Learning Objectives: Explain the benefits and impacts of using an economic capital framework within the following areas: Credit portfolio management, Risk-based pricing, Customer profitability analysis, and Management incentives.
Questions:
24.9.1. Alpha Bank is analyzing the risk and return profile of its credit portfolio and wants to minimize concentration risk. It is considering transferring some high-risk loans to reduce this concentration.
How can the economic capital framework assist the bank in making this decision?
a. By identifying the potential impact of each loan on the portfolio's overall risk profile
b. By evaluating the individual credit risk of each borrower in isolation
c. By quantifying the incremental risk each loan adds to the total portfolio, guiding rebalancing decisions
d. By estimating potential future losses from default without considering portfolio correlations
24.9.2. Amero Bank is setting the interest rate for a new loan product that will be offered to corporate clients. The bank wants to ensure that the pricing reflects the risk associated with the product and aligns with shareholder value objectives.
How does the economic capital framework influence the risk-based pricing decision?
a. By ensuring the pricing reflects both expected losses and the capital allocated to support the loan's risk profile
b. By calculating interest rates that only account for operational costs and expected loan losses
c. By factoring in risk-adjusted returns, ensuring that the pricing strategy aligns with long-term value creation
d. By setting uniform pricing across all loan products to simplify internal processes
24.9.3. 11th Avenue Bank is analyzing its customer base to optimize profitability and resource allocation. The bank is focused on balancing customer relationships with the economic capital each one absorbs.
How does the economic capital framework support this initiative, and how might it align with management incentives?
a. By providing a detailed analysis of risk-adjusted profitability at the customer level, guiding resource allocation decisions
b. By prioritizing customer segments with the highest revenue generation, independent of the capital requirements
c. By enabling managers to tailor strategies that optimize resource allocation based on the risk-adjusted performance of each customer segment
d. By concentrating resources on low-risk customers, regardless of their overall profitability contribution
Answers here:
Questions:
24.9.1. Alpha Bank is analyzing the risk and return profile of its credit portfolio and wants to minimize concentration risk. It is considering transferring some high-risk loans to reduce this concentration.
How can the economic capital framework assist the bank in making this decision?
a. By identifying the potential impact of each loan on the portfolio's overall risk profile
b. By evaluating the individual credit risk of each borrower in isolation
c. By quantifying the incremental risk each loan adds to the total portfolio, guiding rebalancing decisions
d. By estimating potential future losses from default without considering portfolio correlations
24.9.2. Amero Bank is setting the interest rate for a new loan product that will be offered to corporate clients. The bank wants to ensure that the pricing reflects the risk associated with the product and aligns with shareholder value objectives.
How does the economic capital framework influence the risk-based pricing decision?
a. By ensuring the pricing reflects both expected losses and the capital allocated to support the loan's risk profile
b. By calculating interest rates that only account for operational costs and expected loan losses
c. By factoring in risk-adjusted returns, ensuring that the pricing strategy aligns with long-term value creation
d. By setting uniform pricing across all loan products to simplify internal processes
24.9.3. 11th Avenue Bank is analyzing its customer base to optimize profitability and resource allocation. The bank is focused on balancing customer relationships with the economic capital each one absorbs.
How does the economic capital framework support this initiative, and how might it align with management incentives?
a. By providing a detailed analysis of risk-adjusted profitability at the customer level, guiding resource allocation decisions
b. By prioritizing customer segments with the highest revenue generation, independent of the capital requirements
c. By enabling managers to tailor strategies that optimize resource allocation based on the risk-adjusted performance of each customer segment
d. By concentrating resources on low-risk customers, regardless of their overall profitability contribution
Answers here:
