Next, the banks would like to test your understanding of various risk management techniques. You are provided
Question:
Next, the banks would like to test your understanding of various risk management techniques. You are provided with the following balance sheet information as at 30 June 2022:
Liabilities | Maturity | Int Rate | $m |
| Assets | Maturity | Int Rate | Risk Weight | $m |
Demand deposits |
|
| 450 |
| Cash |
|
| 0% | 10 |
Term deposits | 1-3 yrs | 2% | 730 |
| T-notes | 1 month | 1% | 0% | 50 |
Certificate of deposits | < 1 yr | 3% | 700 |
| T-notes | 3 month | 2% | 0% | 50 |
Certificate of deposits | 1-3 yrs | 5% | 200 |
| T-bonds | 2 years | 3% | 0% | 70 |
Other borrowings | 3-5 yrs | 4% | 150 |
| T-bonds | 10 yrs | 5% | 0% | 100 |
Capital |
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| Loans | < 1 yr | 3% | 20% | 100 |
Tier 1 |
|
| 100 |
| Loans | 1-5 yrs | 5% | 50% | 500 |
Tier 2 |
|
| 80 |
| Loans | > 5 yrs | 7% | 100% | 1,500 |
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| Other assets |
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| 100% | 30 |
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| 2410 |
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| 2410 |
Note: the following information on maturity, interest rate, risk weight, etc. may not reflect reality 1. Interest rates are expected to increase by 1.5% in 2022-2023 financial year |
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2. 3.5% of overall loans are expected to be set aside as potential losses; industry average is 2% |
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3. Legal minimum capital ratio is 8%; Basel framework is practiced |
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With respect to each the following risks: interest rate; liquidity; credit; and capital, you are asked to:
Identify and explain the main components of ONLY ONE technique to manage the risk
Using that or another appropriate technique, and the balance sheet information provided, assess the level of the relevant risk for the current financial year and comment on their riskiness
What would your recommendation(s) be for management of this risk in the next financial year?
Interest rate risk
Identify and explain the main components of ONLY ONE technique to manage the risk
Using that or another appropriate technique, assess the level of the relevant risk for the current financial year and comment on their riskiness
What would your recommendation(s) be for management of this risk in the next financial year?
Liquidity risk
Identify and explain the main components of ONLY ONE technique to manage the risk
Using that or another appropriate technique, assess the level of the relevant risk for the current financial year and comment on their riskiness
What would your recommendation(s) be for management of this risk in the next financial year?
Credit risk
Identify and explain the main components of ONLY ONE technique to manage the risk
Using that or another appropriate technique, assess the level of the relevant risk for the current financial year and comment on their riskiness
What would your recommendation(s) be for management of this risk in the next financial year?
Capital risk
Identify and explain the main components of ONLY ONE technique to manage the risk
Using that or another appropriate technique, assess the level of the relevant risk for the current financial year and comment on their riskiness
What would your recommendation(s) be for management of this risk in the next financial year?
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young