Financial Institution Management
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You have been engaged as a risk consultant to advise on the current Risk Management Policies of Westpac Banking Corporation.
Within six months of the publication of this report the following extracts have appeared in the media and analyst reports.
An analyst research report on Westpac says;
“One of the key reasons for our prior Overweight rec on WBC was its superior peer-relative capital position. However, this has evaporated, and they are now on par with peers, with an expected FY16E pro-forma Common Equity Tier 1 (CET1) of 9.3% due to a larger than expected adjustment to achieve 25% mortgage risk weights, compounded by an additional 30bp of CET1 over the last 12 months for PD changes and reporting of hardship.”
“Risks to Rating and Price Target
The key downside risk to our rating and price target is a materially higher level of regulatory capital. Operationally, downside risks are also evident from margin erosion in the current competitive low growth environment. Upside risk resides in the mortgage re-pricing cycle.”
The analyst further provides the following key metrics:
Based on your knowledge
1. Provide a brief assessment of the usefulness of the Pillar 3 report for the market’s understanding Westpac’s risk exposures and risk management policies. Do you think that the Pillar 3 report is adequate in informing the market? What, if anything, is missing from the report that would have helped market participants to understand the risk condition of Westpac?
2. Which are the techniques used by the Westpac that you consider as new or “state of the art” relative to the ones covered in the textbook? Justify your reasoning.
3. Concentrating on one (1) of the techniques you have chosen as being “state of the art” in (b) above, what are the main strengths and weaknesses of the technique? (Your answer should reflect some financial analysis of what you view as the extent of the exposure of Wespac to a type of risk and how failure of the technique you have chosen could translate into losses). Make at least two (2) suggestions on how Westpac might improve their risk management processes in relation to your chosen risk type. (If you get ideas from secondary sources you must cite the sources accordingly).
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