How it works
Problem 1How thin is the equity?
L1.8.01 · L1.8.02A junior credit analyst
You are handed a summary balance sheet for Harbourview Bank, a small made-up lender, in € billions. The equity line has been left off.
| Assets | €bn | Liabilities | €bn owed |
|---|---|---|---|
| Cash and reserves | 8 | Customer deposits | 70 |
| Securities | 22 | Wholesale funding | 12 |
| Loans to customers | 60 | Other liabilities | 6 |
| Other assets | 5 |
What is Harbourview's equity as a percentage of its total assets? Give two decimals.
Problem 2Profitable, but where is the cash?
L1.8.01A relationship manager lending to a manufacturer
A manufacturing client reports a profit of $2.0m for the year. Its notes show depreciation of $0.6m. Over the year its inventory rose by $0.9m, the amount customers owe it (receivables) rose by $0.5m, and the amount it owes suppliers rose by $0.3m.
What is its operating cash flow for the year, in $m?
Problem 3A bad credit year reaches capital
L1.8.03 · L1.8.06A bank's capital planner
Your bank expects pre-impairment profit of €3.0bn next year on €150bn of loans. Today its CET1 capital is €9bn and its risk-weighted assets are €75bn. The base case has a cost of risk of 0.3% of loans. The recession scenario has 2.6%.
In the recession scenario, what is the CET1 ratio at the end of the year? Ignore tax and dividends, and keep RWA unchanged.
Problem 4Two insurers, one profit, different risks
L1.8.05An insurance analyst
Insurer A has a combined ratio of 97% and earns investment income of 3% of net earned premiums, mostly from government bonds. Insurer B has a combined ratio of 104% and earns 9% of premiums from a portfolio heavy in equities and property.
Which statement is the best assessment?
Problem 5From the premium line to the combined ratio
L1.8.05A reinsurance underwriter
A motor insurer you might reinsure reports gross written premiums of £1500m. It ceded £250m to reinsurers, and its unearned premium reserve rose by £50m. Claims incurred were £840m, commissions £216m and administrative costs £120m.
What is its combined ratio, in %?
Problem 6Own funds under a market fall
L1.8.04 · L1.8.06An insurer's chief risk officer
Your insurer reports IFRS equity of €4,000m. To reach Solvency II own funds you remove €350m of intangibles, add €600m because technical provisions are lower on the Solvency II basis, add €800m of qualifying subordinated debt and deduct €250m of foreseeable dividends. The SCR is €3,000m. The board asks what happens if the €2,000m equity portfolio falls 15%.
What is the solvency ratio after the fall, in %? Keep the SCR unchanged and ignore tax.
Problem 7The higher ROE is not the better bank
L1.8.06 · L1.8.07A bank equity analyst
Bank X made a profit of 1.8bn on equity of 15bn and total assets of 300bn. Bank Y made 1.2bn on equity of 8bn and total assets of 240bn. Both report in the same currency.
Which statement is right?
Problem 8Why did the CET1 ratio fall?
L1.8.06 · L1.8.08A supervisor's analyst
A bank you supervise reports that its CET1 ratio fell from 13.5% to 12.1% in one quarter. The press release gives no reason. You have its Pillar 3 report.
Which two templates do you open first to see whether capital fell or risk-weighted assets rose?
Your score
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