Part 1: Short Questions (14 marks)
1. Before GFC, co-insurance was a popular deposit insurance scheme in some countries.
However, after GFC, most of the countries abolished this scheme. Discuss the moral
hazard implication of this change. (4 marks)
2. In week 8, we discussed the news article “Deutsche-Commerzbank Deal Might Rest on Mountain of ‘Badwill’”. Explain how badwill can impact a bank’s capital ratio. Is
badwill tier 1 or tier 2 capital? (4 marks)
3. One issue countercyclical capital requirement can address is procyclical external ratings. What is procyclical external rating? Explain how procyclical external rating could impact capital regulation and banks’ risk taking? (6 marks)
Part 2: Royal Commission (10 marks)
Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has now concluded. The final report was submitted to the Governor-General on 1 February 2019. The final report was tabled in Parliament on 4 February 2019. Many cases of misconduct in the financial industry have been documented in the report. For instance, Aussie Home Loan’s former employees were engaging in misconduct when they were providing home loan broker services to their customers. Read the article in Exhibit 2.1 and answer the following questions.
1. The case study shows Aussie’s compensation scheme to their brokers.
“Aussie determined the portion of the payments that would be passed through to the broker by reference to the total settled loan amounts. The higher the value of the settled loan amounts, the higher the percentage of the upfront commission passed through to the broker.”
Discuss the problem with the scheme. (4 marks)
- One of the four misconducted brokers submitted more than 50% of his loans to Westpac a lender that would accept a letter of employment to verify income (being a document that Aussie knew could be easily falsified). Discuss the risk of this exercise for Westpac. While the risk of such activities is high, why do you think Westpac will accept these activities? (Hint: Use Washington Mutual Bank’s Case as a reference to justify your statement.) (6 marks)
Part 5: Fintech (25 marks)
Afterpay is one of the new hot Fintech companies in Australia. While its share price has risen rapidly in recent years, its activities have also drawn some attentions from regulators. Read the article in Exhibit 5.1 and answer the following questions.
1. In the article, it mentioned “ASIC did not recommend that the sector be brought under the National Credit Act, which would compel companies like Afterpay to take steps to ensure the credit it provides is not unsuitable for consumers.” Which role of financial intermediations is absent for Afterpay? (2 marks)
2. Do you think Afterpay should charge a higher or lower fee than other credit card companies for late payments? Explain why. (3 marks)
3. Use the information in the annual report to discuss the bank profit model. (6 marks)
Atom bank is a mobile-only bank, its profit model is with unique features comparing with traditional banks.
4. Assuming the following scenario happened for Atom bank in 2019: The RWA and totalleverage ratio exposure measure for Atom bank are unchanged from 2018. The bankexperiences another loss of 50 million pounds. It has difficulty to raise any new
common shares in the equity market. But the British Business Bank successfully
purchase another 22.1 million pounds subordinated debt from Atom bank based on their
previous commitment. Based on the information in the regulation disclosure,
comment on the bank’s four capital and leverage ratios based on Basel III framework
in 2019. Under Federal Reserve Board’s capital categorisation, which zone will Atom
bank fit in 2019? (14 marks)