[资本市场和金融机构].9电子教案

A: ? b) What type of financial claims? A: ? c) How this problem can be reduced? A:?
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7.5 Off-Balance-sheet Risk
The risk incurred by an FI due to activities related to contingent assets and liabilities
– Examples?
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7.7 Foreign Exchange Risk
The risk that exchange rate (XR) changes can affect the value of an FI’s assets and liabilities denominated in foreign currencies.
– Those funds stopped buying paper during last quarter of 2008. originating a liquidity crisis to the U.S. banks
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7.6 Technology and Operational Risk
• Technology Risk. Risk that technology investment fails to produce anticipated cost savings.
• Operational Risk. Risk that technology or support systems may fail.
• What would happen to the Cdn FI’s profits (in C$) if the US$ depreciates?
What is the total foreign exchange profit (loss) incurred in 2008 from above net position if the loans are charged a US interest rate of 8%, and the exchange rates are C$1.538 and C$1.282 at the beginning and at the end of 2008, respectively?
A:?
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7.3 Market Risk
The risk of losses in on-and off-balance-sheet positions arising from movements in market prices.
• Incurred in active trading (risky investing) of assets and liabilities (and derivatives).
• Usually FIs make decisions under uncertainty in terms of risk, i.e., they know (estimate) the probability of the results of a course of action.
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• Risk. A situation where an action has more than one possible result and the probability of each result is known.
– Alternatively, Risk is the degree of uncertainty associated to the outcome of an event
Ch. 7 Risks faced by FIs (Saunders et al, 2006)
Outline This chapter discusses the risks associated with financial institutions
7.1 Uncertainty vs. Risk 7.2 Interest rate risk 7.3 Market risk 7.4 Credit Risk 7.5 Off-balance sheet risk 7.6 Operating risk 7.7 Foreign exchange risk 7.8 Liquidity risk 7.9 Other risks
The risk that the promised cash flows from loans and securities held by FIs may not be paid in full
I.e., payments of principal and interest on their promised dates. a) What type of FIs are more prone to default risk?
– Types: Credit substitutes (e.g., standby line of credits, loan commitments, loan guarantees) and positions on derivatives
– The OBS activities could eventually appear in the future Balance Sheet
Example: C$/Euro may be decreasing while C$/¥ increasing
Undiversified foreign expansion creates FX risk.
• A FI is fully hedged only if the average lives and amounts of foreign assets and liabilities are the same and by the same amount.
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• Example Consider a Canadian FI that holds US$200-million loans as assets and finance US$100 of them with CDs (liabilities in US$ ). The remaining US$ are funded with C$ CDs. In this case, the Canadian FI is net long US$100M. It holds more foreign assets than liabilities
– Examples:
Defaulted guaranteed loan (would appear as a liability of the FI).
If a Finance Company (FC) has credit guarantees by an insurance company to back the FC’s commercial paper and it defaults the insurance company will have to pay the FC debts.
Profit spread 1st year = 10% - 9% = +1%. 2nd year: ?? - 9%
[Other example of reinvestment risk: mortgage refinancing at a lower interest rate]
I.e., FI pays deposits at a fix-rate, investing in floating-rate loans
• a) Reinvestment risk. The risk that the returns on funds to be reinvested will fall below the originally anticipated returns
Example: 1-year loans at 10% annual funded with 2-year deposits at 9%
Liabilities (Deposits at 9%)
0
1 year
2 years
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Assets (Loans at 10%)
0
1 year
2nd year i = ?
i= 8% i= 11%
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• Firms should try to match maturities of assets and liabilities –fixed rate assets – Eliminates interest rate risk Disadvantage of matching?
“It is the risk of losses resulting from inadequate or failed internal processes, people, and systems or from external events” (BIS)
It includes technology system, organizational behaviour and other legal aspects of managing an FI, as well as reputational risk and strategic risk.
• Diversification: domestic and foreign (direct or portfolio) investment ↑ return ↓risk
Conditions: 1) Uncorrelated returns