Bank Organization, Structure, and Capital

An Organizing Group (the major shareholders) – which desires to open a bank has to identify its directors, the CEO (who usually must have past experience running a bank) and other executives.

• The integrity, past business histories and credit histories of these people will greatly affect the acceptance or denial of the bank's charter.

• These people should have the experience and know-how to help make the bank work, and can withstand the close scrutiny of the regulatory investigation.

• The group shall contribute capital to get the bank going.

Starting a Bank

There is a lot of information to be gathered and submitted.

Incomplete information will slow down the review process considerably.

If the application is deemed complete, a decision by the CB will be given within 180 days.

If the charter is granted, the applicant will have up to one (1) year to open the bank.

A bank in operation will be required to apply for deposit insurance with a deposit insurance company before accepting deposits from the public.

Starting a Bank

• The names/addresses of the following: (a) organizers, (b) directors, (c) CEO, (d) senior officers, and (e) holding company (if there is any)

• The name and address of the bank • The number of shares, par value, and share prices for

each share that will be sold• The total amount of common stock, as well as surplus

and reserves for operating expenses • The number of shares of bank stock that each

organizer plans to purchase

The charter application contains:

The Charter Application

Cont'd. Origin of the funds for purchasing the shares Detailed business plan Assumptions/strategies to achieve the projected market share

for each type of product/service Projected organization costs Assumptions used to calculate earnings Pro-forma financial statements Proposed bank policies Others

The Charter Application

Compute the following (in thousand pesos):

1. Cost of raising capital = 100/one-time

2. Filing and regulatory fees = 20/one-time

3. Professional and consulting fees = 20/mo.

4. Payroll and taxes (15 Executives 50–100/mo; 80 Non-executives 10–40/mo; 6 Directors 20–50/mo) 30% income tax. Note: Bonuses is up to 16th months' pay.

5. Rent = 30/mo.

6. Office machines and equipments = 1,000/one-time

7. Printing, postage, telephone and office supplies = 15/mo.

Projecting Organization Costs

Compute the following, in million pesos:

(Note: Tax = 20%)

Projecting Income and Expense

Income

1. Loans = 800 @ 8%

2. Investments in bonds = 100 @ 6.5%

3. Deposit with other banks = 100 @ 3%

4. Fees/charges = 5

5. Other income = 0.75

Expense

1. Deposit = 500 (@ 2%

2. Regulatory penalties = 0.5

3. Regulatory payment = 2.5

4. Other expense = 32

Earnings About one-half (1/2) of the gross bank income is derived

from interest earned on loans of various categories. About one-third (1/3) of the gross bank income is derived

from interest earned on securities. The rest of the bank’s gross income is derived from

service fees, or charges for other miscellaneous bank services, and from other miscellaneous incomes.

Net Operating Earnings About one-third (1/3) of all gross earnings remain net

operating earnings after deducting all bank operating expenses.

Bank Earnings and Expenses

Expenses Salaries of officers and employees. Wages of laborers and other bank personnel. Bank directors’ fees. Contribution to central bank (bank supervision) Miscellaneous operating expenses Interest expense on deposits of various types. Income tax, other taxes

Bank Earnings and Expenses

A Holding Company – is the company that has control over a bank.

It holds at least 25% of the stock and has the ability to control the election of a majority of the directors of the bank.

The organizing group has the option of establishing a holding company for the bank when it applies for the charter.

The Holding Company

Location of the Bank: The location of the bank is a very important decision. One has to do some market research to determine how well a new bank will do in a particular area, or where the best spot in a large geographic region might be. The specific physical location of the bank is chosen

by the organizing group and is just as important as finding the right market.

The economy will also be taken into consideration in locations where there are lots of competing banks.

Location and Capital Requirements

Capital Requirements: The capital requirements to start a bank often vary greatly depending on the type of bank.

Capital requirement = larger in an urban area and lesser in a rural area.

Capital requirements = determined by the selected market, strategic plan, and pro forma financial statements.

Location and Capital Requirements

The remainders that may be sold to shareholders may shoot from 400 to 750 (or more) shareholders in order to raise the money needed to start the bank. Usually, the more shareholders a bank has, the better its chance of succeeding.

Organization/Structure of Banks

1. Must be organized in the form of stock corporations.

2. Required to secure a certificate of authority from the CB.

3. Required to register with the SEC4. At least 70% of the voting stock of KBs

should be owned by Filipinos (but may be lowered up to 60% by the country's President).

5. At least 40% of the voting stock of Thrift Banks should be owned by Filipinos.

6. For rural banks, its capital stock shall be fully owned and held by Filipino citizens.

Application. May be made by 5 or more persons who are Filipino citizens and shall be filed with the BSP the following:

The Application Process Per BSP Circular-Letter dated July 31, 1998 – Basic Guidelines

in Establishing Banks:

1. Proposed name of the bank. 2. Type of bank proposed to be established3. Names of organizers4. Proposed capital5. Paid-up capital6. Other information which the MB may require

Upon acknowledgment and receipt of the application, the CB sends an examiner to: (1) survey the economic/ financial condition of the community where the bank shall be established, and (2) justify its establishment.

Note: The investigation shall be undertaken with respect to the character, integrity and financial experience/competence of the organizers.

If the findings are favorable, the next step is to circulate a subscription list.

The Application Process

The Articles of Incorporation – primary rules governing the management of the bank; also known as the Corporate Charter

The Articles of Incorporation

The Articles of Incorporation should be accompanied by a Certificate of Authority (issued by the CB).

The Certificate of Authority will only be issued if:

1. All requirements have been complied with2. The public interest and economic conditions justify the

authorization3. The amount of capital, the financing organization, director

and administration (and their integrity/responsibility) assure the safety of the interest of the public.

The By-Laws By-Laws - set of rules adopted by an organization

for governing its own meetings or affairs. There are three general types of rules that are often

included within bylaws: 1. Definitions of organizational structure2. Descriptions of the rights and duties of members3.Descriptions of the group's decision-making process

Note: The By-Laws shall be accompanied by an CB certification that such by-laws or amendments are in accordance with law.

Stock – owner’s investment in the bank Shares of Stocks – represent units of ownership,

entitles the stock holders to receive dividends. Different Types of Shares and Examples:

1. Authorized Share, ex. 1002. Unissued Share, ex. 203. Restricted Share, 104. Float Share = AS–US–RS

70 = 100 – 20 - 10 5. Outstanding Shares = RS + FS 80 = 10 + 70

The Shares of Stocks

10

10

10

10

10

10

10

10

10

10

Authorized shares – the maximum number of shares that can be sold (as specified in the Article of Incorporation); composed of the following:

a) Issued shares – if sold to shareholdersb) Unissued shares – authorized but not issued;

belong to the company, and not considered for shareholders' ownership percentages

c) Treasury shares – if bought back Floating shares – shares available for trading.

Note: the number of floating shares may be smaller than the outstanding shares if shareholders do not wish to sell them.

Outstanding shares – what remains in the hands of shareholders.

The Shares of Stocks

An Authorized Capital Stock – is the number of shares of capital stock a company may issue.

Subscribed Capital Stock – are shares acquired under an installment plan.

Note: At least 25% of the total Authorized Capital Stock shall be subscribed.

Formula: Subscribed Capital = ACS x 0.25

The Paid-Up Capital

A Paid-Up Capital – is the total amount of shareholder capital that has been paid in full by shareholders.

At least 25% of the subscribed capital should be paid up.

Formula:Paid-Up Capital = SC x 0.25 OrPaid-Up Capital = ACS x 0.0625

Par Value – is the stated value assigned to a stock; reported as capital at par value.Note: All amount of stock sold in excess of par value goes to “paid in capital in excess of par value.”Formula:Capital at par value = No. of shares x par value

= 100M x P100 = P100M

The Paid-Up Capital

Capitalization of Phil. Banks

Capitalization – Universal Banks: P5.4 B

Commercial Banks: P2.8 B

Thrift Banks: P400 M (Head Office in Metro Manila) P64 M (Head Office outside Metro

Manila)

Rural Banks: P32 M (located in Manila,

Kalookan,Quezon, Pasay, Mandaluyong, Makati, Paranaque, Malabon, Navotas, and San Juan)

P16 M (located outside Metro Manila) P8 M (Located in 1st, 2nd, 3rd class cities and

1st class municipalities) P4.8 M (Located in 4th, 5th , 6th class cities

and 2nd, 3rd, and 4th class municipalities) P3.2 M (Located in 5th and 6th class

municipalities)

Capitalization of Phil. Banks

Through the years, a progressively increasing bank capitalization has been launched by the BSP to attain the following objectives:

Capitalization of Phil. Banks

1. To make banks more competitive

2. To be able to expand their lending capacity (and enable them to supply the country’s developmental needs)

3. To strengthen the solvency/liquidity of individual banks

Mergers and consolidation. For banks which suffer weak capital base, BSP encourages mergers among banks.

Diffusion of ownership. No new commercial bank shall be licensed to operate if the stockholdings of any persons related to each other within the 3rd degree of consanguinity or affinity, constitute more than 20% of the voting stock of the new bank.

Consanguinity vs. Affinity

1st Degree 2nd Degree 3rd Degree

Father or Mother Grandparent Great Grandparent

Son or Daughter (and Spouse)

Grandchildren (and Spouse)

Great Grandchildren (and Spouse)

Uncle or Aunt (and Spouse)

Great Uncle or Aunt (and Spouse)

First Cousin (and Spouse)

Children of Great Uncle or Aunt (and Spouse)

Nephew or Niece (and Spouse)

Second Cousin (and Spouse)

Brother or Sister (and Spouse)

Children of First Cousin (and Spouse)

Grand Nephew or Niece (and Spouse)

Consanguinity – individuals related by blood.

Consanguinity vs. Affinity

1st Degree 2nd Degree 3rd Degree

Spouse Grandparent Great Grandparent

Father or Mother Grandchildren Great Grandchildren

Son or Daughter Uncle or Aunt Great Uncle or Aunt

First Cousin Children of Great Uncle or Aunt

Nephew or Niece Second Cousin

Brother or Sister Children of First Cousin

Grand Nephew or Niece

Affinity – the spouse and individuals related to the spouse.

The Management of Bank Capital

Calculating the Cost of Capital

Cost of Capital – is calculated as the weighted average of each component of capital - debt, common stock, preferred stock, and retained earnings. Each component is calculated as follows:

Cost of Debt (CD): Calculate the after tax cost of debt based on the effective interest rate. Formula:

CD = r (1–tr) Where:

r = Interest rate on debttr = Tax rate

The Management of

Bank Capital

%33.896,000

0.08 x 100,000r

Ex.Bank X borrowed $100,000 at 8% interest. The amount of the loan proceeds was $96,000 and the tax rate is 35%. Calculate the cost of debt.

Solution:

Computing for r:

Computing for CD:

%42.5

0.35)0.0833(1CD

The Cost of Debt

The Management of

Bank Capital

RateGrowth OverallStock of ValueMarket

1Year in DividendsStockCommon ofCost

There are three different methods to calculate the cost of common stock:

1. Dividend Growth Method: Dividends paid to common shareholders along with the overall expected growth rate.

Formula:

The Cost of Common Stock

The Management of

Bank Capital

Ex.: Bank X expects to pay a $6 dividend this year to common shareholders. Historically, dividends have grown by 2% each year. The corporation’s common stock is currently selling for $45/share. Compute the cost of common stock:

Solution:

The Cost of Common Stock

%33.15

0.0245

6StockCommon ofCost

The Management of

Bank Capital

2. Capital Asset Pricing Model Method - The CAPM is the most widely used approach to calculating the cost of common stock. The CAPM uses three components to calculate the cost of common stock: (1) rf is the risk free rate earned by investors (such as U.S. Treasury Bonds; (2) b is the beta coefficient which expresses the risk of the common stock in relation to the market; and (3) rm is the rate earned in the market (such as the Standard & Poor’s 500 Composite Index).

Formula: Cost of Common Stock = rf + b (rm – rf)

The Cost of Common Stock

The Management of

Bank Capital

Beta, Explained

Beta – is a measure of the volatility of a security (in comparison with the market) and calculated using regression analysis. One can think of beta as the tendency of a security's returns to respond to swings in the market. 

= 1 the security's price will move with the market.

< 1 the security will be less volatile than the market. 

>1 the security's price will be more volatile than the market.

Ex., = 1.2, the security is (theoretically) 20% more volatile than the market (or a benchmark like S&P's 500).

Note: Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk.

The Management of

Bank Capital

Volatility, Explained

Volatility – refers to the amount of uncertainty or risk about the size of changes in a security's value.

A higher volatility – means the price of security can change dramatically over a short period of time in either direction.

Illustration: A company with a = 1.1 has historically moved by 110% for every 100% move in the benchmark (on price levels).

The Management of

Bank Capital

Ex.: Bank X has a common stock with a listed beta of 1.35. The estimated market return is 12% and the risk free rate based on Treasury Bonds is 6.5%. Compute the cost of common stock:

Solution:

Cost of Common Stock = rf + b (rm – rf) = 0.065 + 1.35 (0.12 – 0.065)

=13.93%

The Cost of Common Stock

The Management of

Bank Capital

3. Bond Plus Method: A simple approach to calculating the cost of common stock is to add a risk premium to the cost of debt. The risk premium is the additional rate that must be paid to common shareholders above what is paid to bond holders.

Formula: Cost of Common Stock = CD + Risk Premium

Ex. Referring back to the Cost of Debt example, the cost of debt was computed at 5.42%. On the other hand, the estimated market risk premium on common stock of 4%. Compute the cost of common stock.

Solution: Cost of Common Stock = 0.0542 + 0.04 = 9.42%

The Cost of Common Stock

The Management of

Bank CapitalStock of PriceMarket

DividendsStock Preferred ofCost

If a bank’s capital structure includes preferred stock, the Cost of Preferred Stock – is calculated by the amount of dividends in relation to the market price of the preferred stock.

Formula:

Ex. Assume we have preferred stock selling for $80/share and dividends per share are $10. Compute the cost of preferred stock.

Solution :

The Cost of Preferred Stock

12.5% 80

10Stock Preferred ofCost

The cost of retained earnings (ks) – is the return stockholders require on the company's common stock

Using the Discounted Cash Flow Approach, the formula is as follows:

The Cost of Retained Earnings

ROE expected roe

payout expected po

rategrowth g

:Where

)ROE)(PO1(g

gStock of ValueMarket

year2in Dividendsk

Ex. Bank X stocks is selling at $40, its expected ROE is 10%. Next year's dividend is $2 and the company expects to pay out 30% of its earnings.

The Cost of Retained Earnings

%7

)10.0)(30.01(g

%12

740

2

sk

Surplus (in a bank’s FS) – refers to the difference between the bank’s book assets, and its liabilities plus the other capital accounts; replaced by the title “Retained Earnings” or “Undivided Profits”.

Profits from the bank’s operations, which are eligible for distribution as dividends to shareholders, but which are not yet declared as dividends, and are still being kept by the bank as of part of its operating funds.

Bank Surplus Account

The Management of

Bank Capital

The Cost of Equity – is the rate of return required by those who invest in equity securities. The expected return can be broken down into two components (1) risk free rate, and (2) risk premium.

A good benchmark for establishing the risk free rate is the rate paid on 30 year U.S. Treasury Bonds since the risk of default is virtually non-existent.

The risk premium can be established by understanding two forms of risk – (1) business risk, and (2) financial risk. In the absence of debt, shareholders are confronted with one form of risk, business risk.

The Cost of Equity and Risk

The Management of

Bank Capital

Business Risk – is the risk of changes to operating income from numerous factors that influence business.

Financial Risk – is the risk of changes to earnings from the use of increased debt. More debt results in higher interest payments, which impacts earnings. Note: When we introduce debt, we have to include financial risk.

Consequently, the Risk Premium consists of Business Risk + Financial Risk .

The Cost of Equity and Risk

The Management of

Bank Capital

In the above graph, we have a total risk free rate of 5%. The addition of business risk increases the required rate on stock to 10%. When we introduce debt, this adds financial risk and increases the required return on stock. The final total rate of return on stock with all forms of risk climbs from 12% to 16% over a range of Debt to Equity Ratios. Since the cost of capital represents the rate that must be paid to investors for the use of long-term funds, higher risk to investors will increase the cost of capital.

The Cost of Equity and Risk

A Typical Bank Set-up

Board of DirectorsChairmanVice ChairmanDirectors – regular and independent directors

Executive OfficersPresident – also known as CEO

Vice Presidents – 1st VP, 2nd VP, etc. Senior VPs and Asst. VPsTreasurerControllerAuditors – internal and external

The Board must have at least five (5) but not more than fifteen (15) members. At least 2/3rd shall be Filipino citizens. For thrift banks, majority should be Filipino citizens, and for rural banks, all should be Filipino citizens.

Membership of the Board may be a combination of:- Executive Directors- Non-Executive Directors

Board Composition

A person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

Bank shall have at least two (2) Independent Directors (ID) or such number of IDs that constitutes twenty percent (20%) of the members, but in no case less than two (2).

Independent Director

Qualification of a Director1. At least twenty-five (25) years old

2. College graduate or at least five (5) years experience in business.

3. Practical understanding of the business of the corporation

4. Membership in good standing in relevant industry, business or professional organizations.

Responsibility of Board of Directors. The BOD represents the top echelon of authority, for it is the voice of the stockholders themselves.

The Board of Directors

a. Fosters the long-term success of the corporation, and to sustain its competitiveness and profitability consistent with its corporate objectives and the best interests of its stockholders.

b. Formulates the corporation's vision, mission, strategic objectives, policies and procedures that shall guide its activities

c. Appoints administrative officials and employees of the bank.

d. Manages the affairs of the bank in such a way as to being profitable business to the bank.

e. May be held personally liable to the bank for negligence which may cause the losses to the bank or its shareholders.

Functions of the Board of Directors. To acquire new business for the bank, and direct and control the bank’s operations.

The Board of Directors

Must actively participate in the administration/supervision of the bank (and see to it that it is manned by competent/efficient officers/employees – educated, trained, and experienced in banking).

Must not be negligent in his duties (for he is the trustee of the interest of the stockholders, depositors, borrowers, bank employees, and the community).

Must exercise at least ordinary care (prudent and diligent) in the administration of the affairs of the bank.

Must see to it that the bank’s operations are in conformity with all legal requirements and never allow himself to be a party to some illegal transactions.

A sound and accepted principle and practice in good management is to divide the business organization into units or departments for purposes of delineation of duties and responsibilities of each against the over-all task of accomplishing desirable goals and objectives.

Attention should also be focused on the functions of administrative officials and heads of various departments of the bank (that help in the attainment of maximum efficiency/profitability in the organization).

The Board of Directors

The Audit Committee

- Oversees the bank’s internal and external auditors.

- Ensures management is taking corrective actions in a timely manner to address control weaknesses, non-compliance with policies, laws and regulations, and other problems identified with auditors.

The Executive Committee- Establishes the Bank’s policies/strategies.

- Approves the budget.

- Evaluates management performance vis-à-vis business plans, strategies, and budget.

Board Committees

The Risk Management Committee- Oversees senior management’s activities in

managing credit, market, liquidity, operational, legal and other risks of the bank.

The Corporate Governance Committee

- Assists the Board fulfill its corporate governance responsibilities.

- Promotes, monitors, and enforces the bank’s corporate governance policies.

- Monitors and oversees compliance by the bank to its Compliance Program and Anti-Money Laundering Program.

Board Committees

The Remunerations Committee- Oversees remuneration of senior management and

other key personnel.

- Ensures that compensation is consistent with the bank’s culture, strategy and control environment.

The Nomination Committee

- Provides important assessment of board effectiveness and directing the process of renewing and replacing board members.

Board Committees

The Trust & Investment Committee

- Oversees and supervises the trust, fiduciary business, and investment management services provided by the Bank.

- Manages high net worth accounts, portfolio management, escrow, custodianship, and estate planning.

- Formulates trust products and asset products.

Board Committees

- The Management Committee (Mancom) is the Bank’s permanent collegiate executive body.

- It has nine members.

- Under the authority of the President and the supervision of the Board of Directors, it oversees the day-to-day running of the bank, prepares decisions for directors and ensures that these are implemented.

- The President chairs the meetings of the Mancom.

- The members of Mancom are responsible solely to the Bank.

The Management Committees

The Management Committee

- The Credit Committee (Crecom) determines the credit policy of the bank.

- Identifies possible risks assumed by the Bank for different types of transactions.

- Makes final decisions on raising and use of funds within its authority as determined by the Executive Board of the Bank.

- The Crecom has the authority to make a final decision on approval or rejection of proposed transactions as well as to establish personal limits and client limits in accordance with its powers.

The Credit Committee

The Management Committees

- The Asset & Liability Committee (Alco) is a management committee which is responsible for coordinating the institution's borrowing and lending strategy, and funds acquisition to meet profitability objectives as interest rates change.

The Asset & Liability Committee

The Management Committees

Administrative Officers Administrative officers – are chosen and

appointed by the BOD; charged with the task and responsibility of implementing the policies laid down by the BOD. (Note: the policies laid down should (a) delineate the task and responsibility of officers, and (b) define what they must do.)

The administrative officials are the following:1. President2. Executive Vice-President3. Vice-Presidents4. Cashier5. Comptroller

Board of Directors Audit

Subsidiaries

Compliance Office

Trust Banking

Office of the President

Security

Human Resources

Legal Management

General Services

Risk & Operations

Management

Retail & Corporate Banking

Treasury

Accounting

Information Technology

A Typical Bank’s Table of Organization

Branch Manager

Branch Operation

Officer

Sales Officer

New Accounts

Clerk

Teller 1 Bookkeeper

Teller 2

Janitor/ Messenger

Support Group

Teller 3

Guard 1

Armored Car

Personnel

A Typical Branch’s Table of Organization

Guard 2

The President – is the bank’s administrative head selected and appointed by Board because of his experience, reputation, and prestige that he brings to the bank.

The duties are defined either by the by-laws of the corporation or resolution of the board (which may limit the president’s authority, e.g. his authority to grant loans).

He is primarily responsible to the BOD. He is the official representative of the bank (including

law suits involving the bank). He is assisted by the EVP/ other VPs.

The President

He is the most senior among all VPs. In the president’s absence, the EVP discharges the position of the

president. Assists and help relieve a very busy president with some of the

president’s responsibilities and supervise the internal activities. Usually VPs are in charge of branches or departments who are

responsible to the president and board. All banks have one or more VPs, the number will depend on the

size of the bank and volume of its operation. If there are several VPs, their seniority is indicated in their titles.

The ranking is set forth in the bank’s by-laws. Ranking determines the order of authority.

Executive Vice President

The person responsible for running the Treasury Department of a bank.

Responsible for the following:

- liquidity risk management

- Issuing debt, Fx, and interest rate risk hedging

- Securitization

- Investment management, and

- Capital structure Gives advice on matters relating to corporate finance Oversees how money is spent.

Treasurer

In charge of the internal operations which involves handling/safekeeping of money and checks (custodian of the bank’s funds).

Responsible for the proper conduct of the tellers’ cages, transit department, and other departments handling the bank’s money.

Cashiers are properly bonded in an amount to be determined/ approved by the BOD.

He is responsible for all reports that may be required the bank and/or regulatory authorities.

Cashier

The Chief Accountant – is usually the comptroller and statistical officer.

Gathers and interprets data valuable to the bank (in the determination of proper and sound policies for future course of action).

Has authority and supervision over accounting and examination; checks the actual operation of the bank.

Prepares the budget (for review/approval by the Board).

Chief Accountant or Comptroller

The Auditor

Performs constructive and sound verification (i.e., audits) of the internal controls of the bank.

Through his audits, the bank’s procedures, policies, and guidelines, may be observed/noted.

Has access to all bank’s records. Because of his function, he reports to the BOD

and is considered as the board’s direct representative.

Bank Departments

Departments (or Divisions) – are the spheres of activity or knowledge (distinct part) of a bank.

Some departments (or divisions) are the following:1. Cash 2. Savings3. Commercial4. Credit5. Loans and

Discount

6. Foreign7. Accounting8. Audit 9. Personnel

Cash Department Charged with the functions of maintaining custody and

control of bank’s assets. Supervises the paying and receiving functions of

banks. Where such department is established by the bank, the

Savings and Commercial Departments are usually under it.

Charged primarily with accepting deposits in cash and permitting withdrawals to authorized individuals.

Keeps on file the signature cards of its depositors. Computes the interests due on deposits (through the

use of table designed for the purpose and entered in a a ledger card, and eventually posted in the passbook).

This department is under the supervision and control of the Cashier.

Savings Department

In charge of current or checking account. Receives checks against the bank itself which it

prepares for the corresponding credits/charges. Sorts, lists, proves, and examines stop-payments,

overdrafts, certifications, indorsements, signatures, dates, and files.

Commercial Department

Reviews and audits the loans and credit facilities. Has Credit Policy and Loans Division and various sections.

1. Credit Policy Division:

- Defines and plans the general policies of credit

- Establishes rules and instructions pertaining to the granting of credit (should be within the framework of policies aimed at realizing sound lending status).

2. Loans Division:

- Supervises loan applications from the time of submission and processed in the concerned departments and sections for approval in accordance with the guarantees submitted, credit studies, and research of such loans.

- Monitors the loans and credit facilities activity, follows-up and settles them in coordination with other departments.

Credit Department

The various sections:

Credit Department

1. Correspondence Section – answers inquiries involving the credit standing of the customers.

2. Statement Analysis Section – sets-up the financial statement year after year; makes sure that complete and duly analyzed information is maintained.

3. Files Section – keeps records of all its customers (new/closed accounts, grants/extensions of accommodations, payment on loans, etc.); makes sure that records on file are up to date.

Credit Department

4. Investigation Section – undertakes credit investigation of individuals and business enterprises which seek credit accommodations from the bank.

5. Appraisal Section – conducts the necessary appraisal based on all information it obtains including the kind of securities used as collaterals. Its recommendations are important guides to the Loans and Discount Department.

Loans and Discount Department

This is an earning department of a bank. Its main function is to make available the use of funds

of the bank for lending purposes. Must take into account the limitations on amount of

loans to any borrower, eligibility regulations, etc. Takes charge of passing credit lines subject to certain

limits. Implements the policy laid down by the board with

regard to type and amount of different classes of loans.

Sells foreign exchange covering remittances for imports, services, etc. through any of the following:– Commercial LCs, authority to purchase, etc.– Drafts (sight or time)– Cable, telegraphic, mail transfers– Traveler’s checks

Buys foreign exchange in any form acquired by clients covering exports of merchandise, services, etc.

Handles the collection of foreign bills for its customers. Consist of the following sections:

– Import Bills– Export Bills– Sundries or Remittance Section

Foreign Department

Accounting Department Consolidates the proof sheets of all departments. Posts tickets to the general ledger forwarded by the

different departments. Prepares daily financial statements. Prepares reports on reserves. Prepares reports for submission to the central bank.

Auditing Department

1. Verification of the bank’s assets and liabilities

2. Establishment and maintenance of effective controls

3. Preparation of reports and recommendations to the BOD

In charge for constructive and sound verification (or auditing procedures) of the bank’s policies and internal controls.

The watchdog of the bank. Keeps a close eye on the operations of the business

enterprise to detect any discrepancy and prevent its commission.

Has the following functions:

Auditing DepartmentTypes of Audit: Operational audit – review of the bank’s activities in

relation to specified objectives for the purpose of assessing performance of operations and identifying measures for improvement.

Compliance audit – an audit conducted to determine compliance with criteria standards or rules established by an authoritative body.

Internal audit – determination of compliance with internal control, accounting system and operational practices, and special investigation; assist management in the discharge of their duties/responsibilities (furnishing analysis, appraisals, counsels, recommendations, and information).

Personnel Department Recruits personnel and undertakes job analysis. Interviews and selects applicants for bank positions;

orients new hirees with respect to the rules and regulations of the bank.

Provides training, conducts supervisions, etc. Keeps essential records (the “201 file”) regarding

appointments, discharges, transfers, promotions, vacations, etc.

Opening of Branches There are a number of factors to consider in opening

branches, the most important are the ff:1. General economic factors

a. Population trends

b. General economic potential

c. Potential of commercial/industrial growth

2. Specific business conditions

a. Number and diversity of business establishments

b. Characteristics of the place as a market center

c. Number of potential or probable clients

3. Needs

a. Inadequate banking facilities

Banking Hours and Days Shall not be less than six (6) hours a day (to be selected

from 8:00AM to 8:00PM) which time shall be reported to the Monetary Board.

Banks may, limited by the regulation, remain open beyond the minimum hours for as long as they find it necessary of serving deposits and withdrawals.

They may be opened five (5) days a week, Monday thru Friday, with Saturdays and Sundays as options.

They shall not close or open for business (during the banking days and hours they reported to the MB) except for emergency cases (public calamity, fire, flood, etc.).