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N1577

Principles of Banking

Seminar 5

Managing Credit Risk

1. Which of the following loan requests by a pizza restaurant would be unacceptable and why?

a.   To buy cheese for inventory.

b.   To buy a pizza heating oven.

c.   To buy a car for the owner.

d.   To repay the original long-term mortgage used to buy the pizza oven.

e.   To pay employees due to a temporary cash-flow problem.

f.   To buy stock in the company that supplies cheese to the restaurant.

2. “Because diversification is a desirable strategy for avoiding risk, it never makes sense for a bank to specialise in making specific types of loans.” Critically discuss this statement.

3. Critically discuss the five Cs of credit.

4. Critically discus the pros and cons of competition in the credit ratings industry.

Read the following article (focus on the underlying theory/contribution, literature review of the paper rather than the technical parts) to give supporting arguments.

Bolton, P., Freixas, X. and Shapiro, J., 2012, The credit ratings game, The Journal of Finance, Vol. 67, No.1, pp 85-111. (Available on Canvas).