BANK6002 - Bank Management Group Project: Risk Comparison Analysis

This student project, submitted on Desklib, provides a comprehensive analysis of bank management, specifically focusing on the interest rate risk and credit risk faced by financial institutions, such as Westpac Banking Corporation. The project analyzes the impact of the Reserve Bank of Australia's interest rate cuts on the bank's performance, including the effects on net interest margins, lending environments, and credit quality. It delves into the interest rate risk analysis, examining how fluctuations in interest rates can affect the bank's income and economic value. Moreover, it assesses credit risk by identifying the maximum credit exposure and potential impacts of credit rating downgrades. The project concludes with recommendations for mitigating these risks, including strategies for regulatory capital purposes and credit protection. The analysis incorporates data from 2019 and forecasts future interest rate trends, providing a practical understanding of risk management in the banking sector.

Running head: BANK MANAGEMENT
Bank management
Name of the student
Name of the university
Student ID
Author note

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1.
This year, financial service sector is facing a stimulating period such as “Westpac
Banking Corporation”. With the lesser growth of economy and historically lower interest rates
the operating environment has also become more tough. The bank has continuously faced
uncertainity around APRA’s capital requirements (Authority, 2017), impending for additional
controlling activities, and low earning interest rates and higher acquiescence costs.
Recently the Reserve Bank of Australia has cut official interest rates of 0.5 percent by a
quarter, as to defend the Australian economy from the financial outbreak of the coronavirus
outburst.
In the reduction case of the RBA’s first cash rate Westpac was the first of the major
banks to react since October. The bank has announced that passing the cut in full to debtors.
The economic viewpoint for Australia remains perplexing to make softer global
environment. It is anticipated that the Interest rates are expected o remain very small. The RBA
has concentrated the cash rate from 1.5% to 0.75% over the year. It is expected in early 2020 that
a further rate amended to 0.5%. At this level of rate there would be a limited options for RBA to
changed further if the economy goes down. At this low levels of interst rates, there will be a
important stress on margins. There are several deposits that are fundamentally at a floor beyond
which they can not be repriced down. Additionally Invested capital earnings and liquidity are
increasingly lower since the financial collection rolls over to much lesser interest rates
(tradingeconomics.com, 2020).
Concerning about the lending environment, the bank significantly challenged on the
impact of lowering the interest rate and it will create a demand for falling in a substantiality in

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lending. Credit quality persisted comprehensive over the year, a reasonable deterioration in
delinquencies on the “housing loans” with 0.88% of loan balances more than 90 days due. It
mostly replecates a some increases in tension and slowdown in housing income in ceratian parts
of the country, it increases the time to take for people to clear their loans when they require to
sell. It is remain very low at just 0.08% of the impaired assets to total exposure, while lending
business, “impaired assets to total exposure” was rise just 3 basis points to 0.62% over the last 6
months. The bank has fully funded with the new deposite of the customer.
2.
The “Reserve Bank of Australia” reduced the cash rate by 25 basis point to a new record
low of 0.25% in the next alternative move as to peer all over the world to alleviate the
coronavirus effect. Elaborately it can be said that they will not raise the target of cash rate until
development is being achieved towards full occupation and remains assured that the inflation
will be within 2% to 3% target. In that concern the policy makers wish to launch a 3 year funding
capability for the system in banking with AUD of 90 billion.

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Australian interest rate has been predicted to be 0.25 percent at the end of the quarter. On
the basis on several macro model and analysis it is to estimated that “interest rate of Australia”
stand at 25% in 12 months period. Whereas in the longrun, the Australian interest rate is being
expected to trend around 0.50 percent in 2021and 0.75 percent in 2022, as per the economic
models.

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3. Interest rate risk analysis
As per the banking book “Interest rate risk” (English, Van den Heuvel & Zakrajšek, 2018) is
the risk to “interest income” arising from a divergence among the period of assets and liabilities
that will arise the standard course of business. Since the Reserve Bank of Australia smashed the
cash rate by 25 basis point. Not increasing the cash rate target as per the board, until the progress
is not going towards the “full employment” and remains constatnt that the inflation will be 2-3%.
It will have an instant impact of changes in interest rate on the Net Interest Margin (Busch &
Memmel, 2015). There will be a larger impact in regards to interest rates changing is on the
bank’s net-worth as the economic value of a “bank’s assets, liabilities and off balance sheet”
position got exaggerated.
Credit risk
In this organization the maximum credit risk (Bluhm, Overbeck & Wagner, 2016)
exposure is representated by the carrying amount of monetary assets of the on balance sheet.
Described as below:
Trading securities and financial assets measured at FVIS
45% -economic institution
44%- parent entity
Derivative financial instruments
72%- both the financial institution and parent company
78%- held in Australia by the group

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In relation to the credit risk, if credit rating were lower from the current level the groups
costs of borrowing and capability may be adversely exaggerated, a downgraded credit rating
may compel the organizations to provide the higher interest rate on the currently paid and
wholesale borrowings.
4. Comparison of interest rate risk and credit risk position
As the above table suggests that in 2019, “Interest rate risk and Credit risk” is high compare to
the previous year.
5. Recommendation
This segment describes, some wayout to mitigate the risk (Abbas et al, 2015), the
recommendations are:
For the regulatory capital purposes:
The exposures backed by the financial collateral, either by cash or government or semi-
governement securities.

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Exposures can be alleviated by the qualified assurances, stand by “letters of credit” or the similar
mechanisms. Protection in credit earned via credit default swaps.

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Reference
Authority, A. P. R. (2017). To: All authorised deposit-taking institutions (ADIs), general
insurers, life companies, Level 2 Heads and potential Level 3 Heads Implementing the
non-capital components of the framework for supervision of conglomerate groups. APRA.
Australia Interest Rate | 1990-2020 Data | 2021-2022 Forecast | Calendar | Historical . (2020).
Retrieved 2 April 2020, from https://tradingeconomics.com/australia/interest-rate
English, W. B., Van den Heuvel, S. J., & Zakrajšek, E. (2018). Interest rate risk and bank equity
valuations. Journal of Monetary Economics, 98, 80-97.
Busch, R., & Memmel, C. (2015). Banks' net interest margin and the level of interest rates.
Bluhm, C., Overbeck, L., & Wagner, C. (2016). Introduction to credit risk modeling. Crc Press.
Abbas, A., Amjath-Babu, T. S., Kächele, H., & Müller, K. (2015). Non-structural flood risk
mitigation under developing country conditions: an analysis on the determinants of
willingness to pay for flood insurance in rural Pakistan. Natural Hazards, 75(3), 2119-
2135.