1.Go to your central bank’s website to see how recommendations from the BIS are being implemented in your country. LO 11.5

MC Financial does not want to deviate from the national average by more than 12.25 per cent.
Loan loss ratio-based model Based on regression analysis on historical loan losses, the FI estimates the following loan loss ratio models:
X Bus = 0.001 + 0.85 X L and X Con = 0.003 + .65 X L where XBus = loss rate in the business sector, XCon = loss rate in the consumer (household) sector, XL = loss rate for its total loan portfolio.
MC Financial’s total increase in the loan loss ratio is expected to be 12 per cent next year.
Based on consideration of all three methodologies, should MC Financial Corp grant this loan?

Transcribed Image Text:

Integrated Mini Case As a senior loan officer at MC Financial Corp, you have a loan application from a firm in the biotech industry. While the loan has been approved on the basis of an individual loan, you must evaluate the loan based on its impact on the risk of the overall loan portfolio. The Fl uses the following three methods to assess. its loan portfolio risk. 1 Concentration limits The Fl currently has lent an amount equal to 40 per cent of its capital to the biotech industry and does not lend to a firm in any sector that generates losses in excess of 2 per cent of capital. The average historical losses in the biotech industry total 5 per cent. 2 Loan volume-based model National and MC Financial's loan portfolio allocations are as follows. Sectors Business Allocation of loan portfolios in different sectors (%) National MC Financial 40 30