Question
Question 1 (suggested time allocation: 20-30 mins) Firstly, the banks would like to get an idea of the depth of your understanding of various risks
Question 1 (suggested time allocation: 20-30 mins)
Firstly, the banks would like to get an idea of the depth of your understanding of various risks that financial institutions may be exposed to. To assess your understanding, they provide you with the following real-world scenarios:
Scenario #1: BrisBank had committed to lend $2m to Zafars Enterprises. It is now time to do that. The bank issues 2-year NCDs to do so and lends the proceeds for 4 years at a fixed rate of 7%pa.
Scenario #2: TrustUs Insurance Ltd decides to invest $10m of its recently collected premiums in a 10-year Telstra bond
Scenario #3: The recent increase in RBA's cash rate of 0.25% is causing alarms at AusieBank; it expects a deposit drain equal to 0.5% of its total deposits
Scenario #4: APRA is planning to raise the capital ratios of ADIs. YourBank had recently bought back 10% of its ordinary shares.
To demonstrate your understanding, you are asked to, in a tabular form:
- Identify ONLY ONE risk inherent in each of the above scenarios
- Explain the risk
- Explain clearly how each scenario might result in the risk you have identified
Scenario | Identify the Risk | Explain: the risk | Explain: scenario to risk process |
#1 | |||
#2 | |||
#3 | |||
#4 |
4. The risks that FIs are exposed to may very well be inter-related. With specific reference to any two or more risks (from the above or otherwise), you are asked to explain their connectedness
5. Liquidity management at FIs require a balancing act since it may have consequences for revenue-generation. You are finally asked to explain this dilemma
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