Blind Risk Case Study And Analysis Help With Solution
Banking is a regulated business. Depository institutions have special authority to accept deposits from the public. Given the exceptional public interest in the safety of depositor funds the U.S. Government provides deposit insurance and other guarantees. These protections provide great benefits to banking institutions. In return, government agencies have broad regulatory authority to establish capital, liquidity and credit requirements for banks and to continuously monitor the business of the institutions. This case is intended to examine the interplay of government regulation with the private management of a financial institution. The issue of capital adequacy is of particular concern. The undermining of the institution’s capital by the business practices at Superior Bank provides an example of a negative management situation which can lead to the failure of a banking institution notwithstanding the demanding regulatory expectations. This case involved many of the issues which were critical in the subsequent financial crisis in 2007 – 2008.
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The case focuses on the principal considerations of financial institution management:
1. Regulation establishes the rules for bank structure and operations and the institutions and processes to enforce these rules in the banking industry.
2.Capitalization requirements are central to regulatory standards providing for the safe operation and stability of banking institutions.
3.Management and business practices at banks can challenge and undermine the purposes of regulation and the expectations of sufficient capitalization. As private corporations banks are driven by the needs for profitable operations, growth and shareholder value. Under the wrong circumstances and with management failures business practices can defeat the objectives of regulation.
The discussion should address the following using the information in the case and any additional material you wish to explore:
1. Capitalization Analysis – the regulators reviewed Superior Bank’s performance and provided ratings on its safety and soundness. Special attention was placed on capitalization which is the final indicator of the stability of a bank. The regulators used the CAMELS rating system for this purpose. Review the events at Superior Bank involving the owner’s investment of capital, their reluctance to add capital and the regulator pressure for additional capital. Comment on the impact on the bank’s capital of regulator criticism of the assets and business practices requiring write-down in the valuation of assets. Discuss the severe gap between the apparent capital of the bank and the actuality of the capital following the write-downs. (1 ½ page)
2. Business Analysis – regulatory pressure followed from concerns about the business practices of the bank. The sale of loans packaged as securities to investors was a key business strategy. How was this strategy especially risky? How did the strategy ultimately undermine the capitalization of the bank? Why did regulatory criticism of the business strategy lead to a severe reduction of capitalization which ultimately led to the bank’s failure? (1 ½ page)
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