Lion Bank was the third biggest mortgage lending institution. It was inherent that risk is a part of their day-to-day business. Financial markets are, by the principles, uncertain and face a variety of risks–credit market, liquidity, legal, reputation, and operational risk. Therefore, good risk management is considered to be the base of all operations in the company, as well as risks should be appropriately measured and analyzed. Lion Bank has around 2 million depositors with savings of USD30 billion.

Lion Bank's board of directors is comprised of ten members. Dato Fuad is the Chairman and CEO while the others are independent directors. All independent directors were retired and their average age was 68.4 years (six of them were over 75 years). Only two of them have direct experience in the financial service industry.

Ever since Dato Fuad has been appointed as the chairman of Lion Bank’s nomination committee and the audit committee of the company. With regards to audit committee members, Datin Kim was the staff of Lion Bank’s external auditor at KPJT. During her directorship in Lion Bank, she held the position of Audit Partner, Head of Financial Services in KPJT. Datin Kim has served KPJT for almost 30 years.

Lion Bank board members were paid for their services extremely well, since the range was from RM325,000 to RM500,000 plus very high bonuses every year. However, this hasn’t been enough to Dato Fuad who rewarded his self with nearly twenty million between 2003 and 2020 even though the company performance was questionable. The board meeting was seldom conducted, and the company secretary normally did not provide sufficient minutes of meeting and relevant documents to the board members. But, no one questioned.

Not to mentioned, Dato Fuad was the most powerful figure in financial industry. The industry was shocked by the recent news that Dato Fuad has allegedly secured RM17.2 million in personal loans from vendors in exchange for business contracts. He also allegedly charged over RM1.80 million to his corporate credit card for items that were personal in nature. For example, he charged RM1.2 million for a new yacht, RM26,000 for a shopping spree, RM28,000 for first-class travel for his own family, RM17,000 for a birthday party, and RM20,000 for a charitable donation to his son’s private school, and RM14,000 in personal legal fees. The charges were all paid by the company.

As the Chairman of Audit Committee, Dato Fuad offered Nini & Co, a public accounting firm to audit Lion Bank in order to replace the previous auditor, PWCC. The partner of Nini & Co, Narini Saleh met Dato Fuad in a financial conference where Narini distributed her business card that indicates the name of her firm, her professional qualification and her designation as a chartered accountant to all of the conference participants. Nevertheless, a week after, Narini has declined the offer due shortage of staff. Narini introduced Dato Fuad to another public accounting firm, Lili & Co, who then accepted the appointment. For the referral, the partner of Nini & Co received RM5,000 as a commission.

Lili & Co has just established a year ago, they offered low fees as compared to other accounting firms to Dato Fuad. During the audit, Lili & Co conducted a due diligence review for Lion Bank’s investment activity. Farid a new auditor in Lili & Co has just completed his bachelor's accounting degree was asked to perform the due diligence review. The due diligence review involves inventory valuation that Farid has never had any previous experience in such valuation. Lili & Co also offered Lion Bank other services including consultation, corporate finance, accountancy, and taxation.

Due to the Covid-19 pandemic, Lion Bank was hit by the financial world’s reluctance to lend short-term, as other institutions hoarded cash to cope with the fallout from defaulting sub-prime mortgage loans. In mid-September 2021, Lion Bank could not raise enough money to meet its financial obligations. In October 2021, Dato Fuad urged its savers not to panic, insisting that it was solvent. Nevertheless, the depositors queued for hours to withdraw all of their savings. The bank's internet access crashed as online customers tried to log on to access their funds.

On the very next day, the queues lengthened. The government feared that financial panic could spread to other banks. The classical model of mortgage lending is to borrow short-term from personal savers, who can call on their funds with little or no notice, and lend long to home owns against mortgages on their properties. The strategy is based on the assumption that the savers trust the bank.

However, the business model of Lion Bank leveraged this classical model by relying on savers’ funds for only part of its mortgage financing. It borrowed additional funds from the money market. Some of its loans were scrutinized and traded on the swap market. This worked well; interest rates were low and funds readily available. As a result, Lion Bank‘s business grew and its market share far surpassed its competitors with more traditional and cautious strategies. Then came the fund's famine and Lion Bank’s crisis that hit the bank badly.

Required:

(a) Explain the risk management process based on the bank financial crisis.

(b) Justify the capability of the board in understanding the business model banking approach to lending. Comment on the board roles that they are supposed to execute during the crisis.