QUESTION 1 (30 points) Fiscal banking authorities are closely monitoring the evolution of the structural risk in the banking industry. One respective indicator is the 'z-score'. By definition, z-score is computed as return on assets plus equity- to-assets ratio divided by the standard deviation of return on assets. Please describe your view on the banking KPIs applied to compute the 'z-score'. Please assess and comment on the development in the charts below, comparing United States and France. Which conclusions would you derive for the underlying reasoning, particularly focusing on capital? What are your recommendations to European Central Bank in respect to the upcoming macroeconomic downturn? (30 points) Bank Risk: Z-score 30 - Lower risk France Germany Italy 25 United Kingdom United States Canada 20 15 5 - Higher rick 196 759? 1998 199 2000 2001 2002 20os 2004 zoos 2oce 2007 2008 2009 2010 2011 2012 2012 2014 2015 2016 Source: The World Bank, Financial Structure Database, July 2018 * Estimated as freturn on assets + equity/ assets/ standard deviation of return on assets