Bank liability structures are sometimes represented as an inverted pyramid and the following diagram is approximately to scale for a typical commercial bank. The first thing to notice is just how small the equity base at the apex of the pyramid is. The bulk of their funding comes from customer deposits and these are relatively short term (the proportion of time deposits with a maturity beyond 90 days (three months) is usually very small). Long-term debt is usually only a small fraction of total liabilities.
Deposits from other banks are usually made to support a correspondent banking relationship where the bank provides a local ser vice to another bank operating in a different region or country. Some deposits arise from bank’s activities in the wholesale interbank markets where they lend to and borrow from one another, usually on relatively short terms.
The interbank market is an important source of funding for many foreign banks operating in emerging markets. Branching restrictions mean they frequently lack the local currency deposit base enjoyed by domestic banks. This does, however, tend to put them at a disadvantage in terms of funding costs relative to local banks. Interbank rates in developing markets are often rather volatile as a consequence of their lack of depth and liquidity.
Posts Tagged ‘funds’
The Inverted Pyramid
Monday, October 12th, 2009The International Monetary Fund (IMF)
Saturday, August 29th, 2009The simplest way to view the IMF is that it is the world’s lender of last resort. The principal stated objectives of the IMF are as follows:
To promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment In practice the IMF’s most high profile activity is to provide funding to countries experiencing balance of payment problems while imposing conditions on the governments of these countries to implement economic reforms in return for being given such loans:
Financing. The IMF is financed by contributions from its member countries. Each member’s contribution is based on its relative economic size and condition. These contributions are referred to as quotas and are denominated in a special currency unit, the Special Drawing Right (SDR), based on a weighted basket of four major currencies (at the time of writing this basket was made up of the US dollar, the euro, the Japanese yen and UK sterling).
Quotas are reviewed periodically and may be adjusted to reflect changes in either an individual member’s economic condition or changes in the IMF’s financing requirements. The latter depends largely on the state of the global economy.
The IMF pays interest on members’ positive balances based on short-term money market rates of the currency basket.
In addition to providing the IMF with its funding, quotas are used to define each member’s maximum contribution, and, in principle at least, to determine their ability to borrow from the fund in times of financial distress.
Management. The head of the IMF is, by tacit agreement, always a European. Quotas are used to determine each member’s voting rights. As the world’s largest economy the US has a significant influence on the IMF’s management and policies and the heaviest voting weighting.
In practice the IMF is run by an executive board. This 24-strong board is made up of permanent representatives from the USA, Japan, Germany, France, the UK, China, Russia and Saudi Arabia plus 16 other representatives from other countries elected for two-year terms. Few decisions are, however, made based on formal votes.
Borrowing rights. Member countries can borrow the equivalent of their quota in any given year and up to three times their quotas in total. In exceptional circumstances these lending limits may be lifted.
When trouble star ts politics become an overriding consideration, both domestic and international. Domestic politics affect the ability of governments to make reforms while international politics has an impor tant influence on the IMF’s willingness to provide funds.
Conditionality. Conditionality is the most controversial aspect of the IMF’s operations. Before making a loan to a distressed country the IMF will seek to impose conditions for economic, and sometimes political, reform to ensure that the financing is genuinely short term and that the borrower will be able to repay the loan.
These conditions can be wide ranging and usually require the borrower to meet defined monetary and budgetary targets, the removal of subsidies on selected products, the opening up of markets, reduction in import tariffs and removal of foreign ownership restrictions. These conditions frequently lead to hardship and with the IMF also being widely seen as a tool of US foreign policy tend to lead to popular political opposition in affected developing markets.
It is easy to make the IMF the bogeyman and it does not have a perfect record in terms of corrective action proscribed. These attacks miss the point. In an open global economy the world needs an organization such as the IMF. Trade and capital flow imbalances in individual economies will occur from time to time. These may be the result of poor government or central bank policies. They may also be a consequence of supply side or demand side shocks, such as a sharp increase in energy prices or a fall in commodity prices.
It is also fair to add that many governments have taken advantage of the intervention of the IMF to impose unpopular policies that it can blame on the IMF but had actually wanted to pursue in any case. IMF conditions that a government reduces its fiscal deficit do not normally define in detail exactly how this is to be achieved. A government may choose to cut public employees’ salaries, for example, but maintain its chosen level of military spending.