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IPAG Business School

MIB Madrid Program


Risk Management
` Risk Management at WellIleet Bank: Deciding about Megadeals``
1. a) What kind oI risks does WellIleet Bank Iace?
They consider Iinancial (revenue risk) and other variety oI business progress risks. Those risks
are depends on industry and company structure. Credit Committee undertakes essential risks are
Market Risk, Operational Risk, Compliance Risk, Country Risk (economic and political
strength/weakness), Reputational Risk and Business Risk. Also company success is impacted by
external Iactors such as competition, risky environment and internally complexity oI products.
In my opinion not only Iinancial numbers, company revenue, net proIit, debt are the only
measurements Ior risk management. These numbers Iigure our companies past success, also Iuture
business threats and opportunities is taking into account.
b) What are the challenges Ior the risk culture oI the organization that its new Iocus on large
corporate deals and its need to recruit relationship managers Irom investment banks create?
Actually the case explains that the Ilagship business Ior WellIleet is corporate banking. They
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are strongly Iocused to enlarge transIormational deals with clients. It is very proIitable business
Ior the bank. Risk culture oI the organization works as a circle oI Credit Committee, clients and
client relationship managers who directly contact each other and understand their needs to Iind
better proIitable solution Ior booth side. Then the bank oIIer their proposal via client relationship
manager. Most oI the time ChieI risk oIIicer and head oI client relationship disagreed over the
proposals. Another issue is hierarchic work process in credit oIIicers. Group Credit Committee
required sing-oII Irom senior credit oIIicer and a regional credit oIIicer beIore it got there. So this
time period make the answer oI relationship managers slowed down.
2. What is your decision regarding the two credit proposals?
Why?
I think compare to both companies, their industries; risk Iactors, Ashar seems has more
advantages.
Ashar Industries world`s largest steel producer and their turnover rise in 2005 $28.1 billion
Irom $5.4 billion in 2001. Their EBITDA margin is higher. Their integration policy works well.
There are several risks Ior the industry and company obviously such as under consolidated joint
ventures, very high Iixed cost, product price movements. However Credit Committee Iigure at
better numbers and grade Ior Ashar compare to GGC. Ashar Industries credit grade is 5A and 40
sales came Irom North America, 33Europe. In contrary GGC`s 41 oI production in South
AIrica which means their Iuture business under control oI political risk in AIrica. Gold is key
export as cash generator in South AIrica and as Black Economic Empowerments companies
convert their licenses regarding to new regulatory. In additional the mining cost rapidly growing.
3. Calculate the Expected Loss, Economic Revenue and Economic ProIit Ior Gatwick Gold
Corporation.
,Expected Loss ,Proability oI DeIault X , Exposure at DeIault($) X ,Loss
Given DeIault() ,
, ,39 ,$1.000.000.000,00 ,52,3 ,
, ,$20.377.500.000,00 , , ,
, , , , ,
, , , , ,
, , , , ,
,Total Revenue ,Interest Income ,Fee Income ,
,
, ,($500*42,5)($500*52.5) ($1000*30) ,
,
, ,$125.000.000.000,00 , , ,
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, , , , ,
,Risk Adjusted ,Total Revenu - ,Total Expected Loss ,
,
,Revenue(RAR) , , , ,
, ,$104.622.500.000,00 , , ,
, , , , ,
,Economic Revenue ,RAR - ,Net Capital Charge ,
,
, ,$104.622.500.000,00 ,$3.800.000,00 , ,
, ,$104.618.700.000,00 , , ,
, , , , ,
,Economic ProIit ,Economic Revenue - ,Cost - ,Tax
,
, ,$104.618.700.000,00 ,$300.000,00 ,$9.200.000,00
,
, ,$104.609.200.000,00 , , ,
4. What suggestion might you make to the CEO about improving the Risk Management process
at WellIleet Bank?
WellIleet Bank strategic intent is large-scale transIormational deal. Actually business proposal
reaches WellIleet decision making Iorum Group Credit Committee, three members on the
committee; Credit risk managers, group chieI credit oIIicer and chieI risk oIIicer and group head
oI client relationships. CEO Alastair Dawes does not involve the system. As WellIleet growing
business is risk-management and provide better handle mega-risks I suggest that he should be the
part oI the process. Obviously this high proIitable credit-business is the locomotive business Ior
the bank. The banks started Iormalize their rules according to Basel Committee oI International
Settlements. However WellIleet`s top managers consider that their risk proIile is unique among
U.K. banks. They need to be sure oI growing balance and keep apace the business opportunities.
As Dawes highlighted the risk Iunction can`t be so powerIul. Otherwise bank can`t do anything iI
they don`t like the risk. So maybe they should rearrange their limits and risk-weighted.
Also client relationship manager play very important role in this process. They are the Iace oI
WellIleet Bank to represent the proposal and business deal to clients. They reveal the time-
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consuming eIIect oI hierarchical structure. Dawes might be considering oI the disadvantages. I
also suggest amending the time wasting process.
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