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Excercise Chapter 5

excercise chapter 5

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47 views3 pages

Excercise Chapter 5

excercise chapter 5

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Hoa Đỗ
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© © All Rights Reserved
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CHATER 5 EXERCISE

A bank manages a $1.5 billion loan portfolio consisting of loans to various sectors. Recently,
concerns have arisen about loan quality and concentration risks in specific sectors. The following
data is provided about the portfolio's performance:

Loan Delinquent Loan Loss


NPL ($ Charge-offs
Loan Type Amount ($ Loans ($ Provision ($
million) ($ million)
million) million) million)

Corporate
600 50 70 10 30
Loans

SME Loans 400 40 60 8 25

Consumer
300 30 45 6 20
Loans

Real Estate
200 20 30 4 15
Loans

Requirements:

1. Loan Quality Assessment:

Finish the table:

NPL Delinquent Loans Charge-offs Loan Loss Provision


Loan Type
ratio ratio ratio ratio

Corporate
Loans

SME Loans

Consumer
Loans

Real Estate
Loans

Total

Discuss:

o How do the loan quality metrics indicate weaknesses in the bank’s portfolio?

o Which loan categories require the most immediate attention and why?
o Determine and assess the level of concentration risk.

2. Risk Mitigation Strategy:

o Refer to the “Additional information on Risk Mitigation Strategies” below, which


strategy would you prioritize and why?

o What challenges might arise when implementing securitization or loan sales


(regarding the prices and customer relationship)?

3. Long-term Improvements:

o What additional steps can the bank take to diversify its loan portfolio?

o What are long-term strategy to enhance risk management?

Additional information on Risk Mitigation Strategies:

1. Securitization

● Description: Pool and sell loans as securities to investors.

● Application:

o Bundle high-risk loans (e.g., Corporate and SME loans) into asset-backed securities.

o Transfer credit risk to external investors, freeing up capital for new lending.

● Implementation Steps:

0. Identify loans suitable for securitization (e.g., corporate loans with high
delinquency).

1. Partner with investment banks to structure the securitized products.

2. Ensure compliance with regulatory guidelines for securitization.

2. Credit Options

● Description: Use credit options to hedge against potential losses from loan defaults.

● Application:

o Buy credit default options for high-risk categories like Corporate Loans.
o Use options to mitigate losses if a borrower defaults.

● Implementation Steps:

0. Assess credit risk of individual borrowers.

1. Purchase credit options from market participants.

2. Regularly monitor and adjust the hedge as portfolio conditions change.

3. Loan Sales

● Description: Sell off loans or loan portfolios to reduce exposure to high-risk categories.

● Application:

o Sell underperforming Corporate Loans to other financial institutions or investors.

o Focus on loans with high NPL ratios and delinquency rates.

● Implementation Steps:

0. Identify loans to offload based on risk and performance metrics.

1. Negotiate terms with buyers and execute sales agreements.

2. Reinvest proceeds into diversified and lower-risk loan categories.

4. Enhanced Risk Management Procedures

● Description: Strengthen internal processes to better manage and monitor loan quality.

● Application:

o Improve borrower credit assessments to minimize future delinquencies.

o Regularly review loan performance and adjust risk limits.

● Implementation Steps:

0. Implement advanced credit scoring systems for loan approval.

1. Conduct regular stress testing and scenario analysis.

2. Increase monitoring of high-risk sectors (e.g., Corporate and SME loans).

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