US Banking Environment
Regulation
The U. S. banking environment has a dual nature. This means that banks are regulated by both state as well as federal agencies.
There are three federal agencies that are involved in banking regulation, supervision and examination.
• The Office of the Comptroller of the Currency (OCC) grants charters to national banks and regulates, supervises and examines them.
• The Fed administers twenty-nine banking regulations to its member banks which include all national
banks and state banks that have elected to be Fed members.
- The FDIC only supervises banks insured by the FDIC that are not Fed members.
- All state chartered commercial banks are regulated and supervised by their respective state agency.
US Banking Environment
The Fed
In addition to its role as a supervisor and regulator of commercial banks as described above, the Fed has four other principal roles. These roles consist of:
managing the U.S. monetary policy,
wholesaling banking services,
being the fiscal agent of the U. S.Treasury and
being a consumer protection agency for financial services.
Collection System
Four basic elements?
- Collection system must:
1. move funds from the customer’s control into the company’s accounts within the banking system.
- provide for a means to update customer payment information on policies.
- provide accurate and timely cash flow and bank balance information.
- maintain an audit trail, so that the integrity of the system can always be proven
Collection System
Collection Float
The treasury manager must identify and minimize
the delays that are inherent in all collection systems. The more efficient and timely the process of moving funds from a customer to the company, the better off the company is.
- Three components:
1. Mail float: is the delay during which a check leaves the possession of the customer until it arrives at the processing site of the company.
- Processing float: is the delay during which a check arrives at the processing site of the company until it is deposited at a bank.
- Availability float is the delay during which a check is deposited at a bank and the bank credits the company’s accounts with the collected funds.
Collection System
Collection System Considerations
The goal of the treasury manager is to funnel the company’s collections into the banking system, recognizing that the company collection system has its limitations and so does the banking system
Collection System
Collection System Methods
- Field Collections: collect premiums at field locations.
- Mail Collections:
- Electronic Collections: ACH
- List Collections: block of business that is paid by one source
- Credit Card Collections
- Other Collection Methods: Debit Card, EBT cards, The internet, a smart card.
Collection System
Collection System Methods.
Mail Collections?
Mail collections are the result of a periodic billing process usually carried out by the home office. Three Options for collecting mailed premium payments:
- At the home office.
* Pre-encoding checks, requires a check encoder and also a sorter if the home office wants to sort the checks by regional check processing center, image the checks and prepare the deposit as if it were a cash letter. A cash letter is merely a sorted bundle of checks accompanied by lists of individual items and other control documents which is normally prepared by the bank to present to the clearing system of the Fed. - Through a lockbox
The advantages of having a lockbox are a reduction in the processing float and the availability float, efficiencies in processing exploited by banks due to economies of scale, lower administrative costs (personnel and equipment), uninterrupted service in the case of a disaster and greater segregation of duty controls. The disadvantages are reduced operational control and higher bank fees - At the remote locations.
Concentration System
- Refers to the transfer of funds from many bank accounts into one account, where the disbursement accounts may be funded or the excess collections may be invested. Objectives of the cash concentration are to quickly move the funds from the account of first deposit into a centralized account and to provide accountability for those funds.
The most common method of concentration is the electronic depository transfer (EDT).
Disbursement System
Disbursement Float
disbursing funds to beneficiaries, policy holders, vendors, employees and other payees in an accurate, timely and cost effective manner.
Disbursement float has the components of mail float, processing float and clearing float.
Disbursement System
Centralized and Decentralized Disbursements
In a centralized disbursements system, the home office typically issues the checks and reconciles the accounts. In a decentralized disbursement environment, the district offices or other remote locations would issue the checks and reconcile the accounts.
Disbursement System
Disbursement Methods
Life insurance companies have options when it comes to disbursing funds other than paper checks, EFT, and wire transfers.
In addition to those traditional methods of payment, life insurance companies also use payable-through drafts (PDT), electronic data interchange (EDI), and retained asset accounts.
Disbursement System
Disbursement Support Services
Imprest Accounts
Zero Balance Accounts
Controlled Disbursement
Positive Pay
Disbursement System
Disbursement Support Services (Imprest Accounts, Zero Balance Accounts, Controlled Disbursement, Positive Pay)
Zero Balance Accounts?
- is a type of imprest account (demand deposit account-DDA). The bank balance is always maintained at zero and the general ledger balance is allowed to float as usually a negative balance (representing uncleared checks).Checks clearing against the ZBA are covered by a transfer from another account. This account does not have to be with the same bank, but the transfer is automatically generated on the same day that the checks clear.
The principal advantage of the ZBA is that the cash manager only needs to monitor the concentration account that funds the ZBA rather than monitoring all transactions from all disbursement accounts.
Disbursement System
Disbursement Support Services (Imprest Accounts, Zero Balance Accounts, Controlled Disbursement, Positive Pay)
Controlled Disbursement?
is another method that life insurance companies use to optimize their balances in the disbursement accounts. It is a bank service that notifies the company of the amount of check clearings that will happen that day.
Disbursement System
Disbursement Support Services (Imprest Accounts, Zero Balance Accounts, Controlled Disbursement, Positive Pay)
Positive Pay?
- Positive pay, also called match pay, is a reconcilement service offered by the bank that protects against fraud. The life insurance company sends a daily file to the drawee bank that includes the check number and check amount of each check processed that day. The bank is then able to maintain a complete list of all authorized check numbers and their related amounts. If a clearing check agrees to an item on the positive pay list, it is permitted to clear. But if it does not agree, the check is handled according to standing instructions which usually involves returning the check unpaid.
Reverse positive pay is a similar system. The difference is that the bank transmits a file of all checks presented that day, and the company makes the comparison to its records.
Reconciliation System
Commercial banks have developed support services called account reconcilement services (ARS) to facilitate the reconciliation process.
Cash Flow Forecasting
Short term forecasting
Short term forecasting predicts cash receipts and disbursements on a daily, weekly or monthly basis in order to make short term borrowing or investing decisions and scheduling concentration transfers.
- Short term forecasts are often accomplished by scheduling cash receipts and cash disbursements. Receipts and disbursements are scheduled on a cash basis rather than an accrual basis.
- Distribution forecasts estimate the pool of receipts and disbursements by averaging past cash flows. The average can be as simple as an arithmetic mean or as complex as regression analysis. This technique is used for short term forecasting.
Cash Flow Forecasting
Medium term forecasting
Medium term forecasting works with a monthly or quarterly time frame and complements the short term forecasting as well as serving as a benchmark for performance by comparing actual to budgeted cash flows.
Cash Flow Forecasting
Long term forecasting
Long term forecasts covering periods of a year or longer, considers capital expenditures, sales and expense projections as well as market and economic trends. Long term forecasts are used in investor relations and by crediting and rating agencies.
Methods (Both pro forma and statistical forecasting are useful in analyzing trends.)
• Pro forma financial statements are typically created on a percentage of sales basis. As sales fluctuate in relation to a comparable period or budgeted amounts, income statement and balance sheet items are adjusted proportionately.
• Statistical forecasts are accomplished either through extrapolation or by deriving a relationship between unknown cash flow components and known cash flow components.
Cash Flow Forecasting
Lines of Credit
A line of credit is a commitment from a commercial bank to make available an amount of credit for a specific time period that the life insurance company can draw upon at the company’s option. Lines of credit can be secured or unsecured and typically last for one year.
The company gets these commitments, instead to facilitate the sale of commercial paper. It is the commercial paper that gives the life insurance company the necessary liquidity or short term financing.
- Commercial paper is unsecured short-term debt with a duration of 1 to 270 days. The limit of 270 days avoids Securities Exchange Commission (SEC) registration requirements.
Cash Flow Forecasting
Standby Letters of Credit
life insurance companies are required to establish standby letters of credit for certain reinsurance contracts. The amount of the standby letter of credit is equal to the reserve requirement ceded to the life insurance company. If a life insurance company fails to perform according to its reinsurance agreement and documentation is provided to the bank of the failure, the bank must pay the obligation.
Standby letters of credit used in these circumstances are irrevocable.This means that the standby letter of credit may only be changed by permission of the ceding company, the beneficiary.
Cash Flow Forecasting
Financial Risk Management
The risk management process involves:
identifying and measuring the financial risk exposure, developing and implementing a risk management strategy and then
measuring the effectiveness of the strategy.
Cash Flow Forecasting
Derivatives
derivative is simply a financial product that bases its value on something else, called an underlying asset. The underlying asset could be a currency, a commodity, a financial instrument like a Treasury Bill, or even an index of mutual funds or a portfolio of other investments.
- Four Types
• Forward is a contract between two entities to buy/sell an amount of an underlying asset at an established date and price. *Custom designed agreements between entities - Future is much the same as a forward, except that future contracts are standardized and traded on organized exchanges.Unlike forwards, futures are rarely settled by the delivery of the underlying asset. Generally futures are closed out before the settlement date.
- Swaps, like forwards are custom designed agreements between entities. *Custom designed agreements between entities
- An option is a contract to buy or sell an underlying asset that is exercised at the option buyer’s discretion.
Cash Flow Forecasting
Derivatives Addressing Interest Rate Risk
Forward Rate Agreements (FRA) are forward contracts on interest rates.
Interest rate futures are future contracts on financial instruments whose value depends on the interest rate of the underlying assets, like U. S. T-Bills, Treasury notes and Treasury bonds.
An interest rate swap, as noted above, is typically an exchange of a financial instrument whose cash flows have a fixed rate, for example, with one whose cash flows have a floating rate.
There are basically three varieties of interest rate options.
- interest rate cap
- interest rate floor
- interest rate collar: Combination of cap and floor
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Chapter 251
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Chapter 358
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Chapter 427
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Chapter 521
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Chapter 655
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Chapter 718
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Chapter 823
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Chapter 918
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Chapter 1018
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Chapter 1120
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Chapter 1237
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Chapter 1317
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Chapter 1425
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Chapter 1520
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Chapter 1626
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Chapter 17 - Budget24
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Chapter 18 - Strategic Planning8
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Chapter 19 - Management reports18
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Chapter 20 - Mergers and Acquisitions20
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Chapter 2120
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Chapter 2220
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Chapter 24 - Internal Control22
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Chapter 25 - Reinsurance25
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Chapter 262
