Chapter 9: Capital risk

Question 1

Capital Definition

Answer 1

Capital is 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.

Question 2

Treasury Focus Areas

Answer 2

CtRL+F

Capital management:
Ensures the bank and the supporting business areas have 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.

Funding management:
Provides funding to assets and manages the sources of funding (deposits, borrowing, and other forms of funding)

Question 3

Business Case Contents

Answer 3

D-FRAIMS

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

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

Alternatives
* Provide alternative solutions with their cost, benefits, and drawbacks

Implementation plan
* Implementation plan that includes timelines, milestones, and resources required and expected deliverables.

Market analysis
* Competitor analysis
* Market demand
* Target market
* Customer surveys

Strategic alignment
* Description of how the project aligns with the organisational objectives
* Include how the project will contribute to the bank’s growth and profitability

Question 4

Capital Risk Definition

Answer 4

Capital risk is the risk that banks do not hold sufficient capital to absorb losses as they arise.