Chapter 9 - Problem Solving Flashcards
What is the primary objective of the asset-liability management (ALM) function in a bank?
To ensure adequate and robust liabilities to support the assets being originated.
What major change occurred to Northern Rock in 1997?
It changed from a mutual savings-and-loan organisation to a bank.
What was the main product focus of Northern Rock?
Residential mortgages.
True or False: Northern Rock’s retail deposit base expanded significantly after its transformation into a bank.
False.
What led to the high-street bank run on Northern Rock in September 2007?
The inability to roll its overnight funding and subsequent media headlines.
What should banks aim to match to avoid liquidity risks?
Maturity between assets and liabilities.
List three lessons learned from the Northern Rock case.
- Monitor liquidity ratios
- Arrange diversified funding
- Grow at a measured and sustainable pace
What issue was identified during the ILAA review of a UK bank in 2010?
The public funding curve was misaligned with market prices.
What was the risk management issue related to the internal yield curve construction process?
No recognised best-practice interpolation method was employed.
What was a significant risk-management decision related to the internal yield curve?
Selecting the internal yield curve construction methodology.
Fill in the blank: A bank’s internal yield curve is crucial for _______.
[pricing and risk management process].
What assumption was challenged regarding the FTP methodology at Europe Arab Bank?
That the bank could fund across the term structure at zero spread over Libor.
During the global financial crash, what was the loan-deposit ratio (LDR) for corporate banking at EAB?
Approximately 180%.
What did treasury at EAB implement to improve its FTP process?
A liquidity-premium-enhanced FTP.
What was the initial FTP regime used at EAB?
All internal funds were transacted at Libor-flat.
What was one of the main objectives of the new FTP regime implemented at EAB?
To incentivise corporate banking to attract more customer deposits.
What action did treasury take to address objections from business lines regarding the new FTP regime?
Assured that flagged internal deal tickets would not count towards treasury P&L.
True or False: The FTP changes at EAB were implemented without regulatory review.
False.
What is a key factor in the liquidity premium introduced in the new FTP?
It increases as a function of the tenor.
What is the definition of liquidity premium?
Liquidity premium is the additional return expected by investors for holding less liquid assets.
What does O/N to 2 weeks > LIBOR - 12.5 bps indicate?
It indicates a borrowing rate that is 12.5 basis points lower than LIBOR for overnight to 2-week maturities.
What is the LIBOR rate for 2 weeks to 1 month?
LIBOR - 12.5 bps.
What is the LIBOR rate for 1 to 3 months?
LIBOR + 10 bps.
What does LIBOR + 32.5 bps signify for 3 to 12 months?
It signifies a borrowing cost that is 32.5 basis points higher than LIBOR for maturities between 3 and 12 months.
What was the base rate for EAB deposit rates in June 2009?
50 basis points.
What rate was offered for a 1-year deposit at EAB in June 2009?
100 basis points.
What was the impact on corporate banking due to the need for liquidity-friendly customer term deposits?
Stopped writing back-stop liquidity facilities and term loans became less competitive.
What is the crucial operational issue regarding the treasury in the context of P&L?
Demonstrating that treasury did not generate and report P&L based on the FTP regime.
What is the purpose of the ALCO Book?
To hold the P&L of FTP tickets centrally.
What is the significance of the treasury updating the curve monthly?
It ensures that term liquidity premium rates are calculated using market-observed external parameters.
What is the objective of the treasury desk in any bank?
To undertake prudent management of the funding requirement regarding liquidity management, interest-rate management, and funding diversification.
Fill in the blank: The primary deliverable of the treasury desk is the _______.
ALM report.
What should the funding function report to ensure management attention?
A person of sufficient seniority.
What is the maximum percentage limit for any one maturity bucket of total funding requirement?
20%.
True or False: The CBD treasury department was able to effect rationalization to the governance structure easily.
False.
What happened to the lower-tier ALCOs in the European universal banking institution case study?
They were abolished in favor of a single, unified CBD ALCO.
What was the total balance sheet size of the CBD in the case study?
Over GBP 180 billion.
Fill in the blank: The ALCO process at the corporate banking division was deemed not fit-for-purpose due to _______.
Inefficiency and risk of exposures falling through the cracks.
What is a key lesson learned regarding management strategy and revenue?
Do not allow management strategy to be overwhelmed by the revenue side of the balance sheet.
What was the primary motivation for the firm’s historical funding concentration?
The short-term trading nature of its assets.
What should be highlighted to ensure management action on issues?
What the regulatory authorities would say if they were aware of relevant facts.
What is the significance of management reporting in the treasury function?
To ensure transparency regarding funding usage and risk management.
What was the redesign of the ALCO pack aimed at?
To be more user-friendly, accessible, and succinct.
What is a key lesson learned regarding risk governance?
To continuously review risk governance and operating model to ensure it is still optimum.
What is gap risk in the context of IRRBB?
The risk that revenue and earnings decline as a result of changes in interest rates due to the difference in the maturity profile of assets, liabilities, and off-balance-sheet instruments.
Define yield curve risk
The risk that non-parallel or pivotal shifts in the yield curve cause a reduction in net interest income (NII).
What is basis risk?
Arising because assets are often priced off one interest rate, while funding is priced off another interest rate.
What does run-off risk refer to?
Associated with the non-interest-bearing liabilities of banks and the opportunity cost to depositors.
What is option risk in banking?
When banking products entitle the customer to terminate contractual arrangements ahead of the stated maturity.
What are the primary sources of IRRBB?
- Writing fixed-rate assets funded by floating-rate liabilities
- Writing floating-rate assets funded by floating-rate liabilities referencing another index.
How is IRRBB hedging typically undertaken?
On a ‘macro’ or aggregate balance sheet basis.
What is the orthodox approach to IRRBB hedging?
Hedging asset-side IRRBB as it appeared and liabilities-side IRRBB as they appeared, without considering the balance sheet as an integrated whole.
What is the main hedging tool used by banks for interest rate risk?
Interest rate swaps.
What is a recommended approach for hedging IRR exposure?
To use cash products to hedge IRR exposure rather than derivatives.
What lessons were learned from the case of Capital One’s cyberattack?
- Need for more regulation and compliance
- Importance of better governance processes and early-warning systems.
What are the four themes of cyberattacks?
- Internal malicious
- Internal unintentional
- External malicious
- External unintentional.
What was the outcome of the Capital One cyberattack in terms of penalties?
Capital One was ordered to pay a US$80 million civil penalty.
What is a defining characteristic of blockchain technology?
- Decentralised
- Democratised
- Secure
- Transparent
- Trustless
- Time-stamped and programmable.
What was the first financial institution to execute a live global trade transaction using blockchain?
Barclays Africa (now Absa Group).
What are the benefits of using blockchain technology in banking?
- Cost savings
- Reduced risk of document forgery
- Increased security
- Reduced operational risk
- Enhanced data collection.
What are some disadvantages of implementing blockchain in banking?
- Scalability issues
- High implementation costs
- Regulatory challenges
- Increased complexity.
Fill in the blank: Cyber risk is commonly defined as exposure to harm or loss resulting from breaches of, or attacks on _______.
[information systems]
True or False: The use of derivatives in hedging IRRBB is always efficient and optimum.
False
What is the potential impact of remote working on cybersecurity?
It may affect cybersecurity in various ways.
What is the true cost of applying blockchain within the banking environment?
The true cost of applying blockchain includes implementation expenses, training costs, and potential disruption to existing systems.
Costs may vary significantly based on the size of the bank and the complexity of the blockchain solution.
Is there a need for further regulations on utilizing blockchain in banking?
Yes, further regulations may be necessary to address legal, compliance, and operational challenges associated with blockchain technology.
Existing regulations may not fully cover the unique aspects of blockchain, such as smart contracts and data privacy.
How can increased cyber risks associated with blockchain be mitigated?
Increased cyber risks can be mitigated through enhanced security protocols, regular audits, and by employing advanced encryption techniques.
Organizations should also invest in cybersecurity training for employees to recognize potential threats.
Are there unforeseen operational risks with utilizing blockchain technology?
Yes, unforeseen operational risks may include integration challenges with legacy systems and potential transaction delays.
These risks can affect the overall efficiency and reliability of banking operations.
