2. Part 5 Commerical baking

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Commercial banking policy

JPM's Risk Metrics Model

How much can the FI potentially lose should market conditions move adversely

Market risk

Estimated potential loss under adverse circumstances

Daily Earnings at risk

$ market value of position X price volatility

Price volatility

price sensitivity x adverse daily yield move

Qualitative Models Default risk

-Leverage or capital structure (D/E) threshold beyond which probability of default increases
-Volatility of earnings (stable v.s. high tech)
-Collateral
Reputation, long term relationship, implicit contracts

Assume risk neutrality

the FI would be indifferent between the corporate and the treasury of same maturity discount bonds

RAROC Model

Risk adjusted return on capital, RAROC is the ratio of loan income to loan risk. A loan is approved if RAROC exceeds a FI estabilished benchmark rate (cost of capital, ROE)

Migration Analysis

Measures a loans probability of being upgraded, down graded or defaulting over a period of time. Historic data is used, and can be used as a benchmark against credit migration patterns of any new pool of loans can be compared.

Repudiation

Common before WW2 Bonds

Rescheduling

Common since WW2 bank loans

Concessionality

The amount the bank gives up in present value terms as a result of a MYRA

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