Objective of the project
- Simulate a real world situation.
- Evaluate and make important credit risk related decisions.
- Apply your knowledge of credit risk to solve real problems faced by banks.
- Gain insights into the profession whilst in the classroom.
- Expand your knowledge base in the area of credit risk and credit derivatives.
- Apply regulatory capital calculations and provide necessary explanations on adequate capitalization.
Background
CDSs are important instruments used by financial institutions to manage credit risk exposure. In this case study, you will evaluate CDS and use information about specific transactions to calculate the probability of default that First American Bank (FAB) may face in dealing with its clients.
In an additional application, you will calculate regulatory capital under Basel 3 by playing a scenario and assuming that the dates of the financial statements provided is 2016 (See guiding question 3 for details).
This case study exposes you to various challenges faced by banks and to strategic decisions carried out by top management in managing these challenges. You will work in groups, discuss the case, analyze various developments and decisions and provide assessments and solutions. Most importantly, you will learn about a real world case and hopefully have fun while learning.
Please read the case individually before you start discussing it, as this will enrich your discussions during your meetings.
Guiding Questions
1- Evaluate the fee that the managing director of FAB should charge for the CDS.
2- How should the risk of a CEU default be managed? Should it be transferred from FAB's balance sheet?
3- Consider the hypothetical scenario that the financial statements of FAB (Exhibits 1-3...) occur after Basel 3 was implemented. That is, 2001 becomes 2016, 2000 becomes 2015 and 1999 becomes 2014. What are the regulatory requirements for credit risk that FAB should meet under Basel 3? Address the CDS position as part of your answer.
4- Global citizenship is a new direction that is adopted by the financial services and banking industry. Propose a one-page statement of global citizenship in 2016 for FAB after answering question 3.
The solution for the case should be analytical as a number of outcomes may emerge. Your analysis is expected to be supported by calculations carried out using an Excel sheet. Decisions made need to be articulated clearly given your analysis and calculations.
Groups
5 members per group unless an approval is provided for specific cases.
Learning Outcomes
- Demonstrate professional ability to apply knowledge and skills acquired in this subject.
- Integrate and apply credit risk theories, concepts and models to a real world situation.
- Demonstrate an understanding of strategies and tactics employed by financial institutions in managing credit risk.
- Evaluate critical scenarios faced by banks and develop solutions for problems therein.
- Be critical thinkers and effective problem solvers.
- Be able to work effectively in a team environment and communicate within an intercultural context.
- Demonstrate ability expected from graduate students to conduct research.
- Communicate research and project results by developing a group written report and presenting results.
- Recognize ethical standards.
Output
Written Report and Power Point Presentation.
Written Report
Executive report of 1800 words including addressing questions 1-4 (without appendices). The report is submitted to the CRO and the BOD of FAB.
Use footnotes to make cross references to pages in Appendix A.
Additional requirements: Two appendices
Appendix A: Document details you wish to communicate including additional analysis, models, exhibits, graphs, tables, calculations, estimation results.
Appendix B: Documents brief minutes of your meetings, mode of the meeting (Physical meeting or online), decisions made, tasks allocated, tasks completed and by whom as well as a progress milestone. (A maximum of one page per meeting signed by all who are present).
Please have a draft of meeting minutes during weekly lectures as well.
Calculations:
Show detailed calculation steps in Appendix A. Submit an Excel sheet demonstrating these calculations.
References:
Proper referencing is required to justify claims raised, support your analysis or add facts.
Attachment:- CRM Assignment trial.zip