FINS5530 – FINANCIAL INSTITUTION MANAGEMENT
FINANCIAL INSTITUTION MANAGEMENT
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FINS5530 – FINANCIAL INSTITUTION MANAGEMENT
INSTRUCTIONS:
• This is a group assignment. Each group should have a minimum of 4 to a maximum
of 5 members. You are expected to work collaboratively on this assignment.
• You are required to register yourself into a group via the group builder tool on Moodle.
The sooner you finalize your group, the more time you have on this assignment.
• Page limit - 12 pages, at least 12 pt font, excluding assignment cover and reference
list. You are encouraged to include tables and graphs in your report. You should avoid
direct screenshots of tables and graphs from the annual report.
• Format: PDF or Word
• You may also use the textbook or other online resources as references. All sources
must be carefully cited in a reference list.
• To write a successful report, please carefully read the marking criteria in the last page.
• PLAGIARISM: Your report will be checked for similarity against other students’
submissions, past assignments, and Web resources. High similarity scores may
indicate plagiarism and could result in a fail mark or referral of the group members to
the University for academic misconduct.
1. Introduction
Banks are subjected to a wide array of risks during their operations. Risk management is
about understanding and managing the Bank's risk environment and taking measures, where
necessary, to ensure that risks are contained to acceptable levels, while making sure loss-
absorption buffers are sufficient. In addition, the analysis of banks must also consider the status
of a country’s financial system and overall economy.
Financial statements offer a window into the operation and management of a bank. The
financial statements for banks can look very different from those reported by most
companies. The nature of banking operations means that there will be unique items on a
bank’s balance sheet. In addition, banks are also subject to some unique accounting
standards, financial regulations, and disclosure requirements.
2. Purpose
This term-long project will allow you to apply theory and financial modelling techniques to a real
bank. Thus, you will need to draw on the knowledge you acquire during lectures and the skills you
practice. You will also be expected to critically analyse bank decision making.
An additional learning outcome is for teams to learn to collaborate effectively, incorporate
different perspectives, produce quality work according to an agreed plan, and provide
constructive feedback to each other.
3. Setting the scene
This group assignment is based on an integrated case analysis of the risk management
practices of Westpac Banking Corporation as summarised in the bank’s Risk Appetite
Statement Pillar 3 Disclosures, and annual reports.
Please refer to the following documents provided with this assignment:
• Westpac Annual Report 2021
• Westpac Sustainability Supplement 2021
• Westpac Bank Pillar 3 Disclosures 2021
• Westpac Risk Appetite Statement (publicly released as part of the proceedings of the
Royal Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry).
These documents are available with the group assignment materials via Moodle.
The aim of Pillar 3 is to allow market discipline to operate as sharing of information
facilitates assessment of the bank by others, including investors, analysts, customers, other
banks, and rating agencies, which leads to improved corporate governance. The disclosures
compliment regulatory and IFRS reporting.
All banks are required to maintain a risk appetite statement. According to Australian
Prudential Regulation Authority (APRA) Prudential Practice Guide CPG 220 Risk
Management, the risk appetite statement is used to communicate the Board’s expectations
of how much risk the APRA-regulated institution is willing to accept. The risk appetite
statement is developed through an iterative process involving the Board and management.
Risk appetite is the degree of risk an APRA-regulated institution is prepared to accept in the
pursuit of its strategic objectives and business plan. Risk tolerances support the translation
of the risk appetite by management into operational limits for the day-to-day management of
material risks.
3.1. Timeline
Students will form consulting teams to combine their perspectives and skill sets to work on a
detailed and critical analysis of several risk aspects of this bank.
Assessment Tasks Due date (11:59 PM)* Weight Deliverable
Group Self Registration Friday of Week 3 n/a Self-Registration via the Group
Builder tool on Moodle
Team Resume
and Contract
Friday of Week 5 n/a Team Resume and
Contract Submission
Final submission Friday of Week 10 20% Final team consulting report
submission
Team Evaluation Monday of Week 11 5% Team evaluation survey
*Note: Sydney time
3.2. Risk analysis report
Your team’s job is to deliver a risk analysis report on how well the bank is managing the three
risk topics including a) Credit Risk, b) Liquidity Risk, and c) Capital Adequacy along the
following broad dimensions:
1. What is the approximate risk level for each risk area?
2. What are the main strategies that the bank has used to control/manage each of the
relevant risk area relative to the bank’s risk tolerance?
3. Compared previous year, how well has the bank performed in each risk area?
Your manager has analysed these questions and broken them up into smaller and more specific
questions and tasks for you and your teammates to address in the consulting report:
a) Credit Risk Management
Refer to the following quote from a past Westpac Pillar 3 report:
Pillar 3 reporting requirements, set out in Prudential Standard APS 330, makes available to
the public, risk management data and management commentary that used to be shared
only between banks and regulators such as the Australian Prudential Regulation Authority
(APRA).
1. What are the duties of the risk management and governance committees mentioned
in the statement above? Discuss how such committees fit into the recommended risk
management framework of a modern bank in accordance with Prudential Standard
APS 330.
2. With regards to credit risk management, after perusing the risk metrics used by
Westpac in the management of credit risk [see Risk Appetite Statement, Section 6.1]
and the credit risk management section of the Pillar 3 disclosure, briefly advise
whether Westpac should be giving itself a RED, AMBER or GREEN self-assessment
against the items in Section 6.1 of the Risk Appetite Statement. (Briefly support your
answer by citing information/data from both statements).
3. Referring to the Westpac Pillar 3 disclosures of September 2020, briefly describe the
approach used by the bank to manage credit risk exposures to retail lending. Explain
whether and how this approach is related to the concept of credit-rationing that we
learnt in the course?
b) Liquidity Risk Management
After perusing Westpac’s Risk Appetite Statement and Pillar 3 disclosures with regards to
liquidity risk management:
1. Comment on whether Westpac Bank's Liquidity Coverage Ratio is consistent with its
relevant risk appetite.
2. What are the strategies used by the Bank to manage this ratio in compliance with
regulatory requirements in the context of the COVID pandemic?
3. Do you agree with the statement that a well-run bank will keep the highest possible level
of the Liquidity Coverage Ratio? (Justify your response).
After perusing Westpac’s Risk Appetite Statement and Pillar 3 disclosures with regards to
liquidity risk management:
1. Comment on Westpac Bank's Net Stable Funding Ratio relative to its relevant risk
appetite.
2. What are the strategies used by the Bank to keep within its risk appetite for this
ratio? [2 marks]
3. Do you agree with the statement that a well-run bank will keep the highest
possible level of this ratio? (Justify your response).
c) Operational Risk and Conduct Risk
1. Identify the emergent or new types of risk that Westpac has faced in the area of
operations and corporate conduct.
2. How well has Westpac managed these risks so far? (Support your views with
reference to the documents provided for the assignment)
3. Identify the financial consequences of operational and conduct risk for Westpac.
d) Capital Adequacy Management
1. Comment on the trajectory of Westpac’s capital ratios over the 2-year period 2020-21.
What does this tell you about the capital risk of the Bank relative to the APRA
requirements in the context of the COVID pandemic?
2. On 14 Feb 2021, Westpac announced that it has successfully completed a $3.5 billion off-
market share buy-back. Comment on the implication of the buyback on the bank’s
capital management.
Assuming the share buyback succeeds:
2.1 Recalculate and comment on the CET1 ratio
2.2 Recalculate and comment on the leverage ratio
2.3 Comment on the expected direction of change in Westpac’s liquidity metrics (especially the
liquidity coverage ratio), making sure to state the reason for your prediction.
3.3. Submission Instructions
See Moodle course site for details.
Late submissions: A 5% penalty will apply for not completing the survey. Please make sure
your response in the survey is a fair reflection of each group member's contribution. If you give
a too high or too low rating, you will provide an explanation of your reasons for doing so.
The team evaluation scores can affect your final grade in this assessment.
3.4. Peer evaluation
Below is the list of questions included in the team evaluation survey:
• For each person, indicate the extent to which you agree with the statement, using a
scale of 1-5 (1=strongly disagree; 2=disagree; 3=neutral; 4=agree; 5=strongly
agree):
• Attends group meetings regularly and arrives on time.
• Contributes meaningfully to group discussions.
• Prepares work in a quality manner.
• Demonstrates a cooperative and supportive attitude.
• Rate each team member's overall contribution to the Group Assignment.
• Justify your rating of contribution. Were the behaviours of any of your team
members particularly valuable or detrimental to the team? Please justify the rating for
any team member that you deemed to have not performed or contributed equally
to your Group Assignment.