bank ips ability

Chuckrox8

the alco decides to increase winthrop bank's credit standards for loans although winthrop bank's overall risk tolerance is unchanged.

evaluate how this affect the bank's risk-taking ability

Analti_Calte

decrease the default risk because standards are improved and improve bank's surplus/decrease liquidity as small reserve can be maintained now

Unforseen

higher credit standards will result in lower net interest margin, so lower profitability ..reduced ability to take risk

ll11

CFAI answer: winthrop bank should have more leeway to invest in below-investment-quality debt in its bond portfolio as a result.

bkballa

I would agree with that. If you assume that "increase credit standards" means that the risk profile of their loan profile improves (i.e. they are less risky), it would enable the bank to take more risk in the investment portfolio. The loan portfolio and investment portfolio would balance each other out, and the overall risk would be unchanged.

NakedPuts2011

ability to take risk would increase because we are only looking at the investment portfolio when we are doing the IPS. The rest of the balance sheet is just a given.


The bank's overall risk tolerance is unchanged (aka willingness to take risk), which is fine, because overall we haven't done anything to increase the overall risk. Think of it as moving risk from one bucket to the other (out of loan portfolio, into investment portfolio)

lcw77

willispierre Wrote:
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> ability to take risk would increase because we are
> only looking at the investment portfolio when we
> are doing the IPS. The rest of the balance sheet
> is just a given.
>
>
> The bank's overall risk tolerance is unchanged
> (aka willingness to take risk), which is fine,
> because overall we haven't done anything to
> increase the overall risk. Think of it as moving
> risk from one bucket to the other (out of loan
> portfolio, into investment portfolio)
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+1.....I remember that there is no such willingness to take risk for institution...just ability