Review-Questions-11.1

FIN2108ReviewQuestions11.1Reviewquestions11.111.1.1PleaseAttemptQuestions1-5ofSathyeetal.chapter13.11.1.2Provideabriefdefinitionofanimpairedasset11.1.3IfabusinessentityhasmultiplefacilitieswithanADIorifitispartofawidercorporategroup,howmusttheADItreatfacilitiestotheentityorgroupifoneofthefacilitiesbecomesimpaired?11.1.4Usingdotpoints,listthewarningsignsofearly,mid-termandlatedeclineasnotedbyCheckleyandDickinson(2000).11.1.5Discussovertrading.Whatisit?Whydoesitoccur?Whataretheindicators?Whataretheremedies?Howcanthesufficiencyoffundsbeassessedbyalendingbanker?11.1.6Usingdotpoints,notethemainfeaturesandissuesconcerningthethreetypesoffinancialdistress:mild,moderateandsevere.11.1.7Supposeyouwereaskedtoprovideguidanceforconductinginterviewswithcustomerswhohaveexperienceddifficultiesrepayingloans.AccordingtoCheckleyandDickinson(2000),whatarethekeystepsintheprocessoforganizingandconductinganinterview?11.1.8Distinguishgeneralloan-lossreserves(orprovisions)fromspecificloan-lossreserves.1Chapter13ProblemLoanManagementASolutionstodiscussionquestionsQ1.Whyareproblemloansanissue?A.Thisquestionneedstobeconsideredinthelightofthelender.Ifaborrowerstopsrepayingaloan,theimmediateconsequenceisthatincome,intheformofinterest,islost.Furthermore,iftheloanultimatelyisnotrepaid,thenthebankwilllosefundsagainstcapital.Inbothinstances,itwillbetheshareholderswholose.Thereareotherissues,whicharenotfinancialoreconomic,rathertheyarereputational.Ifalendercontinuestoexperienceproblemloans,theirexpertisewillbequestionedbothbylendersandborrowers.Q2.Explainthedifferencebetweenaccounting,regulatoryandinternalprovisioningpolicies.A.Thesimpleanswertothisquestionisthattheprovisionscomputedcouldbeverydifferent.StandardsBoardwilldetermineaccountingpolicies.Theywillbebasedonformulaewhichcomefromthelengthoftimethataloanisnon-interestaccruing.Regulatorypoliciestendnottomakeanydiscernmentofproblemloansandapplyastandardpercentageagainstrisk-adjustedloans.Finally,internalpoliciestendtobemoreeconomicallybasedandforwardlooking.Inthis,wenotethatthereisarealdangerthatformula-styledpolicieswilleitherunder-provision(thusprovidinginsufficientprotection)ormoreoftenoverprovide(whichnegativelyimpactsincome).Q3.Whyaresomepartsofthebusinesscycleidentifiedwithincreasednumbersofproblemloans?A.Ithasbeennotedthatloansarerepaidwhencashflowisgenerated.Itisalsonotedthatsomepartsofthebusinesscycle,particularlyjustpastthepeakwheninterestratesrise,havethecharacteristicofcashflowfalling.Q4.Compareandcontrastdynamicprovisioningandothermethodsofassessingprovisioning.A.Thisissimilartoquestion2.Themajordifferenceisthatdynamicprovisioningisforwardlookingwheretraditionalmethodsarebackwardlooking.2Q5.Discusstheadvantagesanddisadvantagesofdynamicprovisioning.A.Asnotedinthepreviousquestion,dynamicprovisioningisforwardlooking.Intermsoftraditionalmethods,theytendedtobereactiveandcauseprovisionstobelargeandlumpy.Thishadthepotentialtocreatevolatilelendingearnings.Dynamicprovisioninghastheadvantageofsmoothingoutthisvolatilitywitheconomicmodelling.However,thedisadvantageisthatmostlendersdonotrevealhowtheydotheirmodelling.ReviewQuestion11.1.2-11.1.811.1.2Provideabriefdefinitionofanimpairedasset.InaccordancewithAPS220CreditQuality(APS220),anyfacility(includinganoff-balancesheetfacility)forwhichthereisadoubtoverthetimelycollectionofthefullamountofcashflowscontractedtobereceivedmustberegardedasimpairedforcapitalandotherAPRApurposes.Insuchcircumstances,theADImustraiseprovisionstocoveranypotentialshortfallinestimatedcashflowscontractuallyduetobereceived.按照APS220信用质量（APS220），任何设备（包括资产负债表外设施）有一个存疑签约将收取的现金流量全额及时收集，必须被视为减值资本和其他APRA目的。在这种情况下，必须提高ADI公司的规定，包括任何潜在的短缺，估计现金流合约到期收到11.1.3IfabusinessentityhasmultiplefacilitieswithanADIorifitispartofawidercorporategroup,howmusttheADItreatfacilitiestotheentityorgroupifoneofthefacilitiesbecomesimpaired?WhereanADIhasmultiplefacilitiestoasingleentityandoneofthefacilitiesisassessedasimpairedonanindividualbasis,theADImustclassifyallexposurestotheentityasimpaired.Similarly,ifanADIhasassessedonanindividualbasisafacilityprovidedtooneormoreofagroupofrelatedentitiesasimpaired,theADImusttreatallfacilitiesprovidedtotherelatedentitiesinthegroupasimpaired.311.1.4Usingdotpoints,listthewarningsignsofearly,mid-termandlatedeclineasnotedbyCheckleyandDickinson(2000).Earlydeclineshortageofcashforcurrentobligationsworkingcapitalreducing(currentassetsdecreasing,currentliabilitiesincreasing)increaseinaccountspayableagingincreaseinaccountsreceivableagingROEdecreasingby20%-30%lackofsalesgrowthseveralquartersoflossesquartersoflossesexceedingthoseofprofitsoverayearortwoemployeeabsenteeismandaccidentsincreasingincreaseincomplaintsregardingproductquality,delivery,backorders,serviceetc.latefinancialandmanagementinformationMid-termdeclineinventoryincreasing,salesdecreasinggrossprofitmargindecliningbankadvancesincreasinginamountandfrequencyfinancialandmanagementinformationunreliableandlatecustomerconfidenceandcustomerbaseerodingvendorsdemandingpaymentonoverdueaccountsandplacingth