Risk Control Techniques

Question 1

What are the types of controls that can be implemented?

Answer 1

PCDD

Preventative - most important
Corrective - when preventative controls are not possible.
Directive - most common. Directions on how to behave.
Detective - Fire alarms and 6 month audit of a project.

Question 2

What are the 5Cs of credit analysis?

Answer 2

1. Character - reputation of the borrower.
2. Capital - how is the borrower financed? Do they have skin in the game?
3. Conditions - What is the economic situation in the country/countries the borrower works in? What is the state of the industry?
4. Capacity - How much cash does the company generate? Are cash flows sustainable and predictable? What are the company’s other liabilities? What is the value of the company’s inventory?
5. Collateral - If the borrower cannot pay, what can the bank lay claim to to satisfy the debt?

Question 3

What is the credit analysis path?

Answer 3

1. Macroeconomic analysis - GDP, inflation, demographics, political situation.
2. Microeconomic analysis - Industry trends, regulatory trends.
3. Management Analysis - Proactive/reactive, strategy, motivation, experience, corporate governance.
4. Financial Analysis - Operating and financial position, financial disclosure.
5. Type of borrower - holding company, primary operating subsidiaries, secondary operating subsidiaries.
6. Type of borrowing - secured, unsecured, long term, short term, subordinated.

Question 4

What is structural risk?

Answer 4

A risk of loan loss arising out of the financial or economic exposure inherent with a company’s structure e.g. debt lent to a holding company is said to be structurally subordinated to debt located in the company’s subsidiaries because the claims of subsidiary’s creditors would be satisfied first in the event of a default.