Posted: December 5th, 2015

Salem Five Bank

 

 

 

 

 

Salem Five Bank

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The case study analyzes the provision of savings products which involves different set of skills through banking products. The purpose of this case study is to examine a savings volatility analysis done at Salem Five Bank on January 1, 2011 for the purposes of highlighting the process and share results that they can be applied towards the inflow of deposits. The case study demonstrates the implementation of savings volatility which is simple and useful to liquidity management and costing.

Salem Five Bank analyzes savings behaviour by understanding what portion of its savings balances can be considered to be long term, stable funding source. This bank provides savings to their customers. This case study looks at the minimum balances for all savings products at the Salem Five Bank. The bank looks at the minimum balances for pledge savings and demand deposits at the Salem Five Bank level (Ashraf, 2012). The minimum balance has by definition remained in the bank for four years and therefore can be considered as a long term stable funding. 50% of the average total savings balances are long term and stable. This shows the funding that Salem Five Bank has not had to borrow from other sources thus representing the savings in funding costs, that is, if the cost of raising deposits is cheaper than the cost of borrowing from banks.

Pledge savings of the combination of compulsory savings and voluntary savings. The compulsory savings of the bank involved a percentage of loan principal and a fixed deposit amount per week while the voluntary savings enabled members to deposit more than the largest percentage at each week (Furlong, 2014). The deposit balances represented the largest percent of total savings and they were expected to be the most stable due to the limitations on withdrawals.

By analyzing the Salem Five Bank’s total savings balances have been growing steadily over the time period from the starting point of 528 million to a level of almost 1.6 billion and for annual growth of about 65%. The daily changes are typically plus or minus 20 million with a few notable exceptions. By looking at the largest absolute change, we see that it was a net inflow of deposits of almost 120 million in August. The largest net outflow ever was approximately 42 million in December. Those deposits of 528 million replaced other liabilities that Salem Five Bank may have used to fund client loans and provide for liquidity reserves through the consideration of core deposits.

Observing the inflows and outflows, the absolute numbers are 120 million for the inflow and 42 million for the outflow. The absolute numbers are not useful to use when savings balances change every day. This enables the banking officials to identify the large and small absolute numbers compared to the overall savings balances Salem Five Bank is working with.

A snapshot of the run of Salem Five Bank can be gained by comparing the composition of its liabilities before the run and after the run. The difference is the liability to the Bank after its liquidity support to the inflows and outflows which stood at 1.6 billion. This was relatively stable compared to the past years. The largest falls are for the retail deposits and for the wholesale liabilities with the latter falling from $243 million dollars to $167 million (Salemfive.com, 2015). The wholesale funding refers to the non retail funding that does not fall under either covered bonds or securitized notes. The detailed breakdown of the wholesale funding is not disclosed in the annual reports since they contain clues on maturity and sourcing of the funding. The wholesale funding consists of balanced mixture of short and medium term funding with increasing diversification of the global investor. Following substantial inflows from securitisation during the first half, Salem Five Bank repaid net $2.4 billion mainly short term funds. During the second half, the bank raised a net worth of $4.7 billion. Salem Five Bank managed to raise a net$1.6 billion of wholesale funding. Maturing loans and deposits were not renewed by investors in Salem Five Bank because timing coincides with investment series thus it was the wholesale funding that was unrelated to the securitized notes or covered bonds that were the heart of the business crisis (Salemfive.com,2015).

Future deposit growth of Salem Five Bank will be determined by the core deposits which are likely to be a funding source that is least sensitive to shifts in interest rates on competing business instruments. Apart from the relative decline in core deposits, there are other aspects that are important in understanding bank funding concerns which involve depositing and the new sources of funding banks are using to enhance profitability. Most of the community bank balance sheets are relatively heavily concentrated in business securities and repositioning banking investment portfolios at a cost to yield.

The relationship between a bank’s asset size and net interest margin 6pis that businesses manage the spread of deposits between liabilities, loans and assets. When the interest that the bank earns from loans is greater than the interest it must pay on deposits thus generating a positive interest spread or net interest income. The asset size and interest margin is the major determinant spread of the profit generated by the bank.

The relationship between a bank’s asset size and the fee income is that it ties together the bank’s balance sheet with the income statement and displays the yield generated from earning assets and also interest bearing deposits. Fee income provides a better analytical framework to help understand the bank’s financial performance (Cornett, 2011). Each fee income is corresponding to the interest related income or expenses and the average yield for the time period. It also shows the impact that a flattening yield curve can have on a bank’s net interest income. Changes in the general level of fee income may affect the volume of certain types of business activities that generate fee-related income. Fee income is associated with the economic value arising from mortgage servicing related businesses which may increase or remain stable in the periods of moderately rising interest rates.

The relationship between a bank’s asset size and the operating expenses involve when banking requires regulators to dictate minimal capital levels to help ensure the solvency of each bank and the banking system (Salemfive.com,2015). One of the most highly regulated banking industries in the world has some level in the soundness of the banking system (King, 2013). Investors can focus most of their efforts on how a bank will perform in different economic environments.

Finance banking institutions expand from lending money to clients to borrowing money from clients and taking on an important responsibility. They have to guard the savings of clients and earn the trust of clients and the general public. Salem Five Bank has to balance the need of their clients for secure and convenient place their money with the need of the lower costs and stable funding sources. The design and delivery of deposits create emphasis on evaluating the ability and willingness of the client to repay and design products which match the cash flows of the clients.

 

 

 

 

 

 

 

 

 

References

Furlong, F. T. (2014). New deposit instruments. Fed. Res. Bull., 69, 319.

Cornett, M. M., McNutt, J. J., Strahan, P. E., & Tehranian, H. (2011). Liquidity risk management and credit supply in the financial crisis. Journal of Financial Economics, 101(2), 297-312.

King, S. R. (2013). Monetary transmission: Through bank loans or bank liabilities?. Journal of Money, Credit and Banking, 290-303.

Ashraf, N., Karlan, D., & Yin, W. (2012). Deposit collectors. Advances in Economic Analysis & Policy, 5(2).

Allman, B. (2006). Banking. Minneapolis, MN: Lerner Publications Co.

Salemfive.com,. (2015). Search. Retrieved 12 November 2015, from https://www.salemfive.com/search?indexCatalogue=full-site&searchQuery=financial+statements&wordsMode=0