Economics of Banking and Finance: Roles of Banks, Debt Financing, Basel III and OCBC

Running head: ECONOMICS OF BANKING AND FINANCE
Economics of Banking and Finance
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1ECONOMICS OF BANKING AND FINANCE
Table of Contents
Two key roles of the bank in terms of its contributions to country’s financial system...................2
Critical Evaluation of problem with relying on debt finance for financial surplus unit and
financial deficit unit.........................................................................................................................4
Changes to the capital adequacy, liquidity and leverage requirements as stipulated by Basel III
and its impact on OCBC..................................................................................................................5
Processes of asset securitization......................................................................................................8
Implications of the global financial crisis on the bank’s financial performances.........................10
References......................................................................................................................................12

2ECONOMICS OF BANKING AND FINANCE
Two key roles of the bank in terms of its contributions to country’s financial system
The developmental activities of a country are dependent on its economic growth which is
attained over a certain period. The economic growth considers the investment and the production
to the extent which illustrates that the investment and production is to the extent of GDP in a
country. This leads to improvement in the overall standard of living and economic development.
The two key contributions of the banks in terms of the financial system are stated below as
follows:
1. Brokerage Services - Banking assists in investing in listed securities in the capital market.
These services are discerned to be provided in accordance with registered financial
advisors who are able to provide a high level of professional assistance to their clients. In
the recent times, banking service is able to determine the long-term and short-term
financial goals along with risk tolerance limit. It is also able to examine the most suitable
alternative investments which might help in reaching the desired goal and execute trades
(Webb and Martin 2017). OCBC securities is considered as one of the first brokerage
service in Singapore to introduce “OCBC OneTouch on their iOCBC TradeMobile” app
for both Android and iPhone which enabled the users to evaluate their stock portfolio.
The bank took noteworthy initiative to launch app named Apple Watch. This service was
able to provide important “account information via wrist devices”. The bank is able to
make significant contribution to the financial system with continuous engagement with
prospective customers to initiate cross selling of the brokerage services. In addition to
this, OCBC launched “StockReports+ in September 2016”, which aggregates
independent research done by the brokers and provide quantitative analysis for the stocks
in “Singapore, Hong Kong, United States and Malaysia markets”. OCBC expanded the
contribution of brokerage services to the financial system by enabling trading on the
“Shenzhen ‘A’ market after the launch of the Shenzhen-Hong Kong Stock Connect in
November 2016”. This allowed the existing customers to trade over 15 global exchange
online (Ocbc.com. 2018). Some of the other brokerage services are identified in form of
providing opportunity to earn income on unvested cash in the brokerage account with
bank deposit program thereby assisting in dividend reinvestment plan, periodic

3ECONOMICS OF BANKING AND FINANCE
reinvestment plan and providing margin borrowing and option trading (Unionbank.com.
2018).
2. Asset Transformation - The process of asset transformation deals with creating new
asset from liabilities with different characteristics and conversion of small denomination,
“immediately available and relatively risk-free bank deposit into loans”. Asset
transformation in banks is used with deposits to produce revenue for pooling deposits to
fund loans. Henceforth, in a simple way the process of asset transformation involves
converting bank liabilities or deposits into bank assets or loans. The primary activities of
bank include withdrawal of deposits by the customers at the stipulated time and the
contract is made at the time of deposit agreement (Entrop et al. 2015). Bank loans are
considered as assets as the present money is the bank lends and expects to receive along
with interest payments. Very often, bank decides to undertake asset transformation via
lending long and borrowing short rate of interests with transformation of revenues. The
bank performs asset transformation by offering varieties of financial products in form of
“deposits, loan products and investment options” (Majd Bakir 2015). The asset
conversion cycle of OCBC shows that as there was an increase in the customer deposit by
6% in 2016 (“amounting to S$ 261 billion”), this comprised of 80% compensation for
funding of the group. This shows that 80% of the Banks’s liabilities (deposits) were
transformed into assets (loan). The sound assets transformation policies adopted by the
bank was further evident with a stable funding and liquidity position in 2016. In addition
to this, there was an increase in the “loans-to deposits ratio stood at 82.9%, as compared
with 84.5% a year ago”. However, bank is in a good position to cover any unforeseen
fund requirements due to the high asset transformation rate (Ocbc.com. 2018).
A study conducted by the IMF has implied that an increase in one percentage
point of the GDP is able to increase the output by 0.4% in the same year and after four
years by 1.5%. In general, the financial institutions are also able to bring economic
development in the infrastructure facilities in a country with asset conversion. The
financial services are discerned to play an important role in terms of providing growth to
the infrastructural facilities. The private sector finds it difficult for raising the capital
needed for setting up of the infrastructure industries. The development banks and the