Reference no: EM133239440
A financial institution has four divisions, with each division focussing on its own specialisation:
• Insurance operations
• Pension fund operations
• Mutual fund operations
• Commercial bank operation
This financial institution is operated in a country which is concerned about inflation and has set a target rate for the year. The central bank is expected to embark on a series of interest rate increases. As a financial analyst, you are asked to assess various strategies the financial institution is considering and explain how they could affect its regulatory review. Regulatory reviews include an assessment of capital, asset, quality, management, earnings, liquidity, and sensitivity to financial market conditions. Many types of strategies can result in more favourable regulatory reviews based on some criteria, but lessfavourable reviews based on other criteria. The financial institution is planning to issue more stocks, retain more of its earnings, increase its holdings of Treasury securities, and reduce its business loans in the commercial bank operations. It has historically been rated favourably by regulators, but the financial institution believes that these strategies will result in an even more favourable regulatory assessment.
1. Which regulatory criteria will be affected by the financial institution's strategies? How?
2. Do you believe that the strategies planned by the financial institution would satisfy both regulators and shareholders? Explain
3. Explain why the financial institution's holdings of cash might have increased significantly as a portion of its balance sheet in recent times.
4. Given the circumstances, would the interest rate increases be more likely to hurt or help the financial institution's profitability? Consider the typical sources and uses of funds at each division of the financial institution. What steps might the financial institution take to prepare for each division in this scenario?