ASSET QUALITY--CAMALS

ASSET QUALITY

Asset quality:

Asset represents all the assets of the bank, current and fixed, loan portfolio, investments and real estate owned as well as off balance sheet transactions.

Rating factors:

Asset quality is based on the following considerations:

·         Volume of problem of all assets.

·         Volume of overdue or rescheduled loans.

·         Ability of management to administer all the assets of the bank and to collect problem loans.

·         Large concentrations of loans and insiders loans, diversification of investments.

·         Loan portfolio management, written policies, procedures internal control,

·         Management Information System.

·         Loan Loss Reserves in relation to problem credits and other assets.

·         Growth of loans volume in relation to the bank’s capacity.

Asset quality rating 1:

Asset quality rating “1” is characterized by:

·         Ratio of troubled assets to capital is less than 2% or 3%.

·         Past due and extended loans kept under control by a specific unit, in accordance with the law.

·         Concentrations of credits and loans to insiders provide minimal risk.

·         Efficient loan portfolio management, close monitoring of problem loans.

·         Adequate Loan Loss Reserves in accordance with CBI’s regulations.

·         Non credit assets pose no loss threat.

Asset quality rating 2:

Asset quality rating “2” is assigned to banks that display similar characteristics as “1”, but are experiencing non significant weaknesses, and the management is able to address these issues without close regulatory oversight.

Problem assets do not exceed 10 % of total capital, but:

·         The bank is experiencing negative trends in the level of overdue and prolonged credits and of LLR

·         There are weaknesses in the management underwriting standards and control procedures

·         Loans to insider pose some regulatory concern, but can be easily corrected

·         Return on non credit assets is low and they display more than normal risk without posing a threat of loss

Asset quality rating 3:

Asset quality rating “3” indicates that a bank displays weaknesses in one or more of the “2” factors. Regulatory oversight is required to ensure that management is able to address the problems. Other characteristics are:

·         Bank is experiencing high level of past due and rescheduled credits

·         Inadequate LLR

·         Poor underwriting standards

·         Policies and procedures are not properly implemented

·         Inappropriate loans to insiders

·         Non credit assets display abnormal risks and may pose a threat of loss.

Asset quality rating 4:

Asset quality rating “4” indicates a bank with severe problems resulting in inadequate capital to support risks associated with then bank business and operations.

·         High volume of loss making loans, and;

·         Level of problem credits continues to increase and could result in insolvency

·         Doubtful and loss credits exceed LLR and pose a threat to capital

·         Non-credit assets pose major threat of loss of capital and may result in bank’s insolvency

·         Lack of proper policies and procedures

Asset quality rating 5:

Asset quality rating”5” displays a high level of problem assets credit and non-credit that impairs the capital or results in a negative capital.

·         Problem assets to capital ratio above 50%

·         Slight possibility that management actions can improve the quality of the bank

·         Strong regulatory oversight is needed to prevent further capital erosion and protect depositors and creditors

·         Law authorize CBI to send an custodian for assessment and recommendations

Treasury bill:

Treasury bills (or T-Bills) mature in one year or less. Like zero-coupon bonds, they do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity. Many regard Treasury bills as the least risky investment available to U.S. investors.

Regular weekly T-Bills are commonly issued with maturity dates of 28 days (or 4 weeks, about a month), 91 days (or 13 weeks, about 3 months), 182 days (or 26 weeks, about 6 months), and 364 days (or 52 weeks, about 1 year). Treasury bills are sold by single price auctions held weekly. Offering amounts for 13-week and 26-week bills are announced each Thursday for auction, usually at 11:30 a.m., on the following Monday and settlement, or issuance, on Thursday. Offering amounts for 4-week bills are announced on Monday for auction the next day, Tuesday, usually at 11:30 a.m., and issuance on Thursday. Offering amounts for 52-week bills are announced every fourth Thursday for auction the next Tuesday, usually at 11:30 am, and issuance on Thursday. Purchase orders at Treasury Direct must be entered before 11:00 on the Monday of the auction. The minimum purchase, effective April 7, 2008, is $100. (This amount formerly had been $1,000.) Mature T-bills are also redeemed on each Thursday. Banks and financial institutions, especially primary dealers, are the largest purchasers of T-bills.

Like other securities, individual issues of T-bills are identified with a unique CUSIP number. The 13-week bill issued three months after a 26-week bill is considered a re-opening of the 26-week bill and is given the same CUSIP number. The 4-week bill issued two months after that and maturing on the same day is also considered a re-opening of the 26-week bill and shares the same CUSIP number.

During periods when Treasury cash balances are particularly low, the Treasury may sell cash management bills (or CMBs). These are sold at a discount and by auction just like weekly Treasury bills. They differ in that they are irregular in amount, term (often less than 21 days), and day of the week for auction, issuance, and maturity.

Treasury bills are quoted for purchase and sale in the secondary market on an annualized discount percentage, or basis.

General calculation for the discount yield for Treasury bills is

Treasury note:

This is the modern usage of "Treasury Note" in the U.S., for the earlier meanings see Treasury note.

Treasury notes (or T-Notes) mature in one to ten years. They have a coupon payment every six months, and are commonly issued with maturities dates between 1 to 10 years, with denominations of $1,000. In the basic transaction, one buys a "$1,000" T-Note for say, $950, collects interest over 10 years of say, 3% per year, which comes to $30 yearly, and at the end of the 10 years cashes it in for $1000. So, $950 over the course of 10 years becomes $1300.

T-Notes and T-Bonds are quoted on the secondary market at percentage of par in thirty-seconds of a point (n/32 of a point, where n = 1,2,3,...). Thus, for example, a quote of 95:07 on a note indicates that it is trading at a discount: $952.19 (i.e., 95 + 7/32%) for a $1,000 bond. (Several different notations may be used for bond price quotes. The example of 95 and 7/32 points may be written as 95:07, or 95-07, or 95'07, or decimalized as 95.21875.) Other notation includes a +, which indicates 1/64 points and a third digit may be specified to represent 1/256 points. Examples include 95:07+ which equates to (95 + 7/32 + 1/64) and 95:073 which equates to (95 + 7/32 + 3/256). Notation such as 95:073+ is unusual and not typically used.

The 10-year Treasury note has become the security most frequently quoted when discussing the performance of the U.S. government bond market and is used to convey the market's take on longer-term macroeconomic expectations.

Treasury bond:

"U.S. Bonds" redirects here. For the singer/performer, see Gary U.S. Bonds.

Treasury bonds (T-Bonds, or the long bond) have the longest maturity, from twenty years to thirty years. They have a coupon payment every six months like T-Notes, and are commonly issued with maturity of thirty years. The secondary market is highly liquid, so the yield on the most recent T-Bond offering was commonly used as a proxy for long-term interest rates in general. This role has largely been taken over by the 10-year note, as the size and frequency of long-term bond issues declined significantly in the 1990s and early 2000s.

High-yield debt:

In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade at the time of purchase. These bonds have a higher risk of default or other adverse credit events, but typically pay higher yields than better quality bonds in order to make them attractive to investors.

Contents 1 Flows and levels 2 Risk 3 Usage 3.1 Corporate debt 3.2 Debt repackaging and subprime crisis 4 High-yield bond indices 5 2010 European sovereign debt crisis

Flows and levels

Global issue of high-yield bonds more than doubled in 2003 to nearly $146 billion in securities issued from less than $63 billion in 2002, although this is still less than the record of $150 billion in 1998. Issue is disproportionately centered in the United States, although issuers in Europe, Asia and South Africa have recently turned to high-yield debt in connection with refinancing and acquisitions. In 2006, European companies issued over €31 billion of high-yield bonds. 2010 is set to be a record year for European Junk Bond issuance, with as much as €50bn expected.

Risk

The holder of any debt is subject to interest rate risk and credit risk, inflationary risk, currency risk, duration risk, convexity risk, repayment of principal risk, streaming income risk, liquidity risk, default risk, maturity risk, reinvestment risk, market risk, political risk, and taxation adjustment risk. Interest rate risk refers to the risk of the market value of a bond changing in value due to changes in the structure or level of interest rates or credit spreads or risk premiums. The credit risk of a high-yield bond refers to the probability and probable loss upon a credit event (i.e., the obligor defaults on scheduled payments or files for bankruptcy, or the bond is restructured), or a credit quality change is issued by a rating agency including Fitch, Moody's, or Standard & Poors.

CORPORATE DEBT:

The original speculative grade bonds were bonds that once had been investment grade at time of issue, but where the credit rating of the issuer had slipped and the possibility of default increased significantly. These bonds are called "fallen angels".

The investment banker Michael Milken realized that fallen angels had regularly been valued less than what they were worth. His time with speculative grade bonds started with his investment in these. Only later did he and other investment bankers at Drexel Burnham Lambert, followed by those of competing firms, begin organizing the issue of bonds that were speculative grade from the start. Speculative grade bonds thus became ubiquitous in the 1980s as a financing mechanism in mergers and acquisitions. In a leveraged buyout (LBO) an acquirer would issue speculative grade bonds to help pay for an acquisition and then use the target's cash flow to help pay the debt over time.

In 2005, over 80% of the principal amount of high-yield debt issued by U.S. companies went toward corporate purposes rather than acquisitions or buyouts.

In emerging markets, such as China and Vietnam, bonds have become increasingly important as term financing options, since access to traditional bank credits has always been proved to be limited, especially if borrowers are non-state corporates. The corporate bond market has been developing in line with the general trend of capital market, and equity market in particular.

Debt repackaging and subprime crisis

High-yield bonds can also be repackaged into collateralized debt obligations (CDO), thereby raising the credit rating of the senior tranches above the rating of the original debt. The senior tranches of high-yield CDOs can thus meet the minimum credit rating requirements of pension funds and other institutional investors despite the significant risk in the original high-yield debt.

When such CDOs are backed by assets of dubious value, such as subprime mortgage loans, and lose market liquidity, the bonds and their derivatives are also referred to as toxic debt. Holding such "toxic" assets has led to the demise of several investment banks such as Lehman Brothers and other financial institutions during the subprime mortgage crisis of 2007-09 and led the US Treasury to seek congressional appropriations to buy those assets in September 2008 to prevent a systemic crisis of the banks.

Non-performing loan:

A non-performing loan is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 3 months, but this can depend on the contract terms.

“A loan is nonperforming when payments of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full” (IMF)

Asset quality

Asset quality is related to the left-hand side of the bank balance sheet. Bank managers are concerned with the quality of their loans since that provides earnings for the bank. Loan quality and asset quality are two terms with basically the same meaning.

Government bonds and T-bills are considered as good quality loans whereas junk bonds, corporate credits to low credit score firms etc. are bad quality loans. A bad quality loan has a higher probability of becoming a non-performing loan with no return. The ratio of non-performing loans in Japan is expected to be as high as 25% of the overall bank assets.

Bank management components are:

1. Asset management
2. Liquidity management
3. Liability management
4. Capital adequacy management
5. Risk management

Market liquidity

In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value. Money, or cash in hand, is the most liquid asset, and can be used immediately to perform economic actions like buying, selling, or paying debt, meeting immediate wants and needs.

An act of exchange of a less liquid asset with a more liquid asset is called liquidation. Liquidity also refers both to a business's ability to meet its payment obligations, in terms of possessing sufficient liquid assets, and to such assets themselves.

Overview of Asset Quality:

A liquid asset has some or more of the following features. It can be sold rapidly, with minimal loss of value, any time within market hours. The essential characteristic of a liquid market is that there are ready and willing buyers and sellers at all times. Another elegant definition of liquidity is the probability that the next trade is executed at a price equal to the last one. A market may be considered deeply liquid if there are ready and willing buyers and sellers in large quantities. This is related to the concept of market depth that can be measured as the units that can be sold or bought for a given price impact. The opposite concept is that of market breadth measured as the price impact per unit of liquidity.

An illiquid asset is an asset which is not readily saleable due to uncertainty about its value or the lack of a market in which it is regularly traded. The mortgage-related assets which resulted in the subprime mortgage crisis are examples of illiquid assets, as their value is not readily determinable despite being secured by real property. Another example is an asset such as a large block of stock, the sale of which affects the market value.

The liquidity of a product can be measured as how often it is bought and sold; this is known as volume. Often investments in liquid markets such as the stock market or futures markets are considered to be more liquid than investments such as real estate, based on their ability to be converted quickly. Some assets with liquid secondary markets may be more advantageous to own, so buyers are willing to pay a higher price for the asset than for comparable assets without a liquid secondary market. The liquidity discount is the reduced promised yield or expected return for such assets, like the difference between newly issued U.S. Treasury bonds compared to off-the-run treasuries with the same term remaining until maturity. Buyers know that other investors are not willing to buy off-the-run so the newly issued bonds have a lower yield and higher price.

Speculators and market makers are key contributors to the liquidity of a market, or asset. Speculators and market makers are individuals or institutions that seek to profit from anticipated increases or decreases in a particular market price. By doing this, they provide the capital needed to facilitate the liquidity. The risk of illiquidity need not apply only to individual investments: whole portfolios are subject to market risk. Financial institutions and asset managers that oversee portfolios are subject to what is called "structural" and "contingent" liquidity risk. Structural liquidity risk, sometimes called funding liquidity risk, is the risk associated with funding asset portfolios in the normal course of business.

 Futures

In the futures markets, there is no assurance that a liquid market may exist for offsetting a commodity contract at all times. Some future contracts and specific delivery months tend to have increasingly more trading activity and have higher liquidity than others. The most useful indicators of liquidity for these contracts are the trading volume and open interest.

There is also dark liquidity, referring to transactions that occur off-exchange and are therefore not visible to investors until after the transaction is complete. It does not contribute to public price discovery.

Banking

In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable losses. Managing liquidity is a daily process requiring bankers to monitor and project cash flows to ensure adequate liquidity is maintained. Maintaining a balance between short-term assets and short-term liabilities is critical. The investment portfolio represents a smaller portion of assets, and serves as the primary source of liquidity. Investment securities can be liquidated to satisfy deposit withdrawals and increased loan demand. Banks have several additional options for generating liquidity, such as selling loans, borrowing from other banks, borrowing from a central bank, such as the US Federal Reserve bank, and raising additional capital. In a worst case scenario, depositors may demand their funds when the bank is unable to generate adequate cash without incurring substantial financial losses. In severe cases, this may result in a bank run. Most banks are subject to legally-mandated requirements intended to help banks avoid a liquidity crisis.

Banks can generally maintain as much liquidity as desired because bank deposits are insured by governments in most developed countries. A lack of liquidity can be remedied by raising deposit rates and effectively marketing deposit products. However, an important measure of a bank's value and success is the cost of liquidity. A bank can attract significant liquid funds. Lower costs generate stronger profits, more stability, and more confidence among depositors, investors, and regulators.

Liability

"Liable" redirects here. For "Libel", see Libel (disambiguation).
A liability can mean something that is a hindrance or puts an individual or group at a disadvantage, or something that someone is responsible for, or something that increases the chance of something occurring (i.e. it is a cause).

Liability may also refer in specific fields to:

• legal liability
• public liability

Legal liability is the legal bound obligation to pay debts.

• In law a person is said to be legally liable when they are financially and legally responsible for something. Legal liability concerns both civil law and criminal law. See Strict liability. Under English law, with the passing of the Theft Act 1978, it is an offense to evade a liability dishonestly. Payment of damages usually resolved the liability. Vicarious liability arises under the common law doctrine of agency – respondeat superior – the responsibility of the superior for the acts of their subordinate.
• In commercial law, limited liability is a form of business ownership in which business owners are legally responsible for no more than the amount that they have contributed to a venture. If for example, a business goes bankrupt an owner with limited liability will not lose unrelated assets such as a personal residence (assuming they do not give personal guarantees). This is the standard model for larger businesses, in which a shareholder will only lose the amount invested (in the form of stock value decreasing). For an explanation see business entity.
• Manufacturer's liability is a legal concept in most countries that reflects the fact that producers have a responsibility not to sell a defective product. See product liability.

Public liability is part of the law of tort which focuses on civil wrongs. An applicant (the injured party) usually sues the respondent (the owner or occupier) under common law based on negligence and/or damages. Claims are usually successful when it can be shown that the owner/occupier was responsible for an injury, therefore they breached their duty of care.

The duty of care is very complex, but in basic terms it is the standard by which one would expect to be treated whilst one is in the care of another.

Once a breach of duty of care has been established, an action brought in a common law court would most likely be successful. Based on the injuries and the losses of the applicant the court would award a financial compensation package.

Asia

In Asia, the law has not developed to the same extent, although the law does recognize negligence. Most professionals are predicting this development to occur rapidly and within the next 10 years.

The Law and Public Liability

In the course of managing any property, you are obliged to comply with laws and statutes administered by government and municipal bodies. These bodies impose various liabilities of which the property owner/manager should be aware.

The most common examples of statute liability are in areas where you are required by law to effect insurance, e.g. workers' compensation and motor vehicle compulsory third party.

Property, Hotel and Operations Managers should become familiar with the various types of contracts involved in commercial and retail activities. These cover a wide field but the more significant contracts are:

• the head lease or the management agreements
• tenancy and casual leasing agreements
• contracts with independent contractors for cleaning, lift and escalator maintenance, air conditioning and fire protection maintenance, etc.

The major contractual liability from an insurance viewpoint is undoubtedly found in head lease and management agreements. These require the Manager or Head Lessee to fully maintain, repair and replace the property, if damaged, until expiration of the agreement or lease.

Furthermore, the contracts usually require an indemnity to the Owner against liabilities imposed upon him for injuries and property damage arising out of the use, occupation or management of the property.

Every contract contains covenants imposing responsibilities on one or other of the parties. These should be carefully examined to ensure they are not unduly onerous

Degrees of Duty of Care

Owner/occupiers are required to provided a certain level of care. The duty of care is not the same for all people. It is dependent on a number of issues. To assist in establishing the duty of care required it is more clear to divide into groups the individuals who your premises and for what reasons. If we take an example of a large shopping complex the following groups of individuals would be attract different levels of care.