FIN369e

Financial Risk Management

Assignment 2 – Group-based Assignment

July 2014 Presentation

FIN369e Assignment 2

Group-based Assignment

This assignment is worth 30% of the final mark for FIN369e Financial Risk Management.

The cut-off date for this assignment is 20 October 2014, 2359hrs.

This is a group-based assignment. You should form a group of 3 members from your
seminar group. Each group is required to upload a single report to MyUniSIM via your
respective seminar group. Please elect a group leader. The responsibility of the group leader
is to upload the report on behalf of the group.

It is important for each group member to contribute substantially to the final submitted work.
All group members are equally responsible for the entire submitted assignment. If you feel
that the work distribution is inequitable to either yourself or your group mates, please
highlight this to your instructor as soon as possible. Your instructor will then investigate and
decide on any action that needs to be taken. It is not necessary for all group members to be
awarded the same mark.

In this assignment, you are expected to:

 Design strategies to identify, measure and manage different types of risks
 Apply risk measurement models
 Compute risk based capital for banks
 Develop strategies to manage financial risk
 Demonstrate the essential knowledge and interpersonal skills to work effectively in a
team
 Demonstrate proficiency in writing

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Instructions

Please read the questions carefully before writing your responses. There is no ‘model’
or ‘unique’ answer to the discussion questions. The questions require brief, considered,
responses. A premium will be placed on cogent, well-reasoned responses. Grades will be
based on:
 Structure and coherence (i.e. the answer should flow as a narrative),
 Analytical strength (e.g. the extent to which you draw upon theoretical
paradigms discussed in the course),
 Illustrations with examples,
 The synthesis of different viewpoints,
 Originality (including reasoning and structuring of your responses) and
 Professionalism (i.e. the extent to which you follow rules of writing papers), e.g.
referencing, formatting, editing for grammatical and other errors.

For each answer, you should cite at least four references. Marks will be deducted for
those not following these rules and following the suggested word limit. Please make sure
you cite every reference you use in your answer. The reference should be cited in the
main body of the text as well as in the list of references at the end of the answer.

SIM UNIVERSITY Assignment 2 – Page 2 of 4

FIN369e Assignment 2

At the end of each response, you must mention the number of words used in your
answer. Please feel free to use graphs, diagrams, tables, etc. to substantiate your
responses. These do not count towards the word limit.

Question 1

In August 2014, the rating agency, Moody’s, downgraded the credit ratings of South Africa’s
four dominant banks as the country’s financial sector continues to endure the ripple effects of
the collapse of the African Bank, the nation’s biggest lender of unsecured loans.
Moody’s said the decision to downgrade Standard Bank, Absa, FirstRand and Nedbank by
one notch reflected its view “of the lower likelihood of systemic support from South African
authorities to fully protect creditors in the event of need”.

Identify the key risks that have let to Moody’s downgrading the four major banks in South
Africa. In your response, assess the interaction between different risks faced by the South
African banks. What factors may have contributed to the lower likelihood of systemic support
from South African monetary authorities to protect creditors in the event of a crisis?
(25 marks)
(Maximum of 750 words)

Question 2

Assume the role of a consultant to the CEO of a hypothetical multinational bank, EM Bank.
EM Bank has operations in the Ukraine, including the eastern part of the country, and in
Crimea – regions that have faced severe internal conflict and instability over the past few
months. The CEO of the bank, Mr. Dominique Hall wants a clear account of the risks faced
by the bank.

Write a report not exceeding 750 words that outlines the risks faced by your bank. In your
report, distinguish between Sovereign and Foreign Exchange Risk and examine the
manifestations of these risks in financial institutions. What advice would you offer to the
CEO for formulating strategies to manage these and other risks faced by the bank as a result
of its operations in parts of the Ukraine affected by internal violence?
(25 marks)
(Maximum of 750 words)

Question 3

The continuing spread of the Ebola virus during August and September 2014 through large
parts of West Africa, especially, Liberia and Sierra Leone, and incidents of travelers
transmitting the virus to the US and the UK raised global concerns about spread of the
epidemic. The WHO, health ministries, medical research institutes across the world are
actively engaged in treating and containing this disease. Elements of the transmission of the
Ebola virus are reminiscent of the SARS epidemic in East and Southeast Asia in 2003, that
also had a profound impact on Singapore.

SIM UNIVERSITY Assignment 2 – Page 3 of 4

FIN369e Assignment 2

Our focus is on the banking sector. Place yourself in the shoes of an analyst at one of the
major credit rating companies, S&P, Moody’s and Fitch. The company has commissioned
you to write a report for the regulatory authorities on the risks faced by the banking system.
Your report should be structured as an executive summary.

Appraise the role of regulatory authorities in identifying and evaluating the different types of
risks faced by banks in the region. Be precise in the specification of the risks and in your
explanation of how these risks would manifest themselves.
(25 marks)
(Maximum of 750 words)

Question 4

In a recent speech, Mr. Jamie Dimon, the CEO of JPMorgan Chase Bank expressed concerns
that the bank faced tough global competitors. One of the main sources of competition, he
went on to explain, would be shadow bank. He stated that we really should not call them
“shadow” banks—they do not operate in shadows. They are non-bank financial competitors,
and there is a wide set of them.

Discuss the outstanding issues and challenges to bank risk management and the broader
financial system arising from shadow banking. In your response, describe what is shadow
banking; which entities are engaged in shadow banking; what do they do; how does shadow
banking benefit the broader financial sector; how do these activities impact bank’s operations
and the risks faced by banks. Is there any way shadow banks could also make the financial
system more stable?
(25 marks)
(Maximum of 1000 words)

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SIM UNIVERSITY Assignment 2 – Page 4 of 4