Assignment
Part A Multiple Choice Questions
Questions 1- 11 are based on FIN3109 Assignment Reading 1: The Australian Financial System. Financial Stability Review. October 2016, p.29-39. To access this article, go to the course Study Desk and click on FIN3109 Assignment Reading 1
Choose the best answer from among the 4 alternatives.
1. Australian bank provisions for doubtful debts ____________ in the first half of 2016?
Increased, due largely to increases in past due loans
Increased, due largely to increases in impaired loans
Decreased, due largely to falls in past due loans
Decreased, due largely to falls in impaired loans
2. What proportion of major banks corporate exposures had a probability of default of 10% or higher in mid 2016?
0 - 0.5%
0.5% - 0.75%
0.75% - 1%
1% - 2%
3. With regard foreign bank provision of Australian business credit in early 2016, which region or country supplied the most credit?
Japan
China
Europe
North America
4. In order for banks to meet the net stable funding ratio, due to be implemented in January 2018, the RBA predicts a likely increase in
Long term debt issuance
Short term debt issuance
Ordinary share issuance
Preference share issuance
5. By what proportion did banks subject to LCR rules exceed the minimum LCR ratio requirements in June 2016?
10%
20%
100%
120%
6. At the time of writing, term deposit rates had not changed much over the recent period. This was because
There had been no change in the cash rate
The had been a fall in the cash rate, but this was offset by a rise in competition among banks for stable funding
There had been a rise in the cash rate, but this was offset by a fall in competition among banks for stable funding.
There had been a fall in the cash rate, but this was offset by a fall in competition among banks for stable funding
7. APRA imposes minimum regulatory capital requirements on the major banks. As of June 2016, major Australian banks CET1 capital ratios were on average about
Equal to the minimum regulatory requirement
5.5 percent above the minimum regulatory requirement
3 percent above the minimum regulatory requirement
2 percent above the minimum regulatory requirement
The following relates to questions 8 & 9
Assume for simplicity that total risk adjusted assets could be represented by the expression wA, where A = total assets and w = average risk weighting.
We could then, as an approximation, express the CET1 ratio as (CET1 capital)/wA
Likewise, we could approximate the leverage ratio as (CET1 capital)/A
8. Information supplied on page 35 enables you to derive that the average risk weighting (w) applied to the assets of Australia's major banks was about
5%
10%
50%
100%
9. Following on from question 8, derive the relationship between the average risk weighting applied to the major banks' assets (w) and the leverage ratio of those banks (L).
w = 0.5L
w = 2L
w = 10L
w = 50L
10. What does the article suggest has happened to sustainable internal growth of Australian banks?
It has slowed, because the dividend payout ratio has fallen
It has slowed, because generation of retained profits has slowed
It has slowed, because issuance of new equity has slowed
It has increased, because the dividend payout ratio has increased
11. Industry forecasts suggest subdued profit growth of the banking sector. Reasons for this included
low or zero growth in net interest margins
increase in bad debt charges (provisions for doubtful debts)
negative asset growth
all of the above
Questions 12 -15 are based on FIN3109 Assignment Reading 2: Information Paper: The countercyclical capital buffer in Australia. APRA. To access this article, go to the course Study Desk and click on FIN3109 Assignment Reading 2
Choose the best answer from among the 5alternatives.
12. What is the purpose of the countercyclical buffer?
To raise banking sector capital requirements in periods of excess credit growth
To reduce the flow of credit during downturn, by increasing capital requirements in periods of stress
To moderate the cycle of credit growth and asset prices
a), b) & c) are all correct answers
a) & c) are correct answers
13. Which of the following trends might act as an indicator to APRA that excessive credit growth is occurring?
Fall in share prices
Widening of interest rate margins
Fall in loan-loss provisions
a), b) & c) are all indicators that excessive credit growth may be occurring
a) & c) are indicators that excessive credit growth may be occurring
14. What categories of institutions does APRA have authority to apply countercyclical buffer requirements to?
Australian credit unions
Australian exposures of foreign banks operating in Australia
Australian banks
a), b) & c) are all correct answers
a) & c) are correct answers
15. For major Australian banks, the countercyclical buffer that is applied to their capital requirements
Is set by the Basel Committee
Is set by APRA
Is set by foreign regulators where the bank has credit exposures
a) , b) & c) are correct answers
a) & c) are correct answers
Part B Short Answer Questions
1. Generally speaking, what is the relationship between interest income and non-interest income earned by a bank, i.e., are they positively correlated, negatively correlated, or unrelated/independent? Explain your answer.
2. If an Australian ADI has the same amount of foreign assets (comprising loans) and foreign liabilities (comprising deposits) in the same currency, has that FI necessarily reduced to zero the market risk involved in these international transactions? Explain.
3. Why did the Basel Committee introduce a leverage ratioto complement the other capital asset ratios?
Part C Capital Adequacy Calculations
Answer the following questions in relation to an Australian ADI. Use the risk weightings contained in the formula sheet (module 4 formulas - and note the example calculation 1.8). Assume that all values given refer to the calculated exposure after any risk mitigation measures, i.e. that any collateral and haircuts etc. have been geared in where appropriate.
a) Use the set-out described below
What is the credit risk-weighted value of:
1. $100 cash
2. $100 loan to Herbal Imports Co., an unrated company. It is incorporated in a country with a credit rating of BBB+.
3. a $120 in long term bonds issued by African Development Bank (AAA),
4. $130, 3 year loan to the Commercial Bank of Kuwait (A-)
5. $140 in bonds issued by Regional Energy Australia Co. (B),
6. $80 in documentary letters of credit secured against shipment of goods for Oz Homeware Corp (BB),
7. $100 loan commitment (formal standby facility) with residual maturity of 18 months to Pacific Bell (Not Rated)
8. $220 in housing loans fully secured by registered first mortgages over residential property, where the LVR is between 82% and 85%, and there is on average 50% mortgage insurance in place,
9. $100 in commercial real estate mortgages
10. $70 guarantee to Ergon Energy Queensland (AA),
11. $150 standby letter of credit to Woolworths Ltd (A-),
12. $140 worth of premises and equipment
Note: the letters in brackets following each term refer to the credit rating of the relevant sovereign, government entity, bank, development bankor general corporation.
Note: please use the following framework to answer part a). Expand the rows as necessary
Table 1: On-balance sheet items
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Item
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Exposure ($)
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Counterparty Risk Weight (%)
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Risk-weighted value ($)
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Total On-Balance Sheet Risk Weighted Value:
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Table 2: Off-balance-sheet items
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Item
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Exposure ($)
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Conversion factor (%)
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Counterparty Risk weight (%)
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Risk-weighted value ($)
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Total Off-balance-Sheet Risk Weighted Value:
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b) Include the formula and show working
Assume that the ADI in part a) has the following capital and capital charges:
CET1 Capital = $101
Total Tier 1 Capital = $110
Tier 2 Capital = $50
Capital charge for Market risk = $20
Capital charge for Operational Risk = $15
i. Calculate the CET1 capital ratio.
ii. Calculate the Tier 1 capital ratio.
iii. Calculate the total capital ratio.
iv. Ignoring capital buffers, does the ADI meet APRA's minimum PCR guidelines as stated in Reading 4.4 paragraph 22?
v. To answer this question, refer to Reading 4.4 paragraphs 24-27 and Appendix B.
Assume that APRA has imposed a countercyclical buffer of 0.5% on Australian banks. Will the Australian ADI be subject to any restrictions on the distribution of dividends, share buy backs or discretionary staff bonuses? Note: Ignore any countercyclical buffers applied by foreign regulators
You don't need to say what the restriction will be, you just need to note:
a. The minimum CET1PCR requirement + capital buffer
b. Whether the ADI in question exceeds this minimum
c. Whether the ADI will be subject to any restrictions.
Attachment:- Reading_1_and_2.rar