7FNCE019W International Risk Management

Assignment Sample 7FNCE019W International Risk Management 

Introduction,

If we look at the bank’s 60-day averages for valuation of risk and standard deviation of risk, we can see that both VaR and sVaR are 14 percentage points higher than the bank’s most recent estimates, which were based on VaR and standard deviation of risk values from the previous six months, respectively. It is essential to divide the bank’s most recent anticipated VaR value by twelve in order to acquire one-twelfth of the total in order to obtain one-twelfth of the total, which is then used to calculate the star measurement.

To compute risk measures for its customers, DCDI Bank employs a weighted historical simulation approach that is based on an updated version of the technique mentioned above.

Based on this approach’s weighted version, we can observe that the parameter lambda has been modified to equal 0.995, which is an unusually low number when taking into consideration the conditions.

As a preventative measure, DCDI Bank established precautionary countercyclical buffers equal to 1.5 percent of its total risk-weighted assets value, in accordance with the legislation in existence at the time of construction.

It is the bank’s conventional approach to credit risk weighting that has resulted in the achievement of this grade for its customers’ benefit.

A proprietary market risk-weighted asset model developed by DCDI Bank is used to determine market risk-weighted assets, and a straightforward indicator-based technique established by DCDI Bank is used to calculate operational risk-weighted assets.

Literature review,

As seen in the following instances, making as much money as possible is one of the oldest and most fundamental business strategies, but it is also one that organizations frequently abuse and misuse, as demonstrated by the examples below. It is at the foundation of almost any business model that involves the providing of goods or services to clients that profit maximization is sought to be accomplished. Profit maximization is at the center of every successful company model’s long-term success strategy, and it is the most important factor to consider (Levitt, 2015, p.1). An organization’s ability to maximize its investments to the maximum extent possible is critical if it is to ensure that only the most promising ideas are pursued and realized (Obara et al., 2000, p. 8).http://7FNCE019W International Risk Management All other business decisions, such as those relating to investments, financing, and dividends, are made with the goal of increasing profits in mind, in the same way, that decisions relating to all other aspects of the company’s operation, such as those relating to investments, financing, and dividends, are made with the goal of increasing profits in mind (Borad, 2018, p. 1). http://7FNCE019W International Risk ManagementThe profitability of a company, as a result, has an immediate and direct impact on the crucial business decisions that must be taken in the near future at some point throughout that period. In order to determine how liquidity management tactics affect the profitability of financial institutions, the researchers set out to conduct this research in the first place.

The quantity of liquidity that a bank owns has an impact on the amount of profit that a bank can create over the course of its business operations over a long period of time. The long-term profitability of a bank is affected by the decisions made by financial management about the amount of liquidity a bank should have on its balance sheet (Ibe, 2013, p. 1).http://7FNCE019W International Risk Management The importance of liquidity to the operation of financial institutions has been shown to an unprecedented degree in recent financial crises, revealing a hitherto underestimated level of its importance to the operation of financial institutions. There is little doubt that there is a relationship between the amount of money earned and the degree to which one has influence over business operations (Lamberg et al., 2009).http://7FNCE019W International Risk Management

A corporation’s ability to repay the short-term debt before it matures (within one year) is one of the most important factors to consider when assessing a company’s long-term health, according to Shim and Siegel (2000).http://7FNCE019W International Risk Management, Generally speaking, an organization with a liquidity ratio of more than one is considered to be in good standing; on the other hand, an organization with a liquidity ratio of less than one is considered to be bankrupt (Morrel, 2007, p. 62).http://7FNCE019W International Risk Management

According to some studies (Crespi, F, 2019, p.55), http://7FNCE019W International Risk Management presence of an excessively high liquidity ratio can be an indication of a company’s mismanagement issues, as it indicates that the company did not make the best use of assets in order to maximize profits, as current assets are less profitable than fixed assets. According to Matarazzo, 2003, p.55, the presence of an excessively high liquidity ratio can be an indication of a company’s mismanagement issues, as it indicates that the company did A firm’s mismanagement concerns can also be indicated by the presence of an extremely high liquidity ratio since it suggests that the company did not make the best use of its assets in order to maximize profits and avoid debt payments. This is due to the fact that current assets generate less profit than fixed assets, which explains why current assets are more expensive. Businesses did not make the most efficient use of their assets in order to maximize revenues and sales, as seen by the numbers presented here (Chandra, 2001, p. 72).http://7FNCE019W International Risk Management

Main body 

Banks must make every effort to maintain a healthy balance of liquid assets and liabilities if they are to avoid facing short-term liquidity difficulties. An excess or a shortage in liquid assets should not be present at the operating level of a bank to guarantee that the organization continues to run smoothly (Bhunia, 2012, cited in Ibe 2013, p. 1).http://7FNCE019W International Risk Management

According to the International Financial Reporting Standards (IFRS), the goal of liquidity management is to accomplish the greatest possible trade-off between liquidity and profitability while also minimizing risk at the same time (Nahum et al., 2012, p. 1).http://7FNCE019W International Risk Management

This step is necessary in order to ensure the smooth functioning of a company’s commercial operations. It is necessary to withdraw a company’s liquid assets from the market. Rather than increasing working capital as a result of money invested, it may be possible to decrease liquidity by increasing working capital, which may result in better profit rates when money is invested (Raykov, 2017, p. 2).http://7FNCE019W International Risk Management A liquidity management issue to consider is whether to invest in income-generating assets such as high-yield bonds, which are illiquid but offer a high rate of return, or whether to keep the money set aside for investment in cash. A source of future profit or a source of future potential cost, depending on the circumstances, might be generated from bank funds as a result of the additional security it gives. One of the primary aims of this research is to do additional research in this area in order to gain a more in-depth understanding of the relationship between liquidity and profitability in a typical corporate context. (Bose, S2021)http://7FNCE019W International Risk Management

We have launched an investigation into the situation due to the fact that liquidity and profitability are vital to the survival of our company. In the course of the training, we gained a greater understanding of working capital management and profit maximization, which has proven to be a tremendous value for our organization. As a result of our research design, which entails employing representative bank samples as research objects, we anticipate that the findings of this study will offer bank management an overall picture of the profitability and liquidity of their respective institutions. Management will benefit from the findings of this study if they can use them as a guide to better manage working capital and strike a better balance between liquidity and profitability in their specific organizations, according to the authors of the paper. The findings of this study can be found here. When Rasul (2013)http://7FNCE019W International Risk Management conducted a study, he focused on Islamic banks rather than commercial banks in a manner similar to Ibrahim (2012)’s examination of commercial banks in a study that focused on Islamic banks (2017).http://7FNCE019W International Risk Management When it comes to bank profitability, liquidity can have a positive or negative impact on it, depending on whether liquidity and profitability proxies are used to estimate bank profitability or if bank profitability is monitored directly by the bank. The researchers Vintila and Ahelegbey, (2019) http://7FNCE019W International Risk Managementand Bellouma (2011), on the other hand, discovered that there is a negative relationship between profitability and liquidity based on their separate research approaches. Researchers TUFAIL et al. (2013)http://7FNCE019W International Risk Management and Bordeleau et al. (2010)http://7FNCE019W International Risk Management discovered that there is an adverse relationship between profitability and liquidity in their separate studies, which they published in their respective journals.

Following our investigation, we discovered that our findings differed from those of earlier studies in the following areas: Because of the increased importance placed on liquidity during a financial crisis, the relationship between liquidity and profitability is a topic that is actively investigated, particularly in the context of a crisis. This is particularly true during a financial crisis. It is our intention to study this link during the normal course of business rather than only in times of crisis, as is common, in order to have a more complete understanding of how it is connected. For our study, we engaged organizations from all over the world as participants in order to conduct a more thorough analysis and, as a result, to make more accurate generalizations than had been previously achievable through previous studies. Our study includes a longer period of time than previous studies, which allows us to more accurately account for the effects of short- and long-term liquidity on profitability in our analysis. The sample size in this survey is also substantially more than it was in the prior study, which will allow us to collect a more representative sample of the general public than we were able to do in the previous study. In addition, it is obvious that different types of studies have produced a broad range of conclusions regarding the relationship between liquidity and financial performance (MISHRA,2019).http://7FNCE019W International Risk Management

Consider the following case study: existing research, as proven in the following case study, does not effectively analyze the relationship between liquidity and profitability as it exists in the normal course of business across a broad variety of countries and over an extended length of time. As a result of the inconsistent findings found in the literature to date, we propose to perform this research in order to establish a more precise relationship between liquidity and profitability (Oduro,2019).http://7FNCE019W International Risk Management

According to shift ability theory, financial institutions should be able to readily sell off their assets for cash in order to meet their liquidity requirements in order to avoid a future liquidity restrictions. The implementation of this notion in financial managers who have complete control over the categories and proportions of their holding assets may be beneficial in improving their ability to manage their liquidity under specific circumstances.

When a commercial bank manages its convertible assets internally, rather than relying on central banks for assistance during a crisis, it is preferable to that bank (Ibe, 2013, p. 3).http://7FNCE019W International Risk Management

For banks with insufficient assets, shift ability theory is difficult to apply due to its reliance on the promise of rising liquidity through the holding of self-liquidating assets as a way of lowering risk while simultaneously raising liquidity. Some analysts believe that increasing the number of liabilities on a company’s balance sheet can help to increase the amount of money that the company has easily available to spend or invest, hence increasing the amount of money the company has quickly available to spend or invest.

To ensure that a bank’s liquidity is not compromised, the author asserts that borrowing from customers, rather than owning marketable assets and concentrating on obligation management, may be beneficial for the bank’s liquidity. Commercial banks must carefully assess their ability to get funds from their creditors, as well as the quantity of money they borrow from their creditors, before making any choices concerning their future business activities. Making progress on the construction of a conceptual framework for the Stock Exchange’s Liquidity Model is a never-ending endeavor that is still in its early phases.

As stated by the authors, corporate executives and publicly listed organizations should invest in the same way as individual investors should, according to Biderman and Santschi (2005).http://7FNCE019W International Risk Management Sellers sell when they sell and buyers purchase when they buy, just like it does on the stock market. This operates in the same way as the stock market, with sellers selling when they sell and buyers purchasing when they buy. This liquidity hypothesis should be used by individual and institutional investors (such as banks) to avoid investing failures and financial losses, which are both costly. In the absence of strong control over the amount of working capital available to the organization, the corporation will be unable to meet its profit maximization objectives and will fail. Having an excess of working capital can have a variety of negative outcomes, including poor cash management, additional administration, and monitoring requirements, bad debt losses, and low profitability, to mention a few of them. Unless a firm has adequate operating capital, it is virtually inevitable that it will experience business disruption or closure. Additionally, harm to the company’s brand and loss of commercial opportunities are practically certain, as is the inability to respond promptly in times of crisis. The idea that working capital is crucial to a company’s long-term health and growth is sometimes disregarded for a variety of reasons.

A company’s working capital (also known as net working capital) is an excellent predictor of the organization’s ability to create cash flow. In the context of a business, working capital is defined as money that is immediately available for use in the activities of the company. Working capital is defined as money that is readily available for use in the operations of a business. The idioms listed under the heading “working capital” can all be used to refer to money that is available for use in business operations; however, they differ in terms of how quickly they can be used to refer to funds that are currently in use in business operations, which is referred to as “working capital velocity.” Despite the fact that Treasury bills and other dangerous securities are categorized as current assets, the liquidity of Treasury bills and other risky securities varies depending on the state of the financial markets. The working capital classification was kept as a result, and it is critical that this category be given specific weight when analyzing liquidity.

The cash flow from operations (CFFO) methodology, in addition, is the most straightforward method of assessing the amount owed (CFO). Calculated as a proportion of profit after tax and fewer changes in working capital in the prior year, cash flow from operations is a measure of profitability. Profit after tax fewer changes in working capital from the previous year is expressed as a percentage of cash flow from activities in the current year. It is critical for organizations to generate positive cash flow from operations in order to accomplish their liquidity objectives and achieve their liquidity targets. Generally speaking, the bigger the amount of cash flow generated by a corporation, the more liquid that company is seen as being.

In this way, a company’s ability to convert sales into cash flow from operations is measured, and the word “cash conversion efficiency” was established to reflect a company’s ability to convert sales into cash flow from operations in this manner.

A product’s profit is computed when a product is sold by dividing the amount of money collected from sales of that product by the entire amount of opportunity costs incurred by each factor engaged in the production of the product in question (Aburime,2008:1).http://7FNCE019W International Risk Management

For-profit organizations such as banks have as their ultimate goal profit maximization, which is comprised of two components: revenues collected and expenses incurred. Because of their for-profit nature, banks have as their ultimate objective the maximization of profit. The two components of profitability that are linked to this goal are the revenues collected and the expenses incurred. Amount of money that is made compared to the amount of money that is spent. The tactics of increased revenues and cost savings are two of the most important that must be implemented in order to attain profitability. Application of profit-maximizing methods such as breakeven analysis, cost reduction, and ratio analysis can help organizations raise their profit margins by reducing costs and increasing revenues (Ibe, 2013 p. 41).http://7FNCE019W International Risk Management

Conclusion

Commercial banks may find it incredibly difficult to achieve their common goal of profit maximization since there are so many variables at play in the process of achieving their common goal of profit maximization. According to Tsomocos (2003),http://7FNCE019W International Risk Management a company’s long-term existence and profitability are dependent on its ability to generate sufficient liquidity and profit in the near term. Managed liquidity is critical for a corporation’s success if the company’s goal is to raise profits through sales growth, which is exactly what the company is trying to do. It is necessary for the organization to be able to take advantage of investment opportunities while also maximizing its cash resources in order to fulfill its financial objectives.

When a company’s wealth maximization strategy is not profitable, effective liquidity management is just as important as cost control in order to prevent paying additional charges as a result of the scenario.

References

Ahelegbey, D.F., Giudici, P. and Hadji-Misheva, B., 2019. Latent factor models for credit scoring in P2P systems. Physica A: Statistical Mechanics and its Applications, 522, pp.112-121.

Altavilla, C., Andreeva, D., Boucinha, M. and Holton, S., 2019. Monetary policy, credit institutions and the bank lending channel in the euro area. ECB Occasional Paper, (222).

Anagnostopoulos, Y. and Kabeega, J., 2019. Insider perspectives on European banking challenges in the post-crisis regulation environment. Journal of Banking Regulation, 20(2), pp.136-158.

Baret, S., Celner, A., O’Reilly, M. and Shilling, M., 2020. COVID-19 potential implications for the banking and capital markets sector. Maintaining business and operational resilience. Deloitte Insights, 2(2), pp.96-108.

Bose, S., Khan, H.Z. and Monem, R.M., 2021. Does green banking performance pay off? Evidence from a unique regulatory setting in Bangladesh. Corporate Governance: An International Review, 29(2), pp.162-187.

Brei, M., Mohan, P. and Strobl, E., 2019. The impact of natural disasters on the banking sector: Evidence from hurricane strikes in the Caribbean. The Quarterly Review of Economics and Finance, 72, pp.232-239.

Claeys, G., 2020. The European Central Bank in the COVID-19 crisis: Whatever it takes, within its mandate (No. 2020/09). Bruegel Policy Contribution.

Crespi, F., Giacomini, E. and Mascia, D.V., 2019. Bail‐in rules and the pricing of Italian bank bonds. European Financial Management, 25(5), pp.1321-1347.

Demmou, L., Franco, G., Calligaris, S. and Dlugosch, D., 2021. Liquidity shortfalls during the COVID-19 outbreak: Assessment and policy responses.

Ebeke, M.C.H., Jovanovic, N., Valderrama, M.L. and Zhou, J., 2021. Corporate liquidity and solvency in Europe during COVID-19: The role of policies. International Monetary Fund.

Mashamba, T., 2018. THE EFFECTS OF BASEL III LIQUIDITY REGULATIONS ON BANKS’PROFITABILITY.

MISHRA, S. and PRADHAN, B.B., 2019. Impact of liquidity management on Profitability: An empirical analysis in private sector banks of India. Revista Espacios, 40(30).

Oduro, R., Asiedu, M.A. and Gadzo, S.G., 2019. Impact of credit risk on corporate financial performance: Evidence from listed banks on the Ghana stock exchange. Journal of Economics and International Finance, 11(1), pp.1-14.

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