Wilbert -Internal Assessment PDF

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Summary

finance material...

Description

Faculty

Business and Accounting

Assessment Name Ex: End/Sup

Internal Assessment 2

Paper Code

Module Name

Banking Operations & Services

Module Code A8-BOS-15

Month

April

Year

2020

Total Marks

100

Duration

3 hours

SECTION A

ABOS/A20/IA-02

[60 MARKS]

Answer all the questions in this section. QUE 1

[10 MARKS]

Describe with a practical example for each, the five components of operational risk. Discuss along the following lines; I.

Internal process risk

.

Failure of the bank’s processes and procedure

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• Inadequate control environment II.

People risk Management errors

III.

• Inadequate staff training System risk Computer, technology, and systems failure

IV.

• Cyber crime External risk Events having negative impact that are beyond the bank’s

V.

control, such as terrorist attacks or natural disasters Legal risk Page 1 of 7

Uncertainty of legal action • Uncertainty of rule and regulation applicability

QUE 2

[10 MARKS]

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Bank of Gaborone operates several different lines and is evaluating the operational risk capital estimates that the basic indicator approach and standardized approach have provided. The following additional information is provided; 2006 (MilIion Pula)

2007 (Million Pula)

2008 (Million Pula )

Basic Indicator ApproachBeta Factor

Standardized ApproachBeta Factor

Corporate Finance

20

30

25

15%

18%

Retail banking

35

55

30

15%

12%

Commercial Banking

55

60

20

15%

15%

Agency Services

15

10

5

15%

15%

Retail Brokerage

10

25

10

15%

12%

Total

135

180

90

Required: a) Compute an estimate of regulatory minimum capital for operational risk using the Basic Indicator Approach. Basic Indicator Approach: Operational risk capital charge = (135 * 15% + 180 * 15% + 90 * 15%) / 3 = 20.25 b) Compute an estimate of regulatory minimum capital for operational risk using the Standardized Approach. Page 2 of 7

Standardized Approach: 2006 component = (20 * 18% + 35 * 12% + 55 * 15% + 15 * 15% + 10 * 12%) = 19.5 2007 component = (30 * 18% + 55 * 12% + 60 * 15% + 10 * 15% + 25 * 12%) = 25.5 2008 component = (25 * 18% + 30 * 12% + 20 * 15% + 5 * 15% + 10 * 12%) = 13.05 Operational risk capital charge = (19.5 + 25.5 + 13.05) / 3 = 19.35

QUE 3pg279

[10 MARKS

ABSA Bank has determined that its total risk weighted assets is at USD2,450 million. In addition, ABSA Bank has the following eligible capital: i) ii) iii) iv)

Tier 1 Capital: USD 150 million Tier 2 Capital USD 110 million Tier 3 Capital USD 0 million Deductions from capital: USD 10 million

Required:

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I. II. III. IV. V. VI. VII. VIII.

QUE 4 a)

Determine the minimum capital that it would be required to hold under Basel II Accord Determine the amount of Tier 1 capital that it would be required to hold under Basel II Accord Determine the amount of capital it would be required to hold under Basel III Accord Determine the amount of Tier 1 capital it would be required to hold under Basel III Accord. Determine the amount of Tier 2 capital it would be required to hold under Basel III Accord. How much capital conservation buffer would Bank A be required to hold under Basel III Accord? What would be minimum regulatory capital required under Basel III? Identify a concern for Bank A and Advise appropriately Bank A with regard to its minimum regulatory capital requirements

[10 marks] Explain the meaning of the following risks as it relates to banking; i. Credit riskCredit Risk Credit risk is the risk that a bank borrower, also known as a counterparty, may fail to meet its obligations—pay interest on the loan and repay the amount borrowed—in accordance with agreed terms. Credit risk is the largest risk most banks face and arises from the possibility that loans or Page 3 of 7

bonds held by a bank will not be repaid either partially or fully. Credit risk

ii.

iii.

is often synonymous with default risk. Market risk Market risk is the risk of losses to the bank arising from movements in market prices as a result of changes in interest rates, foreign exchange rates, and equity and commodity prices. Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events. This definition

includes legal risk, but excludes strategic and reputational risk. b) Explain clearly the meaning of systemic risk? Systemic risk refers to the possibility that an entire banking system may face losses or even collapse, with all banks operating in that system being affected. c) Provide two examples of activities that may cause systemic risk Systemic risk can arise due to macroeconomic or monetary events, such as a currency devaluation, or it can result from the failure of a single “systemically important” financial institution, whose problems cause difficulties for all other banks in the system.

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QUE 5

[10 MARKS]

a) What is the objective of asset and liability management (ALM) in a bank? The ALM function in a bank focuses on: ■ Maintaining liquidity for the bank ■ Analyzing the shape and structure of the bank’s balance sheet ■ Maintaining a stable net interest margin b) Identify the name of the committee that is responsible for asset and liability management in a bank? Asset-Liability Committee (ALCO) c) What are the balance sheet exposures or risks that are managed through the ALM? ■ Interest rate risk -refers to the potential loss in value of an asset due to

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changes in interest rates. For example, a bank pays one interest rate to its depositors and receives another from its debtors. If interest rates change, the profitability of the bank changes as well. Interest rate risk affects both the banking book and the trading book. ■ Liquidity risk- refers to the potential inability of a bank to meet its payment obligations when they are due. In particular, a bank must manage its ability to pay its depositors interest and to repay depositors seeking to withdraw any part of their money. Liquidity risk is also called funding liquidity risk. d) The ALM considers and balances several factors simultaneously. Which are these factors that are considered and balanced simultaneously? ■ The bank’s balance sheet is a dynamic portfolio of loans and deposits. As new loans are extended, as existing loans mature, and as new deposits arrive, existing deposits may be withdrawn. ■ The interest rate on liabilities and assets. Some will be fixed, but the interest rate on other liabilities and assets will change periodically according to market rates, resulting in fluctuations in the value of floating-rate liabilities and assets.

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■ Timing differences between changes in market rates and in the interest rates on retail products such as bank loans to customers. ■ The bank’s current liquidity needs. The current market interest rates for all maturities and competition among banks determine the interest rates offered on deposit products. ■ Commercial (e.g., corporate loans) and retail (e.g., home mortgage loans) products. Both allow for the early termination of the loans, but

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the terms and conditions can be widely different among individual commercial or retail loans, as well as between commercial and retail loans in general

QUE 6 a) b) c) d)

[10 MARKS] What is regulatory arbitrage? Identify three examples of regulatory arbitrage Is regulatory arbitrage legal? What is the objective of international cooperation with regard to regulatory arbitrage?

SECTION B

[40 MARKS]

Answer all the questions in this section. QUE 2

[25 MARKS]

MONETARY POLICY STATEMENT BOTSWANA CASE STUDY a) Provide a critique to the Botswana’s 25th February 2020 Monetary Policy Statement (MPS) that was issued by Moses D. Pelaelo, the Governor of the Bank of Botswana (BOB). (Use a clean copy of the February 2020 MPS supplied to you by the invigilator on the day of the exam). [20 marks] b) Distinguish between Present Value Basis Point (PVBP), Value at Risk (VaR) and Expected Shortfall (ES) measures of market risk [3marks] QP-ASM-001|Rev 004

c) State two approaches that are used to measure regulatory capital requirements for market risk in the Basel 2 Accord. [2 marks] -Standardized Approach

-internal Models Approach QUE 7

[15 marks]

Describe and explain in full the significance of the following terms as they relate to Portfolio management of credit risk (including how they are measured); I.

Probability of default (PD) The likelihood that the borrower will default. PD is normally represented as a percentage. Page 6 of 7

II.

Exposure at Default (EAD) The total exposure the lender could have at the time of default. EAD is influenced by debt type, asset type, recourse, assignment terms, and payment delays. EAD is normally represented as

III.

an amount of money Recovery Rate (RR) The assumption of the fraction of the asset value that will likely be recovered after a default. RR is normally represented

IV.

as a percentage Loss Given Default (LGD) The actual loss the lender suffers in the wake of a default: a function of (1 – RR). LGD is normally represented as a percentage. Gross LGD is used for bonds, whereas Blanco LGD is used

V.

for loans where bankers include the effects of collateral, if any. Expected Loss (EL) The loss given default multiplied by the probability of default multiplied by exposure at default.

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END

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