Assignment Task
Scenario
The four major Australian banks (ANZ, WBC, NAB and CBA) are on their annual national recruitment drive. Due to COVID19 restrictions, the drive this time is essentially virtual (i.e. not in-person). The target of the drive at Griffith University is students of Financial Institutions Management (2204AFE) course, which the banks are aware is real world related and covers the very aspects of risk management practiced at the banks. The main objective of the session is to assess the aspirant’s understanding of financial institutions’ risk management relating in particular to interest rate, liquidity, liability and liquidity, credit and capital.
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Firstly, the banks would like to get an idea of the depth of your understanding of various risks that financial institutions may be exposed to. To assess your understanding, they provide you with the following real-world scenarios:
Scenario 1: A bank uses one-year CDs to lend $1m at fixed rate for 5 years to a new customer, for business expansion
Scenario 2: An insurance company invests $10m of its policy premiums in a ten-year corporate bond
Scenario 3: A bank’s balance sheet shows $1m in cash, $9m in loans, $6m in deposits, $2m in subordinated debts, and the rest in equity. It expects market interest rates to increase by 1% resulting in a net drain of $2m in deposits over the year
Scenario 4: A bank repurchases $1m of its ordinary share
To demonstrate your understanding, you are asked to, in a tabular form:
(a) Identify ONLY ONE risk inherent in each of the above scenarios
(b) Explain the risk
(c) Explain clearly how each scenario might result in the risk you have identified
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