case assignment 1
FNCE10001 Finance 1
Student No. 614024
Student Name: Xi Feng
Tutorial time: 10-11 am Monday
Tutor Name: Sarah
Case Assignment 1
Abstract
The purpose of this report is to discover the current state of the overall risk level in NAB confronting a severe situation of low level of cash, also to investigate the methods to manage the risks and to overcome the state.
Introduction
There has been a very low level of cash and liquid securities possessed by NAB. In order to prevent this state from continuing, the office of chief financial officer believes that $100 million AUD would cover the risk generated by low level of cash and liquid securities and guarantee for the bank’s financial stability.
Types of Risks
The main risk faced by NAB from the low cash level is liquidity risk, and there are two risks derived from liquidity risk: contagion risk and funding risk. Liquidity risk refers to an ADI will have insufficient funds to meet its financial obligations when due. In fact, a low liquidity ratio in one bank could affect the entire system, in other words, it can lead to contagion risk that the payment system collapses as a result of default by ADIs in general. Hence manage liquidity adequately could minimise serious problems arise in the future (Jasiene et al, 2012, p189). While the funding risk refers to an ADI is difficult to maintain sufficient funds to cover its loans. It is closely related to liquidity risk since failure to rollover liabilities will result in a liquidity crisis for the ADI.
Causes of The Risks
There are several causes of the liquidity risk.
1.
A liquidity risk could arise due to the mismatch in the maturity of the bank’s sources and uses of funds. The maturity mismatch is an imbalance between the average maturity of a bank’s assets and its liabilities. Observed by Gatev (2009), approximately half of the funds in banking system are provided by deposits, and the majority of them are in transaction or saving accounts that could be withdrawn
Student No. 614024
Student Name: Xi Feng
Tutorial time: 10-11 am Monday
Tutor Name: Sarah
Case Assignment 1
Abstract
The purpose of this report is to discover the current state of the overall risk level in NAB confronting a severe situation of low level of cash, also to investigate the methods to manage the risks and to overcome the state.
Introduction
There has been a very low level of cash and liquid securities possessed by NAB. In order to prevent this state from continuing, the office of chief financial officer believes that $100 million AUD would cover the risk generated by low level of cash and liquid securities and guarantee for the bank’s financial stability.
Types of Risks
The main risk faced by NAB from the low cash level is liquidity risk, and there are two risks derived from liquidity risk: contagion risk and funding risk. Liquidity risk refers to an ADI will have insufficient funds to meet its financial obligations when due. In fact, a low liquidity ratio in one bank could affect the entire system, in other words, it can lead to contagion risk that the payment system collapses as a result of default by ADIs in general. Hence manage liquidity adequately could minimise serious problems arise in the future (Jasiene et al, 2012, p189). While the funding risk refers to an ADI is difficult to maintain sufficient funds to cover its loans. It is closely related to liquidity risk since failure to rollover liabilities will result in a liquidity crisis for the ADI.
Causes of The Risks
There are several causes of the liquidity risk.
1.
A liquidity risk could arise due to the mismatch in the maturity of the bank’s sources and uses of funds. The maturity mismatch is an imbalance between the average maturity of a bank’s assets and its liabilities. Observed by Gatev (2009), approximately half of the funds in banking system are provided by deposits, and the majority of them are in transaction or saving accounts that could be withdrawn