Bank Financial Management

This report provides an overview of the Basel levels and bank management system in Eastern Caribbean. It covers the financial statements, income statement drivers, evaluation of returns, risks and performance, function of bank financial managers, bank risk management, and capital adequacy. The report concludes on the capital adequacy requirement in the jurisdiction.

Running head: BANK FINANCIAL MANAGEMENT
Bank Financial Management
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Executive Summary:
The report is designed to provide the brief overview of the Basel levels regarding the different
matters of banks. For the analysis Eastern Caribbean jurisdiction has been chosen. The report
contains the different matters of bank management system and there Basel level. At the end, the
report concludes on the capital adequacy requirement in the jurisdiction.

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Introduction
The Evolution of Bank Financial Management
The dominant institutional class is the commercial banks in the Caribbean among
monetary institutional in the eastern region of the Caribbean. In this region there, the condition
regarding the monetary system is critically related to deposits as well as financial assets.
Performance of profitable banks was being mixed in the years of 2013 and 2014. Specifically,
though capital adequacy, as well as liquidity, was vigorous, the performance was weakened
related to the quality of assets and its profitability in the year 2014 along with 2013 the growth of
the economy in most countries was weak. Effectively implementing Basel II and Basel III in the
jurisdiction where applicable is still not achieved in spite of that the reliability of banking system
was strengthened during the years of post-crisis. Stress tests of profitable banks have usually not
exposed probable unreliability to convinced worst-case situations. These stress tests recommend
that the banking segment, taken as a whole, remnants hardy and able to endure radically
opposing tremors originating from proceedings such as sharp actions in interest rates, credit
situations, sudden payment runs or opposing changes in native, provincial and international
macroeconomic cases. The detail also reinforced the flexibility that most nations are in the
course of accepting general crisis administration outlines and a local crisis administration and
resolve system is being established to deal with contamination effects that can influence the
outcome from the cross-border procedures of systemically vital banking institutes.

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Financial Statements
Key drivers on a Bank’s Balance Sheet
While carefully studying the examination performed by the Financial Soundness
Indicator of the banks under the commercial sector in the eastern region of Caribbean exposed
about the performers who are weak relating to the matters of quality regarding asset. Mainly the
profits earned from the economies relating to the service class as they had experienced slow
growth in economic concerning the commodities that are based on the counterparts of their
regions.
The principal cause behind the difference in performance in regard between the two teams of
the nation is because of the higher incidence of loans that are non-performer. (NPLs) Belonging
in the service base of economics. The ratio comparison of non- performing loans between the
service based industrial and commodity-based economy in the year 2014 resulted to 4.6 percent
and 13.5 percent. In the recent trend, it was noticed that in the commodity-based economy there
was a slight increase in the performance of non-performing loans that is 0.1 percent while on the
other hand there was a decline of 1 percent in non-performing loans in the service-based
economy. The complex provisioning linked to high NPLs mutual with condensed loan request
and lesser interest rates managed to weedier stages of profitability, especially amid the service-
based economies in the Eastern Caribbean region. (Álvarez, García & Gouveia, 2016).
There was a decrease of 12.44 percent in the domestic assets. The vital fluctuations were
reported relating to Receivables and Loans- in Government Securities, Advances and dues from
the local area of Banks the decrease of 16.28 percent was seen.

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Income Statement Drivers
In December 2015, the interest rate of Federal Reserve increased. The bank`s foreign
reserve did not show a positive impact due to the US interest rates were remaining at low
recording in history. The net loss percentage increased. The net loss was reduced from the
income of interest in operating expenses. Increase in operating income was the note by 9.60%
due to growth in the revenue from interest along with the bank`s reserve portfolio. On the other
hand, operating expense increased by 4.52 percent due to an increase in currency expense with
administrative and general liability concerning the recording the provisions relating to
impairment loss in receivable accounts.
Evaluation of Returns, Risks and Performance
IMF was liable to Update safeguard assessments to the banks. The observation noticed
that the Banks maintained the framework of governance that is provided for the oversight
independency. More or less, it came into notice that transparency is maintained in reporting the
financial statement and there prevails a sound external audit mechanism. The need of IAD`s for
the bank was underscored at the time of assessment. A strategic plan of three years was made
for preparing IAD. The method utilized the approach of risk-based through the results of a Bank
Wide Risk Assessment. The resources of IAD put stress on the engagement of assurance
covering entire departments of the Bank in the three-year span. ( Boyce & Kendall, 2016)
To reflect, the revised role of the IAD was being reviewed by the Internal Audit Charter, the
duties and responsibility of the Board Audit committee along with the needs of QA Programmed.
Further added, confusion in the policy interest about IAS is developed for the department to
accompaniment the Charter.

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Function of Bank Financial Managers
Operational risk is regarded as potential about the loss that is resulted due to inefficient or
lack of ability in the internal process, factors relating to humans, events that are external,
distribution those are related to business. Alike, another institution regarding finance Caribbean
development banks is linked to different types of operational risk that it helps in attempting to
mitigate through maintaining a system to control internally. It is designed for keeping the risks at
levels of appropriate in strengthening the financial view of Caribbean development bank along
with the features of actions and the market where the Caribbean Development Bank operated.
The bank takes the initiative to opt the best approach concerning managing the risks relating to
operations. Caribbean Development Bank review, monitor and control all the internal matters of
the bank. Separately from unalike tactics for vital credit risk capacity, Basel II also comprises a
specific capital condition for Operational Risk. As Basel, I restored on the smallest capital
custody of 8 percent for most assertions and Basel II’s primary condition is also 8percent, at
chief vision this give the impression as a supplementary condition that will upsurge banks’
capital necessities inclusive. (Birchwood, Brei & Noel, 2017).
Bank Risk Management:
Liquidity Risk
As there is no pressure seen from the liquidator in any market, so the risk regarding
liquidity is relatively low, high planes of fluidity establish an outdated operative exercising by
banks operating in the Caribbean, and the establishments frequently had mop-up excess
liquidness if price steadiness is threatened. The requirement regarding funding is based on
Bank`s business programs these are drawn by the amount of commitment of loan along with the

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state of maturity of debts. The primary needs meet them through issuance regarding obligations
if debt, payments of interest along with the principal amount and the free cash flows net figure.
Caribbean Development Bank is considered as an AAA-rated institution, due to the rating
accessing capital market on considerable rates by the Banks. (Álvaro, Garcia & Gouveia, 2016).
Liquidity Risk Management Process
Management of Liquidity Process is done on a day-to-day release of cash, supervising the
future cash flow, so that fulfills the requirement. For the fulfillment of the needs, funds are to be
replenished as they are matured along with borrowing from BMCs. There is an active presence
of Central Development Bank in the foreign money market for supporting the fulfillment.
Preserving a portfolio of extremely marketable assets that can merely be liquidated as the
defense against any unpredicted disruption to cash flow, and Supervising the meditation and
profile of debt maturities. The risk in liquidity involves lack of funding the portfolio regarding
assets at the time of getting maturity along with liquidating the positions according to the need of
time. The impartial of liquidity administration is to safeguard the accessibility of adequate cash
flows to encounter all of the Bank’s financial promises. As a constituent of liquidity
administration, CDB preserves lines of credit with self-governing financial institutes. One such
capability is a line of credit that is used to cover any immediate overdrafts that may occur due to
failed craft. Another is a line of praise to meet unanticipated financial promises in its normal
processes. (Boyce & Kendall, 2016)
Interest Risk
Interest rate risk talks about to unexpected interest rate fluctuations that might disturb
market as well as recognition actions to interrupt the fair value of stable income from bonds and
quality of assets, respectively.

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The interest rate on asset and liability are concluded in the Gap report constructed on the
levels of their maturity. As it is difficult to identify their levels of maturity. Management has
grouped the level of maturity under non-interesting bearing head sub divided into several months
gap 1-3 months, 3-6 months or 6-12 months and others.
Duration Gap Analysis
Analysis of income gap focuses on evaluating the alteration that occurs in the net interest
income due to fluctuation in the interest rate. Since it is taken into account as a short term charge
that is related to the bank`s profit. But, while evaluating the risk from which banks businesses are
being effected it is recommended to take into account both risks associated to long term and
short term. It is also recommend that bank shall focus on economic value as well as IRR. In the
period when liquidity crisis prevails bank stress more upon savings its net interest proceeds but
does not pay attention to market net cost.
Duration Gap is calculated as below,
DUR gap= DURa- L/A* DURl
Where, DURa= average duration of asset.
DURl= average duration of liability
A= market value of asset
L= market value of liability
Credit Risk
Credit risk endures to be a first monetary steadiness matter in the Caribbean and usually first
reveals itself in three behaviors, through the prevalence of non-performance of loans, quick

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credit growing and credit attentiveness. The risk is due to non-fulfillment of obligations if the
nation those are contractual. Regularly reviewing of operations to forecast the exact levels of
losses on loans along with assessing the adequacy regarding generating the income along with
the capacity of risk bearing. Measuring of credit risk can be done based on terms of potential
and the probable losses that are projected from the arrears regarded in payments.
Credit risk assessment the provision of
Valuation of the comprehensiveness and superiority of app data compulsory for the scrutiny of
innovative credit applications.
− Precarious risk silhouettes and approvals on appropriate, suitable risk modification procedures
to the administration of the Banks.
− Mechanical support to project captains and administration with reverence to expressions and
situations of the loan, investment in equity, and guarantee of proposals that includes packages of
security. (Howard, 2013)
− Credit estimation to supervision and validation-off on credit decisions.
Basel II contains of a broad set of managerial standards to develop risk supervision
Practices, which are controlled along three equally strengthening fundamentals or pillars:
· Pillar 1, which speeches slightest necessities for credit with operational risks
· Pillar 2, which delivers direction on the managerial inaccuracy procedure
· Pillar 3, which needs banks to openly reveal key evidence on their risk
Profile and capitalization as a means of reassuring marketplace correction.

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Capital Adequacy
The objectives of the Bank’s capital adequacy strategy are to:
a) Ensure a dependable outline and practice to control the proper levels of financial capital that
the Bank shall carry for practical purposes
b) Conclude from time to time the appropriate changes in the level of commercial capital that
the Bank must have constructed on variations in the hazard profile of its recognition experiences.
(Alber, 2014).
A revenue targeting policy that would enable the Bank, not only to safeguard but also to
strengthen its level of capitalization, maintains the capital adequacy outline. CDB’s Board of
Directors has accepted a total equity-to-exposure ratio (TEER) 1 in the variety of 50 and 55
percent. At the end of every recording period, a valuation was made to regulator the entrenched
risk in the Bank’s acquaintances to the public and private sectors and its volume to carry this
risk. The unresolved loans for every insolvent are positioned into the assessment class of
insolvent. The evasion rate that is related with each assessment is practical to the unresolved
experience by all oblige. Stress tests used in the valuation of capital adequacy. A bank must have
in residence comprehensive stress testing procedures for use in the assessment of capital
adequacy. Stress testing necessity includes identifying conceivable proceedings or upcoming
changes in financial circumstances that could have the unfavorable impact on a bank’s credit
experiences and valuation of the bank’s aptitude to endure such alteration.
The Bank aims when administration capital, which is a broader thought that the equity on the
expression of the balance sheet, are:
• To fulfill with the capital necessity set by the Eastern Caribbean Central Bank.

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To maintain the Bank capability to endure as a profitable apprehension so that it can take to
afford returns for shareholders and reimbursements for other shareholders; and
• To preserve a stout capital base to back the growth of it is corporate.
The Bank management, employing techniques based on the guidelines developed by the Eastern
Caribbean Central Bank (‘the Authority’) for supervisory purposes, monitors capital adequacy
and the use of regulatory capital daily. The necessary evidence is filed with the Authority on a
quarterly basis. (AL-FAWWAZ & ALRGAIBAT, 2015).
The Expert necessitates each bank or economics group to:
(a) Hold the minutest level of the monitoring capital of $5,000,000 and
(b) Maintain a relation of total supervisory investment to the risk-weighted asset (the ‘Basel
ratio’) at or overhead the worldwide-agreed least of 8%. The Bank supervisory capital as
achieved by management is divided into two tiers:
• Tier 1 capital: retained earnings, reserves and share wealth shaped by seizure in retained
earnings.
• Tier 2 capital: succeeding subordinated loan capital, cooperative damage payment and
unrealized advances rising on the fair estimate of impartiality devices held as ready for sale.
(Jones & Zeitz, 2017)

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Conclusion:
The monetary system in the Caribbean has weather-beaten the intercontinental monetary and
financial crisis well. Conversely, although the functioning applies of its governing fiscal
creativities are in the core fairly outmoded and hazard opposed. The County’s economic
steadiness still accepts careful inspecting, partially because of the dangers and susceptibilities
originating from important macro-inequities. The dangers supplementary with its fewer than
established monetary markets, the tilted nature of the experience to the non-monetary sectors, the
imperfect degree of benefit divergence in the serious banking and assurance sectors. The
significant allowance of systemically vital fiscal institutes (SIFIs); and the imperfect national of
fiscal reform and reorganization in the numerous jurisdictions. The regional establishments are
presently absorbed on foremost not only stress tests on nationwide fiscal systems but also cross-
border contamination stress tests that are at the emotion of local command sensible investigation.
These stress tests on discrete institutes are designed not just at guesstimating the elasticity of
internal fiscal systems, but also at sighted how disappointment of specific institutes would
proliferate conclude the province, and consequently whether there are national risks that are
locally universal in greatness. These continuing improvements to the construction for fiscal
steadiness in the Caribbean imitate the promise of local investors to endure refining the elasticity
of the monetary system in the county

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