Liability Concept

The application incorporates a powerful liability administration tool which enables multiple liability entries to be dealt with.

International and national requirements sometimes make it necessary to enter liabilities which can represent a risk to the respective bank into the bank's balance sheet. There are several levels of such liability entries and these, of course, can be handled differently from country to country.

The basic idea of this concept is that every transaction / situation can lead to the necessity of having proof of any liability and / or risk recording on the bank side. Some of these 'liabilities' have to be shown as 'assets' or as 'contingent liabilities'. Others such 'liabilities' require limit control only, but no booking entries in the bank's general ledger. The latter are used to be able to confirm certain details to a party (client , foreign bank, etc.). Such details may include, for example, the value of a set of documents which were in the hands of the bank and were unpaid on a specific date. Accordingly the following description of 'liability' is possible:

Description of 'liability' (figures refer to the class number):

1. fixed liability, which is a fixed indemnity / risk for a bank (for example: acceptance of a draft, granting loans etc.). Such liabilities have to be entered into the bank's balance sheet.
2. liabilities, which can change into a fixed indemnity / risk for the bank (for example: issuance of letters of credit and guarantees, confirmations (including silent confirmations) of export letters of credit, releases of good etc.). Such liabilities have to be entered into the bank's balance sheet as contingent liabilities.
3. liabilities, which can bear a risk for the bank, but need not to be entered into the balance sheet (for example, payment under reserve under an export letter of credit in cases where the creditworthiness of the beneficiary is sufficient). In those cases, an internal limit has to be reserved.
4. possible risks out of business which cannot be compared with liabilities mentioned under 1-3 such as presentation of documents which belong to a customer etc.

In order to fulfill the different requirements arising from such liabilities, the application incorporates a limit system which can be customized to meet the needs of each individual bank. Furthermore, booking entries can be created which will have to be entered into the general ledger of the bank. The application is also able to create 'internal bookings' which can be linked to limit usage, or not.

* The LIA Class applicable to business sectors is described in detail together with how the different business sectors are to be dealt with.

'Assets and Liabilities' entry in the balance sheet means that during the “creation”, “update” and / or “reduction” of a liability, a booking entry for the general ledger system has to be created and the related booking has to be shown in the balance sheet of the bank.

'Contingent Liabilities' entry in the balance sheet means that during the “creation”, “update” and / or “reduction” of a liability, a booking entry for the general ledger system has to be created and the related booking has to be shown in the balance sheet of the bank or, where possible, it means that during the “creation”, “update” and / or “reduction” of a liability, all necessary details can be stored in a sub-ledger and are associated to the balance sheet without booking on accounts.

Limit Control means that the limit control system of the application is involved and it is necessary to have sufficient free limit availability to create the transaction in question.

Cash Cover / Cash Collateral means that cash cover is booked on an specific cash cover account. Cash cover is possible for all amounts up to the maximum liability amount (LIASUM). Details can be entered by each row. On the following pop-up panel “Liability-Details” the liability type “Cash Cover” or “Standard Limit” can be selected.

Further information about cash cover can be found under “LIACCV Cash Cover”.

(Former Cash Cover handling: The requirement for displaying the “Cash Cover” panel is, that the “Liability” panel does exist in the transaction. In case a cash cover amount is stored, the panel will always be displayed. Otherwise the panel is only visible, if the “Liability” panel is visible as well and a contract change amount has been specified.)

Facility Limit enables user to book limits on a much detailed level per party. It has also been enabled for cash cover. Further information about Facility limits can be found under “ Facility Limits”

Internal 'Booking' means that an entry is created, updated or reduced for the respective liability type (LIATYP) in the database. Accordingly, reports are possible. Internal bookings are used to maintain different amounts, actions and other requirements which have to be fulfilled when processing business transactions.

When creating an internal “booking”, further “bookings” will follow during the complete maturity period of the contract. Document templates etc. are updated respectively. This enables evaluations on the amount of non-processed documents possessed by the bank for a specific party, for example. Additionally the disposition of the limits and the generation of general ledger entries are integrated.

In case a liability was booked in the main contract, the bookings are made in the main contract during the whole maturity period of the contract and not in the subcontracts. When export L/Cs are transferred, the confirmation is booked in the main contract and not in the transfer. If there is a silent confirmation just for the transfer, the presentation of usance documents, etc., each booking is made in the respective subcontract and the main contract is updated respectively, in case this is required.

Note: If the account defaulting in LIA detects, that the old account is not valid any more for the new data (party was changed, another handling type was used, etc.), a rebooking will be created automatically. This function is installation-specific and can be enabled or disabled depending on the liability type.

The following table shows the different “liabilities” and their defaults in the application.

The usage of the liability type (LIATYP) is explained in the description of the business sectors.