This document discusses managing bank risk for a university. It provides an overview of the various types of risks faced from bank partners, including credit risk, liquidity risk, operational risk, and counterparty risk. It then outlines steps a university treasury department can take to manage this risk, such as adopting an enterprise risk management approach, identifying specific risk exposures, evaluating and scoring risks, developing risk responses, and ongoing risk monitoring through tools like a bank risk matrix. The goal is to help the university diversify risk across multiple bank partners and instruments while balancing credit quality, cost, and institutional exposure.
MODULE 3:
Credit Risks Credit Risk Management models - Introduction, Motivation, Funtionality of good credit. Risk Management models- Review of Markowitz’s Portfolio selection theory –Credit Risk Pricing Model – Capital and Rgulation. Risk management of Credit Derivatives.
MODULE 3:
Credit Risks Credit Risk Management models - Introduction, Motivation, Funtionality of good credit. Risk Management models- Review of Markowitz’s Portfolio selection theory –Credit Risk Pricing Model – Capital and Rgulation. Risk management of Credit Derivatives.
This presentation provides complete study ofcredit risk management,how it was performed in yester years ,how it is taken care nowadays and what is the road ahead in future
Safeguard your lending program by learning about the 8 steps of credit risk management. Learn about nonfinancial risks, structuring the loan, and more.
Assessing a bank’s culture is not an easy task, but there clearly is an increased emphasis on culture that is part of the regulators' broader focus on “heightened standards.” Learn what it takes to have a strong credit culture. Read about these 10 credit culture factors to assess your institution's credit culture.
Writekraft Research and Publications LLP was initially formed, informally, in 2006 by a group of scholars to help fellow students. Gradually, with several dissertations, thesis and assignments receiving acclaim and a good grade, Writekraft was officially founded in 2011 . Since its establishment, Writekraft Research & Publications LLP is Guiding and Mentoring PhD Scholars.
Our Mission
“To provide breakthrough research works to our clients through Perseverant efforts towards creativity and innovation”.
Vision
Writekraft endeavours to be the leading global research and publications company that will fulfil all research needs of our clients. We will achieve this vision through:
Analyzing every customer’s aims, objectives and purpose of research
Using advanced and latest tools and technique of research and analysis
Coordinating and including their own ideas and knowledge
Providing the desired inferences and results of the research
In the past decade, we have successfully assisted students from various universities in India and globally. We at Writekraft Research & Publications LLP head office in Kanpur, India are most trusted and professional Research, Writing, Guidance and Publication Service Provider for PhD. Our services meet all your PhD Admissions, Thesis Preparation and Research Paper Publication needs with highest regards for the quality you prefer.
This presentation provides complete study ofcredit risk management,how it was performed in yester years ,how it is taken care nowadays and what is the road ahead in future
Safeguard your lending program by learning about the 8 steps of credit risk management. Learn about nonfinancial risks, structuring the loan, and more.
Assessing a bank’s culture is not an easy task, but there clearly is an increased emphasis on culture that is part of the regulators' broader focus on “heightened standards.” Learn what it takes to have a strong credit culture. Read about these 10 credit culture factors to assess your institution's credit culture.
Writekraft Research and Publications LLP was initially formed, informally, in 2006 by a group of scholars to help fellow students. Gradually, with several dissertations, thesis and assignments receiving acclaim and a good grade, Writekraft was officially founded in 2011 . Since its establishment, Writekraft Research & Publications LLP is Guiding and Mentoring PhD Scholars.
Our Mission
“To provide breakthrough research works to our clients through Perseverant efforts towards creativity and innovation”.
Vision
Writekraft endeavours to be the leading global research and publications company that will fulfil all research needs of our clients. We will achieve this vision through:
Analyzing every customer’s aims, objectives and purpose of research
Using advanced and latest tools and technique of research and analysis
Coordinating and including their own ideas and knowledge
Providing the desired inferences and results of the research
In the past decade, we have successfully assisted students from various universities in India and globally. We at Writekraft Research & Publications LLP head office in Kanpur, India are most trusted and professional Research, Writing, Guidance and Publication Service Provider for PhD. Our services meet all your PhD Admissions, Thesis Preparation and Research Paper Publication needs with highest regards for the quality you prefer.
In this article how risk management in banks is an important concept, what type of risks banks faces and how they curb it through risk management model is described
Risk Rating Improvements for the ALLL in Banks and Credit UnionsLibby Bierman
Risk Ratings will play a pivotal role under CECL at banks and credit unions. In this presentation, find out how to improve risk rating systems, including PD/LGD or Probability of Default as well as internal matrices.
In life, there are universal laws that govern everything we do. These laws are so perfect that if you were to align yourself with them, you could have so much prosperity that it would be coming out of your ears. This is because God created the universe in the image and likeness of him. It is failure to follow the universal laws that causes one to fail. The laws that were created consist of the following: ·
Law of Gratitude: The Law of Gratitude states that you must show gratitude for what you have. By having gratitude, you actually speed your growth and success faster than you normally would. This is because if you appreciate the things you have, even if they are small things, you are open to receiving more.
Law of Attraction: The Law of Attraction states that if you focus your attention on something long enough you will get it. It all starts in the mind. You think of something and when you think of it, you manifest that in your life. This could be a mental picture of a check, or actual cash, but you think about it with an image.
Law of Karma: the Law of Karma states that if you go out and do something bad, it will come back to you with something bad. If you do well for others, good things happen to you. The principle here is to know you can create good or bad through your actions. There will always be an effect no matter what.
Law of Love: the Law of Love states that love is more than emotion or feeling; it is energy. It has substance and can be felt. Love is also considered acceptance of oneself or others. This means that no matter what you do in life, if you do not approach or leave the situation out of love, it won't work.
Law of Allowing: The Law of Allowing states that in order for us to get what we want, we must be receptive to it. We can't merely say to the Universe that we want something if we don't allow ourselves to receive it. This will defeat our purpose for wanting it in the first place.
Law of Vibration: the Law of Vibration states that if you wish on something and use your thoughts to visualize it, you are half way there to getting it. In order to complete the cycle you must use the Law of Vibration to feel the part of what you want. Do this and you'll have anything you want in life.
For everything to function properly there has to be structure. Without structure, our world or universe in fact, would be in utter chaos. Successful people understand the universal laws and apply them daily. They may not acknowledge that to you, but they do follow the laws. There is a higher power and this higher power controls the universe and what we get out of it. People who know this, but wish to direct their own lives, follow the reasons. Successful people don't sit around and say "I'll try," they say yes and act on it.
The law of attraction is the most powerful force in the universe. If you work against it, it can only bring you pain and misery. Successful people know this but have kept it hidden from the lower class for centuries.
3. Query to Bank
Dear Sirs,
One of my checks was returned
from your bank marked
‘insufficient funds’. In view
of current developments in
the credit market, does that
refer to me or to you?
3
4. Credit Rating Trends
35
30
Number of Banks
25
20
15
10
5
0
Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Oct 2012
• Lowest rating of Standard & Poor’s, Moody’s and Fitch shown. Chart labels show Standard & Poor’s ratings for simplicity.
4
5. Risks to the University
• Financial
– Loss of Principal
– Insufficient Liquidity
– Access to Credit Markets
• Operational
• Opportunity Cost
5
6. Cash & Investment Exposure
Cash Investments
• Deposit Balances • Principal Risk
• Liquidity • Diminished Market
• Investment Value
Sweeps • Loss of Credit
Enhancement
• Liquidity
• Opportunity Cost
• Custody
6
10. Enterprise Management
• Diversity of instruments, parties and
potential credit quality
• New paradigm for thinking about banking
partners
– Fewer highly rated players
– Many new entrants in new roles
• Evolution in types of debt instruments
available driven by changes in market
10
12. Letter of Credit Provider Ratings
as of October 2012
35
30
Number of Banks
25
20
15
10
5
0
• Lowest rating of Standard & Poor’s, Moody’s and Fitch shown. Chart labels show Standard & Poor’s ratings for simplicity.
• Source: Bloomberg Finance 12
13. Manage Risk Across the Spectrum
Letters of Credit/Credit
Enhancement/Liquidity
– Put Risk
– Trading Spreads
– 2a7 Issues
Swaps
– Counterparty Risk
Lines of Credit
Direct Placements
– Acceleration Risk
– Cross Default
13
14. Hierarchy of Credit
Bank Credit Quality
Bank Credit Quality
BBB/Baa
A-/A3 Direct Placements
A
A+/A1 Lines of Credit
AA-/Aa3
AA/Aa Swaps
AA+/Aa1
Letters of Credit/Credit
AAA/Aaa Enhancement/Liquidity
14
15. Hierarchy of Credit
Bank Credit Quality
BBB/Baa
A-/A3 Direct Placements
A
A+/A1 Lines of Credit
AA-/Aa3
AA/Aa Swaps
AA+/Aa1
Letters of Credit/Credit
AAA/Aaa Enhancement/Liquidity
15
16. Hierarchy of Credit
Bank Credit Quality
BBB/Baa
A-/A3 Direct Placements
A
A+/A1 Lines of Credit
AA-/Aa3
AA/Aa Swaps
AA+/Aa1
Letters of Credit/Credit
AAA/Aaa Enhancement/Liquidity
16
17. Hierarchy of Credit
Bank Credit Quality
BBB/Baa
A-/A3 Direct Placements
A
A+/A1 Lines of Credit
AA-/Aa3
AA/Aa Swaps
AA+/Aa1
Letters of Credit/Credit
AAA/Aaa Enhancement/Liquidity
17
18. Letters of Credit
• Facility expirations in 2011 had minimal
impact
• Good pricing
– Low VRDB issuance
– Lots of competition
• Overall supply and VRDBs supply is low
• Banks no longer requiring other treasury
service relationships
• Tenors are typically 3 years or less
18
19. Direct Loans
• Borrowers opting for direct loans instead of
public sale
– Lower transaction costs
– Easier implementation
– No credit ratings
– No public disclosure
• Longer tenors for variable rate transactions
(4-10 years)
• Fixed rate typically sold with 20-30 loan and
mandatory tender in 4-10 years
19
20. Direct Loans Share VRDBs Risk
• Bank renewal/Refinancing Risk
• Obligation to Repay Loan Accelerates at
Term
– Many issuers do not have cash on hand or
budget flexibility to cover accelerated
repayment
• Immediate acceleration due to rating or
default triggers
• Unknown costs related to changing
regulatory environment
Source: Moody’s Investors Service
20
21. Direct Loans Reduce Some Risk
• Alternative to Variable Rate Demand
Bonds
• Increases availability of liquidity at renewal
• Limited refinancing risk
– For VRDBs, failed remarketing can occur at
any time
– Credit deterioration of bank or general market
dislocation could result in failed remarketing
Source:of VRDBs Service
Moody’s Investors
21
22. Existing Swaps
• Continued focus on counterparty risk
– Understand collateral thresholds
– Consider replacing counterparties
– Understanding Additional Termination Events
(ATEs)
• Treatment of swaps in debt restructuring
• Review documents to see whether swap is
tied to existing debt structure (i.e. tied to
current LOC provider)
22
25. Bank Risk Matrix - Debt
Treasury Relationship
Matrix Bank 1 Bank 2 Bank 3 Bank 4 Bank 5
Long Term Debt Rating
Parent Rating
Bank Rating
Debt Exposure
Swap Counterparty
Bond Trustee
Line of Credit
Liquidity and Letters of
Credit
Remarketing Agent
25
26. Bank Risk Matrix - Investment
Treasury Relationship
Matrix Bank 1 Bank 2 Bank 3 Bank 4 Bank 5
Cash and Investments
Deposit Accounts
Savings Accounts
Repurchase Agreements
Money Market Funds
Commercial Paper and
Corporate Notes
Foundation
Endowment
Security Custody
Securities Lending
26
27. Bank Risk Matrix - Operations
Treasury Relationship
Matrix Bank 1 Bank 2 Bank 3 Bank 4 Bank 5
Operations
Banking Services
Payroll Card
Merchant Card
Travel & Entertainment
Card
Integrated Payables
On Grounds Branch/ATM
27
36. 5. Measure and Monitor Risk
U.Va. Bank Risk Matrix – Debt (Pre-2008)
Bank of
Treasury Relationship Bank of New Goldman JPMorgan Morgan Lehman Merrill
Matrix America York/Mellon Sachs Chase Stanley Bros. Lynch Wells Fargo
Long Term Debt Rating
Parent Rating AA/Aa1 A+/Aa2 AA-/Aa3 AA-/Aa2 AA-/Aa3 A+/A1 A+/A1 AA+/Aa1
Bank Rating AA+/Aaa --/Aaa --/Aa3 AA/Aaa AA-/Aa3 A+/A1 --/-- AAA/Aaa
Debt Exposure
Swap Counterparty $50 million $50 million
Bond Trustee X
Line of Credit $250 million
Liquidity and Letters of Credit
$300 million $82 million
Remarketing Agent CP VRDB’s
36
37. 5. Measure and Monitor Risk
U.Va. Bank Risk Matrix - Debt
Bank of
America/ Bank of
Treasury Relationship Merrill New Goldman JPMorgan Morgan Lehman
Matrix Lynch York/Mellon Sachs Chase Stanley Bros. U.S. Bank Wells Fargo
Long Term Debt Rating
Parent Rating A-/Baa2 A+/Aa3 A-/A3 A/A2 A-/Baa1 A+/Aa3 A+/A2
Bank Rating A/A3 AA-/Aa1 A /A2 A+/Aa3 A/A3 AA-/Aa2 AA-/Aa3
Debt Exposure
Swap Counterparty $50 million $50 million
Bond Trustee X
Line of Credit $100 million $50 million $100 million
Liquidity and Letters of Credit
$300 million $300 million $78 million
Remarketing Agent CP (1/2) CP (1/2) 2003A
37
38. 5. Measure and Monitor Risk
U.Va. Bank Risk Matrix – Cash and Investments
(Pre-2008)
Bank of
America/ Bank of
Treasury Relationship Merrill New York/ Goldman JPMorgan Morgan SunTrust
Matrix Lynch Mellon Sachs Chase Stanley Bank U.S. Bank Wells Fargo
Cash and Investments
Deposit Accounts X
Savings Accounts
Repurchase Agreements
Money Market Funds
Commercial Paper and
Corporate Notes
Foundation
Endowment
$300 million
Security Custody Portfolio
38
39. 5. Measure and Monitor Risk
U.Va. Bank Risk Matrix – Cash and Investments
Bank of
America/ Bank of
Treasury Relationship Merrill New York/ Goldman JPMorgan Morgan SunTrust
Matrix Lynch Mellon Sachs Chase Stanley Bank U.S. Bank Wells Fargo
Cash and Investments
Deposit Accounts X
Savings Accounts
Repurchase Agreements
Money Market Funds * $390,000 $640,000 $540,000
Commercial Paper and
Corporate Notes
Foundation
Endowment
$100 million
$200 million Portfolio &
Security Custody Portfolio PFM Funds
* Pro-Rata Share of Mutual Fund Holdings
39
40. 5. Measure and Monitor Risk U.Va.
Bank Risk Matrix – Operations (Pre-2008)
Bank of
America/ Bank of
Treasury Relationship Merrill New York/ Goldman JPMorgan Morgan SunTrust
Matrix Lynch Mellon Sachs Chase Stanley Bank U.S. Bank Wells Fargo
Operations
Banking Services X
Payroll Card X
Merchant Card X X
Travel & Entertainment
Card X
Integrated Payables X
On Grounds Branch/ATM X X X
40
41. U.Va – What Next?
• Diversify Operating Risks
• Explore better ways to measure risk
• Use risk register to prioritize work
• Find natural areas of avoidance
• Implement monitoring approach
41
43. Contact Information
Barbara Fava, PFM Asset Management
favab@pfm.com
June Matte, Public Financial Management
mattej@pfm.com
Jim Matteo, University of Virginia
jsm6y@virginia.edu
43
44. PFM Disclosures
The material presented by PFM Asset Management and Public Financial
Management (PFM) is based on information obtained from sources generally
believed to be reliable and available to the public, however PFM cannot
guarantee its accuracy, completeness or suitability. This material is for general
information purposes only and is not intended to provide specific advice or a
specific recommendation. All statements as to what will or may happen under
certain circumstances are based on assumptions, some but not all of which are
noted in the presentation. Assumptions may or may not be proven correct as
actual events occur, and results may depend on events outside of your or our
control. Changes in assumptions may have a material effect on results. Past
performance does not necessarily reflect and is not a guaranty of future results.
The information contained in this presentation is not an offer to purchase or sell
any securities.
44
Editor's Notes
Time to reconsider financial partners?Total EstimatedBanking Industry LayoffsSince November 2007: 133,000 +Banks looking for “fee income”Current service provider may be undergoing changes/stress (staffing, support, capital, credit issues)
The large amount of facility expirations in early 2011 did not have as strong a market impact as anticipatedBanks are pricing credit facilities at low levels due to low level of new VRDB issuance and a lot of competition in the market from other banksStill the case even with the recent review by Moody’s of commercial banksBoth overall supply and VRDBs supply is lowBanks have largely backed off requests for other treasury service relationshipsTenors are typically 3 years or lessDriven by Basell II
Many borrowers are opting for direct loans for transactions that may have otherwise been sold via public saleOften lower transaction costsEasier implementation than publically sold dealsNot always the case due to how involved the bank negotiations may becomeUsually no credit ratings Although rating agencies are requiring to be informed of plans and provided loan documents No public disclosure requiredAlthough borrowers should consider publishing loan documentation on EMMA For variable rate transactions longer tenors than bank liquidity tenors (i.e. 4-10 years instead of ~3 years)Fixed rate typically sold with 20-30 loan and mandatory tender in 4-10 years
Direct Bank Loans Share Many Risks of VRDBsBank renewal/Refinancing RiskIssuer’s Obligation to Repay Loan Accelerates at TermMany issuers do not have cash on hand or budget flexibility to cover accelerated repaymentImmediate acceleration due to rating or default triggers
Direct Bank Loans Reduce Some Risks of VRDBsProvides Alternative to Variable Rate Demand BondsIncreases availability of liquidity at time of renewal bubbleRefinancing risk limited to market access at time of maturityFor VRDBs, failed remarketing can occur at any timeCredit deterioration of bank or general market dislocation could result in failed remarketing of VRDBs
PFM is observing a few things with respect to existing swaps to keep an eye onContinued focus on counterparty riskUnderstanding collateral thresholds on both sidesSeeking opportunities to replace counterparties in some instances Understanding the Additional Termination Events (ATEs)Understand circumstances when bank can trigger ATEIf Bank counterparty downgrade triggers an ATE that may create an opportunity to replace counterparty with favorable terms or to terminate more favorable costTreatment of swaps in restructuring of underlying debtReview documents to see whether swap is tied to existing debt structure (ie – tied to current LOC provider)
