Early Warning Signals in Banks

Fitch Learning

Fitch Learning

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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.

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.

Analytic Overview

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.

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?
  • 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.

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.

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
  • 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.

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Early Warning Signals in Banks at Fitch Learning

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