DRAFT
RISK ANALYSIS & MANAGEMENT
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ADVANCED DIPLOMA IN BANKING -
IOBM AD 313
NOVEMBER 2013
SECTION A
QUESTION 1.
Suggested answer
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There is a direct relationship between risk and reward.
The higher the risk the more likely the higher the reward
The lower the risk the more likely the lower or absence of reward
Completely risk-free environment operates as a deterrent to innovations
Notwithstanding, very risky situations can culminate into regrettable outcomes and future of
mankind would be entirely unpredictable
Therefore, regardless of the risk inherent, those accepting such risks must ensure to take
calculated steps toward measurement, monitoring and controlling such risks
There must be a motivation to engage in risky ventures. Without such motivation no one
would stick his neck out
There must be a proper balance between risk and reward.
QUESTION 2
Suggested Answ:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
Preservation of public or stakeholders’ confidence
To ensure financial stability
Elimination or reduction of criminal activities
To ensure proper accountability
Separation of interests and responsibilities over the affairs of the business
Avoidance of conflicts of interests
Promotes sound advices and sound practices
Facilitation of due diligence and oversights
Facilitation of transparency in the management of corporate affairs.
QUESTION 3.
Suggested Answ.
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Establishing an appropriate credit risk environment
Operating under a sound credit-granting process
Maintaining an appropriate credit administration, measurement and monitoring process
Ensuring adequate controls over credit risk.
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QUESTION 4.
Suggested Answ.
Advantages:
i.
ii.
iii.
iv.
Buyer knows at the outset what the worst case will be
Ideal for hedging contingent cash flows which may or may not materialize e.g. tenders
Provides a flexible means of currency cover
Does not require margins to be set aside in order to cover the exposure.
Disadvantages:
i.
ii.
iii.
Are expensive, especially when commissions are taken into account
Available to only a limited range of currencies
Expiry dates and strike prices are standardized and may not be ideal for a particular situation.
SECTION B
QUESTION 5
(a)
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
Suggested Answer:
Lack of back-up operations in separate locations
If all operations concentrated in the same building
Decisions or indecisions at the appropriate time
Business cycles/ seasonality
Economic/ fiscal changes of government policies
Market preferences as they change with times
Political compulsions i.e. govt directives to enter into risk exposures
Competition leads businesses to throw off board precautionary measures
Technology is both a solution and a cause of risk
Non availability of information for rational decision making
Lack of contingency plans for catastrophies
Poor controls
Fraudulent activities both internally and externally oriented.
(b)
TO PRODUCE AN ANSWER
QUESTION 6
Suggested Answ:
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Management and staff must have latitudes of control over the affairs of the business to the
extent possible so that they can avoid seemingly lucrative but dangerous (risky)ventures
How much control one has in the execution of duties determines the way forward and
assumption of accountability
Where fear and lack of control are both high, the risk is perceived as high. It leads to lack of
objectivity and careful analyses of risks
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Sometimes resources and/or competence levels might be lacking but nonetheless on is driven
into such activities or decisions for fear of failure
Very often there are no measures put in place to mitigate risks – the motivation is to please
out of fear, those that impose high tasks/targets on you
What is not understood, however, is that where control is greater and fear of outcome is
lower, there results a less likelihood of perceived risk. Outcomes might be generally
acceptable albeit not ambitiously at the level sought
Controlled people take risks for which they may not be equipped
Nonetheless, no organization can afford to operate on a laissez-faire basis and expect to
succeed. There must be in place some degree of control and expectations of consequences
when desired achievements or objectives are not met
It is really a question of balancing the act:- how much control should be exercised and the
level of outcomes that can equitably or ethically be generated by those that we have been
given charge to manage
You cannot expect to achieve the impossibles even if you threaten with reprisals those that
are expected to achieve results. Rather, dangle the carrot in front of their noses and let them
devise ways and means, through motivational factors, of how to achieve and ultimately take a
bite at the carrot!
What needs to be established are levels of responsibilities and, above all, accountability for
results.
QUESTION 7.
Suggested Answer:
a) Any of the following definitions will suffice
 The risk that interest rates paid to depositors and yields earned from loans might
change with varying degrees of uncertainty
 The impact on the net interest earning as a result of increases or decreases in levels of
interest rates
 The potential for the bank earnings volatility and declines in the market value of its
equity as a result of changes in interest rates in the economy/ market
b)
 It is a major risk exposure for banks
 It forms part of the bank’s ALM
 Defaults or arrears in interest can make an otherwise good lending book to increase
and become toxic and hence partially uncollectable
 Its effective management determines the bank’s overall profitability
 Sometimes failure to pay interest on depositors’ funds can lead to a bank on-the-run
ie. Flight of depositors to other banks
 It is the basis upon which the pricing of its loan products is made
 Forms the basis upon which a bank manages its sources and uses of funds
 Helps to set an appropriate level of tolerance and/or appetite for banks
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QUESTION 8
Suggested Answ:
Causes
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Deficiencies in information systems or internal controls
Unsound marketing practices
Pre-mature new products of line of business
Unsound procedures
faulty documentations
lack or absence of contingency plans
breakdown in internal monitoring mechanisms
malfunctioning of information systems
absence of rules/regulations
errors in the process of recording transactions
Mitigating strategies
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supervision and control of the highest order
training of personnel
regular internal and independent audits
development of personnel policies with ethical codes
constant training on risk management
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