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3 rd Midterm Review

3 rd Midterm Review. Dr. Bader Alhashel. Types of Risks Incurred by Financial Institutions. Why Financial Institutions Need to Manage Risks Credit Risk Firm-specific credit risk Systematic credit risk Liquidity Risk Interest rate risk Refinancing risk Reinvestment risk.

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3 rd Midterm Review

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  1. 3rd Midterm Review Dr. Bader Alhashel

  2. Types of Risks Incurred by Financial Institutions • Why Financial Institutions Need to Manage Risks • Credit Risk • Firm-specific credit risk • Systematic credit risk • Liquidity Risk • Interest rate risk • Refinancing risk • Reinvestment risk

  3. Types of Risks Incurred by Financial Institutions • Market risk • Off-Balance-Sheet Risk • Foreign exchange risk • Country or Sovereign risk • Technology & Operational Risk • Insolvency Risk • Other risks & interaction among risks

  4. Managing Credit Risk on the Balance Sheet • Credit Risk Management • Credit Analysis • Real Estate Lending • Gross Debt Service Ratio • Total Debt Service Ratio • Credit Scoring System • Consumer and Small-Business Lending • Mid-Market Commercial and Industrial Lending • Five C’s of Credit • Cash Flow Analysis

  5. Managing Credit Risk on the Balance Sheet • Mid-Market Commercial and Industrial Lending (cont.) • Ratio Analysis • Liquidity Ratios • Asset Management Ratios • Debt & Solvency Ratios • Profitability Ratios • Large Commercial & Industrial lending • Credit Scoring Models

  6. Managing Credit Risk on the Balance Sheet • Calculating the Return on a Loan • Return on Assets (ROA) • RAROC Models

  7. Managing Liquidity Risk on the Balance Sheet • Liquidity Risk Management • Causes of Liquidity Risk • Fire-sale prices • Liquidity Risk & Depository Institutions • Liability Side Liquidity Risk • Net Deposit Drain • Purchased Liquidity • Stored Liquidity • Asset Side Liquidity Risk

  8. Managing Liquidity Risk on the Balance Sheet • Liquidity Risk & Depository Institutions (cont.) • Measuring a Bank’s Liquidity Exposure • Sources & Uses of Liquidity • Peer Group Ratio Comparison • Liquidity Index • Financing Gap & the Financing Requirement • BIS Approach: Maturity Ladder/Scenario Analysis • Liquidity Planning

  9. Managing Liquidity Risk on the Balance Sheet • Liquidity Risk & Depository Institutions (cont.) • Liquidity Risk, Unexpected Deposit Drains, & Bank Runs • Bank Run • Deposit Drains & Bank Run Liquidity Risk • Bank Panic • Bank Runs, the Discount Window, & Deposit Insurance (or Guarantee) • The Discount Window

  10. Managing Liquidity Risk on the Balance Sheet • Liquidity Risk & Insurance Companies • Life Insurance Companies • Property-Casualty Insurance Companies • Liquidity Risk & Mutual Funds

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