Below are three situations, each describing a certain risk in banking. For each situation:

a. Identify the risk from the banks point of view, i.e. name the risk. (1 mark)

b. Outline a scenario in which the risk materializes, and describe how the bank is affected. Use the balance sheet numbers if provided. (1 mark)

c. Outline one (1) way in which the bank may mitigate the loss associated with the risk scenario from b. Use the balance sheet numbers if provided. (1 mark)

1. Dust Bank has the following balance sheet: Assets Liabilities Cash 20 120 20 Short-term government securities Loans 50 100 Deposits Long-term debt Subordinated debt (convertible) Equity 20 Other assets 20 30 Over the past few years, Dust Bank has undercut competition in the lending market by offering low interest spreads. Its entire loan portfolio consists of loans to retail stores that only have a physical presence, i.e. the borrowers have no online sales. Today, a global pandemic leads to the mandatory closing of the physical stores. 2. Three executives of Palladium Bank are involved with laundering money for a European crime organisation. The money laundering operation spans from the Baltic to the Caribbean, and features abandoned Ferraris, 10-carat diamonds and 600 kg of banknotes. 3. County Bancorporation is a bank in a small town. It reports the following balance sheet: Assets 125 Cash 30 Government securities (Short-term) 40 140 Corporate loans Other assets 70 Total 280 Liabilities Deposits 1-month CDs Long-term debt Equity Total 100 30 25 280 The bank relies extensively on 1-month CDs for funding. These are certificates of deposit with a 1- month maturity. In the case of County, all its CDs are sold each month to a single investment company named Regional Invest. Today, Regional Invest files for bankruptcy, and the 1-month CDs mature in 20 days. 1. Dust Bank has the following balance sheet: Assets Liabilities Cash 20 120 20 Short-term government securities Loans 50 100 Deposits Long-term debt Subordinated debt (convertible) Equity 20 Other assets 20 30 Over the past few years, Dust Bank has undercut competition in the lending market by offering low interest spreads. Its entire loan portfolio consists of loans to retail stores that only have a physical presence, i.e. the borrowers have no online sales. Today, a global pandemic leads to the mandatory closing of the physical stores. 2. Three executives of Palladium Bank are involved with laundering money for a European crime organisation. The money laundering operation spans from the Baltic to the Caribbean, and features abandoned Ferraris, 10-carat diamonds and 600 kg of banknotes. 3. County Bancorporation is a bank in a small town. It reports the following balance sheet: Assets 125 Cash 30 Government securities (Short-term) 40 140 Corporate loans Other assets 70 Total 280 Liabilities Deposits 1-month CDs Long-term debt Equity Total 100 30 25 280 The bank relies extensively on 1-month CDs for funding. These are certificates of deposit with a 1- month maturity. In the case of County, all its CDs are sold each month to a single investment company named Regional Invest. Today, Regional Invest files for bankruptcy, and the 1-month CDs mature in 20 days