Chapter 9: Capital risk Flashcards
What is capital
Capital is basically funding set aside for expected and unexpected losses
The need for capital arises due to:
* Credit risk
* Market risk
* Operational risk
* Other financial risks and non-financial risks
If a bank has sufficient capital set aside, they’ll be able to absorb these losses when/if they occur and remain solvent.
Main areas treasury focuses on
The main areas treasury focuses on:
* Funding management: Provides funding to assets and manages the sources of funding (deposits, borrowing and other forms of funding)
* Capital management: Ensures the bank and the supporting business areas has sufficient capital to support their operations and comply with regulation
* Risk management: Reviewing, assessing and managing the risks a bank faces
* Liability management: Ensures the bank is sufficiently liquid to meet daily cashflows and unexpected outflows.
Project description
* Detailed description of the project – why is it needed
* Benefits from the project: pricing, liquidity, resources, diversification
* Scope of the project
* Objectives of the project
* Expected outcome
Market analysis
* Competitor analysis
* Market demand
* Target market
* Customer surveys
Financial analysis
* Detailed financial analysis of the project: expected cost, revenue, projects lifespan
* Include projected income statements, balance sheets and cashflows
* Provide return metrics, such as return on capital, WACC, KPIs
* Regulatory and tax benefits
Risk assessment
* Risks and uncertainties surrounding the project and how these will be mitigated
* Stress and sensitivity analysis
Implementation plan
* Implementation plan that includes timelines, milestones and resources required and expected deliverables.
Strategic alignment
* Description on how the project aligns with the organisational objectives
* Include how the project will contribute to the bank’s growth and profitability
Alternatives
* Provide alternative solutions, with their cost, benefit and drawbacks
What is included in a business case
Project description
* Detailed description of the project – why is it needed
* Benefits from the project: pricing, liquidity, resources, diversification
* Scope of the project
* Objectives of the project
* Expected outcome
Market analysis
* Competitor analysis
* Market demand
* Target market
* Customer surveys
Financial analysis
* Detailed financial analysis of the project: expected cost, revenue, projects lifespan
* Include projected income statements, balance sheets and cashflows
* Provide return metrics, such as return on capital, WACC, KPIs
* Regulatory and tax benefits
Risk assessment
* Risks and uncertainties surrounding the project and how these will be mitigated
* Stress and sensitivity analysis
Implementation plan
* Implementation plan that includes timelines, milestones and resources required and expected deliverables.
Strategic alignment
* Description on how the project aligns with the organisational objectives
* Include how the project will contribute to the bank’s growth and profitability
Alternatives
* Provide alternative solutions, with their cost, benefit and drawbacks
