the very Bank Failures: Applying Lessons Learned & Early Warning Signals

Course Objectives

• This two-day intensive workshop will provide a structured approach for identifying early warning signals in financial institutions. The aim is to equip participants with the knowledge and skills to proactively:
• Understand the causes and symptoms of both systemic and individual bank failure in the current crisis
• Anticipate and quantify the vulnerability of institutions to liquidity and refinancing risk
• Stress test solvency for write downs from credit, trading, investment and derivative positions
• Differentiate qualitative, quantitative and market indicators of credit deterioration
• Identify the likely triggers or events which would change the credit standing of a company in the future.

Target Audience

Experienced credit risk and fixed income professionals with a good understanding of the analysis of financial institutions. This workshop follows on from our intermediary level workshops: Intensive Bank Analysis, Emerging Market Banks and Sovereigns and Non-Bank Financial Institutions. Advanced Bank Analysis is a complementary advanced level workshop which drills down into the financial statements of banks with complex activities and accounting practices.

Content

ANALYTIC OVERVIEW

• This section demonstrates the use of a structured approach to the identification of early warning signals of credit deterioration.

Signs of distress

• Common themes in troubled financial institutions: excessive growth, over-concentration, volatile earnings sources, asset and liability mismatches, dependence on unstable funding
• Symptoms of a company’s deteriorating credit standing: financial, non-financial and market indicators.

Structured analytic approach

• Four-step approach to focus on key issues: purpose, payback, risks and structure
• Purpose of the exposure and sources of payback: importance of refinancing in financial institutions, challenges to downsizing assets and availability of external support
• Risks to repayment: Identify the key macro, sector and company specific business and financial risks which might jeopardise repayment
• Structure: conclude on appropriateness of the facilities, assess the level of protection and critique the pricing to assess the risk: return
• Case study: a sub-prime lender. Lessons learned from the origins of the crisis.

OPERATING ENVIRONMENT

• Key macro economic and sector trends, which are likely to erode creditworthiness
• Systemic risks within a financial system: macro variables, competitive pressures, shadow banking system, quality of regulation and supervision
Support for the banking system: too big to fail or too big to rescue? Case study: stressed countries and banking systems Origins of the credit crunch: sub-prime, structured finance (MBS, CDO, SIVs and ABCP), leveraged loans, dependence on interbank and etcetera Market risk exposures: interest rate (structural and specific), credit, equity, currency, commodity etcetera – differences by type of bank and key indicators.

MANAGEMENT AND SHAREHOLDERS

• This section will focus on comparing management responses to a challenged sector
• Companies in crisis: recognising weak management and lack of integrity
• Risk management challenges: credit losses, liquidity, reputation, operational risk
• Disclosure and corporate governance concerns
• Inter-group support: ability of a stressed parent company to support subsidiaries
• Case study: a failed investment bank.

BUSINESS RISK

• This section will focus on companies with challenged business models and companies in crisis
• Credit risk: asset quality in the loan book; excessive growth and concentrations, hidden impaired loans; using surveillance reports to anticipate credit risk problems
• Market risk: stress and back testing VaR indicators, acceptable levels of exposure to structural interest rate and FX risk
• Derivatives: hidden credit and market risks; appropriate exposure levels
• Performance risk: assessing earnings volatility
• Case studies: bank failures due to exposures to credit risk, trading and investment losses, derivatives and structural interest rate risk.

FINANCIAL RISK

• This section will focus on the stability of a company’s funding structure and the ability to withstand solvency and liquidity crises
• Assessing the diversity and stability of funding sources: refinancing risk: quantifying liquidity and financial flexibility
• Asset and liability management concerns: FX, interest rate and maturity mismatches
• Liquidity risk management: managing and stress testing transaction and funding stability
• Securitization vehicles: liquidity exposure to conduits, servicing rights and other residual interests, sub-prime risks
• Double leverage: challenges of a leveraged holding company
• Solvency: stress testing quality and adequacy of capital to withstand write-downs
• Case studies: institutions without a stable deposit base; off-balance sheet exposures and inadequate capitalisation.  

Workshop Times