RISK MANAGEMENT

ASSIGNMENT 2

By :

Group 1

Alexander Gregorius Ersan

Alexander Steven Themas

Alya Ramadhani Oesman

Diandra Safira Larasati

Marcella Leticia Salim

President University

Cikarang Utara

2019
Question 1

Find cases of risk management in bank in real world and answer these questions:

a. Describe the risks.

b. Make the charts for the risk management process and explain.

Answer :

a. Describe the risks

In the course of their operations, banks are invariably faced with different
types of risks that may have a potentially adverse effect on their business.
Banks are obliged to establish a comprehensive and reliable risk management
system, integrated in all business activities and providing for the bank risk
profile to be always in line with the established risk propensity.

Risk management system comprises:

 Risk management strategy and policies, as well as procedures for risk identification
and measurement, i.e. for risk assessment and risk management;
 Appropriate internal organisation, i.e. bank’s organizational structure;
 Effective and efficient risk management process covering all risks the bank is exposed
to or may potentially be exposed to in its operations;
 Adequate internal controls system;
 Appropriate information system;
 Adequate process of internal capital adequacy assessment.

b. Make the charts for the risk management process and explain that

Hazard Identification means that there are dangers that occur or presumably can occur
that affect work or at the workplace / company.
 Risk Assessment, is an evaluation of the possibility of disability or damage or the result
of problems / hazards that can and or occur, what are the consequences?

Control Selection, Control Selection, is what steps are taken in accordance with the
problem / danger that can be found out.

Control Implementation, Control Implementation, i.e. do the control, according to what is

Review and Improve, Review and Develop, which means see whether the control is
appropriate in the sense that it can eliminate or reduce the dangers / problems that can
and or occur, whether the control is effective? If yes, develop it, so as to minimize the
damage, losses and risks that can occur.

Question 2

a. How did concentration in the U.S. banking system change between 1984 and 2010?

b. What risks does a bank take if it funds long-term loans with short-term deposits?

c. What is meant by net interest income?

d. Give three examples of the conflicts of interest in a large bank. How are conflicts of
interest handled?

e. Explain the moral hazard problems with deposit insurance. How can they be overcome?

Answer :

a. Commercial banks over the period 1984-2010 to assess the determinants of bank profits
using a model which includes a profit persistence parameter (which captures competitive
pressure) and various other bank and industry-specific covariates.

b. Using these short-term funds to invest in longer-term assets causes a timing mismatch
between assets and liabilities. Short-term wholesale funding can be withdrawn at short-
notice. Long-term assets usually aren't as liquid. When short-term creditors withdraw these
funds in large quantities, it can result in bank-runs.

c. Net interest income is a financial performance measure that reflects the difference between
the revenue generated from a bank's interest-bearing assets and expenses associated with
paying on its interest-bearing liabilities. A typical bank's assets consist of all forms of
personal and commercial loans, mortgages, and securities. The liabilities are interest-bearing
customer deposits. The excess revenue that is generated from the interest earned on assets
over the interest paid out on deposits is the net interest income.
NII = (interest payments on assets) − (interest payments on liabilities)

d. DEUTSCHE BANK
 i. the Bank and/or a Staff Member failing to comply with legal or regulatory
obligations;

ii. the Bank and/or a Staff Member failing to fulfil a duty of care, trust or loyalty
owed to another person or entity such as a Client;

iii. the Bank obtaining improper advantage or treatment or giving rise to the
appearance of impropriety and reputational damage, including as it relates to the
manner in which business is awarded to or by the Bank.

AOZORA BANK

When the Bank Group identifies a transaction that becomes a conflict of interest, the
Bank Group shall appropriately ensure the protection of the said customer by using
the following methods and other means:

• Method for separating groups that are related to the transaction

• Method for suspending (the other) transaction

e. Deposit insurance makes depositors less concerned about the financial health of a bank. As
a result, banks may be able to take more risk without being in danger of losing deposits. This
is an example of moral hazard. (The existence of the insurance changes the behavior of the
parties involved with the result that the expected payout on the insurance contract is higher.)
Regulatory requirements that banks keep sufficient capital for the risks they are taking reduce
their incentive to take risks. One approach (used in the U.S.) to avoiding the moral hazard
problem is to make the premiums that banks have to pay for deposit insurance dependent on
an assessment of the risks they are taking.
Question 3
An investment bank has been asked to underwrite an issue of 10 million shares by a
company. It is trying to decide between a firm commitment where it buys the shares for $10
per share and a best efforts where it charges a fee of 20 cents for each share sold. Explain the
pros and cons of the two alternatives.

Answer :

Firm Commitment

 Pros : A firm commitment underwriting agreement is the most desirable for the issuer
because it guarantees them all of their money right away.
 Cons : In a firm commitment, the underwriter puts their own money at risk if they
can’t sell the securities to investors.Underwriters are responsible for any unsold
inventory.
Best Efforts

 Pros : The underwriters will do their best to sell all of the securities that are being
offered by the issuer, but in no way is the underwriter obligated to purchase the
securities for their own account. The lower the demand for an issue, the greater
likelihood that it will be done on a best efforts basis. Any shares or bonds in a best
efforts underwriting that have not been sold will be returned to the issuer.
 Cons : No guarantee for issuer as shares may go unsold as there is no obligation on
part of investment bank