The list of modern bank operations is constantly updated. Factoring and leasing, which is popular today, tomorrow may fade into the background. They complement and expand the activities of the bank. Therefore, they are often called unconventional. These also include trust banking.
Specificity
It is very important to separate the concepts of banking "operations" and "services". The latter do not form any resources, do not increase liabilities, requirements of the bank, do not contain risks, income from them is fully included in the GDP. In such transactions, the bank acts as an intermediary between the client and other financial institutions.
A prerequisite for the emergence of specific operations is competition in a particular segment and in the money market in general. The volume of such transactions with a particular bank depends on the level of development of the credit institution.
Essence
Trust operations are transactions related to the management of the customer’s property, the provision of services on his behalf as a proxy. Their essence lies in the fact that the client transfers to the credit institution his property (without ownership) in order to make a profit as a result of investing assets in various markets. From these revenues, the bank receives part of the profit in the form of a commission.
The concept of "trust" in translation from English means "trust." Operations performed by the bank require full trust in the institution.
Parties to the transaction
The subjects of the transaction are:
- Founder - an enterprise or individual who transfers property to a bank.
- Manager - a credit institution that carries out this type of activity on the basis of a license.
- In favor of the beneficiary, the contract itself is concluded.
The object of the transaction may be property or property rights that belong to the founder as property. The fully managed trust operations of a commercial bank are transactions in which the manager acts independently within his authority. They also identify transactions that must first be agreed with the principal.
Benefits
Unlike other transactions, trust transactions:
- carried out without the use of own funds;
- make it possible to manage the Central Bank without a lot of risk: the bank will be able to receive commissions even in the face of unfavorable market conditions; not liable for losses incurred in such situations.
Trust trust operations are available to almost all banks. There is no need to open a new department for transactions. Some of these transactions were carried out by banks before, but they were called differently. Trust operations include services for:
- storage of valuables;
- receipt of funds by proxy;
- disposal of the owner’s property after his death, etc.
Benefit
Trust banking operations are operations between a credit institution and a client in which the bank accepts obligations to dispose of property in favor of a third party. It is beneficial for the client to transfer property management functions and receive the maximum income from such transactions. At the same time, he remains the rightful owner, and the bank receives the authority to dispose of the property for a certain time.
Types
- Personal: available to individual citizens.
- Institutional: appear on the basis of an agreement between the mortgagor and the manager of obligations or between the owner and the trust company.
- “Master Trust”: they turn out to be a PF or AMC bank by managing a common account in order to maximize income.
Personal deals
The types of trust operations that are provided to individual citizens are conditionally divided into irrevocable and revocable. The first group includes transactions in which the principal cannot terminate the contract, and the second, respectively, transactions that can be stopped at any time.
The property, which is listed in the active management, can be resold, transferred into debt, mortgaged. Such transactions are more characteristic of banks. Passive trust operations are property management services that cannot be resold or mortgaged. Such operations are provided by firms that provide consulting services.
Banking transactions
Credit institutions carry out such trust operations:
- personal account management;
- management of the Central Bank for the purpose of sale or exchange;
- provision of custody services;
- temporary management of the company for the period of its reorganization;
- collection of income in favor of the client.
Banks for such transactions:
- store cash, securities and other valuables;
- prepare accounting documents;
- receive payments by proxy;
- carry out securities purchase and sale transactions, carry out settlements and provide consulting services on the selection of the optimal securities portfolio;
- provide guarantees and sureties.
Credit institution undertakes certain obligations. If any operations turned out to be unprofitable due to his fault, then the bank must compensate the client for lost profits. Specific actions are specified in the contract. The Bank establishes the conditions for managing funds. The amount of income is paid to the principal over the entire duration of the contract.
Features
Transactions are carried out on the basis of a trust or agency agreement. It indicates that the bank acts on behalf of the principal in a limited range of issues.
In world practice, operations are carried out in different ways. If in the country the legal system is built according to the Anglo-Saxon scheme, then the ownership right is distributed between the founder and the manager. If the Romano-Germanic (continental) scheme is in effect, then, as in the Russian Federation, the trustee does not receive ownership of the property.
Trust operations are transactions that are carried out with highly liquid assets. This is one of the most difficult types of banking services. The degree of its implementation depends on the market economy and on the experience of a particular bank in this direction. The credit institution is responsible for losses, possible errors, non-compliance with the terms of the contract, careless management of values, inaccurate execution of instructions. For this reason, in some countries there is a “sane person” rule. Evaluation of trust operations is carried out in the same way as their own.
For the implementation of such services, the bank charges a fee. Its size is prescribed in the agreement and depends on the type of transaction. The amount of remuneration for the management of inheritance is determined by law or a court decision. Fee for agency operations include annual deductions from income and contributions of part of the principal amount upon completion of the contract. If the bank resorted to the help of intermediaries, for example, brokers, then the amount of remuneration received by it should include the commission of the intermediary.
Examples of Trust Operations
In the market, new types of services are popular, such as temporary management of the company’s affairs in case of its reorganization, management of a charity fund. The most complex are considered depository services for the storage of securities, their disposal and investment in certain assets. Such trust operations of Sberbank can be carried out only with the help of intermediaries: brokers, stock exchanges, investment companies. All these financial organizations act as agents between the principal and the RZB.
There are also operations when a corporation acts as an issuer, and a bank acts as a dealer: it buys shares of a company for the purpose of their sale (underwriting). These are the most profitable and popular deals. Their implementation requires an impeccable reputation, high demand for the Central Bank, and the bank's participation in the stock exchange.
Investment portfolio management is another example of a trust operation. Important points when concluding such transactions are the terms of the contract, the degree of control by the bank of the Central Bank of the corporation, its impact on business management and profit. Such transactions require substantial preparation, but at the same time they are an important source of income.
To ensure the confidentiality of clients' interests, a bank may
- to close access to bank employees in the network of departments that deal with trust management and agent transactions in the stock market;
- subordinate trust units to the bank management system;
- isolate the trust department from the main office;
- execute a written commitment of employees on non-disclosure of information.
Trust operations in the Russian Federation
To increase the demand for trust management operations in Russia, it is necessary:
- to improve the mechanism of transactions, the technique of interaction of participants of the securities market with banks;
- to develop the process of concluding a transaction in the bank itself;
- to carry out work among potential customers;
- make changes to the regulatory framework.
Let us dwell in more detail on the last point. The Bank of Russia together with the Association for the Protection of Information Rights of Investors (AZIPI) signed an agreement providing for the disclosure of data on the activities of banks in the financial market by publishing balance sheets of general funds. If the information is partially or completely hidden, the Central Bank may apply sanctions against a particular bank.
Conclusion
Trust operations are a promising direction for the development of the bank, as they bring more income in comparison with other options for placing free assets and enable credit institutions to compete with professional participants of the securities market. Banks in the West usually allocate such units to branches. If credit institutions carry out an individual approach to each client, then there is no separation of trust services from classical ones.