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Risk Management project, Risk Management

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Imagine you are the Chief Risk Officer of a newly-formed bank, with a focus on corporate lending in Slovakia. The bank is largely funded by local deposits. The CEO (and so does the regulator) wants to know if sufficient capital has been allocated against assets, and what provisioning policy should be. He would also like your views on pricing of loans and deposits, so that the bank can make a decent profit while making competitive headway without excessive risk. The bank takes small positions in trading local government bonds. The CEO would also like you to assess the bank’s VAR, as well as liquidity, to be sure no undue risks are being taken.

Following is the financial position of the bank after the first year of operations:

Assets (Euro millions)

Cash 194
Due from banks 86
Securities 1200
Gross loans 2700
Loan loss reserves (LLRs) -150
Fixed assets 75
Other assets 175
Total assets 4280

Liabilities & Equity

Deposits 2573
Due to banks 782
Market funds 200
Other liabs 196
Equity 529
Tot liabs & equity 4280

Income Statement

Int inc 300
Int exp -170
=Net int inc 130
Trading inc 20
Net fee & comm. Inc 30
=Optg inc 180
Personnel exp -55
Other optg exp -70
D&A -13
=Pre-prov inc (PPI) 42
Loan loss provisions (LLPs) -29
=P-t inc 13
Tax -3
=Net inc 10
In addition to the above requests from the CEO, he would also like your input on measures to reduce operational risk, and what dividend policy should be.

The bank’s €2.7 billion gross loan book is rated as follows:
€1 billion of BBB rated loans,
€1 billion of BB rated loans
€500 million of B rated loans
€200 million of CCC rated loans. There are no collateralized loans or off-b/s items.

Securities of €1.2 billion are all invested in A rated government bonds.

VAR = 553 mm

Loans are evenly divided between 1, 2 and 3 years’ maturity.

Deposits are 50% demand (due at any time), 25% in 9 months, and 25% over 1 year.

Market debt is of 2 years’ maturity.

Please formulate your recommendations to the CEO (me). Thank you

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