Basel II

Since the financial crisis began in mid-2007, an important source of losses and of the build up of leverage occurred in the trading book. A main contributing factor was that the current capital framework for market risk, based on the 1996 Amendment to the Capital Accord to incorporate market risks, does not capture some key risks. In response, the Basel Committee on Banking Supervision (the Committee) supplements the current value-at-risk based trading book framework with an incremental risk capital charge, which includes default risk as well as migration risk, for unsecuritised credit products. For securitised products, the capital charges of the banking book will apply with a limited exception for certain so-called correlation trading activities, where banks may be allowed by their supervisor to calculate a comprehensive risk capital charge subject to strict qualitative minimum requirements as well as stress testing requirements. These measures will reduce the incentive for regulatory arbitrage between the banking and trading books.

Objectives

The FSI's objectives are to:

promote sound supervisory standards and practices globally, and to support full implementation of these standards in all countries.
provide supervisors with the latest information on market products, practices and techniques to help them adapt to rapid innovations in the financial sector.
help supervisors develop solutions to their multiple challenges by sharing experiences in seminars, discussion forums and conferences.
assist supervisors in employing the practices and tools that will allow them to meet everyday demands and tackle more ambitious goals.

Main activities The FSI achieves its objectives through the following main activities:

Events for financial sector supervisors such as conferences, high level meetings, and seminars held in Switzerland and globally
FSI Connect, an online learning tool and information resource for financial sector supervisors
Publications such as occasional papers and a quarterly newsletter

Pillar 1” of the new capital framework revises the 1988 Accord’s guidelines by aligning the minimum capital requirements more closely to each bank's actual risk of economic loss.Pillar 2 ” Supervisors will evaluate the activities and risk profiles of individual banks to determine whether those organisations should hold higher levels of capital than the minimum requirements in Pillar 1 would specify and to see whether there is any need for remedial actions. Pillar 3” leverages the ability of market discipline to motivate prudent management by enhancing the degree of transparency in banks’ public reporting to shareholders and customers.

The Committee believes that, when marketplace participants have a sufficient understanding of a bank’s activities and the controls it has in place to manage its exposures, they are better able to distinguish between banking organisations so that they can reward those that manage their risks prudently and penalise those that do not.

Tier 1 and Tier 2 3

. Regulatory Capital is Composed of:----T-1 or Core capital*.T-2 or Supplementary Capital *T-3 or Additional Supplementary Capital

Tier 1 capital or ‘Core Capital’ elements:--Paid up capital Non-repayable share premium account Statutory Reserve General Reserve Retained Earnings Minority Interest in subsidiaries Non-Cumulative irredeemable Preference Shares Dividend Equalization Account

Tier 2 capital or ‘Supplementary Capital’ represents other elements which fall short of some of the characteristics of the Core capital but contribute to the overall strength of a bank:

a. General Provision

b. Revaluation Reserves -For fixed assets -For securities - For equity instruments

c. All other Preference Shares

d. Subordinated Debt

e. Exchange equalization AC

Tier 3 capital or ‘Additional Supplementary Capital’ consists of short-term subordinated debt (original/residual maturity less than or equal to five years but greater than or equal to two years) would be solely for the purpose of meeting a portion of capital requirements for market risk.

CONDITIONS FOR MAINTAINING REGULATORY CAPITAL

a. T-2 can not exceed T-1

b. 50% of fixed asset and security revaluation reserve shall be eligible for T-2

c. 10% of revaluation reserves for equity instruments eligible for T-2

d. Subordinated debt shall be limited to maximum 30% of T-1

e. A minimum of about 28.5% of market risk needs to be supported by T-1capital. Supporting of Market Risk from T-3 capital shall be limited up to maximum of 250% of a bank’s T-1 capital that is available after meeting credit risk capital requirement.

ELIGIBLE REGULATORY CAPITAL

a. Following Deductions are to be made from T-1:

o Book value of Goodwill and value of any contingent assets

o Provisioning shortfall against classified assets

o Provisioning shortfall against investment in shares

o Remaining deficit of revaluation in investment after netting off

o Reciprocal/crossholdings of banks capital/subordinated debt

o Additional/unauthorized amount of investment. (50% from T-1 and 50% from T-2)

o Investments in subsidiaries which are not consolidated. (50% from T-1 and 50% from T-2)

b. Eligible T-2 will be derived after deducting deductible components

c. Total eligible regulatory capital will be calculated by summing up the eligible T-1, T-2 and T-3

MINIMUM CAPITAL REQUIREMENT

a. No scheduled bank in Bangladesh shall commence and carryon business unless it has minimum paid up capital as fixed by BB.

b. Bank’s have to maintain minimum CAR on ‘Solo’ basis as well as on ‘Consolidated’ basis.

c. In order calculate MCR, banks are required to calculate their Risk Weighted Assets (RWA) on the basis of credit, market, and operational risks.

d. TRWA = RWA for CR + 10 (capital charges for market risk and operational risk)

e. CAR = With T-1 at least 5%

Non-deposit sources of Bank

In the world of banking practice, extensive development of receiving non-deposit sources of resource mobilization. The most common forms of such engagement means include:-1 Borrowing on the interbank market;2- An agreement to sell securities and repurchase (or operation “repo”);3- Consideration of bills and receipt of loans from central banks;4- Sale of bankers’ acceptances;-5 Issue of commercial paper;-6 Borrowing Eurodollar market;- 7Issue of capital notes and bonds..What are Common Deposit Funds?

Common Deposit Funds (CDFs) are deposit-taking schemes. Before the Charities Act 2006, they were open only to charities in England and Wales, but are now also open to “appropriate bodies” (i.e. bodies established as charitable under the law of Scotland or Northern Ireland and eligible for UK tax relief) where the Scheme permits this. They are set up by Schemes made by the Charity Commission (the Commission) under section 25 of the Charities Act 1993. They operate as deposit-takers and are deemed by law to be charities themselves. They are therefore eligible for registration as charities in their own right. CDFs provide a deposit-taking scheme which is tax efficient, administratively simple and cost efficient. They enjoy the same tax status as other charities.

Efficient fund mng

general principles for choosing bank assets and liabilities, for deciding on when to make a loan and what interest rate to charge, for pricing funds transfer services such as the handling of checks, for establishing compensating balance requirements, and for dealing with government regulation. The discussion assumes markets are efficient and deals first with an unregulated environment and then with policies in the face of regulatory constraints. Most of the policies which would be optimal in an unregulated environment will be optimal in the regulated environment such as in the U.S. today, because it is relatively easy to get around most of the regulations that are applied to banks by the use of non-deposit liabilities, compensating balances and negative checking accounts.

Banks continue to face an uncertain regulatory and business environment as regulators marshal their responses to the global financial crisis. Perhaps nowhere is this uncertainty more keenly felt today than in the area of capital management.

Borrowing in the interbank market. In banking practice, the U.S., this market is known as the Federal Reserve. These funds represent the deposit funds of commercial banks that are stored in the reserve account at the central bank or federal reserve banks. Commercial banks with the reserve account surplus compared with a mandatory minimum, provide them on loan for a short time. This allows them to get extra profit and the bank-borrower to improve liquidity.

60-s purchase of federal funds used mainly to fund the reserve account of the bank, as interest rates on them were below the discount rate the central bank. In subsequent years, interest rates rose and began to exceed the discount rate.

Discounting bills and obtaining loans from the central bank. This way of attracting additional resources are used most often by commercial banks experiencing a seasonal resource, or when they have an emergency. The central bank, it should be that its loans do not become a permanent source of funds. Upon receipt of such loans, commercial banks provide collateral in the form of various Treasury securities, obligations of federal and local authorities, short-term commercial paper.

Accounting for bankers’ acceptances. Banker’s acceptance – this time draft or bill of exchange, exhibited the exporter or importer to the bank, has agreed to accept. Bankers’ acceptances are used to finance foreign trade deals. Commercial bank can discount the Fed acceptances and thus obtain a loan for them. Deemed acceptable for rediscount acceptances up to 6 months of export-import transactions or trade transactions within the country.

Commercial banks to increase their own capital and, consequently, of banking resources may issue capital notes and bonds. Notes and bonds are issued mainly large banks. The launch of these types of bank debt increases, on the one hand, the bank’s capital, on the other – its resources.

The measurement and evaluation

The measurement and evaluation of investment performance is the last step in the investment management process. Actually, it is misleading to say that it is the last step since the investment management process is an ongoing process. This step involves measuring the performance of the portfolio and then evaluating that performance relative to some benchmark.
Although a portfolio manager may have performed better than a benchmark, this does not necessarily mean that the portfolio manager satisfied the client’s investment objective. For example, suppose that a financial institution established as its investment objective the maximization of portfolio return and allocated 75% of its funds to common stock and the balance to bonds. Suppose further that the manager responsible for the common stock portfolio realized a 1-year return that was 150 basis points greater than the benchmark. Assuming that the risk of the portfolio was similar to that of the benchmark, it would appear that the manager outperformed the benchmark. However, sup- pose that in spite of this performance, the financial institution cannot meet its liabilities. Then the failure was in establishing the investment objectives and setting policy, not the failure of the manager. The dividing line between currency economics and long-term valuation analysis is somewhat blurred. There is a difference however and it concerns the time span involved in one’s analysis. The aim of currency economics is to look at the parts of the economy that affect and are affected by the exchange rate, such as the balance of payments and infkation differentials, in order to give an idea about that exchange rate’s current valuation and direction. Long-term valuation models, such as those that focus on REER or FEER, are trying to give a multi-month or more likely a multi-year view of exchange rate valuation. In line with this, the main exchange rate models that focus on long-term valuation are the following:

Purchasing Power Parity
The Monetary Approach
The Interest Rate Approach
The Balance of Payments Approach
The Portfolio Balance Approach

Most of these models focus on the relative price of an asset or good which should over time cause an exchange rate adjustment to restore “equilibrium”.

Loans to small companies terrify management at many larger banks and in many countries a small number of banks tend to specialize in lending to these segments:

They are sufficiently large individually to require personal attention. This is not the case with retail loans where little or no attempt is made to take account of changing borrower circumstances. They are made to companies operating in many diverse manufacturing and service businesses. This means that they are not readily amenable to statistical analysis nor does the bank have the in-house expertise to assess prospects for all these sectors. They are sufficiently large collectively that a high level of losses on loans made to companies in this segment would have a material impact on a bank’s financial position. As a group, SMEs are hit disproportionately hard by economic downturns. This can be seen by the massive increase in failures of companies in this segment as reported by bankruptcy figures through recessions.They are sufficiently small that they fall outside the scope of rating agencies’ coverage.
Their business risks are not well diversified and losing one major customer may be sufficient to cause an otherwise healthy company to fail.Collateral values often depend on the company operating as a going concern.
In most instances a single bank is the major financial creditor. There can be safety in numbers, at least for credit officers, where the borrower has defaulted.

A liquidity crisis

A liquidity crisis occurs whenever a firm is unable to pay its bills on time or lacks sufficient cash to expand inventory and production or violates some term of an agreement by letting some of its financial ratios exceed limits. It is the financial manager's job to ensure that this never happens. But it happens and all interests involved start to scramble to protect their positions.

In financial economics, liquidity is a catch-all term that may refer to several different yet closely related concepts. Among other things, it may refer to Asset Market liquidity (the ease with which an asset can be converted into a liquid medium e.g. cash); Funding liquidity (the ease with which borrowers can obtain external funding) Balance Sheet or Accounting liquidity (the health of an institution’s balance sheet measured in terms of its cash-like assets). Additionally, some economists define a market to be liquid if it can absorb liquidity - trades (sale of securities by investors to meet sudden needs for cash) without large changes in price. Liquidity Crisis refers to drying up of liquidity, which could reflect a fall in asset prices below their long run fundamental price; or deterioration in external financing conditions; or a reduction in the number of market participants or simply difficulty in trading assets.^[1]

How to Respond to a Liquidity Crisis

Once a company finds itself struggling to meet its short-term obligations, it needs to urgently access sources

of cash, both internal and external. The following five-step approach covers the key elements of any

response:

1. Tackle the Root of the Crisis

Normally, a liquidity crisis is only the last symptom of pre-existing root issues such as strategic or profitabilitycrises (for example, losing one key customer contract, misalignment of product portfolio and market, acompany overstretching itself by entering too many markets). A liquidity crisis needs to be addressed right

away, but ignoring the crisis’ root causes will merely postpone the next liquidity crisis. In these times ofurgency, the support of external advisers can bring highly needed extra resources, experience of crisismanagement, and an independent perspective.

2. Be Honest

It is essential that a company is honest about its current situation, and creates a climate of transparencyIt must comply with any regulatory requirements to inform the market, which can be applicable to listedcompanies. A CFO only has one chance to put things right with the banks:

• Give an honest assessment of the situation;

• Communicate appropriate information to all stakeholders; banks, shareholders, employees, suppliers,credit insurers, etc. so as not to mislead, or make fraudulent misrepresentations. Be sure to present

an accurate picture of the current situation; account for all received bills (from experience, purchaseledgers do not include all received invoices, with many invoices hidden in staff drawers).

3. Gain or regain trust

Regaining the trust of banks, shareholders, and other stakeholders is a prerequisite to maintaining, or raisingexternal funding. This requires communicating robust and realistic plans, delivering on these plans andbuilding relationships.

4. Harvest Cash

There are three main ways to improve cash position:

1. Collect and control existing cash2. Reduce working capital3. Restructure the balance sheet

5. Manage Cash Sustainability

Finally, a company needs to ensure a sustainable liquidity position. As mentioned above, strategic andoperational root causes for the last crisis must be understood and tackled to avoid reoccurrences of liquiditycrises; then companies can implement the following techniques to keep control of liquidity:

Asset and liability management-In banking, asset and liability management is the practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. This can also be seen in insurance.Banks face several risks such as the liquidity risk, interest rate risk, credit risk and operational risk. Asset Liability management (ALM) is a strategic management tool to manage interest rate risk and liquidity risk faced by banks, other financial services companies and corporations. Banks manage the risks of Asset liability mismatch by matching the assets and liabilities according to the maturity pattern or the matching the duration, by hedging and by securitization.Techniques of ALM have also evolved. The growth of OTC derivatives markets have facilitated a variety of hedging strategies. A significant development has been securitization, which allows firms to directly address asset-liability risk by removing assets or liabilities from their balance sheets. This not only reduces asset-liability risk; it also frees up the balance sheet for new business.The scope of ALM activities has widened. Today, ALM departments are addressing (non-trading) foreign exchange risks and other risks. Also, ALM has extended to non-financial firms. Corporations have adopted techniques of ALM to address interest-rate exposures, liquidity risk and foreign exchange risk. They are using related techniques to address commodities risks. often presented as ALM.

Asset and liability management imp

Banks are a vital part of the global economy, and the essence of banking is asset-liability management (ALM). This book is a comprehensive treatment of an important financial market discipline. A reference text for all those involved in banking and the debt capital markets, it describes the techniques, products and art of ALM. Subjects covered include bank capital, money market trading, risk management, regulatory capital and yield curve analysis.

liquidity, gap and funding risk management
hedging using interest-rate derivatives and credit derivatives
impact of Basel II
securitisation and balance sheet management
structured finance products including asset-backed commercial paper, mortgage-backed securities, collateralised debt obligations and structured investment vehicles, and their role in ALM
treasury operations and group transfer pricing.

Techniques determin for ALM: ---* Maturity-Gap Analysis * Duration-Gap Analysis *Cashflow-Matching

1. Maturity Gap-Analysis -The technique of maturity gap analysis is based on a general interest rate dependency of assets and liabilities. Assets and liabilities are classified according to the term of fixed interest. This is the period until the interest rate on a nominal balance sheet item is reset or adjusted in line with market rates. The gap is usually defined with regard to a maturity segment or gapping period (GP). We define GAP = ISA - ISL, 2.Duration-Gap Analysis- Where the maturity-gap analysis is directed to interest rate income, the duration-gap analysis focuses on the present value of interest rate payments. The duration of an asset or liability provides a measure for the sensitivity of its present value to changes in interest rates. 3 Cashflow Matching -The cashflow matching approach may be regarded as an optimized maturity gap analysis. The approach aims at minimizing maturity differences between asset and liability cashflows. As suchit is a normative approach, where the gap analysis is only descriptive. However, there are differences in the degree of matching implied by this approach. It has become more or less customary to distinguish between: exact cashflow matching, and dedication.

CAMELS ratings

The six factors examined are as follows:

C - Capital adequacy A - Asset quality M - Management quality E - Earnings
L – Liquidity S - Sensitivity to Market Risk

Bank supervisory authorities assign each bank a score on a scale of one (best) to five (worst) for each factor. If a bank has an average score less than two it is considered to be a high-quality institution, while banks with scores greater than three are considered to be less-than-satisfactory establishments. The system helps the supervisory authority identify banks that are in need of attention.

*The purpose of CAMELS ratings is to determine a bank’s overall condition and to identify its strengths and weaknesses:1Financial 2 Operational 3Managerial

*Rating System

Each bank is assigned a uniform composite rating based on six elements. The system provides a general framework for evaluatingthe banks.It is a standardized method which allows the assessment of the quality of banks according to standard criteria providing a meaningful rating.

**Each element is assigned a numerical rating based on five key

components:

1 Strong performance, sound management, no cause for supervisory concern

2 Fundamentally sound, compliance with regulations, stable, limited supervisory needs

3 Weaknesses in one or more components, unsatisfactory practices, weak performance but limited concern for failure

4 Serious financial and managerial deficiencies and unsound practices. Need close supervision and remedial action

5 Extremely unsafe practices and conditions, deficiencies beyond management control. Failure is highly probable and outside financial assistance needed

*Capital is rated based on the following considerations:

Nature and volume of problem assets in relation to total capital and adequacy of LLR

and other reserves Balance sheet structure including off balance sheet items, market and concentration risk-

1Nature of business activities and risks to the bank2Asset and capital growth experience and prospects 3Earnings performance and distribution of dividends4 Capital requirements and compliance with regulatory requirements5 Access to capital markets and sources of capital 6Ability of management to deal with above factors

Capital is rated based on the following considerations:

z Nature and volume of problem assets in relation to total capital and adequacy of LLR

and other reserves

z Balance sheet structure including off balance sheet items, market and concentration

risk

z Nature of business activities and risks to the bank

z Asset and capital growth experience and prospects

z Earnings performance and distribution of dividends

z Capital requirements and compliance with regulatory requirements

z Access to capital markets and sources of capital

z Ability of management to deal with above factors

Asset quality is based on the following considerations:

1. Volume of problem of all assets 2lume of overdue or rescheduled loans

3.bility of management to administer all the assets of the bank and to collect problem

loansz Large concentrations of loans and insiders loans, diversification of investmentsz Loan portfolio management, written policies, procedures internal control, Management Information Systemz Loan Loss Reserves in relation to problem credits and other assetsz Growth of loans volume in relation to the bank’s capacity

Management is the most important element for a successful

operation of a bank. Rating is based on the following factors:

z Quality of the monitoring and support of the activities by the board and management

and their ability to understand and respond to the risks associated with these activities

in the present environment and to plan for the future

z Financial performance of the bank with regards to the other CAMELS ratings

z Development and implementation of written policies, procedures, MIS, risk monitoring

system, reporting, safeguarding of documents, contingency plan and compliance with

laws and regulations controlled by a compliance officer

z Availability of internal and external audit function

z Concentration or delegation of authority

z Compensations policies, job descriptions

z Response to CBI concerns and recommendations

z Overall performance of the bank and its risk profile

Earnings are rated according to the following factors:

z Sufficient earnings to cover potential losses, provide adequate capital and pay

reasonable dividends

z Composition of net income. Volume and stability of the components

z Level of expenses in relation to operations

z Reliance on extraordinary items, securities transactions, high risk activities

z Non traditional or operational sources

z Adequacy of budgeting, forecasting, control MIS of income and expenses

z Adequacy of provisions

z Earnings exposure to market risks, such as interest rate variations, foreign exchange

fluctuations and price risk

Liquidity is rated based on the following factors:

z Sources and volume of liquid funds available to meet short term obligations

z Volatility of deposits and loan demand

z Interest rates and maturities of assets and liabilities

z Access to money market and other sources of funds

z Diversification of funding sources

z Reliance on inter-bank market for short term funding

z Management ability to plan, control and measure liquidity process. MIS.

z Contingency plan

Sensivity and Market risk is based primarily on the following evaluation factors:

z Sensitivity to adverse changes in interest rates, foreign exchange rates, commodity

prices, fixed assets

— Nature of the operations of the bank

— Trends in the foreign currencies exposure

— Changes in the value of the fixed assets of the bank

— Importance of real estate assets resulting from loans write off

z Ability of management to identify, measure and control the market risks given the

bank exposure to these risks

Short-term subordinated debt covering market it May be unsecured, subordinated and fully paid up;• have an original maturity of at least two years;• not be repayable before the agreed repayment date unless the supervisory authority agrees;• be subject to a lock-in clause which stipulates that neither interest nor principal may be paid if such payment means that the bank falls below or remains below its minimum capital requirement.

Credit risk

The risk of loss of principal or loss of a financial reward stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. Investors are compensated for assuming credit risk by way of interest payments from the borrower or issuer of a debt obligation.Credit risk is closely tied to the potential return of an investment, the most notable being that the yields on bonds correlate strongly to their perceived credit risk. Credit / default risk is a chance or probability that a counterparty cannot fulfil the agreed obligation, including a chance that the counterparty’s credit risk will be down graded,which may affect earnings and capital fund of financial institutions (FIs). Credit risk is very important as it involves credit extension, which is a major transaction of financial institutionsboth credits that are assets and contingent liabilities of the financial institutions.

Credit risk mang

The process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making. Essentially, risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance. Inadequate risk management can result in severe consequences for companies as well as individuals. For example, the recession that began in 2008 was largely caused by the loose credit risk management of financial firms.

Principal mang

1. While financial institutions have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank's counterparties.

2. Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. The goal of credit risk management is to maximise a bank's risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions..

3. For most banks, loans are the largest and most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of a bank, including in the banking book and in the trading book, and both on and off the balance sheet. Banks are increasingly facing credit risk (or counterparty risk) in various financial instruments other than loans, including acceptances, interbank transactions, trade financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees, and the settlement of transactions.

4. Since exposure to credit risk continues to be the leading source of problems in banks world-wide, banks and their supervisors should be able to draw useful lessons from past experiences. Banks should now have a keen awareness of the need to identify, measure, monitor and control credit risk as well as to determine that they hold adequate capital against these risks and that they are adequately compensated for risks incurred

5. The sound practices set out in this document specifically address the following areas: (i) establishing an appropriate credit risk environment; (ii) operating under a sound credit-granting process; (iii) maintaining an appropriate credit administration, measurement and monitoring process; and (iv) ensuring adequate controls over credit risk. Although specific credit risk management practices may differ among banks depending upon the nature and complexity of their credit activities, a comprehensive credit risk management program will address these four areas.

6. While the exact approach chosen by individual supervisors will depend on a host of factors, including their on-site and off-site supervisory techniques and the degree to which external auditors are also used in the supervisory function, all members of the Basel Committee agree that the principles set out in this paper should be used in evaluating a bank's credit risk management system.

7. The Committee stipulates in Sections II through VI of the paper, principles for banking supervisory authorities to apply in assessing bank's credit risk management systems. In addition, the appendix provides an overview of credit problems commonly seen by supervisors.

8. A further particular instance of credit risk relates to the process of settling financial transactions. If one side of a transaction is settled but the other fails, a loss may be incurred that is equal to the principal amount of the transaction. Even if one party is simply late in settling, then the other party may incur a loss relating to missed investment opportunities. Settlement risk (i.e. the risk that the completion or settlement of a financial transaction will fail to take place as expected) thus includes elements of liquidity, market, operational and reputational risk as well as credit risk.

Liquidity Risk

The concept of liquidity is increasingly important in managing financial risk. It is driven by; the structure and depth of markets; volatility of market prices/rates; the presence of traders willing to make markets and commit capital to support trading; and, trading / leverage strategies deployed. It has historically been thought of as associated with funding, however, it can be separated into two distinct risk types – Funding Liquidity Risk and Trading Liquidity Risk. In September 2008 the BIS released a detailed guidance document on liquidity management – “Principles for Sound

Liquidity Risk Management and Supervision4”. The document provides a number of guidance principles around; governance; measurement and management; public disclosure; and, the role of supervisors. It is the most comprehensive regulatory/supervisory response on the subject to date.

Liquidity Management

The main liquidity concern of the ALM unit is the funding liquidity risk embedded in the balance sheet. The funding of long term mortgages and other securitised assets with short term liabilities (the maturity transformation process), has moved to centre stage with the contagion effect of the sub-prime debacle. Both industry and regulators failed to recognise the importance of funding and liquidity as contributors to the crisis and the dependence on short term funding created intrinsic flaws in the business model. Banks must assess the buoyancy of funding and liquidity sources

through the ALM process. . Like all areas of risk management, it is necessary to put a workable framework in place to manage liquidity risk. It needs to look at two aspects: 1) Managing liquidity under the business as usual

scenario, and 2) Managing liquidity under stress conditions. It also needs to include a number of liquidity measurement tools and establish limits against them At the governance level, boards need to recognise liquidity risk as the ultimate killer. This means a board needs to clearly articulate the risk tolerance of the organization and subject the balance

sheet to regular scrutiny. Guiding principles need to be included as part of this process. The

following 5 principles are valuable:

1. Diversify sources and term of funding – concentration and contagion were the killers in the

recent crisis. 2. Identify, measure, monitor and control – it is still surprising that many banks do not fully

understand the composition of their balance sheet to a sufficient level of detail to allow for

management of the risks. 3. Understand the interaction between liquidity and other risks – e.g. basis risk – the flow on

impact of an event in one area can be devastating to others.

4. Establish both tactical and strategic liquidity management platforms – keep a focus on both

the forest and the trees.

5.Establish detailed contingency plans and stress test under multiple scenarios regularly

Funding Liquidity Risk

This refers of course to the ability to meet funding obligations by either financing through sale of assets or by borrowing. Perhaps the most poignant example is the recent crisis-driven drying up of access to debt securities markets globally which forced governments in most jurisdictions to provide massive ‘window’ facilities to market participants. At the strategic level, most banks will manage funding liquidity risk through the ALM process and this is looked at in the sections on ALM below. In many smaller banks, however, it can be the responsibility of the trading department that also has day to day responsibility for operationalising the strategy.

Working Capital

The amount of working capital a company determines it must maintain in order to continue to meet its costs and expenses. The working capital requirement will be different for each company, depending upon many factors such as how frequently the company receives earnings and how high their expenses are. - Working Capital is the amount of Capital that a Business has available to meet the day-to-day cash requirements of its operations Working Capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon be required . It refers to the amount of Current Assets that exceeds Current Liabilities .Working Capital refers to that part of the firm’s Capital, which is required for Financing Short-Term or Current Assets such as Cash, Marketable Securities,

Factors Determining Working Capital Requirements Part

(1) Availability of Credit: The amount of credit that a firm can obtain, as also the length of the credit period significantly affects the working capital requirement. The greater the prospects of getting credit, the smaller will be its requirement of working capital because it can easily purchase raw materials and other requirements on credit.

(2) Growth and Expansion: The working capital requirements increase with growth and expansion of business. Hence planning of the working capital requirements and its procurement must go hand in hand with the planning of the growth and expansion of the firm. The implementation of the production plan that aims at the growth or expansion of the unit necessitates more of fixed capital and working capital both.

(3) Profit and its Distribution: The net profit of a firm is a good index of the resources available to it to meet its capital requirements. But, from the viewpoint of working capital requirement, it is the profit in the form of cash which is important, and not the net profit. The profit available in the form of cash is called cash profit and it can be assessed by adding or deducting non-cash items from the net profit of the firm. The larger the amount of cash profit, the greater will be the possibility of acquiring working capital.

(4) Price Level Fluctuations: A general statement may be made that with price rise, a firm will require more funds to purchase its current assets. In other words, the requirements of working capital will increase with the rise in prices. But all firms may not be affected equally. The prices of all current assets never go up to the same extent. Price of some current assets rise less rapidly than those of the others. Hence for the firms which use such current assets, the working capital need will increase by a smaller amount. Besides, if it is possible to pass on the burden of high prices of raw materials to the customers by raising the prices of final product, then also there will be no increase in working capital requirements.

(5) Operating Efficiency: If a firm is efficient, it can use its resources economically, and thereby it can reduce cost and earn more profit. Thus, the working capital requirement can be reduced by more efficient use of the current assets.

Operational Risk

Under the Basel II Accord, operational risk is defined as “...the risk of loss resulting from inadequate processes, people and systems or from external events.” The Accord also recognises however that the term “operational risk” can include different meanings, and therefore permits banks to use their own definitions provided the key elements of the Basel II definition are included. While banks have always engaged in operational risk management, the Basel II related

rules introduce new dimensions to this practice in the form of explicit capital requirements and corresponding changes in supervisory oversight. The management of operational risk requires systems capable of identifying, recording and

quantifying operational failures that may cause financial loss. The systems are essentially tracking processes that monitor the behaviour and performance of existing systems and processes. The essential elements include 1) the ability to track and monitor performances of specified operational processes and systems, 2) maintenance of databases of operational loss experience history, and 3) capacity to provide exception reporting or initiate actions to enable intervention to reduce operational risks.

Interest rate risk: Interest risk is the change in prices of bonds that could occur as a result of change: n interest rates. It also considers change in impact on interest income due to changes in the rate of interest. In other words, price as well as rein-vestment risks require focus. In so far as the terms for which interest rates were fixed on deposits differed from those for which they fixed on assets, banks incurred interest rate risk i.e., they stood to make gains or losses with every

change in the level of interest rates. As long as changes in rates were predictable both in magnitude and in timing over

the business cycle, interest rate risk was not seen as too serious, but as rates of interest became more volatile, there was felt need for explicit means of monitoring and controlling interest gaps. In most OECD countries (Harrington, 1987), the situation was no different from that which prevailed in domestic banking. The term to maturity of a bond provides clues to the fluctuations in the price of the bond since it is fairly well-known that longer maturity bonds have greater

fluctuations for a given change in the interest rates compared to shorter maturity bonds. In other words commercial banks, which are holding large proportions of longer maturity bonds, will face more price reduction when the interest rates go up. Therefore, the banking industry has substantially more issues associ ated with interest rate risk, which is due to circumstances outside its control. This poses extra challenges to the banking sector and to that extent, they have to adopt innovative and sophisticated techniques to meet some of these challenges. There are certain measures available to Measure interest rate risk. These include:

. 1Maturity: Since it takes into account only the timing of the final principal payment, maturity is considered as an approximate measure of risk and in a sense does not quantify risk. Longer maturity bonds are generally subject to

Reputational risk, often called reputation risk, is a type of risk related to the trustworthiness of business. Damage to a firm's reputation can result in lost revenue or destruction of shareholder value, even if the company is not found guilty of a crime. Reputational risk can be a matter of corporate trust, but serves also as a tool in crisis prevention.^[1]This type of risk can be informational in nature or even financial. Extreme cases may even lead to bankruptcy (as in the case of Arthur Andersen). Recent examples of companies include: Toyota, Goldman Sachs, Oracle Corporation and BP. The reputational risk may not always be the company's fault as per the case of the Tylenol cyanide panic in 1982.^[. Understand the value of your entity’s reputation.

Management Reputational risk -1Treat reputation holistically. 2Understand interrelationships within the business.3Identify and prioritise the main causes of reputational risk.Communicate these causes to key management. 4Have a crisis plan when all else fails.

Call Money loaned by a bank that must be repaid on demand. Unlike a term loan, which has a set maturity and payment schedule, call money does not have to follow a fixed schedule. Brokerages use call money as a short-term source of funding to cover margin accounts or the purchase of securities. The funds can be obtained quickly.

The interest rate on a type of short-term loan that banks give to brokers who in turn lend the money to investors to fund margin accounts. For both brokers and investors, this type of loan does not have a set repayment schedule and must be repaid on demand.

A market that consists of the borrowing of money by brokers and dealers for the purpose of meeting their credit needs.
Generally this money is used to either cover their customersâ?? margin accounts or finance their own inventory of securities. Along with day-to-day loans, call money loans play a significant role in interbank money dealings and between banks and money market dealers. The term â??call moneyâ?? alone usually refers to either secured or unsecured callable loans made by banks to money market dealers. Generally these loans are made on a short term basis.

A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year,^{[1][dead link]} as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties.Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.A capital market is simply any market where a government or a company (usually a corporation) can raise money (capital) to fund their operations and long term investment. Selling bonds and selling stock are two ways to generate capital, thus bond markets and stock markets (such as the Dow Jones) are considered capital marketsStock values reflect investor reactions to government policy as well. If the government adopts policies that investors believe will hurt the economy and company profits, the market declines; if investors believe policies will help the economy, the market rises. Critics have sometimes suggested that American investors focus too much on short-term profits; often, these analysts say, companies or policy-makers are discouraged from taking steps that will prove beneficial in the long run because they may require short-term adjustments that will depress stock prices. Because the market reflects the sum of millions of decisions by millions of investors, there is no good way to test this theory.

Money market A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements. Compare the top money market accounts, money market rates and savings account rates with our money markets comparison chart. Sign up for our newsletter, and we'll keep you informed of the high yield money market rates, high interest savings account rates, and bank bonuses. With an online money market account, banks can pay higher money market rates because of lower costs.

Securitization

Securitization in a broad sense - is a process which converts a illiquid financial asset into liquid asset through a transaction process. Securitization is the issuance of marketable securities backed not by the expected capacity to repay of a private corporation or public sector entity but by the expected future cash flows from specific assets.” .Securitization is a pooling of homogeneous, cash flow producing illiquid financial assets and issuing claims on those identifiable assets in the form of multiple classes of marketable securities

Why Securitization-The higher yield associated with these securities attracts investors who are willing to bear specific credit, prepayment and liquidity risk associated with the cash flows from the pool of assets. The fundamental principle in securitisation is specific identification of risks and allocation of the same to various parties who are best able to manage those risks.

Benefits to Banks /FIs

To improve capital adequacy ratio

(In order to meet regularly capital requirement the bank should,

_ Securities the good assets

- Profit from origination and servicing.

Thus regulatory costs and rigidities in norms create an incentive for banks to shrink their balance sheets by securitizing loans.)

• Reduces risk based capital requirements.

• Increases liquidity

• Reduces exposure to credit concentrations

• Increases lending capacity

• Reduces under performing assets

• Improves return on capital and share holder value

• Provides access to more favourable capital markets funding rates

• Diversified funding options

• Allows for better asset liability managements

• Preserves customer relations

Securitization Process and Participants

The mortgage loan securitization process of creating a trust to acquire mortgages and issue pass-through certificates to investors typically involves seven key participants. These participants are the seller, underwriter, trustee, servicer, rating agency, accountant, and legal counsel. The seller is the owner of the mortgage loans sold to the trust and the ultimate ben- eficiary of the proceeds from the sale of the certificates to investors. The seller may pro-

vide some form of guarantee or credit support to enhance the value of the bonds. The seller will also usually provide certain representations and warranties related to the mort- gage collateral. The underwriter receives individual mortgage loan information, analyzes and struc- tures the portfolio into multiple classes of certificates of varying maturities and interest rates, and underwrites (purchases) the securities from the seller. The underwriter then

resells the certificates to investors. The trustee represents the interests of the certificate holders and acts as administra-

tor of the trust. The primary role of the trustee is to compute the amount of monthly distributions payable to the investors and make appropriate distributions. Each month, an account statement is prepared by the trustee that summarizes the cash received by the trust and explains the calculation of the amounts paid to the investors of each class of securities. The trustee is usually responsible for the preparation of the trust’s income tax return and the related informational tax filings. The trustee for publicly rated securities must provide backup servicing for the securitized loans in case the appointed servicer is unable to service the loans. The trustee must also make advances for delinquent mort- gage payments if the primary servicer fails to do so. For this reason, the trustee must have an unsecured debt or deposit rating of no more than one full rating level below that of the securities issue (that is, if the RTC issues double A rated securities [AA], the trustee must have an unsecured debt or deposit rating of single A [A]). The servicer performs the traditional mortgage loan servicing functions of collecting and accounting for borrower’s payments and resolving delinquent loans. The servicer prepares special reports for the trustee and forwards the monthly mortgage collection

Loan sale-A loan sale is a sale, often by a bank, under contract of all or part of the cash stream from a specific loan, thereby removing the loan from the bank's balance sheet.

Often sub prime loans from failed banks in the United States are sold by the Federal Deposit Insurance Corporation (FDIC) in an online auction format through companies such as The Debt Exchange, Mission Capital Advisors, Eastdil Secured, Garnet and First Financial, all of which are listed on the FDIC's website under Asset Sales and the Carlton Group (under Carlton Exchange). Performing loans are also sold between financial institutions. Mandel & Company is an example of a leading financial services firm that arranges performing loan sales. Bank lending traditionally involves the extension of credit that is held by the originating bank until maturity. Loan sales allow banks to deviate from this pattern by transferring loans in part or in their entirety from their own books to those of another institution. This paper uses a new methodology to test the validity of two hypotheses regarding banks’ motivations for selling and buying loans: (1) the comparative advantage hypothesis, that banks with a comparative advantage in originating loans sell and those with a comparative advantage in funding loans buy, and (2) the diversification hypothesis, that banks lacking the ability to diversify internally use loan sales and purchases to achieve diversification. A third hypothesis -- that reputational barriers can limit access to the secondary market -- is considered as well, with particular attention paid to the importance of affiliate relationships in explaining secondary market activity. Together, the evidence relating to these three hypotheses helps clarify the benefits of an active secondary loan market. It also generates predictions regarding the future of that market in a world of rapid consolidation and disappearing barriers to geographical expansion.With institutional investors looking increasingly to loan sales as an essential tool in commercial mortgage portfolio management,

The rationale for loan sales is quite broad and includes:

the significant trading profit available to seasoned loans given current interest rate and liquidity characteristics of the market
mitigation of mortgage portfolio concentration by asset class, geography, sponsorship, term structure, or credit exposure
proactive watch list management
high NPV alternative to foreclosure of defaulted loans

Factoring

is a financial transaction whereby a business job sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. In "advance" factoring, the factor provides financing to the seller of the accounts in the form of a cash "advance," often 70-85% of the purchase price of the accounts, with the balance of the purchase price being paid, net of the factor's discount fee (commission) and other charges, upon collection. In "maturity" factoring, the factor makes no advance on the purchased accounts; rather, the purchase price is paid on or about the average maturity date of the accounts being purchased in the batch. Factoring differs from a bank loan in several ways. The emphasis is on the value of the receivables (essentially a financial asset), whereas a bank focuses more on the value of the borrower's total assets, and often considers, in underwriting the loan, the value attributable to non-accounts collateral owned by the borrower also, such as inventory, equipment, and real property,^[1][2] i.e., matters beyond the credit worthiness of the firm's accounts receivables and of the account debtors (obligors) thereon. Secondly, factoring is not a loan – it is the purchase of a financial asset (the receivable). Third, a nonrecourse factor assumes the "credit risk", that a purchased account will not collect due solely to the financial inability of account debtor to pay. In the United States, if the factor does not assume credit risk on the purchased accounts, in most cases a court will recharacterize the transaction as a secured loan.It is different from forfaiting in the sense that forfaiting is a transaction-based operation involving exporters in which the firm sells one of its transactions,^[3] while factoring is a Financial Transaction that involves the Sale of any portion of the firm's Receivables.^[1][2] Factoring is a word often misused synonymously with invoice discounting^{[citation needed]} - factoring is the sale of receivables, whereas invoice discounting is borrowing where the receivable is used as collateral.^[4] The three parties directly involved are: the one who sells the receivable, the debtor (the account debtor, or customer of the seller), and the factor. The receivable is essentially a financial asset associated with the debtor's liability to pay money owed to the seller (usually for work performed or goods sold). The seller then sells one or more of its invoices (the receivables) at a discount to the third party, the specialized financial organization (aka the factor), often, in advance factoring, to obtain cash. The sale of the receivables essentially transfers ownership of the receivables to the factor, indicating the factor obtains all of the rights associated with the receivables.^[1][2] Accordingly, the factor obtains the right to receive the payments made by the debtor for the invoice amount and, in nonrecourse factoring, must bear the loss if the account debtor does not pay the invoice amount due solely to his or its financial inability to pay. Usually, the account debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections; however, non-notification factoring, where the client (seller) collects the accounts sold to the factor, as agent of the factor, also occurs. There are three principal parts to "advance" factoring transaction; a.) the advance, a percentage of the invoice face value that is paid to the seller at the time of sale, b.) the reserve, the remainder of the purchase price held until the payment by the account debtor is made and c.) the discount fee, the cost associated with the transaction which is deducted from the reserve, along with other expenses, upon collection, before the reserve is disbursed to the factor's client. Sometimes the factor charges the seller (the factor's "client") both a discount fee, for the factor's assumption of credit risk and other services provided, as well as interest on the factor's advance, based on how long the advance, often treated as a loan (repaid by set-off against the factor's purchase obligation, when the account is collected), is outstanding.^[5] The factor also estimates the amount that may not be collected due to non-payment, and makes accommodation for this in pricing, when determining the purchase price to be paid to the seller. The factor's overall profit is the difference between the price it paid for the invoice and the money received from the debtor, less the amount lost due to non-payment.^[2]

Risks-The most important risks of a factor are:

Counter party credit risk related to clients and risk covered debtors. Risk covered debtors can be reinsured, which limit the risks of a factor. Trade receivables are a fairly low risk asset due to their short duration.
External fraud by clients: fake invoicing, mis-directed payments, pre-invoicing, not assigned credit notes, etc. A fraud insurance policy and subjecting the client to audit could limit the risks.
Legal, compliance and tax risks: large number of applicable laws and regulations in different countries.
Operational risks, such as contractual disputes.
Uniform Commercial Code (UCC-1) securing rights to assets.
IRS liens associated with payroll taxes etc.
ICT risks: complicated, integrated factoring system, extensive data exchange with client.

Repo

Meaning of repo Rate-A repo or more broadly, a repurchase  agreement, is normally a contract through which a seller of  securities promises to buy them back at a later date for a  mutually agreed price. Overnight repo, term repo, reverse

repo, purchase agreement, buyback, and leaseback are some  of the other related terms used in these kinds of

operations. Financial instruments like treasury or government bills,  treasury/government or corporate bonds, and stocks/shares  are offered as securities in a repurchase agreement.  Typically, in this agreement, a prospective seller submits  the instruments for cash, with a promise to repurchase them  from the buyer at a specified time. The sum being repaid is  always greater than the sum received at the time of  agreement. The difference amount is termed as repo rate.A repo differs marginally from a loan transaction. While  taking a loan, the debtor places the instruments under a lien to the lender. Physical possession of the securities  lies with the lender during the tenancy of the loan. When the loan is fully settled, the borrower gets back the  ownership of the securities. If the debtor fails to clear  the loan, the lender can dispose of the securities to  recover the dues. If the sale value of the securities is  lesser than the total loan amount, the creditor holds the  legal right to recover the balance amount from the debtor.

 In the case of a repo, the cash provider can liquidate the  securities if the seller defaults in the repurchase of the instruments. However, the repo buyer cannot recover the  full amount, if the sale value of the securities is lesser than the cash lent originally. This can happen if the  instruments had depreciated in value during the repo agreement period. On the other hand, if the securities had  appreciated during that period, the buyer stands to make a fair profit. Thus, a repo transaction carries a definite  element of risk. Normally, repos are invariably  overcollateralized to reduce the amount of risk involved.  Daily market-to-market margining is also resorted to in  repo agreements.

Reverse Repo Rate

This is the exact opposite of repo rate. The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo  rate. The RBI uses this tool when it feels there is too much money floating in the banking system If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative  rate of interest. As a result, banks would prefer to keep

their money with the RBI (which is absolutely risk free)  instead of lending it out (this option comes with a certain amount of risk) Consequently, banks would have lesser funds to lend to  their customers. This helps stem the flow of excess money  into the economy Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks, while repo signifies the rate at which liquidity is injected.

Bank Rate This is the rate at which RBI lends money to other banks  (or financial institutions .The bank rate signals the central bank’s long-term outlook  on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and vice-versa. Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If the  RBI hikes the bank rate (this is currently 6 per cent), the interest that a bank pays for borrowing money (banks borrow  money either from each other or from the RBI) increases.  It, in turn, hikes its own lending rates to ensure it  continues to make a profit.

Liquidity Analysis Ratios

Current Ratio

		Current Assets
	Current Ratio =	------------------------
		Current Liabilities

Quick Ratio

		Quick Assets
	Quick Ratio =	----------------------
		Current Liabilities

Quick Assets = Current Assets - Inventories

Net Working Capital Ratio

		Net Working Capital
	Net Working Capital Ratio =	--------------------------
		Total Assets

Net Working Capital = Current Assets - Current Liabilities

Profitability Analysis Ratios

Return on Assets (ROA)

		Net Income
	Return on Assets (ROA) =	----------------------------------
		Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2

Return on Equity (ROE)

		Net Income
	Return on Equity (ROE) =	--------------------------------------------
		Average Stockholders' Equity

Average Stockholders' Equity
= (Beginning Stockholders' Equity + Ending Stockholders' Equity) / 2

Return on Common Equity (ROCE)

		Net Income
	Return on Common Equity =	--------------------------------------------
		Average Common Stockholders' Equity

Average Common Stockholders' Equity
= (Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity) / 2

Profit Margin

		Net Income
	Profit Margin =	-----------------
		Sales

Earnings Per Share (EPS)

		Net Income
	Earnings Per Share =	---------------------------------------------
		Number of Common Shares Outstanding

Activity Analysis Ratios

Assets Turnover Ratio

		Sales
	Assets Turnover Ratio =	----------------------------
		Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2

Accounts Receivable Turnover Ratio

		Sales
	Accounts Receivable Turnover Ratio =	-----------------------------------
		Average Accounts Receivable

Average Accounts Receivable
= (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

Inventory Turnover Ratio

		Cost of Goods Sold
	Inventory Turnover Ratio =	---------------------------
		Average Inventories

Average Inventories = (Beginning Inventories + Ending Inventories) / 2

Capital Structure Analysis Ratios

Debt to Equity Ratio

		Total Liabilities
	Debt to Equity Ratio =	----------------------------------
		Total Stockholders' Equity

Interest Coverage Ratio

		Income Before Interest and Income Tax Expenses
	Interest Coverage Ratio =	-------------------------------------------------------
		Interest Expense

Income Before Interest and Income Tax Expenses
= Income Before Income Taxes + Interest Expense

Capital Market Analysis Ratios

Price Earnings (PE) Ratio

		Market Price of Common Stock Per Share
	Price Earnings Ratio =	------------------------------------------------------
		Earnings Per Share

Market to Book Ratio

		Market Price of Common Stock Per Share
	Market to Book Ratio =	-------------------------------------------------------
		Book Value of Equity Per Common Share

Book Value of Equity Per Common Share
= Book Value of Equity for Common Stock / Number of Common Shares

Dividend Yield

		Annual Dividends Per Common Share
	Dividend Yield =	------------------------------------------------
		Market Price of Common Stock Per Share