$ appropriae $inan2ial insiuions
in 0e e2ono'y. A0ere$ore8 +an"s 0ave a vial role o play +y 'a"in%
0eir $inan2ial resour2es availa+le $or $inan2in% an( pro'oin%
(evelop'en. A0ere is no (ou+ 0a 0is role o$ +an"s is very perinen
o (evelopin% 2ounries 2onsi(erin% 0eir pe2uliar 2ir2u'san2es. Ban"s
0ave +een a+le o +rin% relie$ $ro' 0ese 0an(i2aps 0rou%0 0eir
a2iviies o$ 'o+iliCin% $inan2ial resour2es $ro' 0e surplus se2or o$ 0e
e2ono'y o 0e (e$i2i unis o$ 0e e2ono'y 0rou%0 0e eBension o$
loans an( 2re(is. A0e +an"s also 0ave 0e a((iional responsi+iliy o$
allo2ain% 0e resour2es a 0eir (isposal in su20 a *ay as o ensure 0e
pro'oion o$ rapi( (evelop'en o$ 0e naionKs e2ono'y.
Despie 0e role +an"s are per$or'in% in 0e #i%erian e2ono'y8 i is
2rysal 2lear 0a 0e +an"in% syse' *ill 0ave o +ra2e up $or 'ore
20allen%es8 *0i20 are +oun( o +e pose( in 0e $uure. A0e 20allen%es as
enun2iae( +y E(oCien E1<=<F in2lu(e4
1. A0e 20allen%es as 2onaine( in 0e #aional Develop'en Rollin%
plan *0ere i *as sae( 0a +an"s are eBpe2e( o play a
(yna'i2 role in 20annelin% a(e-uae a'ouns o$ 0eir invesi+le
$un(s o 0e pro(u2ive se2or.
:. A0e eBpansion an( (iversi$i2aion o$ 0e ran%e o$ $inan2ial
pro(u2s availa+le an( 0e $ur0er *i(enin% o$ 0e s2ope o$
+an"in% servi2es o en0an2e 0e per$or'an2e o$ 0eir role in 0e
pro'oion o$ e2ono'i2 (evelop'en.
>. A0e nee( o %ive (ue 2o%niCan2e o 0e pe2uliariies o$ 0e
#i%eria siuaion in 0eir pra2i2es an( pro%ra''e. #i%eria8 +ein%
a 0i%0ly $ra%'ene( $inan2ial sru2ure *0i20 is 20ara2eriCe( +y
0e 2o6 eBisen2e o$ +o0 $or'al an( in$or'al 2re(i 'ar"es8 a
si%ni$i2an populaion o$ invesi+le $un(s is li"ely o +e rappe( in
various noo" an( 2rannies o$ 0e e2ono'y *i0ou +ein%
su22ess$ully 'o+iliCe( in $or' o$ savin%s.
.. A0e nee( $or in2reasin% 2o6operaion +e*een 0e %overn'en
an( Ban"in% syse'. I is 2erain 0a 0e poli2ies o$ 0e +an"s are
no al*ays in 2onsonan2e *i0 0e 2ounryKs nee(s an(
aspiraions $or e2ono'i2 (evelop'en an( 0e %overn'en 2oul(
no re'ain o+livious o 0is $a2. An ae'p 'us 0ere$ore +e
'a(e o 'o(i$y 0e +an"in% pra2i2es in a *ay 0a *oul( ensure
0a 0e pursui o$ 0e pro$i 'oives *as no a 0e eBpense o$ 0e
2ounryKs (evelop'en o+3e2ives.
In 2on2lusion8 $inan2ial an( +an"in% in(usry 0as a lo o$ players *0i208
0is su(y 0ave (is2usse( a+ove. A0ere$ore *i0 0e appropriae
re$eren2e o 0e $ore%oin% you 2an un(ersan( 0e operaions o$ +an"s
an( $inan2ial in(usry.
Su''arily8 i is o+vious $ro' 0e $ore%oin% 0a 0e p0eno'enal o$
%ro*0 in 0e #i%erian Ban"in% in(usry 0as su%%ese( "een
2o'peiion8 *0i20 ne2essiae( 0e a(opion o$ 'ar"ein% srae%ies an(
a(e-uae 2re(i analysis. For e$$e2ive 'ar"ein% o$ $inan2ial servi2es8
+an"s s0oul( re2o%niCe 0e 2onsrains pose( +y 0e environ'en an(
ensure 0a 0e 2re(i analysis ele'ens are 2are$ully sele2e( o pro(u2e
0e (eserve( resuls +o0 in er's o$ pro$ia+iliy an( 2uso'er
Menion an( (is2uss 'a3or player in +an" an( $inan2ial in(usryO

G. O. #*an"*o E1<=;F. A0e #i%erian Finan2ial Syse'.
&.#.C. O"i%+o E1<=1F. #i%eriaKs Finan2ial Syse'.
CB# Brie$s4 Resear20 Dep. series #o. <5/;>8 )une 1<<5 6Moneary
&oli2y in #i%eria.

O(oCi8 1. A. 6A0e I'peraive o$ E2ono'i2 Gro*0 in #i%eria 6A0e
#i%erian Ban"er E)an6)une :;;:F.
E. B. O. A"in%+ola 6Srae%ies $or E$$e2ive Mana%e'en o$ Finan2ial
Insiuions in 0e #e* Millenniu' EA0e #i%erian Ban"er 6 )uly6
De2 :;;1F.

C0ie$ EDr.F ). O. Sanusi 6#i%eria E2ono'y4 Gro*08 &ro(u2iviy an(
0e Role o$ Moneary &oli2y.
Cenral Ban" o$ #i%eria E:;;:F. Moneary8 Cre(i8 Forei%n Ara(e an(
EB20an%e &oli2y Gui(elines $or $is2al :;;:/:;;>.
1.; Inro(u2ion
:.; O+3e2ives
>.; Main Conen
>.1 A0e Causes o$ Finan2ial Disress a'on% !o2al Ban"s
>.: E$$e2s o$ Ban" Disress
..; Con2lusion
5.; Su''ary
6.; Auor6Mar"e( Assi%n'en
7.; Re$eren2es/Fur0er Rea(in%s
In 0e 1<=;s an( early 1<<;s several 2ounries8 in2lu(in% (evelope(
e2ono'ies8 (evelopin% 2ounries8 an( e2ono'ies in ransiion 0ave
eBperien2e( severe +an"in% 2rises. Su20 proli$eraion o$ lar%e s2ale
+an"in% se2or pro+le's 0as raise( *i(esprea( 2on2ern8 as +an"in%
2rises (isrup 0e $lo* o$ 2re(i o 0ouse0ol(s an( enerprises8 re(u2in%
inves'en an( 2onsu'pion an( possi+ly $or2in% via+le $ir's ino
+an"rup2y. Ban"in% 2rises 'ay also 3eopar(iCe 0e $un2ionin% o$ 0e
pay'ens syse' an(8 +y un(er'inin% 2on$i(en2e in (o'esi2 $inan2ial
insiuions8 0ey 'ay 2ause a (e2line in (o'esi2 savin%s an(/or a lar%e
s2ale 2apial ou$lo*. Finally8 a syse'i2 2risis 'ay $or2e soun( +an"s
o 2lose 0eir (oors. In 'os 2ounries poli2y6'a"ers 0ave ae'pe( o
s0ore up 0e 2onse-uen2es o$ +an"in% 2rises 0rou%0 various ypes o$
inervenion8 ran%in% $ro' 0e pursui o$ a loose 'oneary poli2y o 0e
+ailou insolven $inan2ial insiuions *i0 pu+li2 $un(s. Even *0en
0ey are 2are$ully (esi%ne(8 0o*ever8 res2ue operaions 0ave several
(ra*+a2"s4 0ey are o$en very 2osly $or 0e +u(%eJ 0ey 'ay allo*
ine$$i2ien +an"s o re'ain in +usinessJ 0ey are li"ely o 2reae 0e
eBpe2aion o$ $uure +ail6ous re(u2in% in2enives $or a(e-uae ris"
'ana%e'en +y +an"sJ 'ana%erial in2enives are also *ea"ene( *0en 6
6as i is o$en 0e 2ase 6res2ue operaions $or2e 0eal0y +an"s o +ear 0e
losses o$ ailin% insiuions. Finally8 loose 'oneary poli2y o s0ore up
+an"in% se2or losses 2an +e in$laionary an(8 in 2ounries *i0 an
eB20an%e rae 2o''i'en8 i 'ay ri%%er a spe2ulaive aa2" a%ains
0e 2urren2y.
By 0e en( o$ 0is uni8 you s0oul( +e a+le o4
• eBplain 0e 2auses o$ (isress in +an"in% in(usry
• 2lassi$y 'a3or e$$e2s o$ (isress in +an"in% in(usry.
041 T#& C$u'&' o2 F!n$n!$% D!'tr&'' $(on- Lo$%
Finan2ial (isress 0as a$$li2e( nu'erous lo2al +an"s8 'any o$ *0i20
0ave +een 2lose( (o*n +y 0e re%ulaory au0oriies or 0ave +een
resru2ure( un(er 0eir supervision. Many o$ 0e +a( (e+s *ere
ari+ua+le o 'oral 0aCar(4 0e a(verse in2enives on +an" o*ners o
a(op i'pru(en len(in% srae%ies8 in pari2ular insi(er len(in% an(
len(in% a 0i%0 ineres raes o +orro*ers is 0e 'os ris"y se%'en o$
0e 2re(i 'ar"es.
A4 In'!d&r %&nd!n-
A0e sin%le +i%%es 2onri+uor o 0e +a( loans o$ 'any o$ 0e $aile(
lo2al +an"s *as insi(er len(in%. In a leas 0al$ o$ 0e +an" $ailures
re$erre( o a+ove8 insi(er loans a22oune( $or a su+sanial proporion o$
0e +a( (e+s. Mos o$ 0e lar%er lo2al +an" $ailures in 7enya8 su20 as
0e Coninenal Ban"8 Ara(e Ban" an( &an A$ri2an Ban"8 involve(
eBensive insi(er len(in%8 o$en o polii2ians. Insi(er loans a22oune(
$or 65 per 2en o$ 0e oal loans o$ 0e $our lo2al +an"s li-ui(ae( in
#i%eria in 1<<58 virually all o$ *0i20 *as unre2overa+le E#DIC8 1<<.8
p. .=F. Al'os 0al$ o$ 0e loan por$olio o$ one o$ 0e U%an(an lo2al
+an"s a"en over +y 0e BOU in 1<<5 0a( +een eBen(e( o is (ire2ors
an( e'ployees. A0e 0rea pose( +y insi(er len(in% o 0e soun(ness o$
0e +an"s *as eBa2er+ae( +e2ause 'any o$ 0e insi(er loans *ere
invese( in spe2ulaive pro3e2s su20 as real esae (evelop'en8
+rea20e( lar%e6loan eBposure li'is8 an( *ere eBen(e( o pro3e2s
*0i20 2oul( no %enerae s0or6er' reurns Esu20 as 0oels an(
s0oppin% 2enresF8 *i0 0e resul 0a 0e 'auriies o$ 0e +an"Ks asses
an( lia+iliies *ere i'pru(enly 'is'a20e( A0e 0i%0 in2i(en2e o$
insi(er len(in% a'on% $aile( +an"s su%%ess 0a pro+le's o$ 'oral
0aCar( *ere espe2ially a2ue in 0ese +an"s. Several $a2ors 2onri+ue(
o 0is.
Firs8 polii2ians *ere involve( as s0are0ol(ers an( (ire2ors o$ so'e o$
0e lo2al +an"s. &olii2al 2onne2ions *ere use( o o+ain pu+li26se2or
(eposis4 'any o$ 0e $aile( +an"s8 pari2ularly in 7enya8 relie( 0eavily
on *0olesale (eposis $ro' a s'all nu'+er o$ parasaals. Be2ause o$
polii2al pressure8 0e parasaals *0i20 'a(e 0ese (eposis are unli"ely
o 0ave 'a(e a purely 2o''er2ial 3u(%'en as o 0e sa$ey o$ 0eir
(eposis. Moreover8 0e availa+iliy o$ parasaal (eposis re(u2e( 0e
nee( o 'o+iliCe $un(s $ro' 0e pu+li2. ,en2e 0ese +an"s $a2e( lile
pressure $ro' (eposiors o 6 esa+lis0 a repuaion $or sa$ey.
&olii2al 2onne2ions also $a2iliae( a22ess o +an" li2enses an( *ere
use( in so'e 2ases o pressure +an" re%ulaors no o a"e a2ion a%ains
+an"s *0en violaions o$ 0e +an"in% la*s *ere (is2overe(. All 0ese
$a2ors re(u2e( 0e 2onsrains on i'pru(en +an" 'ana%e'en.
In a((iion8 0e +an"sK relian2e on polii2al 2onne2ions 'ean 0a 0ey
*ere eBpose( o pressure o len( o 0e polii2ians 0e'selves in reurn
$or 0e assisan2e %iven in o+ainin% (eposis8 li2en2es8 e2. Several o$
0e lar%es insi(er loans 'a(e +y $aile( +an"s in 7enya *ere o
pro'inen polii2ians. Se2on(8 'os o$ 0e $aile( +an"s *ere
un(er2apialiCe(8 in par +e2ause 0e 'ini'u' 2apial re-uire'ens in
$or2e *0en 0ey 0a( +een se up *ere very lo*. O*ners 0a( lile o$
0eir o*n $un(s a ris" s0oul( 0eir +an" $ail8 *0i20 2reae( a lar%e
asy''ery in 0e poenial ris"s an( re*ar(s o$ insi(er len(in%. Ban"
o*ners 2oul( inves 0e +an"Ks (eposis in 0eir o*n 0i%06ris" pro3e2s8
"no*in% 0a 0ey *oul( 'a"e lar%e pro$is i$ 0eir pro3e2s su22ee(e(8
+u *oul( lose lile o$ 0eir o*n 'oney i$ 0ey *ere no pro$ia+le. O$
0e 1> (isresse( lo2al +an"s a"en over +y 0e CB# in 1<<58 all eB2ep
one 0a( pai(6up s0are 2apial *0i20 +arely eB2ee(e( 0e 'ini'u'
re-uire( +y la* o$ #5; 'illion an( #.; 'illion8 $or 2o''er2ial an(
'er20an +an"s respe2ively8 a 0e en( o$ 1<<.. A0e avera%e pai(6up
s0are 2apial o$ 0e $our 2o''er2ial +an"s a"en over +y 0e CB# *as
#51 'illion 2o'pare( *i0 an avera%e o$ #<. 'illion $or all >6 privae6
se2or 2o''er2ial +an"s8 *0ile 0e avera%e pai(6up s0are 2apial o$ 0e
nine 'er20an +an"s a"en over +y 0e CB# *as #5: 'illion 2o'pare(
o an avera%e o$ #6= 'illion $or all .= privae6se2or 'er20an +an"s
A0e pai(6up s0are 2apial o$ 0ese 1> $aile( +an"s a'oune( o an
avera%e o$ only a+ou . per 2en o$ 0eir oal loans.
A0e 0ir( $a2or 2onri+uin% o insi(er len(in% *as 0e eB2essive
2on2enraion o$ o*ners0ip. In 'any o$ 0e $aile( +an"s8 0e 'a3oriy o$
s0ares *ere 0el( +y one 'an or one $a'ily8 *0ile 'ana%ers la2"e(
su$$i2ien in(epen(en2e $ro' iner$eren2e +y o*ners in operaional
(e2isions. A 'ore (iversi$ie( o*ners0ip sru2ure an( a 'ore
in(epen(en 'ana%e'en 'i%0 0ave +een eBpe2e( o i'pose %reaer
2onsrains on insi(er len(in%8 +e2ause a leas so'e o$ 0e (ire2ors
*oul( 0ave soo( o lose 'ore 0an 0ey %aine( $ro' insi(er len(in%8
*0ile 'ana%ers *oul( no 0ave *ane( o ris" 0eir repuaions an(
B4 L&nd!n- to 7!-#?R!', Borro=&r'
A0e se2on( 'a3or $a2or 2onri+uin% o +an" $ailure *as len(in%8 a
0i%0 ineres raes8 o +orro*ers in 0i%06ris" se%'ens o$ 0e 2re(i
'ar"e. A0is involve( ele'ens o$ 'oral 0aCar( on 0e par o$ +o0 0e
+an"s an( 0eir +orro*ers an( 0e a(verse sele2ion o$ 0e +orro*ers. I
*as in par 'oivae( +y 0e 0i%0 2os o$ 'o+iliCin% $un(s. Be2ause
0ey *ere per2eive( +y (eposiors as +ein% less sa$e 0an 0e esa+lis0e(
+an"s8 lo2al +an"s 0a( o o$$er (eposiors 0i%0er (eposi raes. A0ey also
0a( (i$$i2uly in ara2in% non6ineres +earin% 2urren a22ouns +e2ause
0ey 2oul( o$$er $e* a(vana%es o 2urren a22oun 0ol(ers *0i20 2oul(
no also +e o+aine( $ro' 0e esa+lis0e( +an"s. So'e o$ 0e lo2al +an"s
relie( 0eavily on 0i%062os iner+an" +orro*in%s $ro' o0er +an"s an(
$inan2ial insiuions8 on *0i20 real ineres raes o$ over :; per 2en
*ere no un2o''on.
A0e 0i%0 2os o$ $un(s 'ean 0a 0e lo2al +an"s 0a( o %enerae 0i%0
earnin%s $ro' 0eir assesJ $or eBa'ple8 +y 20ar%in% 0i%0 len(in% raes8
*i0 2onse-uen2es $or 0e -ualiy o$ 0eir loan por$olios. A0e lo2al
+an"s al'os inevia+ly su$$ere( $ro' 0e a(verse sele2ion o$ 0eir
+orro*ers8 'any o$ *0o 0a( +een re3e2e( +y 0e $orei%n +an"s Eor
*oul( 0ave +een8 0a( 0ey applie( $or a loanF +e2ause 0ey (i( no 'ee
0e sri2 2re(i*or0iness 2rieria (e'an(e( o$ 0e'. Be2ause 0ey 0a(
o 20ar%e 0i%0er len(in% raes o 2o'pensae $or 0e 0i%0er 2oss o$
$un(s8 i *as very (i$$i2ul $or 0e lo2al +an"s o 2o'pee *i0 0e
$orei%n +an"s $or 0e Ppri'eP +orro*ers Ei.e. 0e 'os 2re(i*or0y
+orro*ersF. As a resul8 0e 2re(i 'ar"es *ere se%'ene(8 *i0 'any
o$ 0e lo2al +an"s operain% in 0e 'os ris"y se%'en8 servin%
+orro*ers prepare( o pay 0i%0 len(in% raes +e2ause 0ey 2oul( a22ess
no alernaive sour2es o$ 2re(i. ,i%06ris" +orro*ers in2lu(e( o0er
+an"s an( #BFls *0i20 *ere s0or o$ li-ui(iy an( prepare( o pay
a+ove6'ar"e ineres raes $or iner+an" (eposis an( loans. In #i%eria
so'e o$ 0e lo2al +an"s *ere 0eavily eBpose( o $inan2e 0ouses *0i20
2ollapse( in lar%e nu'+ers in 1<<>8 as *ell as o o0er lo2al +an"s
EA%uso an( Co.8 1<<58 p. .;F. Conse-uenly8 +an" (isress 0a( (o'ino
e$$e2s +e2ause o$ 0e eBen o *0i20 lo2al +an"s len o ea20 o0er.
Wi0in 0e se%'ens o$ 0e 2re(i 'ar"e serve( +y 0e lo2al +an"s8
0ere *ere pro+a+ly %oo( -ualiy Ei.e. 2re(i*or0yF +orro*ers as *ell
as poor -ualiy ris"s. Bu servin% +orro*ers in 0is se2ion o$ 0e 'ar"e
re-uires sron% loan appraisal an( 'oniorin% syse's8 no leas +e2ause
in$or'aional i'per$e2ions are a2ue4 0e -ualiy o$ +orro*ersK $inan2ial
a22ouns are o$en poor8 'any +orro*ers la2" a ra2" re2or( o$
su22ess$ul +usiness8 e2. A0e pro+le' $or 'any o$ 0e $aile( +an"s *as
0a 0ey (i( no 0ave a(e-uae eBperise o s2reen an( 'onior 0eir
+orro*ers8 an( 0ere$ore (isin%uis0 +e*een %oo( an( +a( ris"s. In
a((iion8 2re(i pro2e(ures8 su20 as 0e (o2u'enaion o$ loans an( loan
se2uriies an( inernal 2onrols8 *ere $re-uenly very poor. Mana%ers
an( (ire2ors o$ 0ese +an"s o$en la2"e( 0e ne2essary eBperise an(
eBperien2e EMa''an an( Oluye'i8 1<<.F.
Re2ruiin% %oo( sa$$ *as o$en (i$$i2ul $or 0e lo2al +an"s +e2ause Q0e
esa+lis0e( +an"s 2oul( usually o$$er 0e 'os alene( +an" o$$i2ials
+eer 2areer prospe2s. Moreover8 0e rapi( %ro*0 in 0e nu'+er o$
+an"s in 2ounries su20 as #i%eria ousrippe( 0e supply o$ eBperien2e(
an( -uali$ie( +an" o$$i2ials.
C4 M$ro&ono(! In't$)!%!t.
A0e pro+le's o$ poor loan -ualiy $a2e( +y 0e lo2al +an"s *ere
2o'poun(e( +y 'a2roe2ono'i2 insa+iliy. &erio(s o$ 0i%0 an( very
volaile in$laion o22urre( in all $our o$ 0e 2ounries 2overe( 0ere.
Durin% 0e 1<<;s8 in$laion rea20e( in Ra'+ia 1<1 per 2en8 in 7enya .6
per 2en8 in #i%eria 7; per 2en8 an( in U%an(a :>; per 2en. Wi0
ineres raes li+eraliCe( EeB2ep in #i%eriaF8 no'inal len(in% raes *ere
also 0i%08 *i0 real raes $lu2uain% +e*een posiive an( ne%aive
levels8 o$en in an unpre(i2a+le 'anner8 +e2ause o$ 0e volailiy o$
in$laion ECollier8 1<<>8 pp. 1<6:;F. Ma2roe2ono'i2 insa+iliy *oul(
0ave 0a( *o i'poran 2onse-uen2es $or 0e loan -ualiy o$ 0e lo2al
+an"s. Firs8 0i%0 in$laion in2reases 0e volailiy o$ +usiness pro$is
+e2ause o$ is unpre(i2a+iliy8 an( +e2ause i nor'ally enails a 0i%0
(e%ree o$ varia+iliy in 0e raes o$ in2rease o$ 0e pri2es o$ 0e pari2ular
%oo(s an( servi2es *0i20 'a"e up 0e overall pri2e in(eB. A0e
pro+a+iliy 0a $ir's *ill 'a"e losses rises8 as (oes 0e pro+a+iliy 0a
0ey *ill earn *in($all pro$is E,arvey an( )en"ins8 1<<.F. A0is
inensi$ies +o0 a(verse sele2ion an( a(verse in2enives $or +orro*ers
o a"e ris"s8 an( 0us 0e pro+a+iliies o$ loan (e$aul. A0e se2on(
2onse-uen2e o$ 0i%0 in$laion is 0a i 'a"es loan appraisal 'ore
(i$$i2ul $or 0e +an"8 +e2ause 0e via+iliy o$ poenial +orro*ers
(epen(s upon unpre(i2a+le (evelop'ens in 0e overall rae o$
in$laion8 is in(ivi(ual 2o'ponens8 eB20an%e raes an( ineres raes.
Moreover8 asse pri2es are also li"ely o +e 0i%0ly volaile un(er su20
2on(iions. ,en2e8 0e $uure real value o$ loan se2uriy is also very
D4 [email protected]!d!t. Su<<ort $nd Prud&nt!$% R&-u%$t!on
Deposi insuran2e s20e'es *ere no 2ru2ial $a2ors in 2onri+uin% o
'oral 0aCar( in 0e $aile( +an"s. 7enya an( #i%eria 0ave provi(e(
(eposi insuran2e sin2e 0e lae 1<=;s8 +u only $or (eposis +elo* a
spe2i$ie( 'ini'u' a'oun. Many o$ 0e $aile( +an"sK (eposis *ere no
insure(8 +e2ause 0ey *ere oo lar%e Eas in 0e 2ase o$ 'os o$ 0e
insiuional (eposisF an(/or +e2ause 0ey *ere $ro' sour2es no
2overe( +y 0e insuran2e s20e'e. Bu 0e *illin%ness o$ 0e re%ulaory
au0oriies o suppor (isresse( +an"s *i0 loans8 ra0er 0an 2lose 0e'
(o*n8 *as pro+a+ly an i'poran 2onri+uor o 'oral 0aCar(. Many o$
0e $aile( +an"s in 7enya8 U%an(a an( Ra'+ia 0a( +een a+le o +orro*
0eavily $ro' 0eir respe2ive Cenral Ban"s $or several 'on0s an( in
so'e 2ases $or 'ore 0an a year8 +e$ore 0ey *ere 2lose(. A0e eBen o$
i'pru(en 'ana%e'en in 0e $aile( +an"s in(i2aes 0a 0ere *ere
serious (e$i2ien2ies in +an" re%ulaion an( supervision. W0en 'any o$
0e +an"s *ere se up in 0e 1<=;s or early 1<<;s8 +an"in% le%islaion
*as ou(ae( an( Cenral Ban" supervision (epar'ens *ere seriously
un(ersa$$e(. In 7enya an( #i%eria 'any +an"s avoi(e( +ein% inspe2e(
$or lon% perio(s +e2ause 0e rapi( eBpansion o$ +an"s in 0e se2on( 0al$
o$ 0e 1<=;s over*0el'e( supervisory 2apa2iies E7ariu"i8 1<<>8 pp.
>;;6<F. Fur0er'ore8 polii2al pressure *as +rou%0 o +ear on Cenral
Ban"s o eBer2ise re%ulaory $or+earan2e. A0e Cenral Ban"s o$en
la2"e( su$$i2ien in(epen(en2e $ro' 0e %overn'en o re$use li-ui(iy
suppor o polii2ally 2onne2e( +an"s an( o sri2ly en$or2e 0e +an"in%
la*s. In pari2ular8 $or 0ose +an"s *i0 sron% polii2al 2onne2ions8 0e
eBpe2aion 0a re%ulaors 2oul( +e pressure( o eBer2ise $or+earan2e
'us 0ave seriously un(er'ine( (is2ipline an( in2enives $or pru(en
+an" 'ana%e'en.
04/ E22&t' o2 B$n, D!'tr&''
In 0e 1<=;s an( early 1<<;s several 2ounries8 in2lu(in% (evelope(
e2ono'ies8 (evelopin% 2ounries8 an( e2ono'ies in ransiion 0ave
eBperien2e( severe +an"in% 2rises. Su20 proli$eraion o$ lar%e s2ale
+an"in% se2or pro+le's 0as raise( *i(esprea( 2on2ern8 as +an"in%
2rises (isrup 0e $lo* o$ 2re(i o 0ouse0ol(s an( enerprises8 re(u2in%
inves'en an( 2onsu'pion an( possi+ly $or2in% via+le $ir's ino
+an"rup2y. Ban"in% 2rises 'ay also 3eopar(iCe 0e $un2ionin% o$ 0e
pay'ens syse' an(8 +y un(er'inin% 2on$i(en2e in (o'esi2 $inan2ial
insiuions an( 0ey 'ay 2ause a (e2line in (o'esi2 savin%s an(/or a
lar%e s2ale 2apial ou$lo*. Finally8 a syse'i2 2risis 'ay $or2e soun(
+an"s o 2lose 0eir (oors. In 'os 2ounries poli2y6'a"ers 0ave
ae'pe( o s0ore up 0e 2onse-uen2es o$ +an"in% 2rises 0rou%0
various ypes o$ inervenion8 ran%in% $ro' 0e pursui o$ a loose
'oneary poli2y o +ailou insolven $inan2ial insiuions *i0 pu+li2
$un(s. Even *0en 0ey are 2are$ully (esi%ne(8 0o*ever8 res2ue 6
operaions 0ave several (ra*+a2"s4 0ey are o$en very 2osly $or 0e
+u(%eJ 0ey 'ay allo* ine$$i2ien +an"s o re'ain in +usinessJ 0ey are
li"ely o 2reae 0e eBpe2aion o$ $uure +ail6ous re(u2in% in2enives
$or a(e-uae ris" 'ana%e'en +y +an"sJ 'ana%erial in2enives are also
*ea"ene( *0en 6 6as i is o$en 0e 2ase 6res2ue operaions $or2e 0eal0y
+an"s o +ear 0e losses o$ ailin% insiuions. Finally8 loose 'oneary
poli2y o s0ore up +an"in% se2or losses 2an +e in$laionary an(8 in
2ounries *i0 an eB20an%e rae 2o''i'en8 i 'ay ri%%er a
spe2ulaive aa2" a%ains 0e 2urren2y.
E'piri2al su(ies s0o* 0a 2re(i o 0e privae se2or an( a%%re%ae
oupu (o in $a2 (e2elerae (urin% +an"in% 2rises. ,o*ever8 0is is no
ne2essarily 0a +an"in% pro+le's 2onri+ue o 0e (e2line in oupu4
$irs8 0e sa'e eBo%enous a(verse s0o2"s 0a ri%%er +an"in% pro+le's
'ay also 2ause a (e2line in a%%re%ae (e'an(8 lea(in% $ir's o 2u
inves'en an( *or"in% 2apial an(8 uli'aely8 (e'an( $or +an" 2re(i.
A0ese sa'e s0o2"s 'ay also 2ause a e'porary in2rease in un2erainy8
lea(in% $ir's o (elay inves'en an( +orro*in% (e2isions. In a((iion8
a(verse s0o2"s 'i%0 0ur +orro*er +alan2e s0ees an( eBa2er+ae 0e
e$$e2s o$ asy''eri2 in$or'aion an( li'ie( 2onra2i+iliy8 pro'pin%
+an"s66even 0eal0y ones6o 2urail len(in% o ris"ier +orro*ers EP$li%0
o -ualiyPF or raise len(in% sprea(s. Ao su''ariCe8 oupu an( +an"
2re(i are li"ely o (e2elerae aroun( +an"in% 2rises even in 0e a+sen2e
o$ a $ee(+a2" e$$e2 $ro' +an" illi-ui(iy an( insolven2y o 2re(i
availa+iliy. Ao i(eni$y 0e real e$$e2s o$ +an"in% 2rises i is ne2essary
o sor ou 0is 3oin en(o%eneiy pro+le'.
In 0e 2ourse o$ 0is su(y *e 0ave +een a+le o esa+lis0 various 2auses
an( e$$e2s o$ +an" (isress in #i%eria an( o0er lo2al +an"s in A$ri2a.
A0us one 2an 2on2lu(e 0a +an" (isress ero(in% 0e 2on$i(en2e o$
popula2e in +an"in% in(usry an( 0is 0as le( o (e2rease in savin% an(
inves'en in 0e e2ono'y.
A0is uni *as a+le o 2lassi$y various 2auses o$ +an" (isress a'on%
*0i20 are insi(er len(in%8 len(in% o 0i%0 ris" +orro*er8
'a2roe2ono'i2 insa+iliy8 li-ui(iy suppor an( pru(enial re%ulaion.
I also (is2usse( various e$$e2s o$ +an" (isress *0i20 in2lu(eJ (isrup
0e $lo* o$ 2re(i o 0ouse0ol(s an( enerprises8 re(u2in% inves'en
an( 2onsu'pion an( possi+ly $or2in% via+le $ir's ino +an"rup2y.
Ban"in% 2rises 'ay also 3eopar(iCe 0e $un2ionin% o$ 0e pay'ens
syse' an(8 +y un(er'inin% 2on$i(en2e in (o'esi2 $inan2ial
Dis2uss 0e 2auses an( e$$e2 o$ +an" (isress in #i%eria e2ono'yO

AGUSAO N Co. E1<<5F. Banking Industry Survey E!a%osF.
BERGER8 Allen #.8 Ri20ar( ). ,ERRI#G an( Gior%io &. SREGO
E1<<5F8 PA0e Role o$ Capial in Finan2ial InsiuionsP8 Journal o
Banking and !inance, 1ol. 1<8 pp. ><>6.>;.
BOR E1<<5F. "nnual #eport E!usa"a4 Ban" o$ Ra'+iaF.
CA&RIO8 Geral(8 )r. E1<<6F. PBan" Re%ulaion4 A0e Case o$ 0e
Missin% Mo(elP8 Policy #esearch $orking Paper, #o. 157.
EWas0in%on8 DC4 Worl( Ban"F. E1<<7F. PSa$e an( Soun(
Ban"in% in Developin% Counries4 WeKre no in 7ansas any'oreP
Policy #esearch $orking Paper, #o. 17>< EWas0in%on8 DC4
Worl( Ban"F.
CA&RIO8 Geral(8 )r.8 an( !a*ren2e ,. SUMMERS E1<<>F. PFinan2e
an( is Re$or'P Policy #esearch $orking Paper, #o. 1171
EWas0in%on8 DC4 Worl( Ban"F.
CB7 Evarious issuesF8 "nnual #eport and "ccounts E#airo+i4 Cenral
Ban" o$ 7enyaF. E1<<5F. Monthly %conomic #evie& E#airo+i4
Cenral Ban" o$ 7enyaF8 #ove'+er.

CO!!IER8 &aul E1<<>F. PA$ri2an Finan2ial !i+eralisaionsP8 Mi'eo
EOB$or(4 Cenre $or 0e Su(y o$ A$ri2an E2ono'iesF.
DEMSEAR8 Re+e22a S.8 Mar2 R. SAIDE#BERG an( &0ilip E.
SARA,A# E1<<7F. PA%en2y &ro+le's an( Ris" a"in% a
Ban"sP8 !ederal #eserve Bank o 'e& (ork #esearch Paper, #o.
<7;< E#e* Dor"F.
ECO#OMISA I#AE!!IGE#CE U#IA E1<<5F. )ountry #eport *enya,
!ourth +uarter ('airo,i).
GARCIA8 Gillian E1<<6F. PDeposi insuran2e4 O+ainin% 0e Bene$is
an( avoi(in% 0e &i$allsP8 IM! $orking Paper, #o. W&/<6/=>
EWas0in%on8 r DC4 Inernaional Moneary Fun(F.
G!AESS#ER8 A0o'as an( I%na2io MAS E1<<5F. PIn2enives an( 0e
Resoluion o$ Ban" DisressP8 The $orld Bank #esearch
-,server, 1ol. 1;8 #o.1 EFe+ruaryF8 pp. 5>67>.
,AR1ED8 C0arles E1<<>F. PA0e Role o$ Co''er2ial Ban"in% in
Re2overy $ro' E2ono'i2 Disaser in G0ana8 AanCania8 U%an(a
an( Ra'+iaP8 I.S.

.iscussion Paper, #o. D&.>:5 EBri%0on4 Insiue o$ Develop'en
Su(ies8 Universiy o$ SusseBF.
,AR1ED8 C0arles an( Carolyn )E#7I#S E1<<.F8. PIneres Rae
&oli2y8 AaBaion an( Ris"P8 $orld .evelopment, 1ol. ::8 #o. 1:8
pp. 1=6<61=7<.
,E!!MA##8 A0o'as8 7evin MURDOC7 an( )osep0 SAIG!IAR
E1<<5F. PFinan2ial Resrain4 Ao*ar(s a #e* &ara(i%'P8
#esearch Paper, #o. 1>55 ESan$or(4 Gra(uae S20ool o$
Business8 San$or( UniversiyF.
I7IllDE8 S.I. E1<<6F. PFinan2ial Se2or Re$or's an( Moneary &oli2y in
#i%eriaP8 Mi'eo EBri%0on4 Insiue o$ Develop'en Su(ies8
Universiy o$ SusseBF.
1.; Inro(u2ion
:.; O+3e2ives
>.; Main Conen
>.1 A0e re%ulaory Au0oriies
>.1.1 A0e Cenral Ban" o$ #i%eria
>.1.: #i%erian Deposi Insuran2e Corporaion
>.1.> A0e Se2uriies an( EB20an%e Co''ission
>.1.. A0e Fe(eral Minisry o$ Finan2e
>.1.5 #aional Insuran2e Co''ission
>.1.6 A0e Fe(eral Mor%a%e Ban" o$ #i%eria EFMB#F
>.1.7 #aional Boar( $or Co''uniy Ban"s
>.1.= Finan2ial Servi2es Coor(inain% Co''iee
..; Con2lusion
5.; Su''ary
6.; Auor6Mar"e( Assi%n'en
7.; Re$eren2es/Fur0er Rea(in%s
A0e +an"in% se2or 0as +een su+3e2 o eBensive re%ulaion +y 0e CB#
as *ell as (ire2 pari2ipaion +y 0e Fe(eral Govern'en an( sae
%overn'ens (urin% 0e pos in(epen(en2e perio(. E2ono'i2
naionalis' an( (evelop'enal aspiraions *ere i'poran 'oivaions
$or inervenionis poli2ies. A0e 20ara2er o$ 0ese poli2ies *as 0a o$
$inan2ial repression8 in i 0a 2onrole( (epresse( ineres raes an(
20annelle( resour2es a*ay $ro' areas *0ere privae raes o$ reurn
*oul( 0ave +een 0i%0.
A0e allo2aion 2onrols 0ave +een li+eralise( o so'e eBen sin2e 1<=68
al0ou%0 2onrols over "ey areas re'ain in $or2e.

By 0e en( o$ 0is uni8 you s0oul( +e a+le o4
• esa+lis0 0e purpose o$ +an" re%ulaion
• eBplain various areas +an" operaions are %ui(e( +y 0e re%ulaion
• i(eni$y various +o(ies responsi+le $or $or'ulaion an(
i'ple'enaion o$ re%ulaion.

041 T#& R&-u%$tor. Aut#or!t!&'
A0ese are insiuions8 *0i20 are responsi+le $or 0e or(erly
(evelop'en o$ 0e $inan2ial syse'. A0ey ensure 2o'plian2e *i0 lai(
(o*n rules an( re%ulaions %ui(in% 0eir operaions.

A0ey are 'a(e up o$ 0e $ollo*in% insiuions an( or%aniCaions4

1. Cenral Ban" o$ #i%eriaJ
:. #i%eria Deposi Insuran2e CorporaionJ
>. Se2uriies an( EB20an%e Co''issionJ
.. Fe(eral Minisry o$ Finan2eJ
5. #aional Insuran2e Co''issionJ
6. Fe(eral Mor%a%e Ban" o$ #i%eriaJ an(
7. #aional Boar( $or Co''uniy Ban"s.
04141 T#& C&ntr$% B$n, o2 N!-&r!$.
A0e Cenral Ban" o$ #i%eria *as esa+lis0e( +y A2 o$ 1<5= an(
2o''en2e( operaions on 1s )uly 1<5<. A0e A28 *0i20 0as un(er%one
so'e a'en('ens8 *as re6ena2e( as 0e CB# A2 #o :. o$ 1<<1. In
a((iion8 Ban"s an( o0er $inan2ial Insiuions A2 #o :5 o$ 1<<1 *as
pro'ul%ae(. A0e *o A2s *i0 ne2essary a'en('ens up o 1<<< %ave
CB# 'ore $leBi+iliy in re%ulain% an( supervisin% 0e +an"in% se2or
an( li2ensin% $inan2e 2o'panies8 *0i20 0i0ero operae( ousi(e any
re%ulaory $ra'e*or".
A0e CB# o(ay san(s as 0e apeB re%ulaory au0oriy o$ 0e $inan2ial
syse' +y virue o$ 0e $un2ions i 0as o per$or' in 0e #i%erian
e2ono'y. I also serves as 0e prin2ipal re%ulaor an( supervisor in 0e
'oney 'ar"e8 as *ell as 0e a2iviies o$ $inan2e 2o'panies an(
spe2ialiCe( in 0e (evelop'en o$ $inan2e insiuions.

Funt!on' o2 t#& C&ntr$% B$n, o2 N!-&r!$
A0e CB# per$or's a 'yria( o$ $un2ions8 *0i20 are (eriva+le $ro' is
o+3e2ives o4
aF Issue le%al en(er 2urren2yJ
+F Mainain 0e eBernal value o$ le%al en(er 2urren2yJ
2F &ro'oe 'oneary sa+iliy an( soun( $inan2ial syse'J
(F Ban"er an( $inan2ial a(viser o 0e Fe(eral Govern'enJ
eF Ban"er o 0e +an"sJ
Wi0 various or%ans o$ 0e CB# is $un2ions 2an +e 2lassi$ie( ino *o
+roa( 2ae%ories8 na'ely4 2ore8 an( (evelop'enal $un2ions.

Is 2ore $un2ions in2lu(e 2urren2y issue an( (isri+uion8 +an"er o
o0er +an"s8 +an"er o 0e %overn'enJ pro'oion an( 'ainenan2e o$
'oneary sa+iliy an( soun( $inan2ial syse'8 (e+ Mana%e'en8
$orei%n eB20an%e 'ana%e'en an( provi(in% $a2iliy o enerain pu+li2
A0e (evelop'enal $un2ions 2arrie( ou +y 0e apeB +an" in2lu(e 0e
pro'oion o$ 0e $inan2ial 'ar"es8 inro(u2ion o$ 'oney 'ar"e
insru'ens8 $a2iliain% 2apial 'ar"e insiuions an( insru'ens an(
sponsorin% spe2ialiCe( insiuions.

A0e spe2ialiCe( insiuions sponsore( +y CB# over 0e pas . (e2a(es
in2lu(e 0e $ollo*in%4
• BOI 6Ban" o$ In(usry.
• #ACRDB 6#i%erian A%ri2ulural Cooperaive an( Rural
• Develop'en Ban".
• #AIC 6#i%erian A%ri2ulural Insuran2e CorporaionJ
• #DIC 6#i%erian Deposi Insuran2e CorporaionJ
• #E?IM 6#i%erian EBpor I'por Ban"J
• SEC 6Se2uriies an( EB20an%e Co''issionJ an(
• Spe2ialise( s20e'es an( $un(s su20 as4
6 Rural +an"in% s20e'e E1<7761<=;J 1<=;61<=5J 1<=561<=<FJ
6 #ERFU#D. 8
6 SMB EApeBF Uni loan s20e'e an(

0414/ N!-&r!$n D&<o'!t In'ur$n& Cor<or$t!on
A0e %ro*0 in 0e +an"in% su+6se2or o$ 0e $inan2ial syse' a 0e (a*n
o$ 0e 1<=;s resule( in rapi( li2ensin% o$ ne* Ban"s 'os o$ *0i20
2oul( no 2o'pee e$$e2ively %iven 0e prevailin% e2ono'i2
environ'en. A0is %ro*0 in 0e nu'+er o$ operain% +an"s +rou%0 a
lo o$ pressure on 0e CB# in 0e 2on(u2 o$ is supervisory roles. A0e
2ollapse o$ so'e o$ 0ese ne* +an"s ne2essiae( 0e esa+lis0'en o$
0e #i%erian Deposi Insuran2e Corporaion. A0is *as o 2o'ple'en
0e re%ulaory an( supervisory role o$ 0e Cenral Ban" o$ #i%eria. A0e
#DIC *as esa+lis0e( +y De2ree #o. :: o$ 150 )une 1<== an( oo" o$$
in Fe+ruary 1<=<. I *as se up prin2ipally o provi(e (eposi insuran2e
an( relae( servi2es $or +an"s in or(er o pro'oe 2on$i(en2e in 0e
+an"in% in(usry. I *as e'po*ere( o eBa'ine 0e +oo"s an( a$$airs o$
insure( +an"s an( o0er (eposi a"in% $inan2ial insiuions.
04140 T#& S&ur!t!&' $nd E1#$n-& Co((!''!on
A0is re%ulaory or%an $or 0e 2apial 'ar"e operaion *as $or'erly
2alle( Capial Issues Co''ission an( *as esa+lis0e( +y SEC A2 o$
:70 Sepe'+er 1<7< an( $ur0er sren%0ene( +y SEC De2ree o$ 1<==.
I is 0e apeB re%ulaory au0oriy o$ 0e Capial Mar"e an( *as
esa+lis0e( o pro'oe an or(erly an( a2ive 2apial 'ar"e. A0e
2o''ission ensures a(e-uae proe2ion o$ 0e invesin% pu+li2 as *ell
as (eer'ines 0e pri2es an( 0e i'e 2o'paniesK se2uriies are o +e
sol(8 0e sales volu'e8 re%iserin% all se2uriies (ealers o ensure
pro$essionalis'. I is e'po*ere( o approve an( re%ulae 'er%ers an(
a2-uisiions an( au0oriCe 0e esa+lis0'en o$ uni russ as *ell as
'ainain surveillan2e over 0e 'ar"e o en0an2e e$$i2ien2y.
04145 T#& F&d&r$% M!n!'tr. o2 F!n$n&
A0e Fe(eral Minisry o$ Finan2e 2aers $or 0e Fe(eral Govern'enKs
involve'en in 0e $inan2ial syse'. A0e Minisry is pri'arily in 20ar%e
o$ 0e $is2al poli2y o$ 0e Fe(eral Govern'en. I a(vises 0e Fe(eral
Govern'en on is $is2al operaions8 *0i20 in$luen2e 'oneary poli2y. I
2ooperaes *i0 0e CB# on 'oneary 'aers as *ell. A0e 'inisry 0a(
so'e responsi+iliy $or $orei%n eB20an%e 'ana%e'en prior o 1<=6
(ere%ulaion. A0is $un2ion is no* per$or'e( solely +y 0e CB#.
04146 N$t!on$% In'ur$n& Co((!''!on
A 0e apeB o$ 0e Insuran2e su+6se2or is 0e #aional Insuran2e
Co''ission E#AICOMF8 *0i20 repla2e( 0e #i%erian Insuran2e
Supervisory Boar( esa+lis0e( +y De2ree #o. 6: o$ 1<<:. #AICOM is
responsi+le $or e$$e2ive a('inisraion8 supervision8 re%ulaion an(
2onrol o$ 0e +usiness o$ Insuran2e in #i%eria. By la*8 i is eBpe2e( o
esa+lis0 san(ar(s $or 0e 2on(u2 o$ insuran2e +usiness an( proe2ion
o$ insuran2e poli2y 0ol(ers. I ensures a(e-uae 2apialiCaion an(
reserves8 %oo( 'ana%e'en8 0i%0 e20ni2al eBperise an( 3u(i2ious $un(
pla2e'en +y 0e Insuran2e 2o'panies i supervises.
04146 T#& F&d&r$% Mort-$-& B$n, o2 N!-&r!$ :FMBN;
A0is +o(y is a 0e apeB o$ 'or%a%e $inan2ial insiuions in 0e 2ounry.
A0e FMB# *as esa+lis0e( +y De2ree #o.7 o$ 1<77 an( i''e(iaely
oo" over 0e asses an( lia+iliies o$ 0e #i%erian Buil(in% So2iey8
*0i20 *as per$or'in% 0e sauory re%ulaory role +e$ore 0en. A0e
FMB# provi(es +an"in% an( a(visory servi2es an( resear20 a2iviies
perainin% o 0ousin% in #i%eria. I *as e'po*ere( +y 0e leers o$ 0e
#aional ,ousin% &oli2y in 1<<; o li2ense an( re%ulae pri'ary
'or%a%e insiuions in #i%eria an( a2 as apeB re%ulaory +o(y $or
'or%a%e $inan2e in(usry.
04147 N$t!on$% Bo$rd 2or Co((un!t. B$n,'
A0e Boar( *as esa+lis0e( +y %overn'en as apeB re%ulaory +o(y *i0
0e responsi+iliy o$ li2ensin% an( supervisin% 0e a2iviies o$ 0e
2o''uniy +an"s in 0e 2ounry. I *as esa+lis0e( in 1<<: o a22ep
an( pro2ess appli2aions $ro' inerese( 2o''uniies8 provi(e
%ui(elines $or operaions an( ensurin% 2o'plian2e. A0e Boar( is
eBpe2e( o 'onior8 inspe2 an( supervise 0e operaions o$ Co''uniy
Ban"s an( apply san2ions *0en ne2essary. I also 2arries ou
pro'oional a2iviies $or enli%0en'en purposes. Mos o$ 0e a+ove
$un2ions are no* vese( in 0e CB# an( 0e Boar( is presenly
0a'srun% o per$or' 0e' (ue o 0is $a2. E$$ors are sill +ein% 'a(e
o resolve 0e 2on$li2 arisin% $ro' 0is (upli2aion o$ re%ulaory
0414A F!n$n!$% S&r+!&' Coord!n$t!n- Co((!tt&& :FSCC;
A0is 2o''iee *as esa+lis0e( +y 0e Fe(eral Govern'en o
2oor(inae 0e supervision o$ a2iviies o$ all 0e re%ulaory insiuions
in 0e $inan2ial syse'. I is 20aire( +y 0e Governor o$ CB#8 an(
2onsiss o$ Dire2or General o$ 0e Se2uriies an( EB20an%e
Co''ission8 0e Co''issioner $or Insuran2e8 0e Re%israr6General o$
0e Corporae A$$airs Co''ission EC.A.CF8 an( a represenaive o$ 0e
Fe(eral Minisry o$ Finan2e EFMFF.
A0is 2o''iee is sa((le( *i0 0e responsi+iliy o$ 2oor(inain% 0e
supervision o$ $inan2ial insiuions8 espe2ially 2on%lo'eraes. I is
eBpe2e( o 2ause re(u2ion o$ ar+ira%e opporuniies usually 2reae( +y
(i$$erin% re%ulaion an( supervision san(ar(s a'on% supervisory
au0oriies in 0e e2ono'y. A0is i (oes +y 2reain% a $oru' o (is2uss
su20 2on$li2s *i0ou 2reain% unne2essary ension in 0e syse'. A0e
Co''iee also (eli+eraes on pro+le's eBperien2e( +y 'e'+ers in
0eir relaions0ip *i0 any $inan2ial insiuion. In so (oin%8 i eli'inaes
any in$or'aion %ap en2ounere( +y re%ulaory a%en2ies in 0eir
relaions0ip *i0 %roups o$ $inan2ial insiuions. Finally8 0e 2o''iee
ari2ulaes 0e srae%ies $or 0e pro'oion o$ sa$e8 soun( an( e$$i2ien
pra2i2es +y $inan2ial iner'e(iaries. A0e roles are 2urrenly +ein%
per$or'e( sais$a2orily as 0ere are re(u2e( 2on$li2s a'on% 0e
$inan2ial syse'Ks re%ulaory au0oriies.
In 2on2lusion8 +an" re%ulaion au0oriies are responsi+le $or 0e
$or'ulaion an( i'ple'enaion o$ rules an( re%ulaions 0a %ui(e 0e
per$or'an2e an( operaion o$ +an"in% in(usry.
In su''ary8 in 0is uni8 *e (is2usse( various insiuions an( +o(ies in
20ar%e o$ $or'ulaion an( i'ple'enaion o$ rules an( re%ulaion an(
0ese insiuions in2lu(e4 Cenral Ban" o$ #i%eria8 Se2uriy an(
EB20an%e Co''ission8 #DIC8 e2.
Sae an( (is2uss 0e +o(ies responsi+le $or +an" re%ulaion in #i%eriaO
A(e%+ie8 Sa'uel I.8 E1<<.F. &a0 o Greaer ,ei%0s4 Fa2s Be0in(
We'a Ban"Ks Aurnaroun( Dears E1<=:61<<:F8 l+a(an4 Spe2ru'
Boo"s A%uso an( [email protected] 1<<58 Ban"in% In(usry Survey8 !a%os.
Alas0i8 S.O. E1<<1F. KA0e I'pli2aions o$ Curren Moneary &oli2ies on
Sa$e an( Soun( Ban"in% &ra2i2e o Ensure Sa+iliy in 0e
In(usryK8 NDIC Bu$rt&r%.8 1 E>F4 :56>5.
Ala*o(e8 A.A. E1<<:F. KFinan2ial (ere%ulaion an( 0e e$$e2iveness o$
+an" supervision in #i%eriaK8 S$+!n-' $nd D&+&%o<(&nt8 E?1IF4
Cenral Ban" o$ #i%eria8 Annu$% R&<ort $nd Aount'8 various issues8
!a%os. E+0o(a%0e8 )o0n U.8 1<<18 KBan" Deposi Insuran2e
S20e'e in #i%eriaK8 NDIC Bu$rt&r%.8 1 E1F4 176:58 1<<:8
KRe$inan2in% Sae Govern'en De+s o Ban"sK8 NDIC
Bu$rt&r%.8 : E1F4 116178 1<<:8 KCrises Mana%e'en a 0e
Boar(s o$ Insure( Ban"sK8 #DIC Suarerly8 : E:F4 1>61=
. E1<<.F. KBoar(roo'/Mana%e'en &ra2i2es an( Disress in 0e
Ban"in% Syse'K8 NDIC
Bu$rt&r%.8 . E:F4 156:5
E"un(ayo8 ).D.8 E1<<.F. KA0e Fuure o$ 0e Ban"in% In(usry in #i%eriaK8
C&ntr$% B$n, o2 N!-&r!$ Eono(! $nd F!n$n!$% R&+!&=8 >:
E>F4 >..6>55.
I+e8 A$or"a C.8 E1<<:F. KO*ners0ip Sru2ure an( &er$or'an2e in 0e
Ban"in% In(usry in #i%eriaK8 S$+!n-' $nd D&+&%o<(&nt8 >
E?1IF4 :.>6:5..
)i'o08 Ayo(ele8 E1<<.F. KRe%ulaion o$ 0e Ban"in% In(usry in #i%eria4
an OperaorKs 1ie*poinK8 C&ntr$% B$n, o2 N!-&r!$ Eono(!
$nd F!n$n!$% R&+!&=C >: E>F4 :<:6 >11.
Ma''an8 ,. an( Oluye'i8 S.A.8 E1<<.F. KBan"Ks Mana%e'en Issues
an( Resorin% 0e ,eal0 o$ #i%erian Ban"s 0rou%0 I'provin%
0e Sualiy o$ Mana%e'en/E'ployeesK8 NDIC Bu$rt&r%.8 . E.F4
5667;8 >1.
Manu8 Balla'a8 E1<<.F. KCrii2al Issues o Consi(er *0en Esa+lis0in% a
Deposi Insuran2e S20e'eK8 NDIC Bu$rt&r%.8 . E>F4 1>6>:.
Molo"*u8 B.C.8 E1<<.F. KCrisis in 0e Finan2ial Syse'4 Genesis8
Causes8 Feaures an( Conse-uen2esK8 &aper &resene( a 0e Ban"
Dire2orsK Se'inar.
#(e"*u8 E((y C.8 E1<<.F. Firs Ban" o$ #i%eria4 A Cenury o$ Ban"in%8
I+a(an4 Spe2ru' Boo"s #i%eria Deposi Insuran2e Corporaion8
Annu$% R&<ort'8 1arious Issues8 !a%os.
#%a'a8 Deri'a !a*an8 E1<<5F. All a+ou #i%eria Deposi Insuran2e
CorporaionK8 T#& N!-&r!$n B$n,&r8 )anuary6)une.
O%unleye8 Roi'i W.8 E1<<1F. Ban" Densiy an( Ban" !i2ensin% in
#i%eria8 NDIC Bu$rt&r%.8 1 E:F4 >56.7.
O3o8 M.D.8 E1<<.F. A0e E2ono'i2s o$ Conrols an( Dere%ulaion4 0e
#i%erian Case Su(y8 R&'&$r# D&<$rt(&nt O$'!on$% P$<&r8
1;8 Cenral Ban" o$ #i%eria.

1<<.+ An Overvie* o$ 0e #i%erian Ban"in% Syse'8 C&ntr$%
B$n, o2 N!-&r!$ E2ono'i2 an( Finan2ial Revie*8 >: E>F4
O"e8 B.A.8 E1<<>F. LAn overvie* o$ 0e S0i$ $ro' Dire2 o In(ire2
Approa20 o Moneary an( Cre(i Conrol in #i%eriaM8 C&ntr$%
B$n, o2 N!-&r!$ Eono(! $nd F!n$n!$% R&+!&=8 >1 E.F4
Olisa(e+e8 E.U.8 E1<<1F. LAppraisal o$ Re2en EB20an%e Rae &oli2y
Measures in #i%eriaK8 C&ntr$% B$n, o2 N!-&r!$ Eono(! $nd
F!n$n!$% R&+!&=8 :< E:F4 15661=5.
Olo%un8 S.O.8 E1<<.F. KBan" Failure in #i%eria4 Genesis8 E$$e2s an(
Re'e(iesM8 C&ntr$% B$n, o2 N!-&r!$ Eono(! $nd F!n$n!$%
R&+!&=8 >: E>F4 >1:6>::.
Oloye(e8 A(e+isi8 E1<<.F. KBan"in% Re%ulaion in #i%eria4 An
Analyi2al &erspe2iveK8 C&ntr$% B$n, o2 N!-&r!$ Eono(! $nd
F!n$n!$% R&+!&=8 >: E>F4 :7<6:<1.
Olua3a"aiye8 D.8 E1<<5F. KS0or6Run Ma2roe2ono'i2 E$$e2s o$ Ban"
!en(in% Raes in #i%eria8 1<=76<14 a Co'pua+le General
E-uili+riu' AnalysisM8 AERC R&'&$r# P$<&r8 >.8 #airo+i4
Olurani8 Osoa O. E1<<1F. KA0e Dere%ulaion o$ #i%eriaKs Finan2ial
In(usry4 Meris An( De'erisK8 NDIC Bu$rt&r%.8 1 E.F4 5766=.
Oluye'i8 S.A.8 E1<<5F. KDere%ulaion an( 0e &er$or'an2e o$ Insure(
Ban"s in #i%eria4 An Overvie*K8 NDIC Bu$rt&r%.8 5 E1F4 .<667.
Oye*ole8 O.B.8 E1<<.F. LAnalysis o$ Resri2ive Finan2ial Se2or
&oli2ies in #i%eria8 1<7;6 1<=6M.
S$+!n-' $nd D&+&%o<(&nt8 1 E?1IIIF4 =161;>.
Sanusi8 ).O.8 E1<<.F. KSupervision o$ +an"in% in(usry in #i%eria 6an
operaorKs vie*poinM8
C&ntr$% B$n, o2 N!-&r!$ Eono(! $nd F!n$n!$% R&+!&=8 >: E>F4
>>76>.> Soyi+o8 A(e(oyin8 E1<<5F. LFinan2ial !in"a%e an(
Develop'en in Su+6Sa0aran A$ri2a4 0e Role o$ For'al
Finan2ial Insiuions in #i%eriaK8 Repor o$ a Su(y Sponsore( +y
0e Worl( Ban" Resear20 Co''iee.
Soyi+o8 A(e(oyin an( A(e"anye8 Fe'i8 E1<<:F. KA0e #i%erian Ban"in%
Syse' in 0e ConeB o$ &oli2ies o$ Finan2ial Re%ulaion an(
Dere%ulaionM8 AERC R&'&$r# P$<&r8 178 #airo+i U'o08 &eer
#.8 1<=<8 KA0e Curren !i-ui(iy S-ueeCe in 0e Ban"in% Syse'4
0e Role o$ #i%eria Deposi Insuran2e CorporaionK8 &aper
&resene( a 0e Annual General Meein% o$ 0e #i%erian
E2ono'i2 So2iey8 !a%os C0aper.
E1<<1F. LCapial San(ar(s an( Ban" Deposi Insuran2e
S20e'eM8 NDIC Bu$rt&r%.C 1 E:F4 1=6:5.
E1<<.F. KAn Assess'en o$ 0e I'pa2 o$ 0e &ru(enial
Gui(elines On Ban"sM Finan2ial Ris" Mana%e'enM8 C&ntr$%
B$n, o2 N!-&r!$ Eono(! $nd F!n$n!$% R&+!&=8 >: r E>F4
Worl( Ban"8 E1<<.F. K#i%eria4 Sru2ural A(3us'en &ro%ra''eK8
Repor 1>;5>6U#I8 Was0in%on8 D.C.4 Worl( Ban".
1.; Inro(u2ion
:.; O+3e2ives
>.; Main Conen
>.1 Ba2"%roun( o$ Ban"in% Se2or Re$or'/Consoli(aion
>.: I'pli2aions o$ Ban"in% Re$or' on 0e Real E2ono'i2
>.> Ban"in% Se2or Re$or' an( 0e Do*nsrea' &eroleu'
>.. Mer%ers8 a2-uisiion an( 20allen%es in #i%eria Ban"in%
..; Con2lusion
5.; Su''ary
6.; Auor6Mar"e( Assi%n'en
7.; Re$eren2es/Fur0er Rea(in%s
I$ +an" 'er%in% is *ell 'ana%e( an( e$$e2ively 'oniore(8 only s0orK
run pro+le's su20 as une'ploy'en *oul( +e eBperien2e as 0e lay6o$$
sa$$ o$ 0e $aile( +an"s *oul( 3oin 0e 'illions o$ %ra(uaes ye
une'ploye(8 0is 0as 'uliplier e$$e2s o$ poor san(ar( o$ livin%8
prosiuion8 0ievery an( 'any o0er 2orrupion pra2i2es. Bu 0e
prospe2s lar%ely envisa%e( is 'ore o$ lon% run8 sin2e 2onsoli(aion
i'proves $inan2ial8 e20ni2al 'ana%erial 2apa2iy o$ 0e +an"in% se2or
all 0in%s +ein% e-ual8 eBpansion in 0e +an"in% se2or is inevia+le an(
0is 2o'es *i0 0e 'uliplier e$$e2s su20 as e'ploy'en %eneraion in
lar%e nu'+er. Mana%e'en o$ 0e Forei%n Reserves +y 0e 'e%a +an"s
*oul( ena+le 0e +an" $inan2e 0i%0 2apial inensive pro3e2s8
'anu$a2urin%8 oil an( %as8 a%ri2ulure se2ors o 'enion +u $e*. A0e
'uliplier e$$e2 o$ all 0ese +rin%s a+ou e'ploy'en in o0er se2ors.
More i'poranly8 +an" 2onsoli(aion re(u2es 0e ension o$ +an"
li-ui(aion in #i%eria an( +o0 lo2al an( $orei%n invesors.
By 0e en( o$ 0is uni8 you s0oul( +e a+le o4
• (es2ri+e 0e +a2"%roun( o$ Ban"in% Se2or Re$or'/ Consoli(aion in
• re2o%nise 0e i'pli2aions o$ Ban"in% Re$or'/2onsoli(aion on 0e
real E2ono'i2 Se2or
• eBplain 0e Ban"in% Se2or Re$or' an( 0e Do*nsrea' &eroleu'
• (is2uss 'er%ers8 a2-uisiion an( 0e 20allen%es in #i%eria Ban"in%
041 B$,-round o2 B$n,!n- S&tor R&2or(>Con'o%!d$t!on
Over 0e years8 0e +an"in% se2or 0as +een una+le o si%ni$i2anly
suppor 0e lon%6er' $inan2ial nee(s o$ 0e real se2or. A0is is in spie
o$ 0e $a2 0a 0e %ro*0 o$ 0e naional e2ono'y 0in%es on 0e eBen
o *0i20 0e real se2or is e$$e2ively suppore( +y 0e +an"in% an(
$inan2e se2or8 *0i20 play a 2aalyi2 role in 0e %ro*0 pro2ess. Mos
inves'ens in 0e real se2or are o$ 'e(iu' o lon%6er' naure.
Un$orunaely8 $un(in% $or su20 inves'ens are no al*ays $or02o'in%
$ro' 0e +an"s +e2ause o$ 0e s0or6er' naure o$ 0eir (eposi
lia+iliies an( 0e inappropriaeness o$ usin% su20 (eposi +ase o
suppor lon%6er' len(in%. Also8 %iven 0e *i(esprea( lu2raiveness o$
ren6see"in% a2iviies8 +an" (eposiors o$en (e'an( su20 raes o$
reurn 0a are usually realiCa+le on su20 -ui2" +usinesses 0a eBis in
0e e2ono'y. A0e 2o'+ine( e$$e2 o$ 0ese is 0e prevalen2e o$ s0or6
er' len(in% a 0i%0 2os a%ains 0e nee( $or lon%6er' $un(s a
'ini'al 2os +y 0e real se2or $ir's E#(io"0o8 1<<6F. A0e sru2ural
*ea"ness o$ 0e +an"in% syse'8 *0i20 0as 0in(ere( 0e per$or'an2e o$
is (evelop'enal role in 0e e2ono'y an( seriously 2uraile( 0e
a20ieve'en o$ Govern'ens o+3e2ives o$ ensurin% pri2e sa+iliy8
e2ono'i2 %ro*0 an( 0i%0 e'ploy'en level pro'pe( 0e CB# o
e'+ar" on 0e 2urren re$or' o$ 0e se2or. A0e purpose o$ 0e +an"in%
se2or re$or' is o ena+le 0e #i%erian +an"s %ive prioriy o8 an( 'a"e
availa+le8 20eap an( 2o'peiive 2re(is8 o 0e real se2or so 0a 0e
e2ono'y 2an %ro*. A0e +an"in% re$or' pa2"a%e is an20ore( on a I>6
poin pro%ra''e8 so'e o$ *0i20 in2lu(e4 in2rease in 0e 'ini'u'
2apial +ase re-uire'en o$ 0e +an"s $ro' #: +illion o #:5 +illionJ
2onsoli(aion o$ +an"in% insiuions 0rou%0 'er%ers an( a2-uisiionsJ
an( 0e esa+lis0'en o$ an Asse Mana%e'en Co'pany as i'poran
ve0i2le $or +an"in% syse' (isress resoluion ESolu(o8 :;;.F.
Ban" 2onsoli(aion 0rou%0 'er%ers an( a2-uisiion an( 0e
esa+lis0'en o$ Asse Mana%e'en Co'pany o pur20ase 0e non6
per$or'in% ris" asses o$ 0e +an"s *oul( 0ave 0e saluary e$$e2 o$
2leanin% up 0e +an"in% se2or8 as *ell as lea( o 0e e'er%en2e o$ +i%
+an"s 0a *oul( a+ly suppor 0e %ro*0 o$ 0e real se2or8 as *ell as
2o'pee in 0e inernaional arena ESolu(o8 :;;.F. A0e resulan
appearan2e o$ 'e%a +an"s *i0 ro+us 2apial an( asse +ase on 0e
naional e2ono'i2 lan(s2ape *oul( provi(e 0e sprin% +oar( $or
laun20in% 0e e2ono'y o %reaer susaina+le 0ei%0s an( in 0e pro2ess
a20ieve 0e lon% er' %oals o$ re(u2in% 0e level o$ povery in 0e
syse'8 provi(in% e'ploy'en in 0e *i(er e2ono'y an( 2reain%
*eal0 $or all.
04/ I(<%!$t!on' o2 B$n,!n- R&2or( on t#& R&$% Eono(!
A0e re$or's in 0e +an"in% syse' are li"ely o 0ave 0e $ollo*in%
i'pli2aions on 0e (evelop'en o$ 0e real se2or4
• A0e poli2y is li"ely o a(e-uaely posiion 0e +an"in% in(usry o +e
a+le o 'o+iliCe inernaional 2apial $or on6len(in% o 0e real se2or
$or 0e (evelop'en o$ 0e e2ono'y.
• A0e poli2y is li"ely o (rasi2ally re(u2e +an"sM 2os o$ $un(s an(
per0aps re(u2e 0e pressures on +an"s 0a en%a%e in s0arp pra2i2es
as a 'eans o$ survival. A0is *ill a$$e2 0e rae o$ ineres 20ar%e( on
loans o real se2or operaors.
• A0e poli2y *ill pro'oe an e$$i2ien $inan2ial syse'. A0is poli2y
*ill suppor 0e 'o+iliCaion o$ savin%s an( len(in% o s'all
'e(iu' s2ale enerprises. For insan2e8 2onsi(erin% 0e $a2 0a ea20
#i%erian +an" 0as o provi(e +asi2 in$rasru2ures $or is operaions8
i *as o+vious 0a 0ere *as a re%ulaory re-uire'en a'on% o0ers.
In 0e ne* (ispensaion8 overlappin% o$ $un2ions an( unne2essary
(upli2aions *ill +e avoi(e(. E$$i2ien2y *ill also +e pro'oe(
0rou%0 0e eBisen2e o$ in2rease( s2ale e2ono'ies in pro(u2in%
$inan2ial servi2es. All 0ese are li"ely o ranslae o lo*er ineres
raes in 0e 2ounry.
• A0e esa+lis0'en o$ an Asse Mana%e'en Co'pany *oul( 0elp
+an"s 2lean up 0eir +alan2e s0ees. W0en 0is is 2o'+ine( *i0 0e
sren%0enin% o$ 0e eBisin% le%islaive $ra'e*or" $or (e+ re2overy8
i *oul( pu +an"s in a 'ore 2o'$ora+le posiion o $un( 0e
a2iviies o$ 0e real se2or operaors.
• I is eBpe2e( 0a 2os o$ $un(s *oul( (rop si%ni$i2anly an( 'ar%ins
*oul( (e2line (ue o si$$er 2o'peiion. ,o*ever8 ano0er 2on2ern
2oul( +e 0a lar%er +an"s *oul( eBploi 0eir %reaer 'ar"e po*er
o re(u2e len(in% an( +y i'pli2aion in2rease loan raes.
• Fuure pro$is 'ay +ene$i $ro' 2os re(u2ions arisin% $ro'
e2ono'ies o$ s2ale6 0a is8 0e a+iliy o sprea( $iBe( 2oss8
in2lu(in% pari2ularly 0ose 0a are e20nolo%y 6relae(8 over a lar%er
s2ale o$ operaions. Cos e2ono'ies 2an also +e a20ieve( +y
eli'inain% (upli2aions in +ran20 ne*or"s8 $un2ions an( sa$$.
A0ere 'ay also +e a re(u2ion in ris"8 an( 0ere$ore savin% in 2oss
(ue o %eo%rap0i2 or pro(u2 (iversi$i2aion an( 0e a+iliy o$ lar%er
insiuions o inves in 'ore sop0isi2ae( ris" 'ana%e'en syse's.
All 0ese are li"ely o i'pa2 posiively on 0e availa+iliy an( 2os
o$ len(in% o 0e real se2or.
• Apar $ro' pri2in% 2onsi(eraions8 0e ne* re$or's 2oul( re(u2e 0e
a'oun o$ 2re(i availa+le o s'all +usinesses. A0is ar%u'en is
+ase( on 0e o+servaion 0a s'all +an"s %ran s'all loans Esin2e
0ey (o no 0ave lar%e enou%0 +alan2e s0ees $or 'ore siCea+le loans
o$en re-uire(8 +y lar%er +usinessesF assu'e( o %o o s'all $ir's8
an( 0a lar%e +an"s en( o len( o lar%e +usinesses Eas 0e
'oniorin% 2oss o$ 'any s'all 2o'panies *oul( +e oo 0i%0 $or
0e'F. A0ere$ore8 a lar%e proporion o$ 0e populaion 'i%0 en( up
no +ein% serve( +y 0e $or'al +an"in% syse'. A0ere is 0ere$ore a
nee( $or non +an" $inan2ial iner'e(iaries o +e sren%0ene( o 2aer
$or 0e nee(s o$ s'all6s2ale real se2or operaors
040 B$n,!n- S&tor R&2or( $nd t#& Do=n'tr&$( P&tro%&u(
Oil an( %as su+6se2or 2onsiue one o$ 0e i'poran 2o'ponens o$ 0e
re$or' pro%ra' $or 0e real se2or o$ 0e naional e2ono'y. A0e "ey
ele'ens o$ 0e re$or' a%en(a in 0is respe2 is 0e (e6re%ulaion o$ 0e
(o*nsrea' se2or 0rou%0 0e privaiCaion o$ 0e naionMs $our
re$ineries an( pro(u2 0aula%e8 appropriae pri2in% o$ peroleu'
pro(u2s 0rou%0 0e *i0(ra*al o$ su+si(y an( 0e ara2ion o$ privae
2apial inves'en in 0is se2or. In(ee( 0e privaiCaion o$ 0e
(o*nsrea' se2or *oul( no +e $ully a20ieve( *i0ou 0e a2ive
suppor an( 2olla+oraion o$ 0e +an"in% an( $inan2e se2or. A0e
iner'e(iary role o$ 0e +an"in% se2or *oul( ena+le 0e 20annelin% o$
0e ne2essary $un(s *i0 *0i20 o $ully an( e$$e2ively re6 posiion 0e
oil an( %as se2or o per$or' is (evelop'enal role in 0e e2ono'y.
&rivae se2or inves'en in 0e (e6re%ulae( (o*nsrea' se2or re-uires
lon% er' $inan2in% arran%e'en an( 0a eBplains 0e relevan2e o$ 0e
2onsoli(aion o$ 0e +an"in% se2or *0i20 is one o$ 0e 0ireen poin
re$or' a%en(a $or 0e +an"in% se2or announ2e( +y 0e CB# Governor.
W0en i +e2o'es $ully operaional8 0e +an"in% se2or re$or' *oul(
unlo2" an( 'a"e availa+le alernaive $un(in% s20e'es o suppor 0e
e'er%en2e an( %ro*0 o$ lo2al privae 2apial in 0e oil an( %as se2or. I
*oul( also a22elerae 0e privaiCaion o$ 0e re$ineries an( pro(u2
045 M&r-&r'C [email protected]!'!t!on $nd C#$%%&n-&' !n N!-&r!$ B$n,!n-
#o (ou+8 re$or'in% 0e $inan2ial se2or8 espe2ially 0e +an"s *ere
never %oin% o +e an easy as" (ue o ri%i(iies in 0e syse'. Bu 0e
uli'ae %oal o$ %overn'en *as o ri%0 siCe 0e +an"s o 'a"e 0e'
+i%%er8 sron%er8 'ore 2o''er2ially ni'+le an( 2o'peiive re%ionally
an( %lo+ally.
A0is 'ean ri%0siCin% o (eal *i0 0e vulnera+iliies asso2iae( *i0
0eir s'all siCes8 resru2urin%8 re6en%ineerin%8 repro$essionaliCin% an(
re$o2usin% 0e +an"s. All 0ese rese( on 0e #EEDS pro%ra''e o$
Essenially8 K#EEDSK8 as a (evelop'enal srae%y8 is an20ore( on 0e
privae se2or as 0e en%ine o$ %ro*0. A0e %overn'en is 0e ena+ler8
0e $a2iliaor8 an( 0e re%ulaor8 *0ile 0e privae se2or a"es 20ar%e as
(ire2 invesor8 eBe2uor an( 'ana%er o$ +usinesses.
A0e #EEDS vision is o 2reae a sron% 2o'peiive an( relia+le
$inan2ial syse' 0a is par o$ 0e %lo+al 20an%e. A syse'8 *0i20
(eposiors 2an rus8 an( invesor 2an rely upon. Durin% 0e re$or'8
+an"s are eBpe2e( o i'+i+e +es pra2i2e 2orporae %overnan2e
pro2e(ures8 i'prove on sel$ re%ulaion8 insiue IA (riven 2ulure an(
see" o +e 2o'peiive in o(ayKs %lo+aliCe *orl(. A0us8 0e ori%in o$
Mer%ers an( A2-uisiion 2a'e as a resul o$ ne* e2ono'i2 re$or'
a%en(a a%%e( #EEDS E#aional E2ono'i2 E'po*er'en
Develop'en Srae%yF *0ose 'a3or 20allen%e *as o resru2ure 0e
#i%erian e2ono'y *i0 spe2ial ineres in 0e +an"in% in(usry. Mer%ers
an( A2-uisiion8 0ere$ore8 are *in 2on2eps re%ar(e( as inves'en
proposal *0ere a 2o'pany or par o$ a 2o'pany is ei0er 'er%e( *i0
ano0er or a"en over 2o'pleely *i0 0e ai' o$ 2onsoli(aion. By *ay
o$ (e$iniion 0ere$ore8 an a2-uisiion Ealso 2alle( a"eoversF is 0e
pur20ase o$ a 2onrollin% ineres in one 2o'pany +y ano0er 2o'panyJ
*0ile a 'er%er is an a'al%a'aion +e*een *o separae 2o'panies o
$or' a sin%le 2o'pany. A0us8 +o0 a2-uisiions an( 'er%ers are $or's
o$ +usiness 2o'+inaions.
For an a2-uisiion or 'er%er o +e *or0*0ile8 0ere s0oul( +e syner%y8
0a is8 a siuaion +y *0i20 a $ir'8 a$er a a"eover or 'er%er loo"s $or a
2o'+ine( resul o re$le2 a +eer rae o$ reurn 0an 0a *0i20 *as
a20ieve( +y 0e sa'e resour2es use( in(epen(enly +e$ore 0e a"eover
o$ su20 separae operaions. A0is is (es2ri+e(8 as 2o'+ine( per$or'an2e
is %reaer 0an 0e su' o$ is pars. Syner%y 2an 0ere$ore +e 'ore
a20ieva+le i$ 0e 2o'panies involve in 0e a2-uisiion or 'er%er is
en%a%e( in relae( line o$ +usiness. A 2lassi2al 2ase o$ 'er%e( +an"s is
0e San(ar( Arus Ban" an( 0e Unie( Ban" $or A$ri2a.
"#. B$n,' !n N!-&r!$ M&r-&dD
Ban"s 'er%e( an( so'e o$ 0e' a2-uire( o0ers as a poli2y (riven
(ire2ive $ro' 0e apeB +an" ECenral Ban" o$ #i%eriaF o se2ure
'aBi'u' se2uriy an( lay 2on$i(en2e on 0e %ro*in% popula2e *0o are
(eposiors in 0e +an"s. ,o*ever8 0ere are a variey o$ reasons *0y 0e
#i%erian +an"s %o $or 'er%er or a2-uisiion +i(s. A0ese reasons 2an +e
as $ollo*s4

• Ao realiCe operain% e2ono'ies +y eli'inain% (upli2aion an(
un0eal0y 2o'peiion
• Ao a2-uire a%%ressive an( 2o'peen 'ana%e'en
• Ao eli'inae or re(u2e 2o'peiion
• Ao (iversi$y8 0a is8 sprea(in% o$ ris"
• Ao +olser asse +an"in%
• Ao i'prove -ualiy o$ earnin%s
• For proe2ion a%ains 'ar"e in$rin%e'en an( un*ane( a"e over
An( $inally o see" rapi( %ro*0 an( i'prove li-ui(iy an( a+iliy o
raise ne* $inan2e 0rou%0 a2-uisiion o$ a 'ore $inan2ially sa+le +an".
Con'&@u&n&' o2 M&r-&r' $nd [email protected]!'!t!on
A0e $ra'e*or" $or analyCin% an a2-uisiion or 'er%er is si'ilar o 0a
o$ inernally %enerain% inves'en proposals. A0e srae%i2 $is an(
poenial syner%ies 'us +e ari2ulae(. In (oin% 0a8 0e $ollo*in% seps
in 0e evaluaion pro2ess 'us +e $ollo*e(4
• Deer'inin% 0e relevan 2as0 $lo* 0a is8 0e $uure 2as0 $lo* or
in2o'e 0a 0e a2-uisiion is eBpe2e( o a((. I%norin% $inan2in%
(e2ision in (eer'inin% 0e 2as0 $lo* esi'aes 2an (o 0is8 0e
eBpe2e( in2re'enal 2as0 pro$i s0oul( +e a(3use( $or aBes8 0e
0oriCon o$ 0e pro3e2 s0oul( also +e (eer'ine8 an( also 0e use o$
pro+a+iliy esi'ae( o o+ain a22urae esi'ae o$ 2as0 $lo* 'us
also +e as2eraine(.
• Deer'inin% 0e re-uire( rae o$ reurn or 2os o$ 2apial usin% 0e
*ei%0e( avera%e 2os o$ 2apial $or +o0 -uoe( an( un-uoe(
A0e 'a3or 20allen%es +an" 2onsoli(aion $a2es in2lu(e4
• Lo'' o2 Po=&r
Corporae 2onsoli(aion8 *0i20 'ay +e +y *ay o$ 'er%ers an(/or
a2-uisiion8 'ay +e resise( +y 'ana%e'en *i0 $ear o$ loss o$ 2onrol
an( erosion o$ 0eir po*ers.
• R!-!d!t. o2 B$n, O=n&r'#!<
A0e ri%i(iy o$ +an" o*ners0ip in2lu(e a 2o'pli2ae( *e+ o$ 2ross
s0are0ol(in% 0e +i(s +an"s o insuran2e 2o'panies an( o0er +an"s.
A0ese ri%i(iies 2an +lo2" 'er%ers.
• L$!&r S!E&'
As a resul o$ 'er%ers an( a2-uisiion8 2onsoli(aion o$en 'eans lar%er
siCes8 lar%er s0are0ol(ers +ases an( lar%er nu'+er o$ (eposiors. A0e
pro3e2 revenue srea' $ro' 0e 2onsoli(aion 'us 3usi$y 0is 2os o$
in2reasin% 2os o$ 'ainainin% several (eposi a22ouns.
• F&$r 2or 9o) Lo''
So'e o$ 0e s'aller 'er%er parners *ill +e 3o+less +e2ause 0e
(o'inan +an" *ill no +e a+le o a+sor+ all 0e sa$$ o$ 0e s'aller +an"
lea(in% o 3o+ losses arisin% $or 'er%ers..
C#$%%&n-&' !n C#$n-& M$n$-&(&nt !n t#& B$n,!n- S&tor
Any $or' o$ ri%0 siCin%8 re6en%ineerin%8 re6$o2usin%8 +usiness re6
invenion8 or reposiionin% 0rou%0 Mer%ers8 A2-uisiion an( Aa"e
Overs in 0e +an"in% Se2or *oul( no (ou+ 2reae %rea 20allen%es $or
0e insiuions involve(8 no only *oul( 0ey +e lon%er as *e 0ave
(is2overe(8 0e resulin% +an"s are no* 'uli 2ulural8 'uli 'ar"e8
'uli 'ana%e'en an( in so'e 2ases 'uli naional.
A0ey are all 0us $a2in% 0e 20allen%es o$ ine%raion an( uli'ae
CO#SO!IDAAIO#. A0ey are also 20allen%e( in innovaiveness in
pro(u2 'ar"e (evelop'en an( IA (riven (elivery 'e0o(s. A0is is
*0ere 0e 'ana%e'en o$ srae%i2 20an%e +e2o'es para'oun.
C0an%e 'us o22ur (ue o 0e $ollo*in%4
• I is s0i$ in 0e +e0aviour o$ an eniy in response o so'e inernal or
eBernal si'uliJ
• C0an%e (e'an(s appropriae responses o a20ieve 0e ori%inal sae
o$ e-uili+riu' or o a"e a(vana%e o$ ne* evens in or(er o
i'prove 0e 2urren e-uili+rain% sae. I o22urs 0rou%04
6 &ro(u2 'ar"e reposiionin%.
6 Re$o2usin%J
6 Resru2urin%J
6 Do*n siCin%8 ri%0 siCin% an( up siCin%J
6 Re en%ineerin%J
6 Business reinvenionJ
&ainless 20an%e 'us 0ere$ore4
• Relae o eBisin% 2orporae visionJ
• e'po*er people o %enerae personal 2o''i'enJ
• in(i2ae i'prove( +ene$is arisin% 0ere $ro'J
• re'ove 2orporae +lo2"ers o a2ionJ
• (evelop ne* 'ana%e'en s"ills an( $leBi+iliy in 3o+ per$or'an2e.
C0an%e is a $a2 o$ li$e8 2orporae li$e an( %overnan2e in2lusive. A0e
only 0in% 0a is per'anen is 20an%e. A 2o'pany 'ay 0ave (e2i(e( on
is vision upon *0i20 a 'ission sae'en is eBpresse(8 %oals an(
o+3e2ives (eer'ine(8 poli2ies $or'ulae( an( srae%i2 (ire2ions
20osen +ase( on is per2epion o$ 0e inernal an( eBernal environ'ens
*i0in *0i20 i eBpe2s o operae an( is assu'pions a+ou
(evelop'ens *i0in 0ese environ'ens. In o0er *or(s8 i 0as pu
o%e0er appropriae response 'e20anis's $or pro$ia+ly +ene$iin% $ro'
0e pro(u2ive relaions0ips o$ is resour2es in inera2ion *i0 is
operain% environ'ens. Bu8 no 'aer 0o* Pper$e2K 0ese response
srae%ies 'ay +e $or a %iven environ'enal s2enario8 0ey +e%in o lose
0eir essen2e an( value *0en 20an%es a"e pla2e. Unless 0ese srae%ies
are 2onsanly revie*e(8 re$ine(8 re(e$ine( an( over0aule( o sui 0e
20an%es 0a are 2oninuously o22urrin% in 0e operain% environ'en8
su+6opi'aliy in eBpe2e( resuls (ue o 0e la2" o$ 2o'peiiveness
*ill +e%in o e'er%e. In 0e 2orporae operain% environ'en 0ere is no
sasis only (yna'is' an( so'ei'es ur+ulen2e8 in e$$e28 20an%e.
W0a is 20an%e *i0in 0e 2oneB o$ 2orporae srae%i2 'ana%e'enO
,o* *oul( a 2o'pany se a+ou 'ana%in% 20an%e in a proa2ive
pro$ia+le *ayO C0an%e is 0e s0i$ in 0e +e0aviour o$ any eniy8 +e i
or%ani2 or 'e20anisi2. I is s0i$s $ro' one posiion o ano0er ei0er in
response o so'e inernal or eBernal si'uli or $or no apparen reason a
Bu 0o*ever in(u2e(8 20an%e al*ays (e'an(s appropriae responses o
a20ieve 0e ori%inal sae o$ e-uili+riu'8 or o a"e a(vana%e o$ ne*
evens in or(er o i'prove 0e 2urren e-uili+riu' sae.
Corporae operain% environ'ens 20an%e +e2ause 'a2ro an( 'i2ro
e2ono'i2 poli2ies are 2onsanly 20an%in%. A0ey 20an%e in 0e +an"in%
se2or +e2ause 0e CB# (e2rees a ne* #:5 +illion 'ini'u' e-uiy
+ase $or 0e +an"s. Bu 'os i'poranly8 environ'ens 20an%e +e2ause
0e *ay o$ (oin% +usiness 0as 20an%e(. Corporae eniies are 0en
eBpe2e(8 nay re-uire( i$ no 2o'pelle(8 o respon( o 0ese 20an%es i$
0ey are o survive in 0e 'ar"e pla2e.
Apar $ro' 0e eBernal operain% environ'en o$ a 2o'pany8 20an%es
(o o22ur in is inernal environ'en as *ell. Mana%erial aiu(es8 s"ills8
apiu(es an( per2epions are 2onsanly on 0e +oil. !ea(ers0ip syles
are 20an%in%8 use o$ e20nolo%y is 20an%in% an( s0i$s are 2oninually
o22urrin% in 'ana%erial a%es an( 0us 0eir approa20 o 'ana%e'en as
*ell as in 0e 2on$i%uraion o$ 0e superior su+or(inae 0ierar20i2al
20ain o$ 2o''an(. Every 2o'pany 'us 0en 2reae 0e ne2essary
or%aniCaional $ra'e*or" $or (ealin% proa2ively *i0 0ese 20an%es.
Bu 0e 'a3or (rivin% $or2e o$ 2orporae 20an%e 2o'peiion in 0e
'ar"e pla2e is no only $or opporuniy s0are +u 'ore $or pro$i s0are.
So lon% as 0ere is 2onsan 2o'peiion8 so lon% *ill 0ere +e non sop
or%aniCaional 20an%e in 0e pursui o$ e$$i2ien2y8 2os e$$e2iveness8
Innovaiveness an( +usiness/in(usry (o'inan2e. C0an%e is a ne2essiy
$or or%aniCaional survival an( 2orporae (o'inan2e. C0an%e is also a
learnin% pro2ess no only $or 0e in(ivi(uals an( sa"e0ol(er *i0in an
or%aniCaion +u $or 0e or%aniCaion isel$. Un$orunaely 0o*ever8
20an%e en(s o +e 'ore people (o'inae( an( 0en2e o$en uni(y8
irraional an( $rusrain% o eBe2ue. A0ere$ore8 0e 20an%e pro2ess 0as
o +e 0an(le( 2are$ully8 planne( $or8 *i0in 0e 2oneB o$ a *ell
ari2ulae( an( a22epe( pro%ra''e o$ a2ion an( pursue( 2onsanly
an( relenlessly.
"#. C#$n-&D
A0ere are several reasons *0y or%aniCaions 20an%e4
A0e inernal environ'en is 20an%in%J 0e eBernal environ'en is
20an%in%J in2reasin% 2o'pleBiy involve( in 0e *ay +usiness is (one.
Ae20nolo%y8 2ulure8 ne* pro(u2s8 'ar"es8 pro2essesJ or%aniCaional
pressures $or 20an%eJ so2ieal pressuresJ
• C0an%in% environ'enal valuesJ
• C0an%in% 2o'peiionJ an(
• Glo+aliCaion an( 0e 'ove o*ar(s 'ar"e ine%raion.
As a resul8 or%aniCaions are 2o'pelle( o su(y 0eir pas 0isories8
assess 0eir presen 2o'peiive posiions8 evaluae 0e environ'ens
*i0in *0i20 0ey eBpe2 o $i ino in $uure. A0is resuls in several
srae%i2 opions open o 0e' $ro' 0e several s2enarios 0a 'ay 0ave
+een +uil. An appropriae response opion in 0e $or' o$ a srae%i2
inen is sele2e( o (eal *i0 0e $uure. A0is 2oninuous re$le2ion8
revie* an( assess'en o$ 0e 2o'peiive environ'en 'us 0en evolve
ino 2onsan reposiionin% o$ 0e or%aniCaion in er's o$ is pro(u2s8
'ar"es an(/or pro2esses an( $un2ions *i0in 0e 2oneB o$ is vision
an( 'ission in e$$e28 20an%e.
In 0e 2ourse o$ 0is su(y you *ere a+le o esa+lis0 various re$or' or
2onsoli(aion pro2ess in #i%eria. A0e 2onsoli(aion as a srae%y in
$inan2ial in(usry 0as prove( o en0an2e a via+le e2ono'y environ'en
$or +an" an( o0er $inan2ial servi2es in(usries in #i%eria.
In su''ary8 0is su(y (is2usse( 0e 'eanin% o$ 2onsoli(aion as
srae%y in $inan2ial in(usry an( one o$ srae%y o$ #EEDS pro%ra''e
in #i%eria. A0e (is2ussion also $o2uses on 'er%er an( a2-uisiion4 is
pro2ess8 an( appli2aion in #i%eria +an"in% in(usry.
W0a (o you un(ersan( +y 2onsoli(aionO Dis2uss 'er%er an(
a2-uisiion pro2ess as relae( o re2en re$or' in #i%eria +an"sO
Ausin8 D.1. E1<7;F. Mer%er My0s4 We Cone'plae no C0an%es in
&ersonnel. Mergers and "c/uisitions, 1ol. 58 #o 58 pp. :;6:1.
Basien8 D.A. E1<=7F. Co''on &aerns o$ Be0aviour an(
Co''uni2aion in Corporae Mer%ers an( A2-uisiions. 0uman
#esource Management, Sprin%8 1ol. :68 #o.18 pp. 176>>.
Berry8 ).W. E1<=;F. A22uluraion as 1arieies o$ A(apaion. In A.M.
&a(illa EE(.F8 "cculturation Theory, Models and Some 'e&
!indings. Boul(er8 Colora(o4 Wesvie* &ress.
Bro*n8 A.D.8 N Sar"ey8 7. E1<<.F. A0e E$$e2 o$ Or%aniCaional
Culure on6Co''uni2aion an( In$or'aion. Journal o
Management Studies, 1ol. >18 #o.68 #ove'+er8 pp. =;76=:=.
Buono8 A.F.8 N Bo*(i208 ) .!. E1<=<F. The 0uman Side o Mergers
and "c/uisitions. San Fran2is2o8 Cali$ornia4 )ossey6Bass.
Calori8 R.8 !u+a"in8 M.8 N 1ery8 &. E1<<5F. Conrol Me20anis's in
Cross6Bor(er A2-uisiions4 An Inernaional Co'parison.
-rgani1ation Studies, 1ol. 158 #o.>8 pp. >616>7;.
1.; Inro(u2ion
:.; O+3e2ives
>.; Main Conen
>.1 A0e Finan2ial Mar"es an( Insiuions
..; Con2lusion
5.; Su''ary
6.; Auor6Mar"e( Assi%n'en
7.; Re$eren2es/Fur0er Rea(in%s
Or(inarily8 a 'ar"e (enoes a pla2e $or +uyin% an( sellin%. ,o*ever8 a
'ore 2on2epual approa20 *oul( reveal 0a 0e er' 'ar"e 2onnoes
all 'eans 0rou%0 *0i20 +uyers an( sellers o$ 2o''o(iies Epro(u2s or
servi2esF are +rou%0 ino 2ona2. A0ere$ore 2re(i 'ar"e is a pla2e
*0ere $un(s are 'a(e availa+le +y 0e surplus uni o$ 0e e2ono'y o
0e (e$i2i uni o$ 0e e2ono'y. A0e 2re(i 'ar"e in2lu(es +o0 'oney
'ar"e an( 2apial 'ar"e *0ere s0or an( lon% er's $inan2es are 'a(e
availa+le $or ineres.
By 0e en( o$ 0is uni8 you s0oul( +e a+le o4
• 2lassi$y various sour2es o$ $un(s
• i(eni$y 0e role an( $un2ions o$ various 2re(i 'ar"es
• (i$$ereniae +e*een 'oney 'ar"e an( 2apial 'ar"e.
041 T#& F!n$n!$% M$r,&t' $nd In't!tut!on'
Mon&. M$r,&t'
A0e 'oney 'ar"e 2an +e (e$ine( as a 'ar"e $or s0or6er' (e+
insru'ens. A0e 'a3or $un2ion o$ 0is 'ar"e is o $a2iliae 0e raisin%
o$ s0or6er' $un(s $ro' surplus se2or o 0e (e$i2i se2or o$ 0e
A0is is (one 0rou%0 ra(in% in s0or6er' se2uriies su20 as Areasury
Bills8 Areasury Ceri$i2aes8 Call Money8 Ceri$i2aes o$ Deposi8 an(
Co''er2ial &apers. A0e Cenral Ban" o$ #i%eria $ur0er (eepene( 0e
'ar"e *i0 0e 2o''en2e'en o$ is Open Mar"e Operaions
Mon&. M$r,&t In't!tut!on'
A0e 'oney 'ar"e insiuions are 0ose insiuions 0a pari2ipae
a2ively in 0e 'ar"es. A0ese insiuions in2lu(e Dis2oun 0ouses8
Co''er2ial an( Mer20an Ban"s as *ell as Co''uniy Ban"s.
T#& C$<!t$% M$r,&t
A0e Capial Mar"e is a veria+le 20annel $or 'o+iliCin% lon%6er'
$un(s. A0e 'ain insiuions in 0e 'ar"e in2lu(e Se2uriies an(
EB20an%e Co''ission8 *0i20 is a 0e apeB an( serves as 0e re%ulaory
au0oriy o$ 0e 'ar"e8 0e #i%erian So2" EB20an%e8 0e Issuin%
,ouses an( 0e So2" Bro"in% Fir's.

A0e Capial Mar"e is 2lassi$ie( ino 0ree. A0ese are 0e &ri'ary
Mar"e8 *0i20 are 'ar"es $or ne* issues o$ se2uriies. A0e 'o(e o$
o$$er $or 0e se2uriies ra(e( in 0is 'ar"e in2lu(es o$$er $or
su+s2ripion8 ri%0 issues an( privae pla2e'ens.
A0e Se2on(ary Mar"e is a 'ar"e $or ra(in% in eBisin% se2uriies. I
2onsiss o$ eB20an%es an( over60e62ouner 'ar"es *0ere se2uriies are
+ou%0 an( sol( a$er issuan2e in 0e pri'ary 'ar"e.
A0e Uni rus s20e'e is a 'e20anis' $or 'o+iliCin% 0e $inan2ial
resour2es o$ s'all an( +i% savers an( 'ana%in% su20 $un(s o a20ieve
'aBi'u' reurns *i0 'ini'u' ris"s8 0rou%0 e$$i2ien por$olio
(iversi$i2aion. I o$$ers 0e a(vana%es o$ lo* 2os8 li-ui(iy an( 0i%0
A0e #i%erian So2" EB20an%e *as esa+lis0e( o provi(e $a2iliies o 0e
pu+li2 $or 0e pur20ase an( sale o$ so2"s an( s0ares o$ any "in( an( 0e
inves'en o$ 'oney e2.

D&+&%o<(&nt F!n$n& In't!tut!on'
A0ese are spe2ialiCe( +an"s an( (evelop'en $inan2e insiuions
esa+lis0e( o 2onri+ue o 0e spe2i$i2 se2ors o$ 0e e2ono'y. A0ey
in2lu(e 0e Ban" o$ In(usry EBOIF8 #i%erian EBpor6I'por Ban"
E#E?IMF8 URBA# DE1E!O&ME#A BA#7 EUDBF8 #i%erian
A%ri2ulural an( Rural Develop'en Ban" E#ARDBF a'on% o0ers.
Ot#&r F!n$n!$% In't!tut!on' $nd Fund'
O0er $inan2ial insiuions an( $un(s un(er 0e $inan2ial syse' in2lu(e
Insuran2e 2o'panies8 Finan2e 2o'panies8 BureauB (e C0an%e8 &ri'ary
Mor%a%e Insiuions8 A0e #aional E2ono'i2 Re2onsru2ion Fun(
E#ERFU#DF8 an( 0e #i%erian So2ial Insuran2e Arus Fun( E#SIAFF.
A0is uni +rie$ly eBa'ines 0e $inan2ial 'ar"e *0i20 is 0e 'ar"e
*0ere 'oney is a pro(u2 0a eB20an%e 0an(s. A0e various insiuions
responsi+le $or raisin% $un(s are 'enione(.
In su''ary8 0is uni $o2use( on various 'ar"e 0a are responsi+le $or
$un(s raisin% $or inves'en purpose. A0ese in2lu(e 'oney 'ar"e8
2apial 'ar"e8 (evelop'en $inan2e 2o'panies an( o0er $inan2ial
Menion an( (is2uss various 'ar"es in +an" an( $inan2ial in(usryO
Olisa(e+e8 E. U.8 E1<<1F. LAppraisal o$ Re2en EB20an%e Rae &oli2y
Measures in #i%eriaM8 C&ntr$% B$n, o2 N!-&r!$ Eono(! $nd
F!n$n!$% R&+!&=8 :< E:F4 1566 1=5.
Olo%un8 S.O.8 E1<<.F. LBan" Failure in #i%eria4 Genesis8 E$$e2s an(
Re'e(iesM8 C&ntr$% B$n, o2 N!-&r!$ Eono(! $nd F!n$n!$%
R&+!&=8 >: E>F4 >1:6 322.
Oloye(e8 A(e+isi8 E1<<.F. LBan"in% Re%ulaion in #i%eria4 an
&erspe2iveM8 C&ntr$% B$n, o2 N!-&r!$ Eono(! $nd F!n$n!$%
R&+!&=8 >: E>F4 :7<6:<1.
Olua3a"aiye8 D.8 E1<<5F. LS0or6Run Ma2roe2ono'i2 E$$e2s o$ Ban"
!en(in% Raes in #i%eria8 1<=76<14 a Co'pua+le General
E-uili+riu' AnalysisM8 AERC R&'&$r# P$<&r8 >.8 #airo+i4
Olurani8 Osoa O.8 E1<<1F. LA0e Dere%ulaion o$ #i%eriaKs Finan2ial
In(usry4 Meris an( De'erisM8 NDIC Bu$rt&r%.8 1 E.F4 5766=.
Oluye'i8 S.A.8 E1<<5F. LDere%ulaion an( 0e &er$or'an2e o$ Insure(
Ban"s in #i%eria4 An overvie*M8 NDIC Bu$rt&r%.8 5 E1F4 .<667.
Oye*ole8 O.B.8 E1<<.F. LAnalysis o$ Resri2ive Finan2ial Se2or
&oli2ies in #i%eria8 1<7;61<=6M.
Uni1 A0eory o$ Ban" Cre(i
Uni: Finan2ial Sae'en Analysis
Uni> Ris"s in Ban"s
Uni. Ris" Analysis/Rain% o$ Ban"s
Uni5 Measure'en an( Conrol o$ Ban" Ris"
1.; Inro(u2ion
:.; O+3e2ives
>.; Main Conen
>.1 Ban" Cre(i A0eories
>.1.1 Sel$6!i-ui(ain% paper A0eory vs. Ani2ipae(
In2o'e A0eory
>.1.: Cenral Ban" Cre(i in 0e &ay'en Syse'
>.1.> &ay'ens A0eory
>.1.. A0e Free'an Mo(el
>.: &ro2ess o$ Ban" Cre(i Creaion
>.> Consrain/!i'iaion o$ Cre(i EBpansion
..; Con2lusion
5.; Su''ary
6.; Auor6Mar"e( Assi%n'en
7.; Re$eren2es/Fur0er Rea(in%s
A0e su(y o$ 0e 'e20ani2s o$ 'ar"e eB20an%e is a (isin2 $iel( o$
in-uiry. &ay'en e2ono'i2s is no narro* e20ni2al spe2ialy8 ei0er. I
+uil(s on 'oneary 0eory8 sin2e is use in pay'ens (e$ines 'oneary
insru'ens. I also (ra*s on +an"in% 0eory8 +ase( on 0e o+servaion
0a virually all insiuions 0a *e usually 0in" o$ as +an"s are
si%ni$i2anly involve( in pay'ens iner'e(iaion.
By 0e en( o$ 0is uni8 you s0oul( +e a+le o4
• (i$$ereniae +e*een Sel$6li-ui(ain% papers A0eory 1s. Ani2ipae(
In2o'e A0eory
• analyse various 0eories 0a %ui(e 0e +an" 2re(i
• i(eni$y vie*s o$ various +o(ies a+ou 2re(i an( loan a('inisraion
• (is2uss 0e pay'en 0eory
• (is2uss 0e role o$ 2enral +an" 2re(i sele'en arran%e'ens.
041 B$n, Cr&d!t T#&or!&'
04141 S&%2?%[email protected]!d$t!n- <$<&r T#&or. +'4 Ant!!<$t&d Ino(&
Ara(iional +an"in% 0eory $avoure( +y 0e 2onservaive +an"ers 0ol(s
0a 0e earnin% asses o$ a +an" s0oul( +e li'ie( o s0or6er' sel$6
li-ui(ain% pro(u2ive loans. A0ese in2lu(e sel$6li-ui(ain% 2o''er2ial
papers or s0or6 er' loans inen(e( o provi(e 0e 2urren *or"in%
2apial8 *0i20 in isel$ is o$ a sel$6li-ui(ain% naure. A0e 'eri o$ 0e
sel$ li-ui(ain% 0eory o$ 2o''er2ial +an" asses is 'ainly (erive( $ro'
0e $a2 0a su20 loans are 2onsi(ere( o li-ui(ae 0e'selves
auo'ai2ally ou o$ 0e sale o$ %oo(s 2overe( +y su20 a ransa2ion. For
insan2e8 le us a"e 0e 2ase o$ a +ill o$ eB20an%e8 a ypi2al eBa'ple o$ a
sel$6li-ui(ain% paper8 (ra*n $or 0e purpose o$ pur20asin% ra*
'aerials. A0e +ill is 2overe( +y a %enuine 2o''er2ial ransa2ion. An(
a +an"er is 3usi$ie( in %ivin% a loan a%ains su20 a paper8 +e2ause sel$6
li-ui(ain% papers are auo'ai2ally provi(in% 0e +an"s *i0 li-ui(iy
0rou%0 loan repay'ens. #o only 0a +u 0ey are also s0i$a+le o 0e
2enral +an" in i'es o$ e'er%en2ies8 as 0e 2enral +an"8 +ein% 0e
len(er o$ 0e las resor8 pre$ers su20 sel$6li-ui(ain% papers. A0e loss
avoi(in% aspe2 o$ li-ui(iy is also presen 0ere +e2ause o$ 0e very s0or
perio(s $or *0i20 0ese loans are %iven. Moreover8 0ey proe2 0e
+usiness *orl( a%ains in$laion +e2ause o$ 0eir elasi2 naure o
2orrespon( *i0 0e ra(e (e'an(s +e2ause 0ey in2rease as pro(u2ion
in2reases an( (e2rease as pro(u2ion (e2reases. #o *on(er 0e
ra(iional +an"ers 0eavily $avoure( 0e 2lai's o$ sel$6li-ui(ain%
,o*ever8 0e vali(iy o$ sel$6li-ui(ain% 0eory 0as +een 20allen%e( +y
2erain *riers. A0ey 2onen( 0a 0e ransa2ion 2overe( +y a sel$6
li-ui(ain% paper (oes no +y isel$ al*ays %uaranee li-ui(iy o$ 0e
loans espe2ially *0ere 0ere is an a+nor'al $all in 0e pri2e o$ 0ose
2o''o(iies. I is sai( 0a 2uso'ersK loans are o provi(e 0eir 2urren
*or"in% 2apial an( no a sa$e an( relia+le sour2e o$ +an" li-ui(iy. A0e
2onenion 0a sel$6 li-ui(ain% 2o''er2ial loans provi(e a proe2ion
a%ains in$laion 0as also +ein% 20allen%e( +y 0e 2rii2s. A0ey ar%ue 0a
(urin% +oo' perio(s8 *0en +usiness 2on(iions are prosperous8 0e
+orro*ers in2rease 0eir loans +y o$$erin% 'ore an( 'ore sel$6
li-ui(ain% papers. As $ull e'ploy'en is rea20e(8 0e pri2es in2rease
+e2ause o$ 0e in2rease in 'oney supply as 2o'pare( o 0e oupu8
inro(u2in% in$laionary ren( in 0e e2ono'y. A0ey 2on2lu(e +y sayin%
0a 0e 0eory o$ sel$6li-ui(ain% are $allen ou o$ (ae. An( as an
alernaive8 0ey a(vo2ae ne* 0eory o$ +an" li-ui(iy viC8 LAni2ipae(
In2o'e A0eory o$ li-ui(iyM. A0e ori%in o$ 0e 0eory lies in 0e
eBension o$ er's o$ loan +y 0e 2o''er2ial +an"s o$ 0e Unie( Saes
$or $inan2in% lon%6er' 2apial nee(s o$ in(usry. A0e loan is %rane( on
0e spe2i$i2 2on(iion on 0e par o$ 0e +orro*er o 2on(u2 0e
$inan2ial an( o0er a$$airs in su20 'anner as a%ree( upon +e*een 0i'
an( +an"er. A0e loan is o +e li-ui(ae( ou o$ 0e ani2ipae( earnin%s.
W0aever +e 0e 'eri o$ su20 a 0eory8 a poin 'ay +e sai( in $avour o$
0e ra(iional 0eory o$ 2o''er2ial +an" asses. W0en a +an"er
provi(es s0or6 er' sel$6li-ui(ae( pro(u2ive loans8 i is $airly easy $or
0i' o %au%e 0e li-ui( posiion o$ 0is 2uso'er +e2ause o$ 0e s0or
len%0 2overe( +y su20 a loan. W0ereas in 0e 2ase o$ lon%6er' loans8
%iven on 0e +asis o$ ani2ipae( in2o'es o$ su20 loans8 0e -uesion
involve( is no one o$ %au%in% 0e 2urren li-ui(iy posiion o$ 0e
+orro*er8 +u 0e $uure earnin% 2apa2iy *0i20 (epen(s on 0e 2orre2
assess'en o$ a nu'+er o$ $a2ors8 *0i20 'ay %o *ron%. I is +e2ause o$
0is 0a 0e En%lis0 +an"ers sill $in( $avour *i0 0e vie* 0a i is
al*ays %oo( $or 2o''er2ial +an"in% o 'a"e s0or6er' sel$6li-ui(ain%
pro(u2ive loans.
0414/ C&ntr$% B$n, Cr&d!t !n t#& P$.(&nt S.'t&(
Cenral +an"s 0ave ra(iionally vie*e( 0e provision o$ 2re(i o 0e
+an"in% syse' as an essenial ool $or a20ievin% 0eir %oals. A0e
1en(er6o$6 las6resor $un2ion is a *i(ely a22epe( role $or 2enral +an"s
o play in respon(in% o e'er%en2y li-ui(iy nee(s. Ba%e0oMs
pres2ripion o len( $reely +u only a a 0i%0 rae on %oo( 2ollaeral o
solven insiuions8 is one o$ 0e 'os *ell6"no*n 'aBi's in 2enral
+an"in%8 al0ou%0 so'e o$ 0ese (isin2ions 2an +e ri2"y o apply in
I is i'poran o re2o%niCe8 0o*ever8 0a 2enral +an" len(in% involves
*o (isin2 a2ions. A0e $irs is an in2rease in 0e (eposi a22oun
lia+iliies o$ 0e 2enral +an". A0e se2on( is 0e a2-uisiion o$ a privae
lia+iliy. In Ba%e0oMs i'e8 a2-uirin% privae lia+iliies *as 0e 'ain
'e0o( o$ alerin% 0e a%%re%ae supply o$ 2enral +an" (eposi
lia+iliies8 an( so 0e len(er6o$6 las6resor poli2y 0e pres2ri+e( *as 0e
naural *ay o provi(e $or an elasi2 supply o$ (eposis *0en (e'an(
$or 0ose (eposis spi"e(. A0e $oun(in% o$ 0e Fe(eral Reserve Syse'
*as 'oivae( +y a si'ilar (esire o preven ineres rae spi"es *0en
0e (e'an( $or reserves sur%e(. A0e a(ven o$ open 'ar"e operaions
in li-ui( %overn'en se2uriies8 0o*ever8 'a(e i less o+vious 0a
a2-uirin% privae lia+iliies *as 0e +es *ay o 'ana%e 0e supply o$
2enral +an" (eposis. Mos 2enral +an"s no* rea open 'ar"e
operaions ai'e( a pe%%in% overni%0 iner+an" ineres raes as (isin2
$ro' len(in% o in(ivi(ual +an"in% insiuions. In $a28 pe%%in% ineres
raes auo'ai2ally seriliCes 0e e$$e2 o$ su20 len(in% on a%%re%ae
(eposi supply. Dis2oun *in(o* len(in% no* represens a $or' o$
$is2al poli2y a pu+li2 se2or loan o a privae eniy. I is no lon%er
ne2essary o 0e provision o$ an elasi2 supply o$ reserves.
A0e len(er6o$6las6resor $un2ion ypi2ally involves overni%0 2re(i.
Many 2enral +an"s provi(e inra(ay 2re(i in 0e 2ourse o$ operain%
iner+an" pay'en syse's 0a provi(e pay'en $inaliy. O$ 2ourse8
(ayli%0 2re(i 0a is no eBin%uis0e( +y 0e en( o$ 0e pro2essin% (ay
+e2o'es overni%0 2enral +an" 2re(i o$ so'e $or' or ano0er. Cenral
+an"s 0ave a"en (i$$eren approa20es o 0e provision o$ (ayli%0
2re(i. A0e S*iss use( o 3us say noJ no* 0ey len( via inra(ay
repur20ase a%ree'ens. Mos 2enral +an"s provi(e (ayli%0 2re(i on
$airly li+eral er's. Many insis 0a su20 2re(i +e $ully 2ollaeraliCe(.
A0e Fe(eral Reserve Syse' 2urrenly allo*s (ayli%0 2re(i o +e
un2ollaeraliCe(8 +u 20ar%es a $ee e-uivalen o >6 +asis poins a an
annual rae on (ayli%0 2re(i a+ove a 2erain 0res0ol(.
04140 P$.(&nt' T#&or.
W0a (oes e2ono'i2s 0ave o say a+ou 0e role o$ 2enral +an" 2re(i in
0e pay'ens syse'O A0e naure o$ 0e pro+le' provi(es so'e
%ui(an2e8 I +elieve8 re%ar(in% 0e 'e0o(olo%y one nee(s o +rin% o
+ear. Ao evaluae 0e role o$ 2enral +an" 2re(i8 one nee(s o assess 0e
2oss an( +ene$is o$ alernaive poli2y re%i'es %overnin% 0e provision
o$ 0a 2re(i. Ao (o 0a8 one nee(s o un(ersan( 0o* +an" +e0aviour
*ill 20an%e *0en one 20an%es 2enral +an" 2re(i poli2y. In o0er
*or(s8 0o* *ill (eposi +alan2es an( 0e i'in% an( 'a%niu(e o$
pay'en $lo*s (i$$er $ro' one re%i'e o ano0erO E'piri2al analysis o$
pay'ens syse's (aa 2an provi(e so'e assisan2e 0ere +y provi(in%
an un(ersan(in% o$ 0e un(erlyin% paerns o$ pay'en $lo*s a'on%
+an"s. Bu su20 analyses invaria+ly run ino 0e P!u2as Crii-ueP 60a
is8 0a esi'ae( relaions0ips $ro' 0e saus -uo re%i'e 'ay s0i$
(ra'ai2ally in response o a 20an%e in re%i'e. Ao 0e eBen 0a one is
evaluain% an alernaive re%i'e 0a (i$$ers su+sanially $ro' 2urren
poli2y8 one 'us i(eni$y 0e Psru2uralP (eer'inans o$ +an" +e0avior
0a are invarian a2ross re%i'es. A0us8 evaluain% alernaive pay'en
poli2y re%i'es 2alls $or a 0eorei2al $ra'e*or"8 al0ou%0 o+servaions
$ro' 0isory or a2ross 2ounries 'i%0 also provi(e so'e insi%0s. A0e
analysis o$ a syse'Ks li"ely response o a 'a3or s0i$ in poli2y re-uires a
plausi+le 'o(el 0a in2orporaes 0e e$$e2s o$ 2enral +an" poli2y on
e-uili+riu' privae se2or +e0aviour.
W0a s0oul( *e loo" $or in 'o(els o$ pay'en a2iviyO One i'poran
prin2iple is e'+o(ie( in Willia' BaBerKs E1<=>F Di2u'60a 0e
issuan2e8 use8 2learin% an( sele'en o$ a pay'en insru'en is a
servi2e o$ 3oin +ene$i o 0e +uyer an( 0e seller an( 0a servi2e is
provi(e( 3oinly +y all paries o 2learin% an( sele'en. As a resul8 a
soun( e2ono'i2 evaluaion o$ alernaive pay'en poli2ies re-uires
assessin% 0e e$$e2 o$ 0ose alernaives on 0e *ell6+ein% o$ an( 2oss
in2urre( +y all o$ 0e paries involve(. Mo(els 0a o'i 0e paries $or
*0o' +an"s are 2learin% an( selin% pay'ens o 0e Pen(6usersP
*ill $ail o sais$y BaBerKs Di2u'8 an( *ill +e poenially 'islea(in%.

&ay'ens arran%e'ens are 2o''uni2aions ne*or"s8 an( 0ese o$en
a"e 0e $or' o$ 2lu+ %oo(s. &rivae a%ens 0a $in( 0e'selves in su20
environ'ens *ill en( o 2reae 'ulilaeral insiuions o e$$i2ienly
2ope *i0 0eir iner(epen(en2ies. A %oo( pay'ens 'o(el s0oul(
re2o%niCe 0a pay'en insru'ens an( insiuions are no eBo%enous8
+u are (eer'ine( +y 0e naure o$ 0e in$or'aion an( o0er $ri2ions
$a2in% ra(ers in 0e 'o(el environ'en. A0is en(o%eneiy o$ pay'en
+e0avior is *0a 'a"es 0e appli2aion o$ 2are$ully spe2i$ie( 'o(els
essenial $or 0in"in% a+ou 0e 2onse-uen2es o$ si%ni$i2an 20an%es in
2enral +an" poli2ies.

1ie*in% insru'ens an( insiuions as en(o%enous a(apaions o 0e
sru2ure o$ 0e e2ono'y 0as i'poran 'e0o(olo%i2al i'pli2aions.
Firs8 *0enever possi+le8 'o(els o$ pay'en +e0avior s0oul( +e $ully
ari2ulae( %eneral e-uili+riu' 'o(els8 spe2i$ie( in 0e *or(s o$ an ol(
+u use$ul slo%an8 a 0e level o$ pre$eren2es8 en(o*'ens an(
e20nolo%ies. A0is is essenial $or (ra*in% *el$are 2on2lusions a+ou
alernaive poli2ies. Se2on(8 0e en(o%eneiy o$ insiuions pla2es
'e20anis' (esi%n a 0e 0ear o$ pay'ens 0eory8 as is rue $or 'o(e'
'oneary 0eory. Un(er a 'e20anis' (esi%n approa208 pay'en
insru'ens are seen as 'essa%es 0a e'+o(y 2onin%en 2onra2s8 an(
one 2an 'o(el 0e in$or'aion an( ris" allo2aion 20ara2erisi2s in a
*ay 0a a"es ino a22oun 0e li'iaions i'pose( +y real6*orl(
pay'en e20nolo%ies. For eBa'ple8 0e 2osliness an( $alsi$y6a+iliy o$
2o''uni2aion8 veri$i2aion an( au0eni2aion.
04145 T#& Fr&&($n Mod&%
S2o Free'an E1<<6F (evelope( a 'o(el 0a 'ees 0ese 2rieria an(
0as proven use$ul $or su(yin% 0e role o$ 2enral +an" 2re(i in
sele'en arran%e'ens. In 0e environ'en o$ 0e Free'an Mo(el8
+o0 $ia 'oney an( privae lia+iliies serve as 'eans o$ pay'en.
Moreover8 ea20 perio( 'any a%ens 'ee a a 2enral lo2aion8 so'e
+earin% privae pay'en insru'ens 0a 0ey *an o eB20an%e $or
'oney8 an( o0ers are +earin% 'oney *i0 *0i20 0ey *ill re(ee' 0eir
(e+. A0e EeBo%enousF i'in% o$ a%ensK arrivals an( (eparures are su20
0a early in 0e 'eein% 0ere is an i'+alan2e +e*een a%ens +earin%
(e+ 0ey *is0 o re(ee' $or 'oney an( a%ens *i0 'oney o o$$er $or
(e+. Wi0ou 2enral +an" inervenion8 0e (e+ sol( a a (is2oun early
in 0e perio(8 is ine$$i2ien relaive o $ri2ionless sele'en. In 0is
'o(el8 0e 2enral +an" 2an pur20ase (e+ $or ne*ly 'ine( 'oney an(
laer reire 0a 'oney +y presenin% 0e (e+ o issuers $or pay'en.
A0e Free'an Mo(el *as (evelope( o su(y 0e 2enral +an"Ks a+iliy o
a22o''o(ae a e'porary +ul%e in 0e (e'an( $or 'oney in 2onne2ion
*i0 sele'en in a *ay 0a (oes no 2reae in$laion. Free'an 'a"es
re$eren2e o Milon Frie('an an( Anna S20*arCKs E1<6>F (is2ussion o$
seasonal 'ove'ens in 'oney (e'an( in 0e U.S. (urin% 0e 1<0
2enury. Bu 0e series o$ 2enral +an" ransa2ions (es2ri+e( a+ove 2an
+e inerpree( as a s0or6er' or even inra(ay loan $ro' 0e 2enral
+an" o 0e issuer o$ 0e (e+s. Un(er 0is inerpreaion8 Ruilin R0ou
E:;;;F 0as s0o*n 0a 0e opi'al er's $or 0e 2enral +an" ransa2ion
are e-uivalen o (ayli%0 2re(i a a Cero ineres rae.
One i'poran o+servaion on 0e Free'an 'o(el is (ue o E( Green
E1<<7F. By 2onsru2in% a 'e20anis' +y *0i20 a 2oaliion o$ privae
a%ens 2an a20ieve 0e sa'e ou2o'e as 2enral +an" inervenion in 0e
Free'an Mo(el8 Green s0o*e( 0a 2enral +an" 2re(i *as no essenial
$or a20ievin% an opi'al allo2aion. In $a28 0e 2oaliion (es2ri+e( +y
GreenKs A0eore' rese'+les 0e privae 2learin%0ouses *0i20 soo( a
0e apeB o$ 0e U.S. 2learin% an( sele'en syse's +e$ore 0e 2reaion
o$ 0e Fe(eral Reserve. A0is resul 0i%0li%0s 0e lesson 0a 0e nee( $or
Eper0aps -uie 2o'pli2ae(F 'ulilaeral 2oor(inaion (oes no +y isel$
2reae a nee( $or pu+li2 se2or involve'en in a pay'ens syse'. A0is
lesson is +uresse( +y 0e o+servaion 0a 'any privae ne sele'en
arran%e'ens eBis alon%si(e 2enral +an" %ross sele'en syse's. As I
noe( earlier8 0is reasonin% su%%ess 0a 0e -uesion o$ 0e 2enral
+an" role in pay'ens is less a+ou e$$i2ien2y an( 'ore a+ou 0e
(isri+uion o$ 2oss an( +ene$is.
Ano0er i'poran o+servaion on 0e Free'an Mo(el involves is
$in(in% 0a 0e opi'al ineres rae on inra(ay 2enral +an" 2re(i is
e-ual o Cero. A "ey $eaure o$ 0is environ'en 0a 0elps (eliver 0is
resul is 0e a+sen2e o$ inra(ay (is2ounin%. An ineres rae is 0e
inere'poral pri2e o$ 2onsu'pion8 an( in 0e Free'an 'o(el8
2onsu'pion is (is2oune( only perio(6o6perio(8 no *i0in 0e
sele'en perio(. A0is a'oun o sayin% 0a 0ere is no *i0in perio(
Einra(ayF opporuniy 2os o$ 2onsu'pion or 'oney8 an assu'pion
0a 'ayor 'ay no +e a %oo( approBi'aion o 0e operaion o$ lar%e
value pay'ens syse's. W0e0er i 'a"es sense o posie 0a all
(is2ounin% a"es pla2e overni%0 is an i'poran open resear20
-uesion8 espe2ially *0en 0e overni%0 perio( lass 3us :½ 0ours8 as i
(oes $or Fe(*ire.
I is *or0 noin% 0a 0e 'oivaion $or (ayli%0 2re(i in 0e Free'an
Mo(el is unrelae( o any ris" o$ so62alle( P%ri(lo2".P &eople (es2ri+e
%ri(lo2" as o22urrin% *0en +an"s srae%i2ally (elay pay'ens *i0in
0e (ay8 0ere+y in2reasin% 0e syse'Ks pro2essin% +ur(en lae in 0e
(ay. A0e opion o (elay pay'en is no availa+le in 0e Free'an Mo(el.
In 'ore %eneral sein%s8 one i'poran -uesion re%ar(in% 0e poenial
$or %ri(lo2" is 0e eBen o *0i20 repeae( inera2ion 2an 2onsrain 0e
in2enive $or srae%i2 'is+e0avior. I is also *or0 2onsi(erin% *0e0er
%ri(lo2" 2oul( isel$ +e a 2onse-uen2e o$ 0e saus -uo poli2y re%i'e.
De ano0er noe*or0y $eaure o$ 0e Free'an Mo(el is 0a 0e 2enral
+an"Ks eBension o$ (ayli%0 2re(i is ris"6$ree. Fro' 0is perspe2ive8
one 'i%0 vie* a (ayli%0 over(ra$ $ee as 2o'pensaion $or ris".
I(eally8 one *oul( *an o se 0is $ee in &i%ovian $as0ion so as o
eli'inae +an"sK in2enives o overuse (ayli%0 2re(i. One 'i%0 0in"
0a sein% 0e $ee a a level 0a 2o'pensaes 0e 2enral +an" $or is
2re(i6ris" eBposure *oul( (o 0e ri2"8 +u 0is *oul( i%nore 0e role o$
0e (eposi insuran2e $un(. A 2enral +an"Ks 2lai' on a $ailin% +an"Ks
2ollaeral si'ply re(u2es 0e li-ui(aion value o$ 0e insiuion an(
0ere+y in2reases 0e 2os o 0e (eposi insuran2e $un(. Moreover8
2enral +an" len(in% 2an allo* 0e 20arerin% a%en2y o (elay 2losure
an( $a2iliae 0e eBi o$ uninsure( 2re(iors8 $ur0er s0i$in% losses $ro'
privae 2ounerparies o 0e pu+li2 se2or an( eBa2er+ain% 'oral
0aCar(. Ei0er *ay8 Fe(eral Reserve ris" eBposure is 0e *ron% 'eri2
a%ains *0i20 o +en20'ar" over(ra$ $ees. I is essenial8 in 'y vie*8 o
evaluae 0e ris"s asso2iae( *i0 2enral +an" 2re(i $ro' 0e
2o'pre0ensive perspe2ive o$ 0e 2onsoli(ae( $is2al +alan2e s0ee
ra0er 0an $ro' a purely 2enral +an" poin o$ vie*.
W0ile i is *i(ely re2o%niCe( 0a 2re(i ris" is an ele'en o$ 0e
+ene$i62os 2al2ulus surroun(in% (ayli%0 2re(i8 assess'en o$ 0is ris"
is $rau%0 *i0 (i$$i2uly. W0en $inan2ial 2on(iions are %enerally
sron%8 0e ris" o$ a2ual loss (ue o (ayli%0 2re(i eBposure is li"ely o
+e s'all8 an( even a s'all +ene$i in 0e $or' o$ a s'oo0er $un2ionin%
pay'en syse' 'i%0 appear o 'a"e 0e provision o$ 2enral +an"
2re(i *or0*0ile. Dayli%0 2re(i is o$en pari2ularly use$ul (urin% a
severe operaional (isrupion8 as illusrae( +y 0e a$er'a0 o$ 0e
erroris aa2"s o$ Sepe'+er 118 :;;1. W0ile so'e +an"s (elaye(
pay'ens ou o$ 2on2erns a+ou in2o'in% $un(s8 0e availa+iliy o$
(ayli%0 2re(i +uil 2on$i(en2e 0a pay'ens *oul( $lo*. On
Sepe'+er 118 :;;18 0e %eneral 2on(iion o$ 0e +an"in% syse' *as
-uie sron%. S0oul( a 'a3or operaional (isrupion o22ur *0en so'e
$inan2ial insiuions are %enerally 'ore $ra%ile8 0en an eBpansion o$
2enral +an" 2re(i 2oul( involve a su+sanial in2rease in eBposure.
Operaional (isrupions asi(e8 *ea" +an"in% insiuions 2an 2reae
+roa(er 'oral 0aCar( pro+le's re%ar(in% (ayli%0 2re(i. !ar%e +an"s
+uil( sop0isi2ae( pay'en pro2essin% syse's assu'in% 0e
availa+iliy o$ auo'ai2 (ayli%0 2re(i. Re2on$i%urin% a +an"Ms
operaions o 2ope *i0 a (enial o$ (ayli%0 2re(i 2an +e very 2osly an(
0i%0ly visi+le o 2ounerparies. A0is 'a"es i (i$$i2ul $or 0e Fe(eral
Reserve o *i0(ra* (ayli%0 2re(i in 0e 2ase o$ *ea" or $ailin%
insiuions8 an( 0is in urn 2an su+sanially *ea"en 'ar"e an(
supervisory (is2ipline.
04/ Pro&'' o2 B$n, Cr&d!t Cr&$t!on
Ban"ers al*ays ry o 'ini'iCe 0eir 0ol(in%s o$ i(le 2as0 o 0e lo*es
eBen possi+le in 0eir ae'p o a20ieve 0is en(8 0ey un*iin%ly
in2rease 0e oal a'oun o$ 'oney in 2ir2ulaion in 0e 2o''uniy. I
(oes no 'ean 0e oal a'oun o$ le%al en(er 2urren2y *ill in2rease.
W0en *e say 0a a +an"er is len(in% 'oney8 0e is a2ually len(in%
'oney in 0e $or' o$ (eposi 2re(i *i0 a ri%0 o 0e +orro*er o (ra*
20e-ues a%ains i. For insan2e a"e 0e 2ase o$ a loan %rane( o
2uso'er. Insea( o$ payin% a*ay 0e *0ole loan a on2e8 0e +an"er is
a2ually pla2in% 0e su' o 0e 2re(i o$ 0e +orro*er. A0us 0e +orro*er
a2-uires a 2lai' a%ains 0e +an"8 3us as a su' o$ 'oney (eposie( +y
0i' *i0 0e +an"er 2reaes a 2lai' a%ains 0e +an". !e us assu'e 0a
0e +orro*er (ra*s 20e-ues in $avour o$ o0er people. A0ey pay 0e'
ino 0eir o*n +an"s $or 2olle2ion8 an( 0eir (eposis %o up. ,ere *e
'ay a%ree *i0 ,arly Wi0ers in 0a Kevery loans 2reaes a (eposiK.
A%ain +y pur20asin% se2uriies or any o0er asses also a +an"er is
a((in% o 0e oal supply o$ 'oney. W0en 0e +uys se2uriies8 0e pays
$or 0e' +y 0is o*n 20e-ue. A0is 20e-ue li"e a 2urren2y noe issue( +y
0e Cenral Ban"8 *0i20 is 'erely 0e IOU o$ 0e Cenral Ban"8 is an
IOU o$ 0e +an" issuin% i. An( 0is is a22epe( +y 0e seller o$ 0e
se2uriies +e2ause o$ 0is $ai0 in 0e a+iliy o$ 0e +an"er o pro(u2e 2as0
on (e'an(. A0e seller (eposis 0is 20e-ue in 0e very sa'e +an" or in
any o0er +an" *0ere 0e 0as an a22oun8 0ere+y 2reain% a((iional
(eposi 'oney. A0e 2o''er2ial +an"ers as a syse' 2an an( (o in2rease
0e oal a'oun o$ 'oney in 2ir2ulaion8 +y in2reasin% 0e pur20asin%
po*er o$ 0e people 0rou%0 (eposi 'oney 2reae( +y 0e'.
A 2lose analyi2al su(y o$ 0e 'e20anis' o$ +an"in% *ill si'pli$y
'aers 'ore. !e us a"e 0e 2ase o$ a 2o''uniy *i0 only one +an"
an( *0ere 0e people are 0i%0ly +an"in% 'in(e( so 0a all 0e
ransa2ions are sele( +y 'eans o$ 20e-ues. Fur0er le us assu'e 0a
0e oal a'oun o$ 'oney in 2ir2ulaion is #IO Million an( 0e +an"er
"no*s +y eBperien2e 0a 1; per 2en o$ is (eposis as reserves is
su$$i2ien o 'ee (e'an(s $ro' 2uso'ers.
Sin2e 0ere is only one +an" in 0e 2o''uniy8 people *ill (eposi all
0eir 'oney in 0a pari2ular +an". A0e +alan2e s0ee o$ 0e +an" 0en
*oul( +e4
L!$)!%!t!&' N A''&t' N
Deposi 1;8;;;8;;; 2as0 in 0an( 1;8;;;8;;;
A22or(in% o our assu'pion8 0e +an"er nee(s o 'ainain only a 2as0
reserve o$ 1; per 2en o$ 0e (eposis an( 2an sa$ely len( 0e +alan2e
a'oun o$ #<8;;;8;;; o 0ose *0o are in nee( o$ $un(s. A0is a'oun
0e +an"er *ill pla2e o 0e 2re(i o$ 0e +orro*ers %ivin% 0e' 0e ri%0
o operae 0eir a22oun *i0 20e-ues. A0eir (eposis *ill 2onse-uenly
%o up +y 0is a'oun. A0e +alan2e s0ee8 0en *oul( +e4
L!$)!%!t!&' N A''&t' N
Deposi Eori%inalF 1;8;;;8;;; 2as0 in 0an( 1;8;;;8;;;
Deposis E2re(i
+alan2e o$ +orro*erF <.;;;.;;; loans o 2liens <.;;;.;;;
1<.;;;.;;; 1<8;;;8;;
A0ese (eposis no* san(in% o 0e 2re(i o$ 0e +orro*er are8 as *e
"no*8 2lai's a%ains 0e +an" an( as su20 0ey 2o''an( a pur20asin%
po*er an( so 0ey 'ay +e 2onsi(ere( as %oo( as 'oney. #o*8 suppose
0e +orro*ers (ra* 20e-ues in $avour o$ 0eir 2re(iors. A0e payees o$
0e 20e-ues *ill no re-uire 2as0 over 0e 2ouner8 sin2e 0ey are 0i%0ly
+an"in% 'in(e(8 a22or(in% o our supposiion. On 0e o0er 0an(8 0ey
*ill pay 0ese 20e-ues ino our suppose( sin%le +an" $or 2olle2ion.
,ere *0a 0appens is 'erely a rans$er o$ 0e 2re(i +alan2e o$ 0e
+orro*ers o 0e 2re(i o$ 0e a22oun o$ 0e payees o$ 0eir 20e-ues. In
s0or8 al0ou%0 0e oal a'oun o$ le%al en(er 2urren2y in 2ir2ulaion in
0e 2o''uniy is only o 0e or(er o$ spa2e #I; 'illion8 our +an"er8 +y
0e pro2ess o$ 2reain% a((iional (eposi 'oney8 0as +rou%0 ino
e$$e2ive 2ir2ulaion an a((iional a'oun o$ spa2e #<'iliion8 0ere+y
raisin% 0e supply o$ 'oney $ro' #I;'illion o #l<'illion. A0e po*er
o$ 0e +an"er o in2rease 0e a'oun o$ 'oney in 2ir2ulaion (oes no
2o'e o an en( 0ere. ,e 2an $ur0er in2rease 0e supply o$ 'oney.
As s0o*n in 0e +alan2e s0ee8 0e a'oun o$ 0e (eposis o$ 0e +an" is
no* #l<'illion. An( our assu'pion is 0a 0e +an"er s0oul( 'ainain
only a 2as0 raio o$ 1; per 2en. Ao 'ainain 0is 0e +an"er nee(s only
o provi(e an a((iional a'oun o$ #<;;8;;; over an( a+ove 0e a'oun
o$ #18;;;8;;; *0i20 0e alrea(y 'ainains.
Even 0en 0ere is a +alan2e o$ #=81;;8;;; in 0e vauls o$ 0e +an"er8
*0i20 0e 2an len( *i0ou un(er%oin% any ris". #o* 0e +alan2e s0ee
*oul( +e4
L!$)!%!t!&' N A''&t' N
Deposi Eori%inalF 1;8;;;8;;; 2as0 in 0an( 1;8;;;8;;;
Deposis E(eposie( +y loans o 2liens
A0e payees o$ 0e <8;;;8;;;
$irs +orro*ersM
20e-ueF <8;;;8;;; =81;;8;;; 1781;;8;;;
(eposi E2re(i
+alan2e o$
+orro*ers =.1;;.;;;
:7.1;;.;;; :7.1;;.;;;
,ere 0e +an"er 0as o "eep an a((iional 2as0 reserves in2rease o
#:781;;8;;;. Sill 0ere is +alan2e o$ loana+le $un(s *i0 0e +an"er
a'ounin% o #78:<;8;;;.
A0us8 0e +an"er 2an %o on in2reasin% 0e 2reaion o$ a((iional 'oney.
Bu 2an 0e %o on in2reasin% 2re(i *i0ou any li'iO Is 0e po*er o$ 0e
+an"er o in2rease 0e supply o$ (eposi 'oney unli'ie(O A0e ans*er
is (e$iniely in 0e ne%aive.
040 Con'tr$!nt>L!(!t$t!on o2 Cr&d!t E1<$n'!on
A0e po*er o$ 2o''er2ial +an"ers o 2reae 2re(i is li'ie( 'ainly +y
0e 2as0 reserves *0i20 0ey 0ave o 0ol( a%ains 0eir (eposis an( 0e
oal a'oun o$ le%al en(er 2urren2y issue( +y 0e 2enral +an". Every
+an" 0as o 'ee 0e (e'an(s o$ is 2uso'ers o pay 2as0 over 0e
2ouner. So a *or"in% reserve o$ li-ui( 2as0 is al*ays ne2essary $or
every +an"er. O$ 2ourse8 i$ 0e people are 0i%0ly +an"in% 'in(e(8 a
lo*er 2as0 reserve *ill su$$i2e. Bu in 0e 2ase o$ a 2o''uniy8 *0ere
0e +an"in% 0a+is are no *ell (evelope(8 a 0i%0er 2as0 reserve is
essenial. In ei0er 2ase8 a 2as0 reserve is ne2essary an( 0is a2s as +rea"
on 0e po*er o$ +an"s o 2reae 2re(i. I$ a +an"er *ans o eBpan(
2re(i $ur0er8 ei0er 0ere s0oul( +e an a((iional supply o$ li-ui( 2as08
*0i20 enirely is a prero%aive o$ 0e 'oneary au0oriies or 0e 2as0
raio s0oul( +e lo*ere(8 *0i20 2an +e (one only a 0is o*n peril.
Moreover8 la* in 'os 2ounries pres2ri+es a 'ini'u' reserve raio.
A0us8 a +an"erKs po*er o 2reae 2re(i is li'ie( +y *o $a2ors viC.8 0e
2as0 raio an( 0e oal a'oun o$ 2as0 in 0e 2ounry.
In 0e 2ourse o$ 0is uni you s0oul( eBplain various 0eories 0a %ui(e
2re(i issuan2e an( a('inisraion in +an"in% in(usry. A0ese 0eories
serve as +asis o$ operaions in +an"in% in(usry. Also8 *e (is2usse(
pro2ess o$ 2re(i 2reaion an( 0e 2onsrains o$ 2re(i eBpansion.
In su''ary8 0is uni $o2use( on various 0eories 0a %ui(e( +an"
operaions a'on% *0i20 are Sel$6li-ui(ain% paper 0eory versus
Ani2ipae( 0eory8 pay'en 0eory e2. Also8 *e esa+lis0e( 0o* 2re(i
2an +e 2reae( o in2rease 'oney in 2ir2ulaion. ,o*ever8 0ere are *o
'a3or li'iaions o 0is 2reaion o$ 2re(i *0i20 in2lu(e 0e 2as0 raio
an( 0e a'oun o$ 2as0 in 0e 2ounry
1. Dis2uss pay'en 0eory
:. ,o* 2an 2re(i +e 2reae( in an e2ono'yO
S0e"0ar 7. C. E1<<;F. Banking Theory and Practice. #e* Del0i8 In(ia4
1i"as &u+lis0in% ,ouse &1A!AA.
1.; Inro(u2ion
:.; O+3e2ives
>.; Main Conen
>.1 &rin2iple an( Co'ponens o$ Finan2ial Analysis
>.: Raio Analysis
>.> Consrain/!i'iaion o$ Cre(i EBpansion
..; Con2lusion
5.; Su''ary
6.; Auor6Mar"e( Assi%n'en
7.; Re$eren2es/Fur0er Rea(in%s
Finan2ial sae'en analysis is 0e analysis o$ 0e +orro*erKs $inan2ial
sae'en as i relaes o 0e pro3e2 an( as i relaes o 0e a'oun as"e(
$or. A0e $irs esa+lis0es 0e en( an( nee( $or 0e loan as *ell as 0e
repay'en a+iliy *0ile 0e se2on( *ill esa+lis0 0o* 'u20 is re-uire(8
$or 0o* lon%8 *0en re-uire(8 an( *0e0er 0e loan (e'an( 2on$or's o
0e eBisin% (ire2ives %ui(elines +o0 o$ 0e 0ea( o$$i2e an( o$ 0e
Cenral Ban"
By 0e en( o$ 0is uni8 you s0oul( +e a+le o4
• veri$y 0e various raios in $inan2ial sae'en o$ +an"s
• apply 0e prin2iples o$ $inan2ial raios $or +an" 2re(i analysis.
041 Pr!n!<%& $nd Co(<on&nt' o2 F!n$n!$% An$%.'!'
One is 0e analysis o$ +orro*erKs $inan2ial sae'en as i relaes o 0e
pro3e2 an( as relaes o 0e a'oun as"e( $or. A0e $irs esa+lis0es 0e
nee( $or 0e loan as *ell as 0e repay'en a+iliy *0ile 0e se2on( *ill
esa+lis0 0o* 'u20 re-uire(8 $or 0o* lon%8 *0en re-uire( an( *0e0er
0e loan (e'an( 2on$or's o 0e eBisin% (ire2ives an( %ui(eline +o0
o$ 0ea( o$$i2e an( o$ 0e Cenral Ban".
In analyCin% 0e en( use8 0e +an"er s0oul( en(eavour o esa+lis0
*0e0er all reasona+le esi'ae( 2oss are allo*e( $or8 an( *0e0er 0e
esi'aes are realisi28 ,e s0oul( also ae'p o esa+lis0 *0e0er 0e
sour2es o$ $inan2e 2one'plae( +y 0e sponsors *ill +e a(e-uae an(
*0e0er 0ey *oul(8 in $a2 +e $or02o'in%. O0er*ise 0e +an"er *ill
+e su2" *i0 0is o*n len(in%. Finally8 0e *oul( ae'p o as2erain 0e
li"ely i'pa2 o$ 0e pro3e2 on 0e level o$ pro(u2ion8 sales8 ne
earnin%s8 +orro*in%s e2. o$ 0e +orro*er8 an( *0en 0e pro3e2 is
eBpe2e( o +rea" even an( sar yiel(in% pro$i.
,avin% esa+lis0e( 0e a+ove8 0e +an"er 0en urns o analyCin% 0e
a'oun o$ 0e loan as"e(. An up6o6(ae au(ie( +alan2e s0ee or 0e
appropriae $inan2ial sae'en nor'ally %ives so'e 2lues.
Generally8 0e 2apial e'ploye( in2lu(in% any un(isri+ue( pro$is8 is
one %ui(e o 0o* 'u20 0e 2uso'er 2an +orro*J *0ile 0e $i%ures $or
2re(iors o$ all "in(s8 o$ so2" an( *or"6in6pro%ress an( o$ ra(e (e+or
s0o* 0e li-ui( posiion o$ 0e +usiness an( 'ay in(i2ae 0e (i$$i2uly
*i0 *0i20 2re(i 2an +e .pai( re%ularly. All in all8 0e o+3e2ive 'us +e
o (eer'ine 0a 0e a'oun (e'an(e( is nei0er oo 'u20 nor oo
s'all +u is 3us a(e-uae an( 0a 'a%niu(e o$ 0e availa+le surplus or
pro$is8 in2lu(in% any o0er 2as0 a22ruals8 *ill +e a(e-uae o servi2e 0e
loan e$$e2ively 0rou%0 repay'en o$ prin2ipal an( ineres plus a
'ar%in $or in2i(enals. A0e poin o e'p0asiCe is 0a 0ere s0oul( +e a
proper perspe2ive o$ 0e $inan2ial posiion o$ 0e 2on2ern. For 0is
purpose a sin%le yearMs per$or'an2e as reveale( in 0e pro$i an( loss
a22oun an( 0e +alan2e s0ee *ill no +e a(e-uae. A (yna'i2 vie* 0as
o +e a"en o$ 0e or%aniCaion +o0 in prospe2 an( rerospe2
E#*an"*o8 1<<1 pp.1:5F
04/ R$t!o An$%.'!'
Raio analysis is a use$ul ool in $inan2ial sae'en an( pro3e2 analysis.
I is use( in 0e iniial sa%es o re(u2e 0e lar%e nu'+er o$ in(ivi(ual
ie's in 0e $inan2ial sae'ens o a $e*er nu'+er o$ 'eanin%$ul raios
0a assis 0e len(in% o$$i2er o analyCe 0e +orro*ersM 2urren posiion.
I 0elps also o i(eni$y 2rii2al areas $or $ur0er (eaile( eBa'inaion.
A0e +asi2 2o''only use( raios relae o li-ui(iy8 'ana%e'en
e$$i2ien2y8 levera%e or (e+8 an( pro$ia+iliy. A0e raios are no
universally appli2a+le o all siuaions. Invenory urnover8 $or insan2e
is no relevan an( 'eanin%$ul in 0e analysis o$ servi2e $ir's +u very
relevan an( i'poran in 0e analysis o$ reail or 'anu$a2urin% $ir's.
A0e a+le +elo* s0o*s 0e "ey raios 2o''only use( +y analyss.
T$)%& 7: Co((on%. u'&d M$n$-&(&nt R$t!o !n Cr&d!t An$%.'!'
T.<&' o2 R$t!o N$(& 2unt!on 7o= (&$'ur&d
aF Curren Raion
+F Sui2" EA2i(
esF raio
aF #e &ro$i
Mar%in or Reurn
on Sale EROSF
+F Reurn on
2F Reurn on
aF De+ o Asse
+F De+ o E-uiy
2F Ai'es Ineres
or Finan2ial
C0ar%es 2overa%e
(F A22oun
&aya+le Aurnover
In(i2ae 0e eBen o *0i20 2lai's o$
s0or6er' 2re(iors are 2overe( +y
asses 0a 2an +e rea(ily 2onvere(
ino 2as0 *i0ou loss. ,i%0 values
su%%es 0i%0 sa$ey 'ar%ins $or s0or6
er' 2re(iors +u (oes no 2onsi(er
-ualiy o$ re2eiva+les an( invenories
A 'ore relia+le 'easure o$ li-ui(iy
0an 0e 2urren raio. &ur%es 0e
2urren raio o$ la2" o$ 2on2ern $or 0e
-ualiy o$ re2eiva+les an( invenories.
#B4 a an( +8 ea20 'easures 0e a+iliy
o$ 0e $ir' o %enerae 2as0 o 'ee
s0or6er' o+li%aion
Measures pro$ia+iliy o$ 0e $ir'
relaive o sales
Measures pro$ia+iliy o$ 0e $ir'
relaive o ne *or0 or o*nerMs e-uiy
in 0e $ir'.
Measure pro$ia+iliy o$ 0e $ir' in
relaion o asses e'ploye(.
Measures 0e a'oun o$ (e+
e'ploye( +y 0e $ir' in relaion o 0e
oal asses o$ 0e $ir'. A0e +i%%er 0e
(e+ 0e 'ore volaile 0e earnin%s
+e2ause o$ 0e $iBe( 20ar%e(.
Measure 0e a'oun o$ (e+ e'ploye(
+y 0e $ir' in relaion o oal e-uiy
or ne *or0.
Measure 0e 2overa%e o$ ineres
pay'en in 0e (e+.
Measures a22oun paya+le in relaion
o pur20ases
Curren asse
Curren lia+iliies
CA G Invenories
Curren lia+iliies
#e In2o'e
#e In2o'e
Aoal E-uiy or
#e *or0
#e In2o'e
Aoal Asses
Aoal De+
Aoal Asses
!on%6Aer' De+
Aoal E-uiy
E#e Wor0F
Earnin% +e$ore
Ineres T AaBes
Annual Ineres
Avera%e a22ouns
Av. &ur20. &er
E.F A2iviy
EaF Colle2ion
+F Aoal Asses
2F Invenory
(F FiBe( Asse
eF Re2eiva+les
Measures 0e (e%ree o$ e$$i2ien2y *i0
*0i20 'ana%e'en 2olle2s
Measures 0e (e%ree o$ e$$i2ien2y
*i0 *0i20 'ana%e'en uiliCes asses
in relaion o sales
Measures 'ana%e'en e$$i2ien2y in
urnin% over invenories o %enerae
pro$i i.e. invenory 2onrol
Measures ne sales over ne $iBe(
Measures sales over re2eiva+les
Avera%e A22oun
Sales per Day
Aoal Asses
Av. Invenory
#e FiBe( Asses
Cre(i sales
For +eer resuls8 2o''on siCe raios s0oul( +e o+aine( +y eBpressin%
ea20 +alan2e s0ee ie' as a per2ena%e o$ oal revenue an( ea20
eBpense ie' as per2ena%e o$ oal eBpenses. A0e raios s0oul( also no
+e analyCe( in isolaion as 0ere are no a+solue san(ar( $or 0e'. A0ey
2an +e .analyCe( 2ross se2ionally +y 2o'parin% 0e $ir's raios *i0 0e
raios o$ peer $ir's in 0e in(usry or a a poin in i'e. Ano0er *ay is
i'e series. A0is (eals *i0 0isori2al ren(s in 0e raios8 in e$$e2
'easurin% 0e $ir' a%ains isel$ a (i$$eren i'e perio(s. A0is 0elps o
(ee2 loo'in% pro+le's +e$ore 0ey o22ur. A $ir' eBperien2in% rapi(
sales +u sea(ily (e2linin% pro$i 'ar%in +e2ause o$ risin% 2oss 'ay
$in(8 0rou%0 i'e series analysis8 0a 0e rapi( %ro*0 'ay 0ave
'as"e( 0e (an%erous sli(e in pro$i 'ar%ins an( *oul( 0en ry o (o
so'e0in% a+ou i G %e a*ay $ro' 0e eup0oria o$ rapi( %ro*0 an(
2orre2 (e$i2ien2ies in 2osin% 'ariB an( 0ere$ore in pro$i 'ar%ins.
I is also usually a(visa+le no o rely on a sin%le raio +u on
2o'+inaion o$ raios. Reurn on e-uiy8 $or insan2e 2an +e +ro"en
(o*n o is 2onsiuens su20 as levera%e8 pro$i 'ar%in8 a2iviy an(
2o''on siCe raios. A0is ena+les analys o si'ulaneously vie* 0e "ey
relaions0ips %overnin% 0e +usiness enerprises.
In 0is uni o$ 0e su(y *e are a+le o esa+lis0 0e prin2iples an(
2o'ponens o$ $inan2ial sae'en analysis an( 0e use o$ $inan2ial
raios o su''ariCe 0e (eail o$ +an"sK operaions.
A0is uni $o2use( on 0e analysis o$ 2re(i 0rou%0 $inan2ial raios.
A0ese raios in2lu(e li-ui(iy raio8 pro$ia+iliy raio8 levera%e raio8 an(
$inally8 a2iviy or 'ana%e'en e$$i2ien2y raio.
Use an annual repor o$ a sele2e( +an" an( analyCe +o0 0e
pro$ia+iliy an( li-ui(iy raios.
#*an"*o G. O. E1<<1F. Bank Management (Principle and Practice).
U.7. OB$or(4 Mal0ouse &u+lis0in% !(.
1.; Inro(u2ion
:.; O+3e2ives
>.; Main Conen
>.1 AaBono'y o$ Ban"in% Ris"s
>.: Ris" Mana%e'en &oli2y an( Srae%y
..; Con2lusion
5.; Su''ary
6.; Auor6Mar"e( Assi%n'en
7.; Re$eren2es/Fur0er Rea(in%s
Ris"8 0e possi+iliy o$ loss8 in3ury8 (a'a%e8 or peril is inevia+le in li$e.
#o aspe2 o$ 0u'an en(eavour is (evoi( o$8 or 2an es2ape i. I is
in0eren in every(ay li$e8 an( 'ore so in 0e li$e o$ a +an"er. ,is
+usiness 0as +een8 an( 2oninues o +e8 a"in% ris"s. A0is 0e (oes
0rou%0 'auriy rans$or'aion 6 +orro*in% s0or an( len(in% lon%. A0e
$oun(aion $or (oin% 0is is 0e pro+a+iliy 0a 0e *ill no +e 2alle(
upon a anyone i'e o re(ee' all 0is o+li%aions8 provi(e( 0e 'ana%es
0is a$$airs pru(enly. A0is i'plies 0avin% a(e-uae 2apial an( earnin%s8
an( a(e-uae li-ui(iy o 0onour 0is o+li%aions as 0ey $all (ue. I also
'eans avoi(in% eB2essive ris"s. ,e 2anno avoi( ris" alo%e0er. ,e *ill
+e ou o$ +usiness i$ 0e ries o (o so. A0e ris" 0e a"es 'us +e
2o'pai+le *i0 pro$ia+iliy8 li-ui(iy an( pru(en2e. Mana%in% ris"8
li"e 'ana%in% 2apial an( li-ui(iy is 0ere$ore 0e 2enrepie2e o$
+an"in% an( 0is 0as +een in2reasin%ly so sin2e 0e +e%innin% o$ 0e
By 0e en( o$ 0is uni8 you s0oul( +e a+le o4
• 2lassi$y 0e aBono'y o$ +an"in% ris"s
• (es2ri+e various ris"s in +an"in% in(usry
• i(eni$y ris" 'ana%e'en poli2y an( srae%y.
041 T$1ono(. o2 B$n,!n- R!','
Ban"in% ris"s 2an +e 2lassi$ie( ino *o +roa( 2ae%ories. One is $rau(
ris"s an( 0e o0er is 'ar"e ris"s. Frau( is (eli+erae (e2epion8 ri2"ery
or 20eain% $or unla*$ul %ain or un3us a(vana%e. A0rou%0 ouri%0
0e$s8 (e$al2aions an( e'+eCCle'en. Frau(s resul in lar%es losses o
(eposiors an( 2re(iors8 in2lu(in% (eposi insuran2e a%en2ies. A0ey are
ra'pan8 pervasive8 an( 0e +i%%es sin%le 2ause o$ +an" $ailures.
Benson E1<7>F $oun( 0a 66H o$ 0e +an" $ailures in 0e US (urin%
1<5</71 *ere (ue o $rau( an( irre%ulariies. ,ill E1<75F also $oun( 0a
==H o$ 67 $ailures (urin% 1<6;6 7 . *ere (ue o i'proper loans8
(e$al2aions8 e'+eCCle'en an( 'anipulaion.

A0e se2on( +roa( 2ae%ory o$ +an" ris"s is 'ar"e ris"s. A0is a"es any
$or's. A0ey 2o'prise all eBposures in +an" operaions in 0e 'ar"e
pla2e 0a su+3e2 0e +an" o 0e prospe2 o$ loss an( 0en2e o 0e
*ea"enin% 2apial resour2es.

A22or(in% o #*an"*o E1<=<F8 i is 0e pervasiveness o$ 0ese ris"s an(
$ailure o$ 0e 'ar"e o e$$e2ively 2onrol 0e' 0a eBplains *0y +an"s
are 'ore 0eavily re%ulae( $ro' 2ra(le o %rave 0an any o0er
2o''er2ial or in(usrial un(era"in%. Al0ou%08 i is e'p0asiCe( 0a
0e uli'ae responsi+iliy $or evaluain% ris"s an( $or sein% li'is
2o''ensurae o a +an"Ks $inan2ial sren%08 resi(es *i0 +an"
'ana%e'en8 i is o+serve( 0a *i0ou re%ulaion8 an un(ue per2ena%e
o$ $inan2ial insiuions are li"ely o a"e PeB2essive ris"sP. ,o*ever8
(espie re%ulaion8 an( parly resulin% $ro' 0e 2oss o$ re%ulaion8 ris"s
0ave in2rease( as +an"s innovae( aroun( 0e 2onrol 0rou%0 a series o$
o$$6+alan2e s0ee oals8 ris"s in2rease(.
AaBono'y o$ +an"in% ris"s is as $ollo*s4
T.<&' Sour&
1. Con$i(en2e !oss o$ 2on$i(en2e on 0e +an" +y
(eposiors8 0e %eneral pu+li2 an(
0e re%ulaory au0oriy.
:. !i-ui(iy Fauly +alan2e s0ee8 $inan2in%
'is'a20es8 20an%es in asses
>. Frau( A0e$8 (e$al2aion8 $or%ery8 an(
.. Cre(i De$aul or (elay in $ul$ill'en o$
5. Ineres Rae Mis'a20es +e*een ineres
sensiive asses an( ineres sensiive
6. Earnin% or &ro$is C0an%es in operain% eBpenses an(
ineres raes8 eB2ess o$ eBpenses
over in2o'e.
7. Operaion Operain% errors8 ine$$i2ien2y8 $auly
2onrol pro2e(ure.
=. Inves'en C0an%es in ineres rae an( 20an%es
in asse pri2es.
<. Curren2y or
Forei%n EB20an%e
Spe2ulaion8 'is'a20es in $orei%n
eB20an%e eBposure.
1;. Fun(in% Ina+iliy o pur20ase $un(s or
o0er*ise o+ain $un(s o 'ee
o+li%aions as 0ey $all (ue 6a $or'
o$ li-ui(iy an( inves'en ris"s.
11. Counerpary De$aul or (elay +y 2ounerpary i.e.
relae( or a$$iliae( pary o 0onour
o+li%aions as 0ey $all (ue.
1:. Counry Failure or (elay +y a 2ounry o
0onour o+li%aions as 0ey $all (ue.
1>. Soverei%n Ina+iliy o a"e a2ion or o+ain
re(ress *0en a 2ounry (e$auls
o*in% o soverei%n i''uniy.
1.. Insure( Arisin% $ro' eB2ess 2lauses or
insure( ris"s8 ris"s no 2overe( +y
15. Re%ulaory Arisin% $ro' violaions8 or su((en
i'posiion o$ la*s an( re%ulaory
16. O$$6+alan2e s0ee Arisin% $ro' operaions 0a (o no
s0o* in +alan2e s0ee

04/ R!', M$n$-&(&nt Po%!. $nd Str$t&-.
As in o0er areas o$ +an" operaions8 an e$$e2ive 'ana%e'en o$
+an"in% ris"s re-uires a *ell6ari2ulae( ris" 'ana%e'en poli2y an(
srae%y. Su''ariCe( in PGui(elines $or Ris" Mana%e'en in 0e
Ban"P8 su20 a poli2y assiss +an" 'ana%e'en o 0in" 0rou%0 0e
oaliy as a$$e2in% 0e +an" as a 2orporae eniy ra0er 0an as
in(ivi(ual ris"s a$$e2in% separae (epar'ens an( unis o$ 0e +an"8
assi%n responsi+iliies8 an( esa+lis0 0e 'a20inery $or i'ple'enaion8
appraisal an( revie*.

A0e poli2y s0oul( +e in 0ree se2ions4 o+3e2ive 2rieria8 srae%y8 an(
pro2e(ures. A0e o+3e2ive 2rieria se2ion s0oul( spe2i$y 0e o+3e2ives
o$ ris" 'ana%e'en in 0e +an"8 i(eni$y 0e ypes o$ ris"s in all 0e
+an"Ks operaions +o0 on an( o$$6+alan2e s0ee8 an( 0eir i'pli2aions
an( spe2i$y responsi+iliy $or 'ana%in% 0e ris"s. As usual8 *0ile 0e
overall responsi+iliy resi(es *i0 0e +oar(8 0e responsi+iliies $or loan
an( inves'en por$olio in pari2ular8 s0oul( +e e'p0asiCe(.
A$er i(eni$yin%8 assessin% 0e i'pli2aions an( assi%nin%
responsi+iliy8 0e neB sa%e *ill +e srae%y o +e a(ope(. A0ree
srae%ies 'ay +e i(eni$ie(4 ris" prevenion an( loss re(u2ion8 ris"
rans$er an( ris" reenion.
&revenion re$ers o 'easures o preven 0e o22urren2e o$ 0e ris"s
*0ile loss re(u2ion re$ers o 'easure o 'ini'iCe 0e loss a$er 0e
ris"s 0ave o22urre(. Ris"s rans$er re$ers o 'easure o rans$er 0e ris"s
or loss $ro' one o ano0er a%en2y 0rou%08 $or insan2e insuran2e or
%uaranees. Reenion8 on 0e o0er 0an(8 2an +e re%ar(e( as a $or' o$
sel$6insuran2e. In %eneral all 0e 0ree approa20es are a(ope( o%e0er.
Ris"s 2anno +e oally avoi(e( in +an"in%8 as in li$e. #o e$$or8 no
'aer 0o* e$$e2ive8 o 'ini'iCe 0e loss 2an oally era(i2ae i.
Si'ilarly8 so'e loss 'us +e reaine( in 0e insiuion +e2ause no all
ris"s are rans$era+leJ an( insuran2e an( %uaranee are only li'ie( in
0e a'ouns 0ey 2over. In spe2i$yin% 0e srae%y8 a revie* o$ ea20
(epar'enKs operain% poli2ies an( 0eir (aily i'ple'enaion s0oul( +e
'a(e o $in( ou i$ 0ey a(e-uaely 2over ea20 $or' o$ ris" eBposure an(
*0a 20an%es in 0e poli2ies an( operain% pro2e(ure are ne2essary o
'ore $ully respon( o ea20 (epar'enKs ris" eBposure.
,avin% spe2i$ie( 0e srae%y8 0e neB sa%e is o spe2i$y 0e pro2e(ure
$or i'ple'enaion8 appraisal an( revie*. Maers o e'p0asiCe $or 0is
purpose in2lu(e a 2o'paraive assess'en o$ ris" 'ana%e'en poli2ies
an( srae%ies an( 0eir (aily i'ple'enaion a2ross all (epar'ens o
'a"e sure 0ere is uni$or'iy an( 2onsensus $or 0e +an" as a *0ole an(
o ensure a(e-uae 2o6 or(inaion a2ross all (epar'ens. A0e o+3e2ive
is o 'a"e sure 0a 0e poli2ies an( srae%ies in all 0e (epar'ens are
0arnesse( an( *or" o%e0er an( 0a poli2ies an( pro2e(ures in one
(epar'en (o no eBpose o0er (epar'ens o a((iional or
unani2ipae( ris"s. In esa+lis0in% 0e ne2essary 'a20inery $or
i'ple'enaion8 approval an( revie*8 'ana%e'en 'us analyCe 0e
+an"sK responses o 0e various ypes o$ ris" srae%ies 6 s0or er' as
*ell as lon% ran%e an( sais$y isel$ 0a 0e responses o various ypes o$
ris"s are 2onsisen *i0 +an"Ks 2urren plan an( plannin% pro2ess8 an(
*i0 0e overall 2orporae srae%y o$ 0e +an".
A0is uni esa+lis0e( various ypes o$ ris"s as re$le2e( in 0e ris"
aBono'y. Dou also 0a( (is2ussion on various srae%ies on poli2ies
$or'ulaion $or ris" 'ana%e'en in +an"in% in(usry.
In su''ary8 0e unis $o2use( 0o* o 'ana%e ris" in +an"in% in(usry
+y a(opin% 0e %ui(elines $or ris" 'ana%e'en in +an" *0i20 en0an2e
+an" o 0in" a+ou is operaion an( 0e ris"s e'+e((e(. A0e uni
$o2use( on 0ree se2ions o$ poli2y na'ely o+3e2ive 2rieria8 srae%y
an( pro2e(ures.
Brie$ly (is2uss 0o* e$$e2ively an( e$$i2ienly ris" s0oul( +e 'ana%e(
in +an"in% in(usryO
#*an"*o8 G. O. E1<<1F. Bank Management (Principle and Practice).
U.7. OB$or(4 Mal0ouse &u+lis0in% !(.
1.; Inro(u2ion
:.; O+3e2ives
>.; Main Conen
>.1 Ris" Analysis
>.: Cre(i Invesi%aion
>.> Se2uriy Analysis
..; Con2lusion
5.; Su''ary
6.; Auor6Mar"e( Assi%n'en
7.; Re$eren2es/Fur0er Rea(in%s
A0is is a loan $un2ion 0a is +asi2 o 'ini'iCin% loan losses. A0rou%0
ris" analysis 0e +an" ae'ps o (eer'ine 0e a+iliy o$ 0e +orro*er
o repay le%ii'ae loans eBen(e( o 0i'. By re$usin% 2re(i o a
poenial +orro*er *0ose analysis reveals insu$$i2ien $inan2ial sren%08
0e +an" 0opes o i'prove on is 20an2es o avoi( unne2essary losses in
is por$olio.
By 0e en( o$ 0is uni8 you s0oul( +e a+le o4
• apply srae%y $or ris" analysis
• %ui(e +an" o$$i2er on ris" analysis
• invesi%ae 2re(i.
041 R!', An$%.'!'
In vie* o$ 0e ris"s in0eren in +an" len(in% an( nee( o 'ini'iCe or
2urail 0e ris"s Esin2e 0ey 2anno +e enirely avoi(e(F8 an( in vie* o$
0e nee( $or li-ui(iy an( pro$ia+iliy 2onsisen *i0 sa$ey an(
re%ulaory 2onsrains8 0e 2enral issue in 'ana%in% 0e len(in%
por$olio is +alan2in% 0e poenial ris"s *i0 reurns. A0is involves
2re(i analysis. A0e +orro*erKs a+iliy o repay 0e loan 0as o +e
(eer'ine(4 0is involves $a'iliariy *i0 0e ype o$ len(in% an( 0e
e2ono'i2 a2iviy involve( 6*0e0er a%ri2ulure8 'anu$a2urin%8 real
esae or resi(enial 0ousin%. A0e +orro*erKs 2apa2iy an( 2apial 0ave o
+e assesse(J 0ese re-uire $inan2ial sae'en an( se2uriy analysis o
pro3e2 0e in2o'e an( 2as0 $lo*s8 assess 0e sour2e o$ repay'en an(
0e e2ono'i2 an( e20ni2al $easi+iliy o$ 0e pro3e2. I also re-uires 0e
assess'en an( $ore2as o$ 0e e2ono'i2 an( polii2al environ'en o
as2erain *0e0er8 even i$ 0e proposiion is pro$ia+le no* i is li"ely o
2oninue o +e pro$ia+le a leas unil 0e loan is $ully pai(.
Basi2ally 2re(i analysis is 0e pro2ess o$ assessin% 0e ris" o$ len(in% o
a +usiness or in(ivi(ual a%ains 0e +ene$is o a22rue $ro' 0e loan. A0e
+ene$is 2an +e (ire28 su20 as ineres earnin%s an( possi+ly (eposi
+alan2es re-uire( as a 2on(iion o$ 0e loanJ or in(ire28 su20 as
iniiaion or 'ainenan2e o$ a relaions0ip *i0 0e +orro*er *0i20
provi(e 0e +an" *i0 in2rease( (eposis an( *i0 (e'an( $or a variey
o$ +an" servi2es.
Cre(i ris" assess'en 0as *o aspe2s. One is -ualiaive8 an( %enerally
0e 'ore (i$$i2ulJ an( 0e o0er is -uaniaive. Ao evaluae 0e
-ualiaive ris"8 0e loan o$$i2er 0as o %a0er an( appraise in$or'aion
on 0e +orro*erK re2or( o$ $inan2ial responsi+iliy8 (eer'ine 0is rue or
2orre2 nee( $or +orro*in%8 i(eni$y 0e ris"s $a2in% 0e +orro*erKs
+usiness un(er 2urren an( prospe2ive e2ono'i2 an( polii2al siuaions
an( esi'ae 0e (e%ree o$ 0is 2o''i'en re%ar(in% 0e repay'en.
A0e -uaniaive assess'en is 'u20 si'plerJ i 2onsiss o$ 0e analysis
o$ 0isori2al $inan2ial (aa an( 0e pro3e2ion o$ $uure $inan2ial resuls
o evaluae 0e +orro*erKs 2apa2iy $or i'ely repay'en o$ 0e loan an(
in(ee(8 0e a+iliy o $inan2ially survive possi+le in(usry an( e2ono'i2
04/ Cr&d!t In+&'t!-$t!on
A0is is an ine%ral par o$ 2re(i an( ris" 'ana%e'en. A0e purpose o$
2re(i invesi%aion is o a2-uire enou%0 in$or'aion a+ou 0e appli2an
o (eer'ine or assess 0is *illin%ness an( 2apa2iy o servi2e 0e loan8 i$
'a(e in a22or(an2e *i0 0e er's o$ 0e loan a%ree'en. I ena+les 0e
+an" o (eer'ine 0e (e%ree o$ ris" 0e is *illin% o assu'e8 an( 0e
a'oun o$ 2re(i 0a 2an +e pru(enly eBen(e(8 %iven 0e ris"s
involve(8 an( 0e er's an( 2on(iions $or 'a"in% 0e loan. I is8 in
o0er *or(s (esi%ne( o (eer'ine 0e +orro*erKs 2re(i *or0iness.
Ban"s nor'ally 2onsi(er siB $a2ors $or 0is purpose. A0ese are 0e $ive
Cs 2re(i invesi%aion plus 'ana%e'en. A0ese are 20ara2er8 2apa2iy8
2apial8 2ollaeral8 2on(iions an( 'ana%e'en. Ban"s are inerese( no
only in 0e +orro*erKs a+iliy o repay 0e loan +u also8 in 0is le%al
2apa2iy o +orro*. Fe* loans are 'a(e o a 'inor or in$an an( 0ese
are only un(er eB2epional or spe2ial 2on(iions6 sin2e 0ey 2an
(isa$$ir' or (iso*n 0e o+li%aion laer unless 0e pro2ee(s o$ 0e loan
are use( $or essenial purposes in 0e 'inor or in$anKs ineres. In 0e
$e* eB2epions *0en su20 loans are 'a(e8 +an"s8 in or(er o proe2
0e'selves8 usually insis on 0e 2o6si%naure o$ a paren or %uar(ian o$
le%al a%e.
I$ 0e +orro*er is a parners0ip or a 2orporaion8 i is a(visa+le o inspe2
0e parners0ip a%ree'en or 0e ari2le o$ 'e'oran(u' o$ asso2iaion
o as2erain 0e 2apa2iy o +orro* an( o ensure 0a 0ose si%nin% 0ave
0e 2apa2iy o 2o''i 0e +orro*er o 0e loan. Ban"s also insis on a
resoluion +y 0e parners0ip or 2orporae +o(y o +orro*J an( 0ey 'ay
$in( i a(visa+le even 0en o 'a"e 0e loan unless 2erain o0er
2re(iors o$ 0e +orro*er a%ree o su+or(inae 0eir 2lai's o 0a o$ 0e
C0ara2er is (i$$i2ul o evaluae. I re$ers o ari+ues o$ 0onesy8
ine%riy8 in(usry an( 'oraliy. As i relaes o 0e 2re(i ransa2ions8 i
'eans no only 0e *illin%ness +u also a sron% (esire o repay 0e (e+
an( 0onour all 0e o+li%aions un(er 0e loan 2onra2. A0is is usually
reveale( 0rou%0 0ree 20annels4 $a2e o $a2e inervie*J an eBa'inaion
o$ 0is pas re2or(s an( 20ara2er re$eren2es. A0is is *0ere personal
"no*le(%e proves very 0elp$ul. Sin2e 0is is no al*ays possi+le8 0e
analysis $or 20ara2er 0in%es on 0e +orro*erKs e2ono'i2 an( $inan2ial
pro$ile8 0e o+3e2ive +ein% o (eer'ine *0e0er 0e +orro*er is a %oo(
2iiCen o +e ruse( *i0 0e loan an( 0e o+li%aion o 0onour 0e er's
o$ 0e loan a%ree'en.
E-ually i'poran is 0e +orro*erKs 2apa2iy o o+ain 0e $un(s *i0
*0i20 o e$$e2 repay'en. I$ pay'en is o 2o'e $ro' earnin%s8 su20
earnin%s 'us +e su$$i2ien $or 0e repay'ens o$ prin2ipal an( ineres.
Ban"s usually insis on 0e pri'ary sour2e o$ repay'en 2o'in% $ro'
earnin%s8 (erive( $ro' 0e 2as0 $lo* o$ 0e +orro*erKs +usiness. A0ey
o+3e2 o $ore2losure or li-ui(aion o$ 2ollaeral o repay as 0is is i'e
2onsu'in%8 involves a 2osly pro2ess8 an( a any rae (a'a%e 0e +an"Ms
pu+li2 relaions. Unless 2one'plae( a 0e ne%oiain% sa%e8 +an"s
also $ro*n a%ains repay'en *i0 $un(s raise( $ro' sale o$ asses or
+orro*e( $un(s $ro' ano0er +an" or insiuion unless a $ir'
2o''i'en *i0 0e insiuion eBiss. Cir2u'san2es 'ay 20an%e an(
'a"e 0ese o0er sour2es unrelia+le. I$ 0e $ir' (oes no pro(u2e
ara2ive pro$is8 0e 'ar"e re2epion $or 0e s0are $loaion 'ay +e
*i00el( or prove( (i$$i2ul.
040 S&ur!t. An$%.'!'
A0e essen2e o$ 0e $inan2ial sae'en analysis is o esa+lis0 0a8 all
0in%s +ein% e-ual8 0e loan *ill +e sa$e8 properly use( an( repai( on
s20e(ule. Bu 0is is a %a'+le in 0e $uure. All 0in%s 'ay no +e e-ual
an( 0in%s 'ay %o *ron% su20 0a 0e +asis an( opi'is' esa+lis0e(
an( eBpe2e( (o no 'aerialiCe. A0is *0y 0e +an"er s0oul( no +e le$
un2overe(. ,e 'us as" $or an( a"e a(e-uae 2ollaeral se2uriies as a
'ani$esaion o$ 2uso'erKs 2on$i(en2e in 0is o*n pro3e2 an( as
so'e0in% upon *0i20 0e +an"er 2an $all i$ 0in%s %o *ron% an(
eBpe2e( resuls are no a20ieve(. In 0is 2onne2ion8 i 'us +e
e'p0asiCe( 0a 0e +an"er is len(in% o0er peopleKs 'oney an(
0ere$ore 'us 0ave so'e0in% in reurn o s0o* $or i. A0e ypes o$
se2uriy as"e( $or an( 0e valuaion pla2e( on i (epen(s on 0e naure
an( 2ir2u'san2es o$ 0e loan an( o$ 0e 2uso'er. In 0is 2onne2ion
$e* poins s0oul( +e sresse( on se2uriy analysis as $ollo*s4
A0e $irs is 0a 2ollaeral s0oul( +e a"enJ se2on(ly8 0is s0oul( 2o'e
a$er 0e e20ni2al an( e2ono'i2 $easi+iliy as *ell as 0e pro$ia+iliy o$
0e pro3e2 0as +een esa+lis0e( an( no +e$ore. A0ir(ly8 0e 2ollaeral
se2uriy nee( no al*ays +e in a an%i+le $or'. In(ee( in so'e 2ases
ine%riy 2an +e 0e 'os valua+le an( i'poran se2uriy E0e so62alle(
unse2ure( loans are a$er all really se2ure( +y 0e +orro*erKs ine%riyF.
Finally8 0e se2uriy 'us +e (eposie( or a"en +e$ore (ra*n (o*n 6no
only a"en8 +u properly per$e2e(.
A0is uni esa+lis0e( various ris"s 0a is aa20e( *i0 2re(i
a('inisraion in +an"in% in(usry. I also (is2usse( se2uriy analysis.
In su''ary8 0e uni8 $o2use( on ris"s 0a e'+e((e( in len(in%
a2iviies o$ +an". I $ur0er a(vise( +an"in% o$$i2ers on 0o* o
invesi%ae 2re(i*or0iness o$ 0e poenial +orro*ers +e$ore loan
approval. In a((iional8 0e uni e'p0asiCe( 0e use o$ 5Cs o$ 2re(i
1. Sae an( (is2uss various sour2es o$ ris"s in +an"sO
:. W0a (o you un(ersan( +y 2re(i invesi%aion analysisO
#*an"*o8 G. O. E1<<1F. Bank Management (Principle and Practice).
U.7. OB$or(4 Mal0ouse &u+lis0in% !(.
1.; Inro(u2ion
:.; O+3e2ives
>.; Main Conen
>.1 In(i2aors $or Measurin% Ban"in% Ris"s
>.: &ro2e(ures $or Ris" Conrol
>.:.1 Ris" Avoi(an2e an( Mini'iCaion
>.:.: Ris" Arans$er Srae%y
>.:.> Ris" Reenion
..; Con2lusion
5.; Su''ary
6.; Auor6Mar"e( Assi%n'en
7.; Re$eren2es/Fur0er Rea(in%s
,avin% i(eni$ie( an( analyCe( 0e ris"s8 in 0is uni *e s0all 'easure or
assess ris". Be2ause ris" relae o evens 0a 'ay o22ur in 0e $uure8
a22urae or eBa2 'easure'en is no possi+le. Besi(es8 no all o$ 0e
ris"s are a'ena+le o -uaniaive assess'en8 or 'easure'en. Even
*0ere 0ey 2an +e raionaliCe(8 0e raios are su+3e2 o serious
reservaions. W0a 0ere$ore is re-uire( is so'e in(i2aion o$ 0e
pro+a+iliy an( eBen o$ 0e ris"s8 *0e0er -uaniaively8 as a %ui(e or
ri%%er $a2ors $or +an" 'ana%e'en in is e$$ors o 2onrol ris"s8
'ini'iCe 0e'8 'aBi'iCe pro$ia+iliy an( sa$ey 2onsisen *i0
pru(enial an( re%ulaory 2onsrains.
A 0e en( o$ 0is uni8 you *ill +e a+le o4
• i(eni$y in(i2aors $or 'easurin% +an"in% ris"s
• pro(u2e ris" 2onrol pro2e(ures.
041 Ind!$tor' 2or M&$'ur!n- B$n,!n- R!','
1. Failure ris" or (e$auls G 2an +e in(i2ae( +y 0e raio o$ a +an"Ks
so2" pri2e o is annual earnin%s per s0are8 or +y raios o$ ne
*or0 o oal asses8 oal lia+iliies an( oal (eposis. A (e2line
in 0ese raios6un(er6$un(in% or un(er62apialiCaion an(
0ere$ore in2rease( ris"s in relaion o 0e volu'e o$ +usiness
un(era"en. Ano0er 'easure is 0e raio o$ pur20ase( $un(s
'aurin% in one year o oal lia+iliies (ue in one year. An
in2rease in 0e raio en(s o in(i2ae in2rease( ris" eBposure8
*0ile 0e lo*er 0e raio8 0e less is 0e ris" eBposure.
:. li-ui(iy ris" 2an +e in(i2ae( an( 'easure( +y 0e raio o$ oal
2as0 asses o oal assesJ 2as0 asses plus %overn'en se2uriies
o oal assesJ oal loan o oal assesJ 2ore (eposis o oal
lia+iliiesJ pur20ase( $un(s o oal assesJ an( $inally $orei%n
+ran20 lia+iliies an( oal asses. An in2rease in 0e raio en(s o
in(i2ae (e2rease( ris" eBposure8 *0ile 0e lo*er 0e raio8 0e
0i%0er is 0e ris" eBposure.
>. Ineres Rae Ris" G 0e 'os *i(ely use( 'easures in2lu(e 0e
raio o$ ineres sensiive asses o ineres sensiive lia+iliies8
'oney 'ar"e asses over 'oney 'ar"e lia+iliies8 uninsure(
(eposis over oal (eposis an( asses 'aurin% *i0in one year
over lia+iliies (ue in one year. An in2rease in 0ese raios
in(i2aes in2rease( ineres rae eBposure. In pari2ular i$ ineres
sensiive6asses eB2ee( ineres sensiive lia+iliies in a pari2ular
'auriy la((er8 0e +an" *oul( +e vulnera+le o loss i$ ineres
raes $alls8 an( i$ ineres sensiive lia+iliies eB2ee( sensiive
asses8 0e +an" *oul( +e vulnera+le o loss $ro' in2reases in
ineres raes.
.. Earnin% Ris" 60is 2oul( +e 'easure( as4
• varian2e o$ ne in2o'e +e$ore or a$er aBes over so'e (esi%nae(
perio( say 0ree or $ive years
• varian2e o$ reurn on e-uiy EROEF or reurn on asses EROAF over a
(esi%nae( perio(.
5. Frau( Ris" 60is 0as o (o *i04
• -ualiy o$ se2uriy 'easures8
• Mana%e'en 2onrol syse's
• inernal au(i
• insuran2e8 an(
• Operain% pro2e(ure.

6. Con$i(en2e Ris" G 0is is a $un2ion o$ 0e +an"s in 0e $ollo*in%
• li-ui(iy
• 2apial a(e-ua2y
• earnin%s8
• 'ar"e rain%8
• re%ar( +y re%ulaory au0oriies
7. Forei%n EB20an%e/Curren2y Ris" G 0ese 2on2erns4
• 2urren2y 'is'a20
• ineres rae 'is'a208
• eB20an%e rae 'is'a208
• sele'en (aes8 an(
• Counerpary o+li%aions.
=. Counry Ris" G eBposure over e-uiy an( provisions8 also
$un2ion o$ (e+or 2ounryMs
• overall (e+J is sprea( an( is 2on2enraion
• De+ servi2in% 2apa2iy8
• e2ono'i2 prospe2s8
• (e+ +ur(en
• &olii2al sa+iliy8
• 20ara2er o$ %overn'en
• 2re(iors %overn'en suppor8
• 'ulilaeral (evelop'en +an"s e. %. IMF8 Worl( +an"
• 2re(ior Cenral Ban"Ks poli2ies.
04/ Pro&dur&' 2or R!', Contro%
I(eni$yin% an( 'easurin% +an"in% ris"s are only 0e preli'inary seps
in 'ana%in% an( 2onrollin% ris"s in +an"in%. A0e neB essenial sep is
0e srae%y. Mana%e'en 'us spe2i$y *0a srae%y +es 'ees 0e
o+3e2ives o$ is ris" 'ana%e'en an( 2onrol. A0ree srae%ies 'ay +e
i(eni$ie(. One srae%y is o ae'p o preven 0e ris"s $ro' o22urrin%
an( 0avin% o22urre( o 'ini'iCe 0e loss. Ano0er is o a(op 'easure
o rans$er 0e ris" o so'e eBernal a%en2y an( 0e 0ir( is o assu'e
an( reain 0e ris".
04/41 R!', A+o!d$n& $nd M!n!(!E$t!on
Ban"s 'a"e 2onsi(era+le use o$ 0e avoi(an2e srae%y in 0eir
operaions. Bo0 0eir asses +ase( an( lia+iliy +ase( approa20es o
+alan2e s0ee 'ana%e'en are (esi%ne( o avoi( an( 'ini'iCe ris"s in
+an" $un(s 'ana%e'en. Ban"s are prepare( o 'a20 in2rease( 2re(i
ris" *i0 0i%0er reurns only *i0in narro* li'is. A0ey *oul(8 in $a2
pre$er no o ou20 'e(iu' len(in% a all. In 'any 2ases 0is ris"
avoi(an2e an( 'ini'iCaion srae%y is rein$or2e( +y re%ulaory
pro0i+iions 0rou%0 'oral suasion an( o0er sipulaions 0a li'i 0e
s2ale o$ pari2ular +alan2e s0ee a2iviies su20 as 2urren2y an( ineres
rae s*aps an( opions an( o0er 0e(%in% (evi2es are a'on% 0e
'e0o(s +an"s use o avoi( an( 'ini'iCe ris"s
04/4/ R!', Tr$n'2&r Str$t&-.
#o a'oun o$ avoi(an2e an( 'ini'iCaion 'easures8 no 'aer 0o*
2o'pre0ensive an( e$$e2ive8 2an 2o'pleely era(i2ae ris"s. W0aever
+an" 'ana%e'en (oes8 so'e ris"s 'us re'ain. One srae%y o
a((ress 0ese re'ainin% ris"s is o rans$er 0e' o an eBernal a%en2yJ
$or insan2e8 an insuran2e insiuion. A0is re-uires 0a 0e 2os an(
+ene$is o$ 0e rans$er s0oul( +e 2are$ully *ei%0e( in er's o$
$easi+iliy8 pra2i2a+iliy an( 0e insuran2e pre'iu'. ,o*ever *0ile
so'e ris"s are insura+le8 su20 as 0e$8 $rau( $ire8 e2.8 so'e are no
insura+le8 su20 as ris"s arisin% $ro' 20an%es $ro' ineres an( eB20an%e
raes. Besi(es8 KeB2ess 2lausesK i'ply 0a 0ere are li'is o 0e
insuran2e 2overa%e even $or 0e insura+le ris"s. A0ese 'ar%ins an( 0e
insuran2e pre'iu' 0ave o +e a"en ino 2onsi(eraion in 0e (e2ision o
rans$er ris"s o an insuran2e a%en2y.
Insuran2e8 0o*ever8 is no 0e only $or' o$ rans$er. Colle2ive
%uaranees an( %uaranees o$ %overn'ens an( 0eir a%en2ies are o0er
possi+iliies. In 0e *a"e o$ 0e 0i%0 (e+ pro+le's o$ 0e 0ir( *orl(
2ounries sin2e 0e ei%0ies8 'any inernaional +an"s no* (e'an(
%uaranee o$ 2re(ior %overn'ens an( 0e un(erpinnin% o$ "ey
inernaional $inan2ial insiuions8 0e Inernaional Moneary Fun( an(
0e Worl( Ban"8 as a 2on(iion $or ne* len(in% o (evelopin% 2ounries.
Even 0ere8 0ere are li'iaions. I is (i$$i2ul o pre(i2 a 2olle2ive
%uaranee 2overin% 0e enire operaions o$ 0e +an"s. Guaranees are
usually li'ie( o so'e pari2ular se2ions o$ 0e operaions. An
eBa'ple is a loan %uaranee. W0ile so'e %overn'ens papers e.%.
reasury +ills an( %overn'en +on(s 0ave i'pli2i %uaranees8
%overn'ens rarely %uaranee enire operaions.
04/40 R!', R&t&nt!on
I$ ris" avoi(an2e 'easures 2anno preven or avoi( all ris"s8 an( i$ no
all ris"s are rans$era+le8 i $ollo*s 0a so'e ris"s 'us re'ain an(
+an" 'ana%e'en 'us (evise a srae%y or srae%ies o a((ress 0e
re'ainin% ris"s. One su20 srae%y is ris" assu'pion. A0e +an" assu'es
0ose 0a 2anno +e avoi(e(. Ris" assu'pion or reenion is a $or' o$
sel$ insuran2e. A0e insuran2e $un( is 0e ne*or0 an( in2o'es earne(
on 2urren operaions *0i20 serve as 0e insuran2e pre'iu' re-uire( o
"eep 0e ne*or0 a an a(e-uae level.One *ay o$ 2ourse o a((ress
assu'e( ris"s is 0rou%0 ineres 'ar%in 20ar%e( on operaions an(
(esi%ne( o 2over operain% eBpenses an( so'e losses. ,o*ever8 over
an( a+ove nor'al losses8 a+nor'al losses 2an o22ur in +an" operaions
resulin% in re(u2e( pro$is or even lar%e losses. A22or(in%ly8 a(e-uae
2apial +a2"in% is in(ispensa+ly i'poran.
In 0is uni our (is2ussion $o2use( on various in(i2aors o$ +an" ris"s as
*ell as 2onrol 'easures e20ni-ues. I $ollo*s 0ere$ore 0a various
in(i2aors an( srae%ies e'ploye( in +an"s 2oul( +e use( as %ui(es
o*ar(s len(er assess'en8 as *ell as or%aniCaion an( a('inisraion o$
In 0e 2ourse o$ 0is su(y8 *e *ere a+le o analyCe 'easure'ens o$
so'e ris" in(i2aors a'on% *0i20 are4 $ailure ris"s8 li-ui(iy ris"8
ineres rae ris"8 earnin% ris"8 e2. 0e su(y also 2overe( so'e o$ 0e
srae%ies *0i20 2oul( +e use( o 'ana%e ris"s in +an"s a'on% *0i20
in2lu(e4 ris" avoi(an2e an( 'ini'iCaionJ ris" rans$erJ an( $inally8 ris"
1. Dis2uss8 various in(i2aors $or 'easurin% +an" ris"s in #i%eriaO
:. Brie$ly sae an( (is2uss 0ree srae%ies $or +an" ris" 2onrolO
#*an"*o8 G. O. E1<<1F. Bank Management (Principle and Practice).
U.7. OB$or( Mal0ouse &u+lis0in% !(
Uni 1 Mana%in% 0e !en(in% &or$olio
Uni : Mana%in% In(ivi(uals Ris"
Uni > !en(in% &rin2iples an( Business Borro*ers
Uni . Ban" Cre(i Or%aniCaion
Uni 5 Areasury Mana%e'en
1.; Inro(u2ion
:.; O+3e2ives
>.; Main Conen
>.1 !en(in% &oli2ies Crieria
>.: An Ari2ulae( !en(in% &oli2y
>.> Fa2ors in !oan &oli2y For'ulaion
>.. AaBono'y o$ an Ari2ulae( !en(in% &oli2y
..; Con2lusion
5.; Su''ary
6.; Auor6Mar"e( Assi%n'en
7.; Re$eren2es/Fur0er Rea(in%s
Co''er2ial +an"s are %eneral all purpose reail +an"ers. A0ey 'o+iliCe
(eposis $ro' all an( sun(ry in reail as *ell as in *0olesale 'ar"es.
A0ey len( o all an( sun(ry8 +o0 *0olesale an( reail an( $or all
purposes. In 0is *ay8 0ey (i$$er $ro' 'any o0er $inan2ial
iner'e(iaries8 'os o$ *0o' spe2ialiCe in pari2ular loan or (eposi
'ar"es an( pari2ular e2ono'i2 se2ors. A0e 2o''er2ial +an"sM
len(in% is 'ore (iverse an( 0e 2rieria are 'ore 2o'pleB.
A 0e en( o$ 0is uni8 you s0oul( +e a+le o4
• (is2uss len(in% poli2y 2rieria
• (es2ri+e ari2ulae( len(in% poli2y
• sae $a2ors in loan $or'ulaion
• eBplain aBono'y o$ ari2ulae( len(in% poli2y.
041 L&nd!n- Po%!!&' Cr!t&r!$
!i"e o0er ie's in 0e +alan2e s0eeG2apial8 reserves8 inves'ens e2.8
0e i'poran2e o$ 0e loan por$olio (erives $ro' 0e $un2ions len(in%
per$or's $or +an"s. I is $or insan2e 0e 0i%0es earnin% asse in 0e
+an" +alan2e s0ee. I 2onri+ues 'aerially o 0e +an"Ks a20ieve'en
an( $ul$ill'en o$ 0e o+3e2ives o$ pro$ia+iliy +y provi(in% 0i%0er
reurn 0an o0er $inan2ial asses. I 0elps +an" 'ana%e'en o sais$y
0e le%al an( o0er re%ulaory o+3e2ives o$ 0e 'oneary au0oriies. I is
a "ey ele'en in 0e 2reaion an( 'ainenan2e o$ (eposior
relaions0ips8 pari2ularly *i0 +usiness $ir's. I is a ve0i2le 0rou%0
*0i20 +an" 'ana%e'en ae'ps o sais$y 0e 2re(i nee(s o$ 0e
2o''uniy or 0e 2re(i 'ar"es 0e +an" serves or inen(s o serve.
A0e i'poran2e o$ len(in% in +an"in% 2anno +e over e'p0asiCe(. All
0e e20ni2al rainin% a +an"er re2eives is 0eavily %eare( o*ar(s
len(in%. W0en i is sai( 0a one is a %oo( or an asue +an"er8 *0a in
$a2 is 'ean is 0a one is a s0re*( len(er i.e one *0o len(s 'oney
sa$ely an( pro$ia+ly.

W0ile +ein% 0e 0i%0es earnin% asses8 0e loan por$olio is also 0e
'os illi-ui( o$ +an" asses. Al0ou%0 a +an"er 0as 0e sauory ri%0 o
2all in 0e loans a$er 0ree (ays noi2e8 any ae'p o en$or2e 0is 'ay
ei0er +e inerpree( in 0e 'ar"e pla2e as a si%n o$ serious $inan2ial
*ea"nessJ or i 'ay su22ee( only a a 2os o$ 20asin% an( losin% 0e
2uso'er o 0e 2o'peiors8 *0i20 is also 0e 'os ris"y o$ +an"sM
operaion. Ban" loans $inan2e a (iverse lap. Apar $ro' +ein% 0e 'os
illi-ui( asses8 0e len(in% por$olio is %roupin% 0e e2ono'yJ
'anu$a2urers8 $ar'ers8 ra(ers8 pro$essionals8 real esae (evelopers8
in(ivi(uals e2. in 0e pro2ess8 0e +an" in2urs ris"s an( eBperien2es
so'e losses *0en 2erain +orro*ers $ail o repay 0eir loans. Besi(es8
sin2e +an"s +orro* s0or an( len( lon%8 $ailure o repay +an" loans
pre3u(i2es 0e +an"Ks 2apa+iliy o 0onour 0eir o*n o+li%aions.
04/ Art!u%$t&d L&nd!n- Po%!.
!en(in% involves 0e 2reaion an( 'ana%e'en o$ ris" asses an( is an
i'poran as" o$ +an" 'ana%e'en. As in li-ui(iy an( por$olio
'ana%e'en8 e$$e2ive 'ana%e'en o$ 0e len(in% por$olio re-uires an
ari2ulae( len(in% poli2y. A0e poli2y s0oul( se ou 0e +an"sM len(in%
p0ilosop0y an( o+3e2ives in2lu(in% 0e 'o(aliies $or i'ple'enaion8
'oniorin%8 appraisal an( revie*. For 2lariy an( ease o$ 2o''uni2aion
o all 2on2erne(8 0e poli2y s0oul( +e in a *rien $or'.
Sin2e len(in% 'eans a"in% ris"s an( assessin% ris" o$ (e$auls an(
'ove'en in ineres raes8 a *rien poli2y *ill a2 as a si%npos o
%ui(e 'ana%e'en an( len(in% o$$i2ers. Well62on2eive( len(in%
poli2ies an( 2are$ul len(in% pra2i2es are essenial o $a2iliae 0e 2re(i
2reain% $un2ion an( 'ini'iCin% ris" in len(in%. A 2are$ully ari2ulae(
len(in% poli2y is also essenial in ensurin% 0a 0e len(in% an( len(in%
por$olio are in line *i0 0e o+3e2ives an( aspiraions o$ 0e +an"8 o$
0e %overn'en an( o$ 0e 2o''uniy 0e +an" serves or inen(s o
serve. Finally8 a len(in% poli2y is re-uire( +y +an" eBa'iner8 an( 0e
Deposi Insuran2e Fun(8 *0ere one eBiss. I is usually one o$ 0e $irs
ie's 2alle( $or (urin% +an" eBa'inaion an( usually o22upies 'os o$
0e eBa'inerKs i'e. In 'any 2ases8 is -ualiy is a"en as an in(i2aor o$
0e -ualiy o$ 'ana%e'en.
040 F$tor' !n Lo$n Po%!. For(u%$t!on
In $or'ulain% 0e loan poli2y8 +an"s nor'ally a"e a nu'+er o$ $a2ors
ino 2onsi(eraion. One is 0e 2onsrains on len(in%. A0ese are +o0
inernal an( eBernal. A0e inernal 2onsrains in2lu(e 0e +an"Ks 2apial8
is earnin%s is li-ui(iy8 0e siCe8 sru2ure8 'auriy an( volailiy o$ is
(eposis an( 0e -ualiy an( 2o'peen2e o$ is 'ana%e'en. Wi0in
li'is8 0ese inernal 2onsrains are *i0in 0eir 2onrol an( 2an +e
in$luen2e( +y 0e +an". Ban" 2apial8 $or insan2e8 serve as a 2us0ion $or
0e proe2ion o$ (eposis an( is relaion o (eposis in$luen2es 0e
a'oun o$ ris" 0e +an" 2an a$$or( o a"e an( 0e a'oun o$ loans i 2an
2o''i o a sin%le +orro*er or o a %roup o$ relae( +orro*ers. I$ i
*ans o a"e 'ore ris"s an( %ran 'ore loans8 0e +an" 2an in2rease is
2apial $un(s8 su+3e2 o 'ar"e sensiiviy an( re2epiviy.
Sin2e earnin%s supple'en 0e 2apial $un( an( in $a2 2onsiue 0e
prin2ipal 'e0o( o$ in2reasin% ne *or08 all +an"s 2onsi(er earnin% as
an i'poran $a2or in $or'ulain% 0eir loan poli2ies. E'p0asis8 o$
2ourse 'ay (i$$er $ro' +an" o +an". Ban"s 0a e'p0asiCe earnin%s
'i%0 a(op a 'ore a%%ressive len(in% poli2y8 2o''iin% 'ore $un(s
o a lon% er' len(in% or 2onsu'er loans sin2e 0ese earn 0i%0er 0an
s0or er' loans. In 0e pro2ess8 0o*ever8 0e +an" 'ay +e in2reasin% is
ris" eBposure an( 0ere$ore *ill +e su+3e2 o pru(enial li'is.
Ban" also 2onsi(ers 0e sru2ure o$ 0eir (eposis in $or'ulain% 0eir
loan poli2y8 in er's o$ sour2es8 'iB an( volailiy. Ban"s provi(e $or
loan $un(s only a$er provi(in% $or pri'ary an( se2on(ary reserves.
Even a$er 0ese provisions8 +an"s never0eless are usually no
un'in($ul o$ li-ui(iy 2onsi(eraions in allo2ain% 0e loan $un(s o
(i$$eren ypes an( 2ae%ories o$ 0e loan por$olio. A%ain8 +an"s 2an
in$luen2e 0e siCe o$ (eposis 0rou%0 variaions in 0e 2oss 0ey 20ar%e
an( pay on su20 (eposis an( 0rou%0 pur20ase( $un(s +y lia+iliy
'ana%e'en su+3e28 as al*ays8 o 0e li'is o$ pru(en2e8 li-ui(iy an(
Ano0er inernal 2onsrain is 0e e20ni2al 2o'peen2e o$ 'ana%e'en.
Wi0 respe2 o len(in%8 0is re$ers o 0e a+iliy8 e20ni2al "no*le(%e
an( eBperien2e o$ 0e +an"Ks personnel in len(in%. A +an" 'ay 0ave
2o'peen2e in one area e.%. in in(usrial len(in%8 an( lile or none in
say8 2onsu'er or real esae len(in% an( 0ese 'ay +e 0e e'er%in%
0oriCon in len(in%. A +an" *is0in% o 2apialiCe on 0e e'er%in%
opporuniies 2an (e2i(e o up%ra(e or reool 0e len(in% personnel or
+uy 0e ne2essary eBperise in 0e 'ar"e8 su+3e2 o or 2ourse o 0e
2os/reurn 2onsi(eraions.
On 0e o0er 0an( eBernal 2onsrains 2anno +e in$luen2e( +y +an"s
sin2e 0ese are %enerally eBo%enous an( +eyon( 0eir 2onrol. A0e
eBo%enous $a2ors in2lu(e 0e 'a2ro6e2ono'i2 ele'ens in 0e e2ono'y
li"e polii2al an( e2ono'i2 2on(iions8 0e i'pa2 o$ 'oneary an(
$is2al poli2ies8 0e +alan2e o$ pay'ens an( 0e 2re(i nee(s o$ 0e sae
or Cone 0e +an"s serve or inen( o serve. A0ese $or2es in$luen2e
(eposi in$lo*s an( ou$lo*s in 0e loan por$olio. W0ile 0e 'a2ro6
e2ono'i2 $a2ors 'ay 0ave +een $ore2as an( in2orporae( in 0e +an"Ks
overall 2orporae plan8 0e $a2 0a i 2anno +e pre(i2e( *i0
eBa2iu(e 'eans 0ey 2anno +e i%nore( in $or'ulain% 0e loan poli2y.
045 T$1ono(. o2 $n Art!u%$t&d L&nd!n- Po%!.
A. &rea'+le
EaF Re2o%niion o$ 0e $un2ion o$ len(in% in +an"in%4
• 0i%0es earnin% asse8 2ulivaion an( 'ainenan2e o$ 2uso'er
relaions8 a 'eans o$ sais$yin% le%al an( o0er re%ulaions8 ve0i2le
$or sais$yin% le%ii'ae 2re(i nee(s o$ 0e 2o''uniy8 an( 0e 'os
illi-ui( o$ +an" asses.
E+F Re2o%niion o$ nee(s $or a *rien poli2y4
• 2o'pass $or 'ana%e'en an( len(in% o$$i2ers in er's o$
p0ilosop0y8 o+3e2ives an( srae%yJ
• 'e20anis' $or assessin% per$or'an2e.
E2 F $a2ors o 2onsi(er in len(in% poli2y $or'ulaion4
• inernal 2onsrains4 2apial a(e-ua2y8 earnin% li-ui(iy8 siCe8
sru2ure an( 'auriy o$ (eposis an( 0eir volailiy8 2o'peen2e o$
• eBernal 2onsrains 60e 'a2ro6e2ono'i2 environ'en8 polii2al an(
e2ono'i2 2on(iions8 i'pa2 o$ 'oneary an( $is2al poli2ies8
le%ii'ae 2re(i nee(s o$ 0e 2o''uniyJ
• all 0e $a2ors 0a in$luen2e 0e (eposi an( loan in$lo*s an(
• re%ulaory 2onsrains.
B. A0e !en(in% &oli2y
&ar one4 General o+3e2ives an( 2rieria4

• 0e len(in% p0ilosop0y an( 'issionJ
• o+3e2ivesJ "eepin% $un(s $ully invese( pro$ia+ly a all i'es
2onsisen *i0 li-ui(iy8 pro$ia+iliy8 sa$ey an( re%ulaory
• ra(e area o +e serve( 6*0ole 2ounry8 sae or ConeJ
• ypes o$ len(in% an( a2iviy se2ors Eproporion sae(FJ
• -ualiy o$ loans8 2ollaeral re-uire'ens8 a22epa+le an( una22epa+le
loans an( 2ollaerals8 se2ure( an( unse2ure( len(in%.
• Spe2i$i2aion 0a $inal au0oriy an( responsi+iliy resi(es *i0
+oar( o$ (ire2ors
• Reporin%8 appraisal an( revie* 'o(aliies.
&ar A*o4 Ma20inery $or loan an( A('inisraion4
• (ele%aion o$ au0oriy o loan 2o''iees an( loan (epar'enJ
• (e$iniion o$ li'is o$ au0oriy (o*n o loan o$$i2ers8 reporin%
relaions0ips up*ar(s6(o*n*ar(sJ
• in$or'aion an( (o2u'enaion re-uire'ens an( 'e0o(s o$
inerpreaion an( appli2aion
• 'a20inery $or rouine a('inisraion /
6 pri2in% ineres raes8 (ra*6(o*n
6 per$e2ion o$ 2ollaerals8 'oniorin% 2ovenansJ
• 'a20inery $or 0an(lin% pro+le' loansJ
• 'a20inery $or appraisal an( revie*
• 'is2ellaneous ie's 6loans o (ire2ors8 sa$$8 insi(er ransa2ions e2.
• 'oniorin% 2o'plian2e *i0 le%islaive an( o0er re%ulaory
&ar A0ree4 Cre(i Invesi%aion an( Cre(i Analysis4
• o+3e2ive as2erain 2re(i *or0iness o$ +orro*er8 0is 2apa2iy an(
*illin%ness o repay loans as a%ree(8 an( 'aBi'iCe reurns *0ile
'ini'iCin% ris"sJ
• pro2e(ures8 2re(i invesi%aion8 $ive Cs o$ 2re(i analysis6 20ara2er8
2apial8 2apa2iy8 2ollaeral8 2on(iions.
• Mana%e'en 2apa2iy
• Finan2ial sae'en an( se2uriy analysis
• Environ'enal appre2iaion
• )u(%'enal a+iliy
• !oan pa2"a%in%
• A0e loan a%ree'en
• Covenan e2.
In 2on2lusion8 len(in% poli2y 2rieria8 ari2ulae( len(in% poli2y8 $a2ors
in loan $or'ulaion8 an( aBono'y o$ ari2ulae( len(in% poli2y 0ave
+een a+le o e'p0asiCe 0e i'poran2e o$ appropriae len(in% poli2y in
+an"s. A0us 0rou%0 e$$e2ive i'ple'enaion o$ 0e $ore%oin%8 0ere
*ill +e proper 'ana%e'en o$ len(in% por$olio.
A0is uni $o2use( on 0e 'ana%e'en o$ len(in% por$olio 0rou%0
len(in% poli2y 2rieria *0i20 e'p0asiCe( 0a +an"ers 'us len( sa$ely
an( pro$ia+ly 0rou%0 various "in(s o$ rainin%. In a((iion 0is su(y
sae( 0a an ari2ulae( len(in% poli2y is also essenial in ensurin% 0a
0e len(in% an( len(in% por$olio are in line *i0 0e o+3e2ives an(
aspiraions o$ 0e +an"8 o$ 0e %overn'en an( o$ 0e 2o''uniy 0e
+an" serves or inen(s o serve are len(in% 2onsrains an( sru2ure o$
0eir (eposis. Finally8 0e uni s0o*s 0e aBono'y o$ ari2ulae(
len(in% poli2y +y %ivin% 0e $un2ions an( sru2ures.
Brie$ly (is2uss 0o* you 2an 'ana%e len(in% por$olio o$ your +an"O
#*an"*o8 G. O. E1<<1F. Bank Management (Principle and Practice).
U.7. OB$or(4 Mal0ouse &u+lis0in% !(.
1.; Inro(u2ion
:.; O+3e2ives
>.; Main Conen
>.1 Cre(i Ris" an( is Mana%e'en
>.: !i-ui(iy Ris" an( Is Mana%e'en
>.> Ineres Rae Ris" an( Is Mana%e'en
>.. Forei%n Curren2y or EB20an%e Rae Ris" an( Is
>.5 Counry Ris" an( Is Mana%e'en
..; Con2lusion
5.; Su''ary
6.; Auor6Mar"e( Assi%n'en
7.; Re$eren2es/Fur0er Rea(in%s
In 'ana%in% or 2onrollin% in(ivi(ual ris"s8 +an"s re2o%niCe 0a all 0e
0ea(in%s un(er *0i20 ris"s o22ur are 2losely relae(. A0e rae o$
in$laion8 0e level an( 20an%es in ineres raes an( $lu2uaions in
$orei%n eB20an%e raes8 en( o %o o%e0er an( 0ese are sour2es ris"s
un(er 'any 0ea(in%s. In a((ressin% 0ese8 i is also re2o%niCe( 0a *o
$a2ors are 0e 2ore o$ 0e ris"s in er's o$ o22urren2e an( 'a%niu(e.
One is 'is'a20in% 6 *0e0er o$ eBpenses o revenue o$ ineres raes or
2urren2y 'is'a20in%. A0e o0er is 2on2enraion in ypes o$ a2iviy8
se2ors an( re%ions. A0ese *o 2ore $a2ors appear li"e re2urrin%
(e2i'al in ris" 'ana%e'en an( 2onrol.
A 0e en( o$ 0is uni8 you s0oul( +e a+le o4
• eBplain 2re(i ris" an( is 'ana%e'en
• (es2ri+e li-ui(iy ris" an( is 'ana%e'en
• $in( ineres rae an( is 'ana%e'en
• (es2ri+e $orei%n eB20an%e rae an( is 'ana%e'en
• eBplain Counry ris" an( is 'ana%e'en.
041 Cr&d!t R!', $nd It' M$n$-&(&nt
A0is is 0e ris" 0a 0e ineres or 0e prin2ipal or +o0 on loans an(
se2uriies *ill no +e pai( as a%ree(. W0en so'e loans +e2o'e
un2olle2i+le an( are *rien o$$8 0e +an" loses +o0 earnin% asses an(
so'e porion o$ is eBpe2e( revenues. I$ loan losses 2oninue o 'oun
an( persis $or several years8 0e +an"Ms 2us0ion $or 2apial evenually
+e2o'es ero(e( an( unless a((iional $un(s are in3e2e(8 0e +an" 'ay
+e $or2e( o li-ui(aion.

A nu'+er o$ $a2ors in(i2ae 0e (e%ree o$ 2re(i ris" in 0e +an"sM loan
an( inves'en por$olios. One is 0e eBen o$ 0e ran%e o$ ineres raes
on 0e por$olios an( 0e proporion o$ 0e por$olio.
04/ [email protected]!d!t. R!', $nd It' M$n$-&(&nt
As li-ui(iy is a sine -ua non o$ +an"in%8 an essenial $irs sep o
'ana%in% li-ui(iy ris" +y re2o%niion o$ is 2o'ponens in $un(in% ris"8
i'e ris" an( 2all ris". A0e (iversiy o$ 0e sour2es o$ li-ui(iy in sore(
asse li-ui(iy an( pur20ase( li-ui(iy s0oul( also +e noe(. W0ile 0e
$or'er relaes o a+iliy o sell8 (is2oun or ple(%e asses a s0or noi2e
*i0ou loss8 0e laer re$ers o 0e a+iliy o +uy li-ui(iy a s0or noi2e
in 0e s0or er' or *0olesale 'ar"e or 'ore %enerally +y 'a20in%
eBpe2e( ou$lo*s *i0 0e eBpe2e( in$lo*s.

A0e se2on( re-uire'en is an appre2iaion o$ 'auriy rans$or'aion as
an inevia+le $eaure o$ +an"in% an( 0e (esira+iliy Eina(visa+iliy an(
i'possi+iliyF o$ a20ievin% a +alan2e( 'auriy sru2ure in 0e sense o$
i(eniy +e*een 0e 'auriy pro$iles o$ asses an( lia+iliies in 0e
+alan2e s0ee.

A0e 0ir( sa%e is o (ra* up 'auriy pro$ile or la((er 0a sais$a2orily
per'is a 2o'parison o$ asses an( lia+iliies *i0in ea20 'auriy
ran%e. A0is %ives a use$ul insi%0 ino li-ui(iy. Bu is li'iaion 2an +e
re2o%niCe(. I (oes no ell 0e *0ole sory8 i (oes no (isin%uis0
+e*een asse -ualiies nor (oes i a"e a22oun o$ o$$ +alan2e s0ee
operaions. Besi(es8 i (oes no an( 2anno a((ress 0e san(in% o$ 0e
+an" in 0e 'ar"e pla2e 6an essenial in(i2aor o$ +orro*in% a+iliy.
Finally8 insru'ens an( 'ar"es s0oul( +e 'o+iliCe( $or 2orre2in% or
a(3usin% any una22epa+le or seriously 'is'a20e( pro$ile. &ossi+iliies
in2lu(e or%aniCin% 2o''ie( line o$ 2re(i $ro' o0er +an"s8 re(is2oun
or s0or6er' asses8 usin% 0e len(er o$ las resor $a2iliies8 len%0enin%
iner6+an" +orro*in%.
040 Int&r&'t R$t& R!', $nd It' M$n$-&(&nt
Ban"s 'ana%e ineres rae ris" E*0i20 arises $ro' 'is'a20 +e*een
rae sensiive asses an( rae sensiive lia+iliies. As in 0e 2ase o$ 0e
li-ui(iy ris"8 a +alan2e( 'auriy pro$ile is nei0er pra2i2a+le nor
(esira+le sin2e 'auriy 'is'a20 is in0eren in +an"in%. Ano0er *ay
is 0rou%0 rollover e20ni-ues *0ere+y ineres rae 2on(iions are
perio(i2ally a(3use( in 0e li%0 o$ 20an%es in so'e 2onra2ually
a%ree( re$eren2e in(i2aors8 usually an iner+an" (eposi rae or a +ase
len(in% rae. By 0is approa20 a +eer rae 'a20in% o$ asses an(
lia+iliies is a20ieve( an( 0e ineres rae ris" re(u2e( +y rans$errin%
0e ris" o$ 0e eBra 2os o$ an ineres rae ris" on o +orro*ers. A0is
(oes no8 0o*ever8 eli'inae 0e enire ris" +e2ause i 2onvers ineres
rae ris" o 2re(i ris". Ban"s re'ain eBpose( o possi+le ineres losses
*0enever 0e 'auriy sru2ure o$ 0eir ineres +earin% lia+iliies (oes
no 2oin2i(e per$e2ly *i0 0e len%0 o$ 0e rollover perio(8 espe2ially
*0en 0e 'ar"e 2on(iion eB0i+i s0arp an( rapi( 'o(i$i2aions.
Ano0er e20ni-ue is %ap 'ana%e'en. A0is re-uires 0e analysis o$ 0e
%ap +e*een 'aurin% asses an( 'aurin% lia+iliies o arrive a 0e
a'oun o$ varia+le rae asses 0a are $inan2e( or re-uire( o +e
$inan2e( +y 0e $iBe( rae lia+iliies. I provi(es 0ree opions $or
'a20in% rae sensiiviy asses o rae sensiiviy lia+iliies8 an( 0e
$or'ula is o 'ainain a posiive %ap a all i'es8 o a(3us 0e %ap as
2ir2u'san2es (i2aes 8o en0an2e an( sa+iliCe 0e ne ineres 'ar%in8
in2rease 0e %ap *0en raes are risin% an( narro* i *0en raes are
Finally8 ineres ris" 2an +e a((resse( +y 0e(%in% 0rou%0 0e use o$
$inan2ial $uures an( opions. Co'+ine *i0 0e %ap 'ana%e'en8
opions an( $uures ena+le a +an" o 'ainain pre(eer'ine( sprea( an(
lo2" in an ani2ipae( rae o$ reurn8 ei0er o re(u2e ris" or o a20ieve
a((iional por$olio reurns. A0e $or'ula in 0is 2ase is o pur20ase
$uure pu opion *0ere 0ere is a ne%aive 'auriy %ap an( ineres
raes are risin% or eBpe2e( o (e2line. On 0e o0er 0an(8 i$ 0e %ap is
posiive8 0e +an" s0oul( sell $uure pu opions i$ raes are $allin% an(
+uy $uure 2all opions i$ raes are risin%.
045 For&!-n Curr&n. or E1#$n-& R$t& R!', $nd It'
I involves ele'ens o$ o0er ris"s su20 as ineres rae8 li-ui(iy8 2re(i
an( $un(in% ris"s. Besi(es8 as 'ove'en in eB20an%e raes $re-uenly
2orrelae *i0 'ove'ens in ineres raes8 a 'is'a20e( 2urren2y
posiion an( 'is'a20e( ineres rae posiion *ill $re-uenly no +e
in(epen(en ris"s.
A22or(in%ly8 'os o$ 0e insru'ens an( e20ni-ues $or a((ressin%
0ese o0er ris"s8 pari2ularly 0e ineres rae ris"8 are also use( $or
'ana%in% 0e $orei%n 2urren2y eBposure ris". A0ese in2lu(e appropriae
'a20in% pro$iles %ap 'ana%e'en8 opion ra(in%8 0e(%in% sein%
li'is an( (iversi$i2aion.
046 Countr. R!', $nd It' M$n$-&(&nt
Counry ris"8 0ei%0ene( +y 0e inernaional (e+ 2risis8 is +ein%
'ana%e( in a nu'+er o$ *ays. One is 2rii2al8 per0aps 2onservaive
2re(i*or0iness analysis an( 0e sein% o$ li'i on eBposures o
2ounries an( %eo%rap0i2al re%ions or Cones. A0e se2on( is (e+
res20e(ulin% an( resru2urin%8 usually on an annual +asis8 +u re2enly
on a 'uli6year +asis8 in so'e respe2s. A0e 0ir( 'e0o( is
i'prove'ens in 0e 2apial a(e-ua2y posiion o$ 0e +an"s 0rou%0
in2rease( provisions. Four0 'e0o( is re(u2ion in eBposure 0rou%0
reren20'en o$ len(in% *0i20 +e%an in 1<=:8 an( +y sellin% so'e o$
0e (e+s in 0e se2on(ary 'ar"e even a loss an( 0rou%0 2onsoli(aion
o$ 0e (e+ in a s'aller nu'+er o$ 2ounries 0rou%0 eB20an%e o$ loan
2lai's. Finally8 *i0 a vie* o avoi( lein% 0e (e+ors %e ino a
0opeless siuaion *0i20 2oul( involve 0e oal loss o$ 0e asse8
2re(ior +an"s are provi(in% so'e 2on2ere( len(in% 2on(iione( on 0e
(e+or si%nin% a sru2ural a(3us'en pro%ra''e *i0 0e IMF.
I s0oul( +e e'p0asiCe( in 2on2lusion 0a in 'ana%in% ris"8 no +an"
2an eBpe2 o %e i ri%0 al*ays. Mis'a20e( posiions are 0ere$ore
inevia+le8 so also are poenial losses. A0ese rise *i0 in2reases in
volailiy o$ ineres raes an( eB20an%e rae $lu2uaions. I is 0ere$ore
ne2essary o (e2i(e 3us *0a ris" a +an" 2an a$$or( o +ear8 'onior
2oninually 0e a2ual an( poenial eBposures an( a2 ne2essary o
ensure 0a 0e ris"s are "ep *i0in esa+lis0e( li'is.
In 0e 2ourse o$ 0is su(y8 e'p0asiCes *ere lai( upon 0o* in(ivi(ual
ris" 2an +e 'ana%e( in +an"in% in(usry. ,ere $ive 'a3or ypes o$ ris"s
an( 0eir 'ana%e'en *ere (is2usse( a'on% *0i20 are4 2re(i ris"8
ineres rae ris"J li-ui(iy ris"J $orei%n 2urren2y or eB20an%e ris" an(
$inally8 2ounry ris".
!is an( (is2uss $our ypes o$ ris"s8 *0i20 you 0ave su(ie(8 an( 0eir
2orrespon(in% 'ana%e'en in +an"in% in(usryO
#*an"*o8 G. O. E1<<1F. Bank Management (Principle and Practice).
U.7. OB$or(4 Mal0ouse &u+lis0in% !(.

1.; Inro(u2ion
:.; O+3e2ives
>.; Main Conen
>.1 Four Basi2 Cre(i Fa2ors
>.1.1 A0e Borro*erMs C0ara2er an( Soun(ness
>.1.: Use o$ !oan Fun(s +y Borro*ers
>.1.> &ri'ary Sour2e o$ Repay'en
>.1.. Se2on(ary Sour2es o$ Repay'en
>.: Cre(i Invesi%aion
>.:.1 Cuso'er Inervie*
>.:.: Inernal Sour2e o$ In$or'aion
>.:.> EBernal Sour2es o$ In$or'aion
>.:.. Sprea( S0ee an( Sae'en Sprea(in%
..; Con2lusion
5.; Su''ary
6.; Auor6Mar"e( Assi%n'en
7.; Re$eren2es/Fur0er Rea(in%s
In is $ulles 'eanin%8 2re(i analysis is 0e pro2ess o$ assessin% 0e ris"
o$ len(in% o a +usiness or an in(ivi(ual. Cre(i ris" 'us +e evaluae(
a%ains 0e +ene$is 0e +an" eBpe2s o (erive $ro' 'a"in% 0e loan.
A0e (ire2 +ene$is are si'ply 0e ineres an( $ees earne( on 0e loan
an(8 possi+ly 0e (eposi +alan2es re-uire( as a 2on(iion o$ 0e loan.
In(ire2 +ene$is 2onsis o$ 0e iniiaion or 'ainenan2e o$ a relaions0ip
*i0 0e +orro*er 0a 'ay provi(e 0e +an" *i0 in2rease( (eposi an(
*i0 (e'an( $or a variey o$ +an" servi2es.
A 0e en( o$ 0is uni8 you s0oul( +e a+le o4
• i(eni$y $our +asi2 2re(i $a2ors8
• per$or' Cre(i invesi%aion
• 2al2ulae *or"in% Capial an( Finan2ial &ro3e2ion.
041 Four B$'! Cr&d!t F$tor'
A0e essen2e o$ all 2re(i analysis 2an +e 2apure( in $our +asi2 2re(i
$a2ors or line o$ in-uiry
1. A0e +orro*erKs 20ara2er an( soun(ness
:. A0e inen(e( use o$ loan $un(s
>. A0e pri'ary sour2e o$ loan repay'en
.. Se2on(ary sour2es o$ repay'en
04141 T#& Borro=&rF' C#$r$t&r $nd Soundn&''
Mos +an"ers a%ree 0a 0e para'oun $a2or in a su22ess$ul loan is
0onesy an( %oo(*ill o$ 0e +orro*ers. Dis0ones +orro*ers (o no $eel
'orally 2o''ie( o repay 0eir (e+s. A (eer'ine(8 s"ille( an(
(is0ones +orro*er usually 2an %e a loan 0rou%0 'isrepresenaion.
Be2ause loan o$$i2ers 'us sprea( 0eir i'e over 'any loan
relaions0ips8 0ey (o no 0ave i'e o un2over ela+orae s20e'es o
(e$rau( 0e +an". Ao +e sure8 i is i'poran 0a (e$aul (oes no al*ays
o22ur +e2ause o$ 'oral $ailin% an( *ill$ul ne%le2 on 0e par o$ 0e
+orro*er. &er0aps e-ually i'poran are inelli%en2e8 personal
(is2ipline8 an( 'ana%erial s"ills an( insin2s. A0ese -ualiies are
so'ei'es easier o evaluae 0an +laan (is0onesy 6+u no so 'u20
easier. !oan o$$i2ers 'us (evoe a'ple i'e in ae'pin% o (eer'ine
0e 2o'peen2e o$ +orro*ers.
A0e +an" 'us proe2 isel$ $ro' (is0ones8 in2o'peen or overly
su+3e2ive +orro*ers +y 0orou%0ly invesi%ain% 0e 2re(i +a2"%roun(
o$ 0e +orro*er. A0e +orro*erKs previous 2re(i relaions0ips 2an +e
evaluae( $ro' re2or(s o$ 0e lo2al 2re(i +ureau8 suppliers8 pas +an"in%
relaions0ips8 an( 2uso'ers. I$ 0e +orro*er 0as +uil a re2or( o$
pro'p pay'en o$ ineres an( prin2ipal8 i is li"ely 0a $uure loans
*ill +e si'ilarly servi2e(. I$ 0e +orro*ers 0as +een rouinely lae in
payin% pas (e+s8 0e reason s0oul( +e (eer'ine(. I$ previous 2re(iors
0ave eBperien2e( losses8 0e loan o$$i2er s0oul( al'os auo'ai2ally
re3e2 0e appli2aion.
0414/ U'& o2 Lo$n Fund' ). Borro=&r'
A $irs %lan2e8 0e +orro*erMs nee( an( propose( use $or $un(s usually
see' per$e2ly 2lear. In 'any 2o''er2ial loans8 0is is $re-uenly no
0e 2ase. More o$en 0an no8 (eer'inin% 0e rue nee( an( use o$
$un(s re-uires %oo( analyi2al s"ills in a22ounin% an( +usiness $inan2e.
An un(ersan(in% o$ 0e loanKs inen(e( use 0elps 0e analys o
un(ersan( *0e0er 0e loan re-ues is reasona+le an( a22epa+le.
Osensi+ly8 'os +usiness loans are 'a(e $or *or"in% 2apial purposes 6
usually a((iions o 2urren asses. ,o*ever8 0e spe2i$i2 purpose $or 0e
loan 'ay +e su+sanially (i$$eren. A0e loan pro2ee(s 'ay provi(e
e'er%en2y $un(s o 'ee 0e $ir'Ks payrollJ 0ey 'ay +e use( o pay
a%%rieve( suppliersK over(ue a22ounsJ 0ey 'ay +e use( o repla2e
*or"in% 2apial 0a *as (eplee( 0rou%0 operain% losses. A 2o''on
nee( $or $un(s arises *0en 2olle2ion o$ re2eiva+les slo* (o*n. A0e
analys s0oul( also (eer'ine *0e0er *or"in% 2apial nee(s are
seasonal or per'anen.
Fre-uenly8 s0or6er' loans are 'a(e o $inan2e *or"in% 2apial nee(s
0a iniially appear seasonal +u su+se-uenly prove( o +e per'anen
nee(s arisin% $ro' %eneral sales %ro*0. As a resul8 s0or6er' loans
o$en +e2o'e (e $a2o er' loans 0a suppor per'anen in2reases in
a22oun re2eiva+le8 invenory8 an( $iBe( asses.

Asses $inan2e( +y lon%6er' 2o''er2ial loans s0oul( 'ee 0e
le%ii'ae nee(s o$ 0e +orro*erKs +usiness. An asse pur20ase( in 0e
0ope o$ pro$iin% $ro' is resale is spe2ulaive. Ban"s or(inarily (o no
len( $or su20 a pur20ase +e2ause i (oes no 2onri+ue o 0e e2ono'i2
nee(s o$ 0e +usiness.
04140 Pr!($r. Sour& o2 R&<$.(&nt
A0e analysKs a22ounin% an( $inan2e s"ills are 2ru2ial in (eer'inin% 0e
a+iliy o$ 0e +orro*er o repay a loan $ro' 2as0 $lo*. For seasonal
*or"in% 2apial loans8 2as0 $lo*s are %enerae( +y 'eans o$ 0e or(erly
li-ui(aion o$ 0e seasonal +uil( up in invenories an( re2eiva+les. In
er' loans8 2as0 $lo*s are %enerae( +y 'eans o$ 0e or(erly li-ui(aion
o$ 0e seasonal +uil(up in invenories an( re2eiva+les. In er' loans8
2as0 $lo*s are %enerae( $ro' earnin%s. A0e analys 'us as2erain 0e
i'in% an( su$$i2ien2y o$ 0ese 2as0 $lo*s an( evaluae 0e ris" o$ 2as0
$lo*sM $allin% s0or.
Sour2es o$ pay'en o0er 0an 2as0 $lo*s $ro' operaions s0oul( +e
vie*e( *i0 2auion. A0e +orro*er 'ay plan on a $uure in3e2ion o$
invesor 2apial o repay 0e loan. Un$orunaely8 i$ 0e $ir' $ails o
pro(u2e ara2ive pro$is8 ousi(ers usually *i00ol( $uure inves'en
in 0e $ir'. A0e 2uso'er 'ay +e (epen(in% on +orro*in% Ea"eou
$un(sF $ro' ano0er insiuion o repay 0e +an" loan. Unless a $or'al
2o''i'en eBiss $ro' ano0er insiuion8 0is sour2e su$$ers $ro' 0e
sa'e li'iaion as a planne( e-uiy in3e2ion. An eB2epion is 0e
ineri' 2onsru2ion loan in *0i20 ano0er lon%6er' len(er 0as
$or'ally 2o''ie( o provi(e a"eou $un(s. A0e $uure sale o$ a $iBe(
asse usually is no a relia+le sour2e o$ loan repay'en.
04145 S&ond$r. Sour&' o2 R&<$.(&nt
In %eneral8 2as0 $lo* $ro' +usiness operaions is 0e 'os (epen(a+le
sour2e o$ loan repay'en. ,o*ever8 i$ su$$i2ien 2as0 $lo*s $ail o
'aerialiCe8 0e +an" 2an preven a loss i$ i 0as se2ure( a se2on(ary
sour2e o$ repay'en. Collaeral s0oul( al*ays +e vie*e( as a
se2on(ary8 no pri'ary sour2e o$ repay'en. Ban"s 0ope o avoi(
$ore2losin% on 2ollaeral +e2ause $ore2losure enails 'u20 i'e an(
eBpense. Collaeral value s0oul( 2over8 in a((iion o 0e loan a'oun
ineres (ue8 0e le%al 2oss o$ $ore2losure an( ineres (urin% $ore2losure
pro2ee(in%s. Collaeral is 0e pre$erre( se2on(ary sour2e o$ repay'en.
O0er se2on(ary sour2es are %uaranors an( 2o6'a"ers. ,o*ever8
2olle2ion $ro' %uaranors an( 2o6 'a"ers o$en re-uires eBpensive
lii%aion an( resuls in 2onsi(era+le ill *ill +e*een +an"8 +orro*er an(
04/ Cr&d!t In+&'t!-$t!on
A0e purpose o$ 2re(i invesi%aion is o a2-uire enou%0 in$or'aion o
(eer'ine 0e loan appli2anMs *illin%ness an( 2apa2iy o servi2e 0e
propose( loan. A0e invesi%aion ae'ps o (evelop an un(ersan(in%
o$ 0e naure o$ 0e +orro*er in er's o$ 0e $our +asi2 2re(i $a2ors 3us
(is2usse(4 0e +orro*erMs 20ara2er8 0e rue purpose o$ 0e loan8 0e
pri'ary sour2e o$ repay'en8 an( 0e se2on(ary sour2e o$ repay'en.
A0ere are 0ree $un(a'enal sour2es o$ in$or'aion4 2uso'ers8 inernal
+an" sour2es8 an( eBernal sour2es availa+le 0rou%0 insiuions ousi(e
0e +an".
04/41 Cu'to(&r Int&r+!&=
Despie possi+le la2" o$ o+3e2iviy8 0e loan 2uso'er or(inarily *ill
provi(e 0e 'os i'poran in$or'aion nee(e( in 2re(i invesi%aion.
A0e prospe2ive +orro*er s0oul( in(i2ae 0e ype an( a'oun o$ loan
re-uese(8 (esi%nae 0e propose( sour2e an( plan o$ repay'en8
i(eni$y 0e 2ollaeral or %uaranors8 na'e o0er previous an( 2urren
2re(iors8 lis pri'ary 2uso'ers an( ra(e suppliers8 i(eni$y 0e $ir's
a22ounan8 in(i2ae 0e prin2ipal o$$i2er an( s0are0ol(ers8 an( %ive
personal an( +usiness 0isories. A0e +orro*er also s0oul( provi(e
(o2u'ens nee(e( o esa+lis0 0e len(in% relaions0ip in2lu(in% su20
ie's as 0e laes 0ree or 'ore years o$ +usiness $inan2ial sae'ens8
personal $inan2ial sae'ens8 personal in2o'e aB reurns8 +orro*in%
au0oriies8 evi(en2e o$ insuran2e an( 2oninuin% %uaranees.
!en(ers 2an -ui2"ly %a0er a *eal0 o$ supporin% in$or'aion usin%
*ell planne( -uesions (urin% 0e inervie*. W0a are 0e 20ara2erisi2s
o$ 0e +orro*erKs 'ar"eO ,o* are 0e pro(u2s sol( an( (isri+ue( o
0e 'ar"eO ,o* i'poran is pri2e8 -ualiy or servi2e in sellin% 0e
pro(u2O W0a is 0e pro(u2ion pro2essO Are la+our relaions a
pro+le'O W0o are 0e prin2ipal o*ners an( eBe2uives8 an( *0a are
0eir eBperien2e an( e(u2aional +a2"%roun(sO W0o *oul( +e in 20ar%e
in 0e even 0a 0e presen 20ie$ eBe2uive o$$i2er +e2a'e unavaila+leO
Does 0e $ir' 0ave a srae%i2 plannin% pro%ra'O ,o* *ill $uure
'ar"es o$ opporuniy (i$$er $ro' 0ose o$ o(ay8 an( *0a resour2es
*ill +e nee(e( o serve 0e'O A0ese an( relae( -uesions serve o +uil(
0e len(erKs 2o'pre0ensive %rasp o$ 0e sren%0s an( *ea"nesses o$ a
loan appli2an.
04/4/ Int&rn$% Sour& o2 In2or($t!on
I$ 0e loan 2uso'er 0as eBisin% relaions0ips *i0 0e +an"8 a %rea
(eal o$ in$or'aion is inernally availa+le o 0e +an" a+ou 0e
2uso'erKs *illin%ness an( 2apa2iy o servi2e 0e propose( loan. A0e
invesi%aor s0oul( su(y 2re(i $iles on any 2urren or previous
+orro*in%s8 eBa'ine 20e2"in% a22oun a2iviy an( revie* o0er
(eposis previously or 2urrenly 0el(. A0ese sour2es *ill in(i2ae 0e
(e%ree o$ 0e +an"Ks sais$a2ion *i0 pas pay'en o$ per$or'an2e8 an(
0ey 'ay reveal any en(en2y o over(ra* (eposi a22ouns. A0ese
sour2es *ill also i(eni$y pri'ary 2uso'ers8 suppliers an( o0er
2re(iors *i0 *0o' 0e +orro*er 0as 0a( $inan2ial ransa2ions.
04/40 E1t&rn$% Sour&' o2 In2or($t!on
Several servi2e a%en2ies provi(e 2re(i reporin% on +usinesses an(
+usiness prin2ipals.

Business In$or'aion Repor provi(es a 2o'posie 2re(i rain%8
(es2ri+es 0e pro'pness o$ ra(e pay'ens +y 0e su+3e2 $ir'8 an(
in(i2aes 0e 0i%0es 2re(i +alan2e 2arrie( (urin% 0e 'os re2en year.
O0er (eail in2lu(es +alan2e s0ees sales an( pro$i re2or(s8 insuran2e
2overa%e8 lease o+li%aions8 +io%rap0i2al in$or'aion on prin2ipals8 0e
$ir'Ks 0isory8 an( is re2en +usiness ren(s.
04/45 S<r&$d S#&&t $nd St$t&(&nt S<r&$d!n-
Sprea(in% Ban"ers %enerally use so 2alle( sprea( s0ees $or re2or(in% a
2re(i appli2anKs $inan2ial in$or'aion. Sprea(s0ees per'i 0e analys
o or%aniCe $inan2ial (aa in a 2onsisen 'anner. A0is $re-uenly
re-uires 0a 2erain (aa su+'ie( +y 0e appli2an +e re2lassi$ie( o
'a20 0e +an"Ks purpose. For eBa'ple8 an ie' in2lu(e( as a 2urren
asse in 0e appli2anKs sae'en 'i%0 +e re2lassi$ie( as non62urren on
0e sprea( s0ee i$ 0e 2re(i analys 0as (ou+s a+ou is li-ui(iy. An
eBa'ple o$ su20 an ie' 'i%0 +e a noe (ue $ro' one o$ 0e +usinessMs
o$$i2ers or prin2ipal. A0e sprea(s0ee is arran%e( o allo* easy
2o'parison o$ 2urren an( 0isori2al ren(s an( is rea(ily up(ae( as 0e
2olu'n are 2o'plee( $ro' le$ o ri%0. Sprea(s0ees ypi2ally are
sru2ure( o per'i enry o$ up o $ive years o$ $inan2ial sae'en
0isory. Colu'ns are provi(e( $or 2o''on siCe raios $or ea20 +alan2e
s0ee an( in2o'e sae'en a22oun. Spa2e is provi(e( $or several "ey
$inan2ial raios an( $or analysis o$ 20an%es in ne *or0 an( *or"in%
2apial. Supple'enary $or's are o$en use( o ener a i'e series o$
o0er "ey raios.
I s0oul( +e e'p0asiCe( in 2on2lusion 0a8 in len(in% prin2iples an(
+usiness8 +orro*er 'us involve +o0 -uaniaive an( -ualiaive
assess'en o$ +orro*ers +y +an"ers *0o 0ave 0e appropriae s"ills $or
su20 assess'en in or(er o sa$e%uar( various $or's o$ ris"s 0a 'ay
arise in $uure.

In 0e 2ourse o$ 0is su(y e'p0asiCes *ere lai( on len(in% prin2iples
an( +usiness +orro*er *0ere 0e $ollo*in% *ere 2rii2ally eBa'ine(4
$our +asi2 2re(i $a2ors viC. 20ara2er an( soun(ness8 inen(e( use o$
loan $un(s8 pri'ary sour2e o$ loan repay'en an( $inally8 se2on(ary
sour2es o$ repay'en. Also8 2re(i invesi%aion reveale( 0ree
$un(a'enal sour2es o$ in$or'aion viC. 2uso'ers inernal +an"
sour2es8 an( eBernal sour2es availa+le 0rou%0 insiuions ousi(e 0e
1. !is an( (is2uss $our +asi2 2re(i $a2orsO
:. W0a (o you un(ersan( +y 2re(i invesi%aionO
1in2en Baris20 E:;;>F. Ban" Areasury Mana%e'en Insiue o$
Finan2ial Servi2es.
1.; Inro(u2ion
:.; O+3e2ives
>.; Main Conen
>.1 Ma20inery $or !oan A('inisraion
>.: A0e !en(in% Or%aniCaion
..; Con2lusion
5.; Su''ary
6.; Auor6Mar"e( Assi%n'en
7.; Re$eren2es/Fur0er Rea(in%s
Mos +an"ers +elieve 0a (e$inin% +usiness o$ +an"in% is len(in%. Also8
+an"ers "no* 0a8 0isori2ally 0e 'ain pa0 o pro$essional
a(van2e'en an( 0i%0 salary as a +an" e'ployee 0as al*ays +een
0rou%0 0e len(in% $un2ion8 al0ou%0 o(ay o0er 'a3or pa0s o
pro%ress in2reasin%ly are openin% as +an" operaions8 $inan2ial
'ana%e'en8 rus a2iviies8 an( o0er a2iviies +e2o'e 'ore 2ru2ial
an( 2o'pleB. Ban" loans $inan2e (iverse %roups in 0e e2ono'y.
Manu$a2urers8 (isri+uors8 servi2e $ir's8 $ar'ers8 +uil(ers8 0o'e
+uyers8 2o''er2ial real esae (evelopers8 2onsu'ers8 an( o0ers all
(epen( on +an" 2re(i. A0e *ay in *0i20 +an"s allo2ae 0eir loana+le
$un(s sron%ly in$luen2e 0e e2ono'i2 (evelop'en o$ 0e 2o''uniy
an( 0e naion. Mos +an"ers +elieve i is in 0eir o*n +es ineress o
supply 2re(i *i0in 0eir o*n 2o''uniies +e2ause 2re(i 0elps
2o''uniy o %ro*. Every +an" +ears a (e%ree o$ ris" *0en i len(s o
privae +orro*ers su20 as +usiness an( 2onsu'ers8 an( *i0ou
eB2epion8 every +an" eBperien2es so'e loan losses *0en 2erain
+orro*ers $ail o repay as a%ree(. W0aever 0e (e%ree o$ ris" a"en8
loan losses 2an +e 'ini'iCe(. A0is 2oul( +e or%aniCin% an( 'ana%in%
0e len(in% $un2ion in a 0i%0ly pro$essional 'anner.
A 0e en( o$ 0is uni8 you *ill +e a+le o4
• (ra* 0e or%ano%ra' o$ loan 'ana%e'en an( a('inisraion in
• eBplain various personnel responsi+le $or loana+le $un(s
• i(eni$y 2o''iees an( (epar'ens responsi+le $or proper
'ana%e'en o$ loans.
041 M$#!n&r. 2or Lo$n Ad(!n!'tr$t!on
A$er 0e loan poli2y 0as +een $or'ulae(8 provision $or is proper
eBe2uion 'us +e 'a(e. Cerain in(ivi(uals 'us 2arry ou 0e loan
poli2y an( provision 'a(e $or is perio(i2 revie* an( evaluaion an( o
e$$e2 20an%es as ne2essary8 (epen(in% on 20an%es in e2ono'i2
Se2ion *o o$ 0e loan poli2y ses (o*n 0e 'a20inery $or 0e (ay6o6
(ay a('inisraion o$ 0e loan8 in2lu(in% rouine a('inisraion. A0is
involves 0e (e$iniion an( $un2ions o$ 0e loan a('inisraion
(epar'en8 is sru2ure an( au0oriy an( 0e assi%n'en o$
responsi+iliies an( reporin% an( approvin% 20annels *i0in 0e
(epar'en an( $ro' 0e (epar'en o %eneral 'ana%e'en. A0e ypes
o$ in$or'aion an( (o2u'enaion re-uire( s0oul( also +e spe2i$ie( as
*ell as 0e 'o(aliy or 2rieria $or inerprein% 0e in$or'aion. A0e
'a20inery $or rouine a('inisraion s0oul( also +e in(i2ae(.
Gui(elines 0ere in2lu(e 0ose $or insuran2e8 (ra* (o*ns8 eB2ess line8
'ar%in re-uire'en8 supervision o$8 o+servan2e o$ 2ovenans an(
'ana%e'en o$ pro+le' loans.

Several $a2ors (eer'ine 0e a2ual 'a20inery a +an" a(ops. A0ese
in2lu(e 0e aiu(e o$ 0e +oar( o$ (ire2ors o*ar(s 0e eBen o$
au0oriy o +e (ele%ae(8 0e 20ara2er an( -ualiy o$ 0e len(in%
o$$i2ers8 0e siCe o$ 0e +an" an( o$ 0e loan por$olio an( 0e ypes o$
loan +ein% 'a(e or o +e 'a(e. W0ile 0e le%al responsi+iliy an(
au0oriy resi(e in 0e +oar(8 so'e +oar(s play 'ore i'poran roles
0an o0ers. In %eneral8 0o*ever8 lar%er +an"s (o (ele%ae len(in%
au0oriy an( spe2ialiCe in len(in% 'ore 0an s'all +an"s.
Usually 0ere is a Dire2ors !oan Co''iee ED!CF in2lu(in%
Mana%in% Dire2or an( C0ie$ EBe2uive8 an( an O$$i2ers !oan
Co''iee EO!CF or Co''iees. In so'e +an"s 0ere is a((iionally
an O$$i2er !oan Revie* Co''iee EO!RCF. A0e Dire2ors !oan
Co''iee oversees 0e +an"s loan por$olio8 a2s on loan re-uess
+eyon( 0e po*ers o$ o$$i2erMs loan 2o''iee an( 0a o$ 0e C0ie$
EBe2uive an( (eals *i0 re-uess (ealin% *i0 poli2y. A0e D!C also
revie*s 0e responsi+iliies an( a2ions o$ 0e O$$i2ers !oan Co''iee.
I usually 'ees on2e in a -uarer8 on 2all $or spe2ial 'eein%s an( 0as
po*ers o 'a"e pru(en 20an%es in 0e +an"Ms loan 'ana%e'enJ an( i
repors o8 an( is su+or(inae o8 0e Boar(.
A0e O!C an( O!RC are 0e operain% 2o''iees o$ loan 'ana%e'en.
Usually 'a(e up o$ 0e EBe2uive Dire2or *i0 loan por$olio
responsi+iliies8 0e O!RC revie*s an( approves loans up o a spe2i$ie(
a'oun *0ile 0e O!RC 0as responsi+iliies o sa$e%uar( 0e -ualiy o$
0e +an"Ms loan por$olio on a 2oninuin% +asis. I 'ees over rou+le( or
(isresse( loans an( repors o C0ie$ EBe2uive an( o 0e Boar(. I
$ollo*s up *ea" loans unil 0eir *ea"ness is 2orre2e( or 0e loan is
2olle2e(. I 0as 0e au0oriy o reassi%n 0e loan i$ 0e !oan O$$i2er in
20ar%e (oes no 'a"e sais$a2ory pro%ress 2orre2in% 0e o+serve(
*ea"nesses or re2overin% 0e loan.
In a((iion o 'oniorin% loan -ualiy an( re(u2in% loan losses8 0e
O!RC ai's a (ee2in% a2ual or poenial pro+le' loans as early as
possi+le8 en$or2in% uni$or' (o2u'enaion an( en$or2in% loan poli2y
04/ T#& L&nd!n- Or-$n!E$t!on
A0e or%aniCaional sru2ure o$ 0e len(in% $un2ions varies *i0 +an"Ks
siCe an( ype o$ +usiness. An o$$i2er o$ a s'all +an" 'ay per$or' all 0e
(eaile( *or" asso2iae( *i0 'a"in% a loan8 in2lu(in% 2re(i
invesi%aion an( analysis8 ne%oiaion8 2uso'er 2ona28 perio(i2
revie* o$ 0e loan $ile8 an( a i'es8 2olle2ion. In lar%er +an"s8
in(ivi(ual loan o$$i2ers spe2ialiCe in 2onsulin% an( ne%oiain% *i0
2uso'ers an( 0ere is %reaer 2o'par'enaliCaion o$ suppor
$un2ions su20 as 2re(i analysis8 loan revie* an( loan 2olle2ion.
Fi%ure 14 Aypi2al !en(in% Or%aniCaion in a Me(iu'6SiCe( Ban"
Fi%ure 1. s0o*s a represenaive loan or%aniCaion $or a 'e(iu'6siCe(
+an". An i'poran 20e2" an( +alan2es $eaure o$ len(in% or%aniCaion
is o 0ave 0e loan revie* (epar'en an( 0e au(i (epar'en repor
(ire2ly o 0e +oar( o$ (ire2ors via appropriae (ire2orsK 2o''iees.
A0e arran%e'en preserves 0e in(epen(en2e o$ 0ese $un2ions an(
proe2 0e' $ro' 0e un(ue in$luen2e o$ 0e o$$i2ers *0o 'a"e loans
an( *0o 'ay no *an o $a2e up o poenially a(verse in$or'aion
a+ou 0eir loan 2uso'ers.

Lo$n D!+!'!on'
A0e various loan (ivisions as s0o*n in $i%ure 1. per$or' 0e +asi2
$un2ions o$ %enerain% loan +usiness an( supporin% 2uso'ers. !ar%er
+an"s are or%aniCe( alon% %eo%rap0i28 in(usry8 or pro(u2 line. !ar%e
+an"s (evelop len(in% eBperise in su20 spe2ialiCe( +usinesses as
ener%y8 'inin%8 pu+li2 uiliies8 spe2ialiCe( line o$ 'anu$a2urin%8 or
2o''er2ial real esae. Separae loan (ivisions are ne2essary o servi2e
0e spe2ial nee(s o$ 0ese in(usries. A 0e sa'e i'e8 naional re%ional
loan (ivision 0a 2u a2ross (i$$eren in(usries is nee(e( o serve
%eo%rap0i2ally (isperse( 2uso'ers.
Cr&d!t D&<$rt(&nt
A0e pri'ary 'ission o$ 0e 2re(i (epar'en is o evaluae 0e 2re(i
*or0iness an( (e+ pay'en 2apa2iy o$ presen 2uso'ers an( ne*
loan suppliers. Be2ause o$ 0e e20ni2al naure o$ is 2re(i evaluaion
$un2ions8 0e 2re(i (epar'en is an eB2ellen pla2e o rain ne* loan
o$$i2ers. Arainees are eBpose( o a variey o$ %oo( an( no so %oo( loan
2ases on *0i20 0ey assis loan o$$i2ers in 'a"in% 2re(i (e2isions.
A0e (epar'en 'ay also +e responsi+le $or loan revie*8 al0ou%0 in
lar%er +an"s 0is $un2ion is li"ely o +e 0an(le( +y a separae
(epar'en. Cre(i (epar'ens are so'ei'es responsi+le $or
2olle2ions o$ pas6(ue loans. A0is $un2ion is usually 0an(le( +y
spe2ialiss *i0in 0e (epar'en.
Co%%$t&r$% $nd Not&
A 2ru2ial an( 2o'pleB loan $un2ion is 0e per$e2ion o$ 0e +an"Ks
se2uriy ineres in 2ollaeral o$$ere( in suppor o$ a loan. A0is
(epar'en also per$or's 0e (is2oun $un2ionJ 0e 'oniorin% an(
2re(iin% o$ pay'ens re2eive( on ousan(in% noes.
Lo$n Co((!tt&&'
!oan 2o''iees are responsi+le $or approvin% +an"s lar%er loan
re-uess. All +an"s nee( e$$e2ive 2o''iees $or 0e revie* o$ 'a3or
loan proposals an( loan (elin-uen2ies. Usually8 *o or 0ree 2o''iees
are nee(e(4 a (ire2orsM loan 2o''iee8 an o$$i2ersM loan 2o''iee8
an( $or +an"s *i0 an eB2essive nu'+er o$ rou+le( loans8 a spe2ial
asses 2o''iee. !oan a+ove 2erain 'ini'u' siCes 'us +e su+'ie(
o 0e o$$i2ersM loan 2o''iee8 2onsisin% o$ 0e +an"Ms 'os
eBperien2e( loan o$$i2ers. A0e o$$i2ersM 2o''iee 'ees $re-uenly. In
lar%er +an"s i 'ay 'ee (aily or on2e a *ee".
A0e loan o$$i2ersM 2o''iee serves as a 20e2" on8 no a su+siue $or
0e in(ivi(ual loan o$$i2erMs 3u(%'en. A0e 2o''ieeKs (uies are as
• Revie* 'a3or ne* loans
• Revie* 'a3or loan rene*als an( as2erain 0e reasons $or rene*al
• Revie* (elin-uen loans an( (eer'ine 0e 2ause o$ (elin-uen2y.
• Ensure $ull (o2u'enaion o$ loans
• Ensure 2onsisen2y in 0e rea'en o$ loan 2uso'ers.
Ban"s (i$$er in 0o* 0ey sru2ure 0e loan approval pro2ess. So'e
+an"s %ive relaively lar%e loan li'is o 0eir loan o$$i2ers8 *i0 0e
a+iliy o 2o'+ine 0eir li'is *i0 o0er o$$i2ers o approve 'os o$ 0e
a22epa+le loan appli2aions. O0er +an"s %ran s'aller loan li'is8 (o
no per'i 2o'+inin% o$ loan li'is8 an( rely 'osly upon loan
2o''iees o approve loans. A0e $irs syse' resul in %reaer $leBi+iliy
an( e$$i2ien2yJ 0e se2on( syse' resuls in %reaer 2onrol an( sa$ey.
A0e (ire2orsM loan 2o''iee revie*s 'a3or loans approve( +y 0e
o$$i2ersM 2o''iee. I is usually 2o'pose( o$ 0e +an"Ms presi(en8 0e
'os senior loan o$$i2ers8 an( *o or 'ore eBernal 'e'+ers o$ 0e
+oar( o$ (ire2ors. A0e 2o''iee 'a"es a $inal 3u(%'en on 0e
o$$i2ersM loan 2o''iee (e2isions8 %ivin% 2loser s2ruiny o 0e lar%es
2re(is. I is espe2ially 2on2erne( *i0 2on$or'an2e o +an" loan poli2y.
A0e (ire2orsM loan 2o''iee also revie*s si%ni$i2an pas6(ue loans
an( 2re(i pro+le's.
A spe2ial asses 2o''iee is so'ei'es 2reae( in +an"s 0a 0ave
eBperien2e( a si%ni$i2an in2rease in re%ulaor62rii2iCe( loans. A0is
2o''iee 'oniors 0e pro%ress o$ pro+le' loans an( ries o (eer'ine
0o* o *or" ou e$$e2ively 0e loans 0rou%0 2reaive 2ooperaion *i0
(isresse( +orro*ers an( 0rou%0 persisen 2olle2ion e$$ors.
In 2on2lusion8 i 2oul( +e o+serve( 0a appropriae loan an( 2re(i
a('inisraion as *ell as %oo( len(in% or%aniCaion 2onsiue par o$
e$$e2ive an( e$$i2ien *ay +y *0i20 +an"sM (ire2ors8 o$$i2ers8 an(
various 2o''iees 2an 0an(le 2re(i an( loans.
In su''ary8 0e uni reveale( various 'a20ineries $or loan
a('inisraion an( 0e spe2i$ie( pro2e(ure. A0e su(y sae( so'e
%ui(elines *0i20 in2lu(e 0ose $or insuran2e8 (ra* (o*ns8 eB2ess line8
'ar%in re-uire'en8 supervisions8 an( a(0eren o$ 2ovenans an(
'ana%e'en o$ pro+le' loans. Also8 0e uni s0o*e( a ypi2al len(in%
or%aniCaion 20ar 0a spe2i$ie( 0e relaions0ip a'on% various
(epar'ens an( saus.
1. W0a (o you un(ersan( +y len(in% or%aniCaionO
:. !is an( (is2uss various (epar'ens in loan a('inisraionO
1in2en Baris20 E:;;>F. Ban" Areasury Mana%e'en Insiue o$
Finan2ial Servi2e.
1.; Inro(u2ion
:.; O+3e2ives
>.; Main Conen
>.1 Develop'en o$ Areasury Fun2ion
>.: A0e Re'i o$ Areasury Fun2ions
>.> Fron6O$$i2e A2iviies
>.. Ba2"6O$$i2e A2iviies
..; Con2lusion
5.; Su''ary
6.; Auor6Mar"e( Assi%n'en
7.; Re$eren2es/Fur0er Rea(in%s
A 2orporae reasury $un2ion *ill (eal *i0 0e 'ana%e'en o$ 0e
2o'pany $un(s8 +e i 0e raisin% o$ e-uiy 2apial8 *or"in% 2apial or
invesin% surplus $un(s. I also 0as o ensure 0a $un(s are availa+le
*0en 0ey are nee(e( o suppor 0e 'ain +usiness. Is role is 0ere$ore a
"ey 0ea( o$$i2e $un2ion 0a ena+les 0e +usiness 'ana%ers o $o2us on
0eir o*n areas o$ eBperise8 +e i $or eBa'ple8 0e sales (epar'en or
0e 'anu$a2urin% plans. W0e0er su20 a 2o'pany 0as a separae
reasury $un2ion or *0e0er 0is is in2orporae( ino 0eir $inan2e
(epar'en (oes no 20an%e 0e naure o$ 0e un(erlyin% a2iviy. A0e
"ey is 0a reasury 'ana%e'en is a $un2ion 0a suppors 0e 'ain
+usiness a2iviy. I 0us ae'ps o i'prove 0e ne *or0 o$ 0e
2o'pany +y 'ana%in% is $un(s in 0e 'os appropriae 'anner. A0e
sa'e applies o a +an"Ks reasury $un2ion. A0e only (i$$eren2e is 0a
'os +an"in% a2iviies (ire2ly (eal *i0 'oney an( 0us 0e %rey area
+e*een *0a is 2learly a reasury a2iviy an( *0a is no. I is 0is %rey
area8 *0i20 eBplains *0y 0ere is su20 variey +e*een 0e roles 0a
reasury $un2ions are %iven in (i$$eren +an"s. #ever0eless8 0e
un(erlyin% o+3e2ive re'ains o i'prove +usiness per$or'an2e an(
in2rease 0e ne *or0 o$ ea20 +an".
A 0e en( o$ 0is uni8 you s0oul( +e a+le o4
• (eal *i0 0ese operaions8 inernal au(i an( 2o'plian2e
• 'ana%e +alan2e s0ee eBposures E$un(in%8 li-ui(iy8 an( 2as0
• eBplain ris" 'ana%e'en prin2iples $or 'ar"e8 operaional an(
2re(i ris"s
• i(eni$y re%ulaory re-uire'ens an( 2apial a(e-ua2y
• 0e $un2ions an( 20ara2erisi2s o$ $inan2ial 'ar"es
• (is2uss $inan2ial pro(u2s8 pra2i2e8 an( pro2e(ures.
041 D&+&%o<(&nt o2 Tr&$'ur. Funt!on
In2reasin% ne *or0 iniially 'ean 0a reasury $un2ion 0a( o ensure
e$$e2ive 2as0 an( li-ui(iy 'ana%e'en. A0ey nee(e( o ensure
su$$i2ien 2as0 *as availa+le $or +usiness ransa2ion an( 0a availa+le
$un(s *ere invese( o ensure 0a 0e +an" re'aine( li-ui(. Ao 'ee
0ese %oals o$ 'ana%in% $ir'Ms li-ui(iy8 reasury $un2ions nee( 0e
a+iliy o (eer'ine *0a 0e a2ual eBposures are. A0is in urn re-uires
0e a+iliy o 'onior 20an%es on an on6%oin% +asis an( o so'e eBen
0e nee( o 2onrol 0e a2iviies o$ o0er +usiness areas o ensure 0ese
(o no en(an%er 0e reasury $un2ion re'i. For eBa'ple8 a reasury
$un2ion *ill nee( o "no* *0en an( in *0a 2urren2y lar%e pay'ens
are (ue8 o avoi( a poenial (e$aul *0en a pay'en (e'an( is 'a(e.
A0e e'er%en2e o$ 'ore 2o'pleB +an" reasury 'ana%e'en an( ne*
approa20es o ris" 'ana%e'en *ere (riven +y 20an%es in 0e
2o'peiive environ'en $a2e( +y +an"s.
04/ T#& R&(!t o2 Tr&$'ur. Funt!on'
Finan2e 0eory says 0a 0i%0 reurns 2an only +e a20ieve( a 0e
eBpense o$ a"in% 0i%0er ris"s. A0us8 a +an" *i0 a 0i%0 ris" appeie
also $a2es poenially 0i%0er levels o$ losses. Su20 a 0i%06ris" appeie
*oul( +e eB0i+ie( i$ a +an" invese( spare 2as0 in 0i%06yiel( +on(s
ra0er 0an U7 %ils. Assu'in% 0a an insiuion 0as (e2i(e( in $avour
o$ a lo* ris" appeie8 0en i *ill +e up o 0e reasury $un2ion o +uy
lo* ris" inves'en pro(u2s. A0is is (ealin% an( sele'en role o$ a
reasury $un2ion. Clearly8 in lar%e insiuions8 0e %overnin% +o(y *ill
only +e a+le o %ive +roa( %ui(an2e *i0 0e insru'ens 0a +es $i 0e
+roa( %ui(an2e +ein% (e2i(e( a 0e level o$ 0e reasury $un2ion. A0e
$un2ion *ill 0us re-uire an eB2ellen "no*le(%e o$ 0e $inan2ial
insru'ens availa+le in 0e 'ar"e.
A reasury $un2ion 2an 0us +e seen as 0e $un2ion 0a i'ple'ens an(
eBe2ues 0e (e2ision a"en +y 0e 2o'panyKs %overnin% +o(y8 'os
o$en 0e Boar( o$ Dire2ors or an EBe2uive Co''iee o$ a +an". A0is
senior 2o''iee *ill 0ave o se 0e %eneral +usiness srae%y o$ 0e
+an"8 0e 'iB o$ a2iviies an( ris" para'eers $or 0e eBe2uion o$ 0ese
a2iviies. In lar%er or%aniCaions8 0e 'ore (eaile( $or'ulaion o$ 0ese
*ill 0ave +een (ele%ae( o su+62o''iees8 su20 as an Asse an(
!ia+iliy Mana%e'en Co''iee 0a eBiss in 'any $inan2ial
insiuions. A 0e sa'e i'e8 0e 0i%06level 2o''iee *ill also nee(
assuran2es 0a is (e2isions are i'ple'ene( 2orre2ly an( 0a 0ey are
appropriae8 %iven 0e 2onsrains o$ eBernal 'ar"e (evelop'ens. I
*ill also nee( o a(vise on 0e ra(e6o$$s +e*een various +usiness
A0is lar%e role sees +an" reasury 'ana%e'en as +ein% an eBer2ise o$
por$olio 'ana%e'en. A +an"Ks +alan2e s0ee 2an +e seen as a lar%e
por$olio o$ inves'ens. Ao (eer'ine 0o* a por$olio is invese(8 0e
+an"Ks %overnin% +o(y *ill no only nee( un(erlyin% resear208 +u also
(eaile( in$or'aion on 0e posiions *i0in 0is por$olio. A0is
'oniorin% $un2ion an( is eBension o ris" 'ana%e'en8 $or's an
in2reasin%ly i'poran par o$ +an" reasury 'ana%e'en. In pra2i2e8
0o*ever su20 por$olio 'ana%e'en re-uires 0e involve'en o$ variey
o$ $un2ions8 *0i20 *ill +e lo2ae( (i$$erenly *i0in ea20 +an".
Irrespe2ive o$ spe2i$i2 arran%e'en8 0e 2o'peiive environ'en +an"s
$a2e 'eans 0a ea20 +an" nee(s a $un2ion 0a 2an ensure 0e %eneral
ris" appeie relain% o +alan2e s0ee eBposure eBpresse( +y is
%overnin% +oar( is i'ple'ene( an( a(e-uaely 2onrolle(.
A0us8 0e eBe2uion $un2ion o$ a reasury area8 i.e. is (ealin% an(
sele'en role8 2anno +e un(era"en in isolaion o$ 0e ris"
'ana%e'en $un2ions 0a +an" re-uire. Al0ou%0 ris" 'ana%e'en
an( reasury a2iviies are o$en spli ino (i$$eren areas $or 0e sa"e o$
syse's an( 2onrol8 0e *o s0oul( al*ays +e 2onsi(ere( o%e0er o
ensure 0e +an"Ks ne *or0 is 'aBi'iCe(.
Dealin% an( sele'en role o$ reasury uni4 6 For 0e avoi(an2e o$
(ou+8 i s0oul( +e poine( ou 0a reasury a2iviies are 2on2epually
(i$$eren $ro' proprieary ra(in% $un2ions. &roprieary ra(in% uni are
(epar'ens 0a uiliCe 0e +an"Ks $un(s o ra(e a2ively in su20 areas
as +on( an( e-uiy 'ar"es. W0ile a reasury $un2ion suppors an(
$a2iliaes 0e runnin% o$ 0e +an" in %eneral8 proprieary ra(in% is 'ore
a"in o o0er +usiness unis8 su20 as reail +an"in% or inernaional ra(e
Despie 0ese 2on2epual (i$$eren2es8 0e ra(in% a2iviies o$ +o0
reasury $un2ions an( proprieary ra(in% unis s0are 'any si'ilariies.
For eBa'ple8 +o0 re-uire (ealin% (es" an( sele'en (epar'ens.
In(ee(8 in 'any +an"s8 0e *o uiliCe 0e sa'e syse's as 0e
insru'ens ra(e( are o$en si'ilar. Fur0er'ore8 syse's an( 2onrols
0a apply o ra(in% operaions are o$en 0e sa'e8 pari2ularly as i (oes
'a"e +usiness sense o 2o'+ine si'ilar +a2"6o$$i2e a2iviies. I is 0us
no surprisin% 0a in 'any +an"s proprieary ra(in% an( reasury
'ana%e'en are un(era"en *i0in 0e sa'e (epar'en.
In pra2i2e8 'any +an"s only rea 0eir e-uiy an( +on( ra(in% as
proprieary ra(in% unis. A0ese a2iviies en( o +e less (riven +y ris"
'ana%e'en aspe2s an( 0ere$ore 2an +e separae( 'ore easily ino
2learly (e$ine( +usiness unis. In 2onras8 i is al'os i'possi+le o
(isin%uis0 +e*een 0ose 'oney 'ar"e or 2urren2y (ealin%s 0a are
relae( o ris" 'ana%e'en an( 0ose 0a are no. Su20 arran%e'ens
'a"e sense *0ere a reasury $un2ion is 'ainly seen as 0avin% o ensure
asses an( lia+iliy 'ana%e'en. A0is in s0or re-uires 0e 'ana%e'en
o$ li-ui(iy +y ensurin% 0a su$$i2ien $un(s are availa+le $or o0er
+usiness a2iviies8 an( ensurin% 0ose $un(s 0a are no re-uire(
i''e(iaely are uiliCe( o 'aBi'iCe reurns. On 0a +asis8 0e (ealin%
a2iviies o$ reasury $un2ions *ill (eal *i0 ensurin% 0e li-ui(iy an(
2as0 'ana%e'en8 +o0 in (o'esi2 2urren2y8 $orei%n an( poenially
euro2urren2y 'ar"es8 suppor an( i'prove 0e +an"Ks ne *or0.
As 0e ra* 'aerial o$ +an"in% is 'oney8 0is 'oney 'us +e %enerae(
a 0e lo*es $un( 2os. Operaional e$$e2iveness a 0e len(in% an(
inves'en $ron 2an +e2o'e in2i(enal i$ 0e 2os o$ $un(s is oo 0i%0 o
2reae a22epa+le 'ar%in8 pari2ularly in 0e 'o(e' 2o'peiive
040 Front?O22!& At!+!t!&'
Dealer8 as (eal'a"er8 *ill see" o 2on2lu(e ransa2ions8 +u pro(u2s
'us +e pri2e( in or(er o %enerae 0e ne2essary level o$ 'ar%in. O$en
0e uli'ae level o$ pro$i *ill +e un"no*n unil 0e (eal 0as run is
2ourse8 (e$aule( or realiCe( any o$ 0e ris"s un(erlyin% 0e ransa2ion.
For eBa'ple8 (epen(in% on ineres rae an( $orei%n eB20an%e ris"8 0e
$inal pro$i 2oul( +e 0i%0er or lo*er 0an pri2e( iniially. A0rou%0ou 0e
(ealin% (ay8 0e +an" nee(s o opi'iCe is 2as0 $lo*s in or(er o ensure
0a s0or$alls are $ully $un(e(8 an( any surpluses are invese( in or(er
o 'aBi'iCe is reurns. A0ese a2iviies 2an +e pla2e( un(er 0e 0ea(in%
K2as0 'ana%e'enK. Doin% 0e (eal is 2lasse( as L$ron6o$$i2eM8 *0ereas
0e re2on2iliaion o$ pay'ens is K+a2" pay'enK. Dealers an( +a2"
o$$i2e 'ana%ers 0ave o $ore2as a2iviy in or(er o ensure pru(en2e is
+ein% applie( in is ra(in% a2iviies an( 0a all lia+iliies 2an +e 'e in
0e 2ourse o$ 0e ra(in% (ay or *ee".
A (ealer *ill inpu 0e (eal o +e ele2roni2ally rans$erre( o 0e +a2"
o$$i2e $or pro2essin%. ,isori2ally8 0e (ealer *roe 0e (eail o$ 0e (eal
on a slip o$ paper8 *0i20 *as laer inpu ino 0e syse' +y 0e +a2"6
o$$i2e. In ei0er 2ase8 0e ransa2ions (elivere( $ro' 0e (ealin% roo'
*ill +e pro2esse( alon%si(e all 0e o0er (i$$eren $or's o$ +alan2e6s0ee
a2iviy a"in% pla2e.
A %oo( reasury $un2ion *ill +e eBpe2e( o +e innovaive in is
approa20 o 'aBi'iCin% pro$ia+iliy +y loan ypes an( in various
%eo%rap0i2al 'ar"es an( a2ross 2lien +ases. In or(er o $un( 0ese
a2iviies 'ore pro$ia+ly8 0e +an"Ms senior 'ana%e'en *ill eBpe2
reasury ea' o (evelop ne* *ays o$ ara2in% 0e 20eapes $un(s. In
0e 2o'peiive 'ar"es in *0i20 .0e +an"s no* operae8 0ese $un(in%
2oss are "ey8 as is 0e nee( o 'aBi'iCe 0e $lo* o$ in2o'e. More
re2enly 0ere 0as +een a ren( o*ar(s 20ar%in% $ees $or various
servi2es aroun( loan8 a(van2es an( 2re(i lines8 se2uriies an( ne*
$inan2ial insru'ens. A0is o$$6+alan2e s0ee in2o'e is very ara2ive
$or reasury 'ana%ers *0o *ill o$en +e 0e pary o en2oura%e 0eir use.
In 0e sa'e *ay 0a +an"s 'us a"e 2are no o 2on2enrae 0eir loan
+oo" %eo%rap0i2ally or +y 2lien or in(usrial se2or8 si'ilar
2onsi(eraions arise *0en loo"in% a (eposis. I$ 0e sour2e o$ $un(s is
e-ually 2on2enrae(8 0en 0e +an" is vulnera+le o 0e re'oval o$ 0ese
$un(s8 an( *ill nee( o see" ou ne* $un(s in 0e $uure. Over
2on2enraion on s0or6er' iner +an" $un(in% *as one o$ 0e reasons
$or 0e (i$$i2ulies eBperien2e( +y Coninenal Illinois in 0e US in 0e
1<=;s8 pre2ipiain% is 2ollapse. By 'ainainin% a por$olio o$ (eposi
sour2es8 0e +an" re(u2es 0e L2on2enraion ris"M 0a 2oul( si
alon%si(e 0e o0er ris"s +an"s $a2e.
In or(er o 0ave 0e a+iliy o 'a"e loans $or perio(s in eB2ess o$ one
year8 eBen(in% ino 0e 'e(iu' an( lon% er'8 i is ne2essary $or 0e
+an" o ara2 (eposis on a lon% er' +asis. A +an" *ill nee( o
eBer2ise a %rea (eal o$ pru(en2e in 'a20in% asses an( lia+iliies8 *0ile
a 0e sa'e i'e8 a"in% 0e ne2essary seps o 'ainain 2on$i(en2e in
0e +an". In urn 0is *ill 0elp o pro'oe sa+iliy in (eposi levels. Bu
+y (e$iniion8 0e s0or er' $un(s sou%0 an( ara2e( no in
0e'selves 'a20e( o 0e +an"Ks asse por$olio.
A0e sa'e siuaion arises in inves'en por$olio as *ell as in loan
por$olios. Inevia+ly8 inves'en por$olio li$e spans *ill eB2ee( 0e
$un(in% 0a lies +e0in( 0e'8 *0ereas a 0e o0er en( o$ 0e spe2ru'
ra(in% por$olio (o re-uire s0or6er' $un(s $or s0or6er' ransa2ions.
A0ree 'on0 'oney *oul( nor'ally +e 0e 'aBi'u' $un(in%
re-uire'en $or en%a%in% in s0or6er' ra(in%.
One o$ 0e +an"Ms o+3e2ives 0ere$ore *ill +e o 0ave (eposiorMs
rollover 0eir 'oney 0el( in (eposi8 so 0a s0or er' (eposi
e$$e2ively +e2o'es 'e(iu' 6er' $un(s $or +an". A0e 0i%0er 0e
proporion o$ 0e $un(s is +ein% rolle( over8 0e 'ore li"ely i is 0a 0e
+an"s 2an respon( o 20an%es in 'ar"e 2on(iions. A0e eBen o *0i20
0e +an" is prepare( o 'is'a20 is asses an( lia+iliies is ano0er
2onsi(eraion $or senior 'ana%e'en on a (ay6+y6(ay8 perio(6+y6perio(
+asis8 +u inevia+ly 'auriy rans$or'aion *ill $or' par o$ 0a
poli2y. Ensurin% 0a a +an" 2an 2ope *i0 0is 'auriy rans$or'aion
role is a "ey area o$ reasury $un2ions.
045 B$,?O22!& At!+!t!&'
On2e a (eal 0as +een (one in 0e $ron6o$$i2e8 i *ill nee( o +e 2leare(
an( sele(. A0is is %enerally seen as 0e role o$ 0e +a2"6o$$i2e.
Clearin% 2overs all 0e a2iviies prior o sele'en su20 as ra(e
2o'parison an( 'a20in%8 ra(e nein%8 se2uriies 'essa%es an(
nu'+erin% an(8 i$ appli2a+le8 se2uriies len(in%. A0e $irs par o$ 0e
2learin% pro2ess is ra(e 2o'parison an( 'a20in%. A0is involves
2on$ir'aion +e*een 0e 2ounerparies 0a a (eal 0as +een (one an(
0a 0e (eail o$ 0e (eal are 0e sa'e on +o0 si(es. A neB sep 'ay
involve nein% o$ ra(es. Durin% 0e 2ourse o$ a ra(in% (ay8 a +an" 'ay
(eposi U5; 'illion in 0e iner +an" 'ar"e *i0 a spe2i$i2
2ounerpary. !aer in 0e (ay8 i 'ay +orro* U>; 'illion $ro' 0e sa'e
2ounerpary8 $or eBa'ple i$ i 0a( an uneBpe2e( ou$lo* o$ $un(s. A0is
'eans 0a a 0e en( o$ 0e (ay 0e reasury $un2ion 'ay8 (epen(in% on
2onra28 only 0ave o rans$er 0e (i$$eren2e o$ U:; 'illion8 ra0er 0an
rans$errin% 0e $ull U5; 'illion an( 0avin% o a*ai re2eip o$ 0e
se2on( (eal.
Sele'en (eal *i0 0e a2ual rans$er o$ o*ners0ip in eB20an%e $or
2as0 or se2uriy an( 0e su+se-uen 2on$ir'aion 0a 0e rans$er 0as
a"en pla2e. Al0ou%0 +a2"6o$$i2e a2iviies are so'ei'es seen as less
%la'orous 0an $ron6o$$i2e a2iviies8 0is 2ru2ial area nee(s ro+us
syse's an( 2onrols. O0er*ise8 a +an" 'ay $a2e 0e poenial ris" o$
+ein% una+le o sele is respe2ive ousan(in%8 a siuaion 0a 2an arise
$or reasons o$ $rau(8 poor 'ana%e'en8 eB2epional 2ir2u'san2es an(
syse' $ailure.
In 2on2lusion8 one 2oul( see 0a reasury 'ana%e'en involve sour2in%
an( appli2aion o$ $un(s +y 0e reasury (epar'en o$ +an"s. A0ere$ore8
appropriae allo2aion an( uiliCaion o$ $un(s is a sy'+ol o$ e$$e2ive
an( e$$i2ien reasury 'ana%e'en.
A0is uni e'p0asiCe( 0e $un2ions o$ reasury Mana%e'en in +an"in%
in(usry. I also (is2usse( o$ +o0 0e $ron o$$i2e an( +a2"6o$$i2e
a2iviies o$ 0e reasury (epar'en o$ 0e +an"s.
Dis2uss 0e i'poran2e o$ reasury 'ana%e'en in +an"in% in(usryO
1in2en Baris20 E:;;>F. Ban" Areasury Mana%e'en Insiue o$
Finan2ial Servi2es.

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