Wellfleet Bank has a unique risk management structure that involves multiple levels of approval for loan proposals. This hierarchical structure can lead to delays and conflicts between risk officers and client managers. The bank also lacks clear risk limits and oversight of its credit committee's approval process. Several improvements could enhance Wellfleet's risk management, such as giving relationship managers more involvement in approvals, setting a risk appetite statement, and increasing oversight of large loans.

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Risk Management at Wellfleet Bank
All that Glitters Is Not Gold
Summary
Wellfleet Bank was founded in 1847 in London. Throughout decades, Wellfleet Bank has proved
its integrity by growing rapidly into a well-known international bank located in 55 countries.
Unlike the majority of international banks, Wellfleet did not own investment banking. One of
Wellfleet uniqueness can be seen from its risk management infrastructure. This strategy is taken
to keep pace with the growing business opportunities. This report will discuss several issues
regarding this unique mechanism. First, the strategy is like a sword with two edges as it brings
benefits and exposure to the risk. Then, it will be argued the additional risk that Wellfleet
encounters if it decides to employ relationship managers from investment managers. As a bank,
Wellfleet evaluates a huge number of proposals, and this report will explain how the calculations
determine whether a proposal is profitable or not. Lastly, the report will suggest some
recommendations to improve the risk management processes at Wellfleet.
SWOT Analysis
Strengths, Weaknesses, Opportunities, and Threats that Risk Wellfleet are summarized in the
table below for more understanding.
Strengths
• Unique risk profile: warranted risk
taking discipline
• Internal controls & models (2008 –
no loss)
• 1st world compliance standard
Weakness
• Compartmentalized risk too much
• Over reliance on risk models
Opportunities
• Leverage and syndicated loans
• Long-term relationship with new
clients
• Large institutional clients
• Multiple revenue streams
Threats
• Global Bank
• Other Competitors
• Recession
• Risk of default

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Analysis of the Bank Organizational Structure
The Wellfleet's "Alpine Pass" approach to risk management poses a significant obstacle. Say for
example if a loan exceeds a credit officer's credit limit, he must refer it to the senior credit manager.
Sign-off is required at each level of the hierarchy, and for larger agreements, the Group Credit
Committee makes the decision but still requires approval from a senior credit officer and a regional
credit officer, making the risk management process highly time-consuming and slowing responses
to clients. Some proposals may
cause conflicts between risk
officers and client relationship
officers because business units do
not address risk management and
risk analysts do not consider the business perspective. This hierarchical structure and risk
management methodology provides significant problems for Wellfleet's risk culture, and the
relationship managers saw the entire process as sluggish.
The Practice of Wellfleet Bank A "no-surprises" culture is demanded by the board of directors and
top management which means that the board of directors is ultimately responsible for risk
management. The board delegated risk management to the Group Risk Committee (which includes
all executive directors), while the Audit and Risk Committee (which includes non-executive
directors) reviewed particular risk areas and monitored the Group Risk Committee's operations.
We can understand that following the Bank's strategic objective, the Corporate Banking Group has
been aggressively chasing large-scale transformative projects, although no Risk Appetite
Statement specifies the related tolerance threshold. Apart from their periodic assessment of the
corporate loan portfolio once a decision has been taken, the Board, CEO, and Group CRO have no
direct participation in the loan
approval process. This Group Risk
Committee reviews and approves
proposed lending rules, standards, and
limitations for both retail and
corporate banking, as well as
monitoring newly accepted mega-
deals from the Corporate Banking
Group to ensure compliance and approval at the appropriate level of authority. We see there are

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no stated upper limitations to the Group Credit Committee's power, thus there are no restrictions
to be questioned or authorized. Within the bank's regulatory restrictions, the Group Credit
Committee can approve loans of any size. This implies the board has no control over the loan
approval process because the Group Risk Committee, to which the Board has assigned risk
management responsibility, has no influence over the Group Credit Committee's decision. Because
the Group Credit Committee does not report to the Group Risk Committee or the Board, the CEO,
and the Group CRO, who sits on the Board Risk Committee, will have no direct involvement with
the loan approval process, aside from their periodic review of the corporate loan portfolio after a
decision has been made. Talking about the corporate banking loans taking into consideration the
structure there is no risk appetite statement to set the tolerance for corporate banking loans or even
oversight from the Board as the Group credit committee has the ultimate authority to approve loans
with no limits, the Chief credit officer has the final say to everything.
Risks & Challenges
In its everyday activities, Wellfleet Bank is exposed to a range of risks. Market risk is a risk that
Wellfleet Bank faces in this case study due to fluctuations in interest rates, currency rates, and
other costs. This is especially true for Wellfleet Bank, which is proposing a $1 billion loan to South
African gold miner Gatwick Gold Corporation (GGC). Furthermore, operational risk is connected
through the everyday operations of Wellfleet Bank, which include auditing, monitoring, and
support systems. When the group head of client connections and the deputy group chief risk officer
disagree on a plan, Wellfleet Bank's operational risk is that the Chief Credit Officer will make the
final decision. Exchange rates, interest rates, and gold prices will all have an impact on credit risk,
both directly and indirectly. Furthermore, because Wellfleet Bank is an international organization
with activities in 78 countries, foreign exchange risk and country or sovereign risk would have a
direct influence on its operations. Interest rate risk is another risk that Wellfleet Bank faces when
the maturities of its assets and obligations are out of sync. As a result of their contingent assets and
obligations, they face off-balance-sheet risk. When there are technical investments, there is a risk
of technology. When there is a rapid increase in liabilities withdrawals, there is liquidity risk.
When Wellfleet Bank does not have enough capital to balance unexpected drops in the value of its
assets, it faces insolvency. Credit risk, market risk, operational risk, compliance risk, country risk,
reputational risk, business risks affecting the consumer bank, and business risks endangering the
corporate bank are all monitored individually by Wellfleet Bank to keep them within preset levels.

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*The interaction between the credit committee, clients, and client relationship managers is
fundamental to Wellfleet's risk culture. Client relationship manager is how the bank makes their
proposition. The problem is that the chief risk officer and the director of customer relations
frequently disagree on suggestions. The credit committee's decision-making procedure is
arbitrary.
Because many of these agreements may be multinational, Wellfleet's increased concentration on
major corporate deals may raise exposure to foreign exchange risk and country risk. The $1 billion
loan to GGC is an excellent illustration of extra risk exposure, as changes in currency rates or
government intervention may have a major impact on the deal's conclusion. While foreign
currency trading mismatches and foreign asset-liability situations can be lucrative, unexpected
events and volatility can sometimes result in large losses. To reduce this risk, Wellfleet Bank may
wish to engage in hedging techniques such as matched foreign asset-liability books, forward
contracts, and foreign asset and liability portfolio diversification. Furthermore, foreign
governments may impose restrictions or outright bans on domestic borrowers in their jurisdiction
from repaying external loans. Wellfleet Bank may wish to invest in methods to cope with this risk
as part of its worldwide expansion. They could wish to invest in nation risk analysis (CRA) models,
Risk Type Description
Operational
The final decision was made by the chief credit officer alone, which was an
arbitrary process.
Regulatory
A government-enacted change in rules or regulations can raise the cost of
doing business. Wellfleet followed the Basel II and recommendations, which
are now obsolete.
Credit
Wellfleet has been chasing large-scale transformative transactions that might
result in significant losses if they go wrong.
Market
Less liquidity, difficulty raising capital, a weak corporate governance
structure, and a higher risk of bankruptcy all contribute to market hazards.
Reputational
This is the spectrum of potential gains and losses in a company's reputational
capital. If the recommendations are turned down, the bank's credibility will
suffer.
Country
Political risk, exchange rate risk, economic risk, sovereign risk, and transfer
risk are all hazards connected with investing in a foreign nation in Wellfleet.
Concentration
Two types of business which are corporate banking and consumer banking,
seems to pour more focus on corporate banking. It can be shown from its
contribution to 58% of pretax profits and 72% assets in 2007.

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for example, to better distinguish between good and bad existing sovereign loans or sovereign loan
applicants. Because Wellfleet Bank is attempting to focus heavily on major transformative
agreements with customers, client relationship managers must be directly involved in the Credit
Group Committee's process to better understand their needs. This will assist Wellfleet Bank in
better meeting the demands of their clients and preparing better platforms for future transactions.
Key Factors to Consider
The deal
Wellfleet's internal rating model and credit committee have assigned the counterparty a 5B rating.
This amounts to a 0.39 percent chance of default. Wellfleet anticipates a first-half profit margin of
425 basis points and a second-half profit margin of 525 basis points. The first charge is 30 basis
points, which is $3,000,000. The amount drawn would be equivalent to the specified maximum of
$1,000,000,000. According to Wellfleet's model, the Loss Given Default for this transaction is
52.25 percent. Capital Charge is estimated to be $3,800,000.00 by Treasury while the cost
($500,000) and tax ($12,000,000) are the transaction's overhead allocations, according to Group
Finance.
Calculation analysis
The proposal is a high-risk transaction. Gatwick Gold Corporation is a high-risk corporation that
faces several threats. In 2007, the company's total debt to EBITDA ratio was over 800 percent, while
EBIT to interest expense was -3.1 percent, indicating a hazardous credit situation. Its Wellfleet grade
is 5B (Internal grades were calculated using internal loan ratings ranging from 1A to 11B, with 1A
indicating the least likely to default and 11B indicating the most likely to default), indicating a weak
credit situation with a high likelihood of default. Its financials also show that the firm is in a high-
risk position, with a -23 percent return on equity, negative net income, and negative cash flows from
investment operations. Labour expenses in South Africa, which account for about 42% of total
output, are rising at a rate of 12% per year, indicating that the firm may face significant expenditures
in the future. With 42 percent of global output, South Africa poses a significant political danger. As
Refinance for GGC = 1 billon, a
South African 3rd largest gold
producer (7% of global gold
production), 21 mining
operations, 10 countries, 41%
production from South Africa,
May 2008, $1.6 bn rights issue

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a result, based on these figures and the overall scenario, the plan appears to be extremely hazardous,
posing a significant default and credit risk.
Expected Lost
= Probability of Default × Exposure at Default
($) × Loss Given Default (%)
= 0.39% × $1,000,000,000 × 52.25%
= $2,037,750
Expected Loss (EL) is a fundamental credit risk
measure that provides a numerical value
between zero and one (a percentage) to the
expected (anticipated) financial loss in the event
of a credit-related event (default, bankruptcy)
occurring within a given time frame.
Total Revenue
= Interest Income + Fee Income
= ($500,000,000 × 4.25%) + ($500,000,000 ×
5.25%) + ($1,000,000,000 × 0.3%)
= $21,250,000 + $26,250,000 + $3,000,000
= $50,500,000
Risk-Adjusted Revenue (RAR)
= Total Revenue - Total Expected Loss
= $50,500,000 - $2,037,750
= $48,462,250
A Risk-adjusted revenue is revenue that has been
adjusted for projected losses. For this
measurement to be authorized, it must be
positive, and any deviations must be assessed by
the head of customer relationship management.
Economic Revenue
= RAR - Net Capital Charge
= $48,462,250 - $3,800,000
= $44,662,250
Economic Profit
= Economic Revenue - Cost - Tax
= $44,662,250 - $500,000 - $12,000,000
= $32,162,250
When calculating income, the bank's cost of
capital is considered, but when calculating
profits, all allocated and overhead costs are
considered. Wellfleet employs "economic"
measures to guarantee that the whole cost of
lending, not just the marginal cost, is
recouped. It will also prevent the company
from wasting the time of the Risk Committee
with subpar possibilities.
Three metrics that are gauged to find the likelhood of default:
1. Probability of Defaul (PD)
2. Loss Given Default (LGD)
3. Exposure at Default (EAD)

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Another explanation to reject:
o GGC's performance has been declining from 2003 to 2001. According to the statistics given in
the case, GGC's income growth stagnated from 2004 to 2007, but D&A and interest
expenditures increased dramatically in 2004. As a result, from 2003 to 2007, the likelihood of
this firm has been falling. From 2005 to 2007, its net income was even negative.
o The capital structure of GGC was flawed. Total debt to EBITDA rose at an incredible rate, as
indicated in the graph, but EBIT to interest expenses dropped to be even negative in 2007.
GGC was reportedly becoming increasingly indebted, and its debt protection had deteriorated
over the years.
o Deep-level hard-rock activities in South Africa accounted for 41% of total output. And the firm
would be nearly completely vulnerable to sharp drops in gold's fluctuating price. Therefore,
GGC would be greatly affected by the market risk of emerging countries. As a result, the
market risk of rising nations would have a significant impact on GGC.
o Within a two-year time period, Wellfleet's economic earnings will be less than a 069 percent;
moreover, GGC's highly leveraged environment has increased its debt to equity to 82 percent,
lowering its interest coverage ratio.
o In times of uncertainty, and as Wellfleet's endeavor to unwind its hedge book from losses, this
trade becomes highly speculative due to their dropping rates due to market circumstances. Its
2003 2004 2005 2006 2007
Revenue 2109 2297 2632 2975 3269
EBITDA 878 642 682 820 235
EBIT 618 233 177 219 -354
PBT 676 116 -175 127 -428
-1000
-500
0
500
1000
1500
2000
2500
3000
3500
STATEMENT ANALYSIS
Revenue
EBITDA
EBIT
PBT

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position has been harmed as a result of the financial crunch, and it should start rethinking its
20 percent dividend distributions.
o Finally, GGC hired a new management team that questioned and overturned the company's
basic business strategy. GGC may be exposed to increased operational and business risk as a
result of this activity.
Imporvement in the Managmenet Process
Within the bank's regulatory constraints, GCC has unrestricted control over loan applicants. The
group chief credit officer, who also acts as chair, the deputy chief risk officer, and the group head
of client connections, who represents the business perspective, are the three members. They
examine the larger credit proposals as a group. If the deputy group chief risk officer and the group
head of client connections cannot agree, the ultimate decision will be made by the group chief
credit officer.
The independence of risk analysis and management was ensured by such a risk management
methodology. It did, however, have a number of flaws. On the one hand, it was time-consuming,
and as a result, Wellfleet may have missed numerous chances and bothered significant clients as a
result of the lengthy risk assessment process. On the other side, it gave the members of the risk
committee much too much power, removing senior management oversight. And such an
organization put Wellfleet at significant operating risk. Several other risk committees, in addition
to GCC, examine various sources of risk on a regular basis, including market risk, operational risk,
compliance risk, nation risk, reputational risk, and business risks that affect both the consumer and
Group Credit Committee
Regional Credit Officer
Credit Officer Head of Client
Relationship
Deputy Chief Risk
Officer
Chief Credit Officer

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corporate banks. The Group Risk Committee oversees the eight risk committees, which report on
risk trends quarterly to the senior executives. The risk officer, on the other hand, reports to the
Audit and Risk Committee at the board level. Giving
relationship managers additional responsibility in the
small credit or lower risk sectors might help to decrease
this. The development of a flat decision structure based
on proposal features such as loan amount, applicant firm
size, and applicant history records would be one
approach. While credit officers may sign off on modest
loans from small businesses with solid credit histories, large loans from large businesses with bad
records may go straight to the Group Credit Committee. The diagram shows how it works.
Another major issue stems from the committee structure. The eight subordinate committees might
specialize in risk assessment by focusing on their respective field's risk. Risk management, on the
other hand, is not particle physics. Different sorts of risks interact with one another. Credit risk
and business risk might both be harmed by a reputational flaw. Credit spreads would widen in a
recessionary environment. The independence of
distinct risks in the study would result in an
erroneous conclusion, reducing the precision of
the interest rate for a loan. It would be unwise to
combine all eight committees into one to manage
all risk, as this would eliminate the value of
committee independence and balance. Financial risks, on the other hand, may be split into micro
and macro categories. The eight committees might be combined into two functional committees
(Graph 4). Facilitating contact between the two committees can increase the system's efficiency.

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Adoption of the 5c for Credit evaluation
Wellfleet bank can adopt a 5cs of the credit evaluation
method, A lender's credit analysis is used to assess the risk
involved in issuing a loan. A bank or lending institution
will be interested in both your business and personal
financials, regardless of the sort of funding required. The
"5 Cs" regulate credit analysis: character, capacity,
condition, capital, and collateral.
o Character: Lenders need to know the borrower and guarantors are honest and have integrity.
o Capacity (Cash flow): The lender wants to know that your business can repay the loan.
o Condition: The lender will need to understand the condition of the business.
o Capital: Your lender will ask what personal investment you plan to make in the business.
o Collateral: the value of the assets, guarantors as a secondary source of repayment.
Recommendations
Finally, I would say that to help with risk management, a more comprehensive risk management
analytics model should be created. Even though Wellfleet is already ahead in the game it should
set up everything in the BI systems several proposal criteria such as loan amount, applicant firm
size, and applicant history data should be maintained. Through dashboards and reports, descriptive
analytics may be used to display proposal features such as loan size. The charts might provide
some information to the management. Furthermore, a prediction model should be developed based
on the relative aspects in proposal characteristics to assess the potential profit and loss.

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References
Risk Management at Wellfleet Bank: All That Glitters Is Not Gold
Publication Date: July 13, 2009
Source: Harvard Business School
Preparer information
Name: Chitroda Harsh
Class: MS Financial Risk Management
Student’s ID#: U01682296