Be Finance Active

Is My Money Safe part 3


Another oft-used figure is the net income of the bank. It is important to distinguish interest income from non-interest income. In an open, sophisticated credit market, the income from interest differentials should be minimal and reflect the risk plus a reasonable component of income to the bank. But in many countries (Japan, Russia) the government subsidizes banks by lending to them money cheaply (through the Central Bank or through bonds). The banks then proceed to lend the cheap funds at exorbitant rates to their customers, thus reaping enormous interest income. In many countries the income from government securities is tax free, which represents another form of subsidy. A high income from interest is a sign of weakness, not of health, here today, gone tomorrow. The preferred indicator should be income from operations (fees, commissions and other charges).

There are a few key ratios to observe. A relevant question is whether the bank is accredited with international banking agencies. These issue regulatory capital requirements and other mandatory ratios. Compliance with these demands is a minimum in the absence of which, the bank should be regarded as positively dangerous.

The return on the bank's equity (ROE) is the net income divided by its average equity. The return on the bank's assets (ROA) is its net income divided by its average assets. The (tier 1 or total) capital divided by the bank's risk weighted assets – a measure of the bank's capital adequacy. Most banks follow the provisions of the Basel Accord as set by the Basel Committee of Bank Supervision (also known as the G10). This could be misleading because the Accord is ill equipped to deal with risks associated with emerging markets, where default rates of 33% and more are the norm. Finally, there is the common stock to total assets ratio. But ratios are not cure-alls. Inasmuch as the quantities that comprise them can be toyed with – they can be subject to manipulation and distortion. It is true that it is better to have high ratios than low ones. High ratios are indicative of a bank's underlying strength, reserves, and provisions and, therefore, of its ability to expand its business. A strong bank can also participate in various programs, offerings and auctions of the Central Bank or of the Ministry of Finance. The larger the share of the bank's earnings that is retained in the bank and not distributed as profits to its shareholders – the better these ratios and the bank's resilience to credit risks.

Still, these ratios should be taken with more than a grain of salt. Not even the bank's profit margin (the ratio of net income to total income) or its asset utilization coefficient (the ratio of income to average assets) should be relied upon. They could be the result of hidden subsidies by the government and management misjudgement or understatement of credit risks.

Minimize Disruption Of Personal Finances After Natural Disasters


With the recent increase of incapacitating natural disasters, it's vital to prepare now for what might happen down the road. The best way to avoid a major disruption in your financial life after a disaster is to automate critical transactions that are currently done on paper. With tornado season from April through June, hurricane and typhoon season from June through November and the potential for earthquakes at any time during the year, there is no time like the present to ensure that you will have access to your money and personal documents in case of emergency. The following are five things you can do now to prepare for the next natural disaster:

1. Sign up for Direct Deposit of your paycheck or Social Security benefit. One of the major problems in the aftermath of Hurricane Katrina was that people paid by checks had no access to their money. On the other hand, people paid through Direct Deposit were paid on time automatically. If your employer doesn't offer Direct Deposit, send them to the business section of www.electronicpay ments.org to see the benefits of offering the service, not only to their employees, but also to the bottom line of the company.

2. Consider online banking so that you have access to your account records if your paper records are destroyed and/or if your bank branch is not accessible. In the aftermath of a disaster, phone lines, cell towers and businesses could be shut down for months while online access to your bank accounts will be virtually uninterrupted by the natural disaster.

3. Ensure that your insurance premiums, car payments, mortgage and other important bills are paid automatically even if you don't have access to the mail or to your checkbook. Sign up with your billers for Direct Payment. Your bills are paid automatically each month, so you are assured that you will have insurance when you need it and that your car and house payments will remain in good standing.

4. Make a photocopy of everything in your wallet, scan the copies into your computer and save them on a disk. Keep the disk with your preparedness supplies. This takes 15 minutes to do and will save you if your wallet and financial records are destroyed or stolen. In case of power outage, also keep a paper copy of these records in a safe place like a bank vault. It's vitally important to have this information if you need to cancel credit cards, have proof of identification and insurance coverage.

5. Get an ATM card or Checkcard even if you only plan to use it in an emergency. In a disaster, cash is king with some retailers, at least for the short term. If you need immediate supplies, you will want to have access to cash through an ATM. In the days after a disaster, it can be virtually impossible to cash a check or to find retailers whose credit card systems are working.