home Banking books Money and credit - Ivanov VM

Money and credit - Ivanov VM

24.2. Formation of equity

To create a commercial bank requires a certain equity capital, which, having a clearly defined legal framework and functional definitions, forms the financial basis of the bank's development. Compared to other areas of business equity commercial banks took a small share in the total capital. This is explained by the specific activities of a commercial bank as an institution to mobilize available resources in the money market and the provision of a loan. Therefore, equity in the banking business has a slightly different purpose than in other areas of business. If in the past - is to ensure the solvency and the implementation of most of the operational responsibilities of enterprises and organizations, the commercial banks' equity is primarily for the security interests of depositors (capital protection feature) and to a lesser extent - for the financial support of its operational activities. In this regard, the amount of equity capital is an important factor in ensuring the reliability of the bank's operation and should be kept under strict control bodies regulating the activities of commercial banks. Therefore, there is reason to believe that the banks' own capital, and performs a regulatory function: by fixing its size regulators affect the activity of commercial banks as a whole.

The protective function of the Bank's equity includes insurance, deposits, guarantees the protection of the commercial interests of the creditors of the bank in the event of liquidation or bankruptcy, as well as to ensure the functioning of the bank even when a loss in its current activities. These losses are usually covered by the current profits. If it is not enough, for unforeseen expenses used part of the equity. Therefore, if a commercial bank has sufficient capital reserves, it is a long time can be a reliable and solvent even when a loss from operating activities.

The role of the protective function of the bank's equity changed under the influence of several factors: general economic and financial situation of the country and the stability of the monetary sphere; development of deposits and loans of insurance country; strategy and tactics of the bank in the first place in their submission to ensure the bank's liquidity. The higher the level of development in the country of deposit insurance, deposits and lending operations of commercial banks, the less the requirements for the protection function and the smaller can be the share of equity in the assets of commercial banks. The stricter requirements of commercial bank adheres to its liquidity, carefully insures its activity against all types of risks, the less the requirements for the protective function of equity capital and lower value may be in the back of the bank. However, excessive "enthusiasm" liquid assets, total exclusion from the practice of issuing risky loans will reduce the profitability of the bank, degrade the quality of service customers, reduce the size of interest payments on shares and deposits, which ultimately threatens the loss of his position in the money market. In the context of economic and financial instability, chronic inflation, the activities of commercial banks exposed to additional risk, which increases the demands on the protective function of equity capital.

Although the operational function of equity capital in the banking sector is much weaker than in other areas of business, yet it should not be underestimated. Especially significant role of this function in the initial period of commercial bank. Due to the funding of the acquisition of equity required for a commercial bank buildings, their construction or rental, provision of furniture, organizational and computer technology, providing other material resources, introduction of new banking systems of protection, banking technologies and communication systems. The development of a market economy enhances the commercial banks need to use the latest achievements of science and technology, the cost of which will continue to grow, especially in terms of inflation.

The essence of the bank's regulatory function of equity capital is to ensure that among the established regulatory authorities for commercial banks in prudential regulations important place is given to the fact that the calculation of the bank's own capital is used. This indicators such as the ratio of equity to liabilities or assets Bank assets with an increased risk, and so on. D. For example, the establishment of capacity to pay commercial banks, t. E. Minimum ratio between equity capital and the sum of weighted degree of asset risk is It aims to prevent excessive minimization of their own capital for the maximization of earnings, reduce the risk of the bankruptcy of commercial banks and strengthen the protection of the interests of its clients and creditors.

Multi purpose of equity capital of the bank makes its heterogeneous composition. One part is designed to ensure that operational activities of a commercial bank, is the most constant and acts in the form of funds: the charter, partly backup, depreciation, economic incentives. The second part is intended for insurance and other active operations of the bank from losses. This part is more mobile and is in the form of funds: insurance, partially contingency reserves to cover losses associated with outstanding loans. The third is intended to regulate the size of the bank's own capital, although it may be used to provide operational and insurance needs. Therefore, the size of this part of the equity for the movable and can depend on both the change in the strategic and tactical objectives of the bank and on the regulatory requirements. He said part of the equity is in the form of retained earnings.

Depending on sources and order of formation of own capital of commercial banks are divided into equity and reserve capital, retained earnings and long-term debentures.

Equity capital is the main place in the bank, because thanks to him, sold the rights of owners of commercial banks - the right to income and bank management. The economic literature is often called the entire equity Equity on the ground that it belongs to the bank, and therefore shareholders. In this section, equity is considered in a narrower sense as the mobilized through the issuance of shares.

The share capital was originally formed as a statutory fund to create a commercial bank through contributions of founders, production and sales of shares. Contributions may be made in the form of money, property and related rights. authorized fund size is determined by the founders, but may not be below the minimum level set by the National Bank of Ukraine. The procedure for making the founders of its share in the authorized capital is determined by the constituent documents of the calculation to the beginning of the operations of commercial banks covered by its disposal of shares sufficient to operational activities. The minimum share of the authorized capital, the introduction of the opening of a bank is determined in the memorandum, but must be no less than required by law.

When you create a business bank the formation of equity capital is generally linked to the issue of shares. On the procedure for the formation of own capital significantly influences the form of issued shares, which, depending on the order of payment of dividends and the right to participate in the management of the bank are divided into simple (ordinary) and preferred.

The holders of ordinary shares with voting rights at the shareholders meeting, shared with the commercial bank all his income, losses and risks. When a commercial bank has not arrived, the owners of common shares may get nothing on their investments, they also did not guaranteed in the case of liquidation of the bank. In addition, the ordinary shareholders' losses can not be more than their initial investment, and the income they can get significant, because the rest of the profit is only distributed among the holders of ordinary shares. They invest money in the entire existence of a commercial bank and thus a higher risk and therefore require a higher amount of dividends as a compensation for the additional risk. Consequently, common shareholders mainly benefit from future revenues of a commercial bank, which are realized in the form of expected dividends and (or) increase the market value of the ordinary shares.

If the development of commercial bank operations require an increase in the share capital, it can make an additional issue of ordinary shares. The new issue of ordinary shares generally leads to a reduction of dividends received by shareholders. Even if the profit amount increases, earnings per share may be lower because the profit is distributed among a large number of shares. Increasing the number of ordinary shares is to expand the composition of shareholders, making it difficult to monitor the activities of commercial banks. In some cases, the reason for this encourages them to block the new issues of ordinary shares, despite the fact that in the new issue of the former shareholders have a priority right to buy shares.

If the former commercial bank shareholders do not find it possible to expand the number of co-owners themselves and increase their own contributions to the statutory fund, it may be decided to issue preferred shares. These shares entitle their holders to receive in advance a fixed dividend that does not depend on the resulting commercial bank profits. Holders of preferred shares in case of liquidation of a commercial bank in the division of his assets have the advantage compared to the holders of ordinary shares. However, in case of liquidation of a commercial bank holders of preferred shares receive the money only after the creditors' claims will be satisfied.

A preferred share, as a rule, does not give the holder the right to vote at the general meeting of shareholders. This benefits the controlling group of shareholders, who does not want the interference of other shareholders in the case of a commercial bank. In addition, the issue preference shares for less than simple. Consequently, the issue of commercial bank preferred shares may be regarded in some cases as an alternative to ordinary shares in the formation of equity capital.

Reserve capital is formed in the process of follow-up activities of a commercial bank. It is intended to cover the possible losses of commercial banks conducted their operations as well as for the payment of dividends when it is not enough profit. Availability of capital reserve fund ensures the stability of the commercial bank activities, strengthens its material and financial base. In turn, this contributes to the implementation of the bank guarantee of their obligations to creditors, reduces the probability of a bankruptcy of a commercial bank.

Reserve capital is formed in the manner prescribed by meeting of shareholders (founders), and its value is set it is usually a percentage of the statutory fund of commercial bank and can not exceed it. The source of the formation of the reserve capital are deductions from profits, the amount of which is determined by the highest body of management of a commercial bank, but not less than the statutory amount. If during or after the formation of the reserve capital from it made payments to cover losses and unforeseen expenses, deductions from profits to renewed recovery set the size of the capital.

It is important to correctly determine the amount of deductions from profits to the reserve capital. Accelerated deductions for the purpose of fast creation of reserve capital may reduce the amount of dividends paid on the shares, the market value of the shares themselves and have a negative impact on the formation of the share capital at all. Very low rate of deductions from profits tightened reserve capital for the long term and can have a negative impact on the provision of a commercial bank's financial stability. Therefore, banks often choose a mixed procedure for the formation of reserve capital, when for several years the increased deductions made from profit, and then set a moderate or low rate of contributions to the achievement of the established amount of the capital.

Retained earnings - is the source of equity commercial bank internal origin. It is formed as a residual income after the payment of dividends, allocations to the reserve and other funds of the commercial bank. Since the dimensions of all charges, except dividends, pre-defined, the balance of retained earnings for the reporting period mainly depends on the size of the dividend, established by the General Meeting of Shareholders. In order to maintain a fixed ratio of regulatory authorities' equity - assets "commercial bank is often forced to choose between increasing the size of the retained earnings and the issue of new shares. However, the commercial bank's shareholders are its owners and have been reluctant to expand the number of shareholders and a new share issues. When a portion of the profits remain in the bank instead of being allocated to dividends, shareholders believe that the retention money will give them the necessary market yields ordinary shares. The increase in equity through retained earnings is more favorable than that of a new issue of ordinary shares, since there are no costs associated with the issuance of new securities. However, long term suppression of dividends can reduce the market value of the shares. Therefore, a commercial bank is constantly striving to maintain a balance between the payment of dividends to shareholders to gain their support, and the reinvestment of income, develop and maintain the price of the shares at a high level.

Long-term debentures may form own capital of commercial banks through the issuance of bonds.

Unlike stocks bonds do not entitle their holders to participate in the management of the issuing of a commercial bank. They testify to the provision of certain holders of cash bonds in the issuer's disposal in the form of long-term loan. Bond holder's right to receive a fixed income on it, and with the onset of maturity bonds, the issuer returns the owner of the nominal value of the security. When a commercial bank in the conditions of expansion needs to be further holding in its turnover this capital, he resorted to refinancing previous releases, t. E. The repayment of the funds received from the issuance of new unsecured debt. Bonds, if provided the terms of issue, can be converted into common shares, while attracted to them via capital becomes constant for a commercial bank. bonds Convertibility enhances their appeal among buyers because it allows the latter to purchase shares in the bank at the most favorable moment.

Keep in mind that buying bonds, investors run the risk of less than shareholders, as in the case of insolvency of a commercial bank creditors to return the money.

To summarize, it should be noted that the commercial banks have an important task - to choose a procedure for the formation of own capital, which at a minimum of spending on education and operation would ensure the payment of sufficient dividends to shareholders, thus creating conditions for further development of the commercial bank.