Four Flashcards
What must funder consider when pricing?
Diminishing return of money that will be repaid to them
Average transaction size (low average transaction size may seek higher fees from customer to cover its higher relative overheads = economies of scale)
Competitive pressures - different funders have different appetites
Routes to market - brokers means they can offer better pricing bewaring in mind commission to add due to work spent
Disposal routes for assets
What is capital adequacy?
Minimum reserve of capital that a financial institution requires
How is capital adequacy assessed (affects pricing)? 8 points
- Level and quality of the capital overall financial condition of the institution.
- Ability of management to address emerging needs for capital
- Nature, trend and volume of the problem lending assets
- Composition of balance sheet, level of intangible assets, market risks with non-traditional activities
- Risk exposure of off balance sheet activities
- Quality and strength of earnings and reasonable dividends
- Prospects and plans for growth and experience
- Access to capital markets and other sources of capital
How does asset finance differ from other lending products?
- Ownership is with the lessor therefore covered if default
- Assets are usually business critical assets - level of asset dependency therefore clients are encouraged to keep up to date with payments
- As asset specialists they know resale market of the asset
- Used to physical collateral whereas banks have are used to non-specific guarantees and deed security which is difficult to realise
- Not all businesses can offer security needed from traditional banks whereas asset finance security is on the asset
- Bank lending can be more expensive leasing to clients having short term cash issues
- Lessors can match deposit payment terms with expected earnings of the asset and useful life of the asset
- Lessors use matched funding to avoid dependency on deposit payments
- Liquidity squeezed as customers rely on overdrafts, asset finance is a longer term solution
Types of re-structuring deals? - 10 points
- Seasonal payment profiles - mirroring the expected seasonal income flow of the business e.g. farming and tourist sectors
- Low start and deferred payment profiles
- High start and stepped payment profiles - Accelerated payments at the beginning when maintenance costs for the assets are at its lowest
- Payment holidays
- Ballon rental
- Payment frequency changes e.g quarterly, etc
- Nil - deposit profiles
- Commission allowance - Paying commission to introducers at the beginning of the agreement = Present Value used to calculate customer payments should be aggregate of the amount financed and the commission
- Subsidies = amount paid by a 3rd party to the lessor to supplement lessor income and adjust the rate charged to the lessee
- Discount = 3rd party may discount the amount paid by the lessor to acquire the leased equipment - sometimes or not disclosed to lessee
Benefits of deal structuring?
Helps differentiate offering by the funder from its competitors
Helps customer make choice as it is based on cash flow requirements and payback on the asset
What are the 3 lines of defence model key areas?
Identify, Measure, Mitigate
2 points - Who originally used the 3 lines of defence model?
FSA then larger banks followed suit
The greater the number of stakeholders involved in a business, the greater the need for a resilient and transparent risk management model.
2 points - What is the 1st line of defence and their correct actions?
Business Operations
- Operational management owns and manages the risk
Corrective actions:
Actions to address
Process
Control Deficiencies
4 points - What is the 2nd line of defence?
Control functions
Does not always provide risk management as a single line in defence - acts as monitoring, advisory and consultative support for the 1st line.
- Risk management committee (Chief risk officer that reports to senior management), has risk reports.
- Compliance function that reports to the board or senior management
- Finance function - monitors financial risk and financial reporting issues
- Security function - physical and data security, inspection and quality function (Anti money laundering checks).
3 points - What is the 3rd line of defence?
Internal audit
This provides the board and senior management with comprehensive assurance based on the highest level
Bank owned asset funders have extensive 3rd line of defence
- Reports independently to board or audit committee
- Might include internal audit or chief risk offices
- Shows how effective 1st and 2nd line has been
4 points - Criticisms of the 3 lines of defence model?
Misaligned incentives for risk takers in the 1st line of defence
Lack of organisational independence in 2nd line
Lack of skills and expertise in the 2nd line
Inadequate and subjective risk assessment performed by internal audit
3 points - What are the additional lines of defence?
External auditors - ‘relationship of oversight to the 1st line’
Board
Regulators
4 points - What must the four lines model consider?
The roles, responsibilities, interactions between:
Internal and External audit
Regulatory financial supervisors
Model is only as strong as the people who work within it
Smaller organisations these models can be expensive to implement
