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About the course
This two day intensive workshop will provide a structured approach for identifying early warning signals in financial institutions.
Key Learning Outcomes:
- Understand the causes and symptoms of both systemic and individual bank failure in the global financial 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.
This section provides a structured framework of analysis highlighting early warning signals of distress and recurring themes in troubled credits.
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.
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?
- Origins of the credit crunch: sub-prime, structured finance (MBS, CDO, SIVs and ABCP), leveraged loans, dependence on interbank and etc.
- Key market risks: including funding problems in the Eurozone and other countries, commercial real estate exposures in Europe and the US
- Potential impacts of forthcoming regulatory changes: Basel III, Dodd-Frank.
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: liquidity, reputation, operational risk
- Disclosure and corporate governance concerns
- Inter-group support: ability of a stressed parent company to support subsidiaries.
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.
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
- Securitisation 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.
Who should attend
This course is designed for experienced regulators, credit risk and fixed income professionals with a good understanding of the analysis of financial institutions. This course follows on from our intermediary level courses: Intensive Bank Analysis, Emerging Market Bank Analysis and Non-Bank Financial Institutions.