Risk Management Project Coursework 2 Imagine you are the Chief Risk Officer of a newly-formed bank, with a focus

on corporate lending in Slovakia. The bank is largely funded by local deposits. The CEO (and so does the regulator) wants to know if sufficient capital has been allocated against assets, and what provisioning policy should be. He would also like your views on pricing of loans and deposits, so that the bank can make a decent profit while making competitive headway without excessive risk. The bank takes small positions in trading local government bonds. The CEO would also like you to assess the banks VAR, as well as liquidity, to be sure no undue risks are being taken. Following is the financial position of the bank after the first year of operations: Assets (Euro millions) Cash Due from banks Securities Gross loans Loan loss reserves (LLRs) Fixed assets Other assets Total assets Liabilities & Equity Deposits Due to banks Market funds Other liabs Equity Tot liabs & equity Income Statement Int inc Int exp =Net int inc Trading inc Net fee & comm. Inc =Optg inc Personnel exp Other optg exp D&A =Pre-prov inc (PPI) Loan loss provisions (LLPs) =P-t inc Tax =Net inc 90 -46 43 9 12 66 -18 -20 -5 22 -10 13 -2 11 993 178 284 31 144 1630 187 68 147 1203 -28 29 24 1630

In addition to the above requests from the CEO, he would also like your input on measures to reduce operational risk, and what dividend policy should be. The banks 1203 million gross loan book is rated as follows: 500 million of BBB rated loans, 500 million of BB rated loans 103 million of B rated loans 100 million of CCC rated loans. Securities of 147 million are all invested in A rated government bonds. Loans are evenly divided between 1, 2 and 3 years maturity. Deposits are 50% demand (due at any time), 25% in 9 months, and 25% over 1 year. Market debt is of 2 years maturity. VAR is Euro 5 million. Please formulate your recommendations to the CEO (me). Thank you.