FINA3030 Group Assignment 2022mar
FINA3030 Group Assignment 2022mar
FINA3030 Group Assignment 2022mar
2) Files to be submitted:
A Word document for the report, an Excel file for any related calculation, and the
PowerPoint slides for the group presentation. Please indicate clearly in the submission
email title the course code and group number in this format “FINA3030 Group XXX
Assignment Submission”. The VeriGuide receipt should be attached to the assignment
report.
3) Submission Mode:
Submit all files to the instructor’s email [email protected] and cc our Teaching
Assistant [email protected] . Please choose one group member to represent the
group and make one single email submission, and cc all the other group members.
Refrain from making duplicate email submissions from the same group, as only the first
submission is accepted. Late submissions may be penalized.
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Please complete all 3 questions in this assignment as a group.
Assignment Question 1:
Analyze the impact of financial crisis on a bank’s activities, financial performance, and
risks. You are required to choose two banks (either commercial or investment banks): one
U.S. or European bank and one Asian bank. The time period of analysis is from 2007 to
2020 to capture the impact of Global Financial Crisis that developed in late 2008, and
European Sovereign Debt Crisis that developed in 2010, and the current economic
recession caused by Covid-19 (if recent financial statement information can be found,
otherwise just focus on the first two crisis periods).
a. Explain the motivation for choosing the banks. Why did you think the banks you chose
would make an interesting comparison? Possible reasons might be size, location, areas of
operation, or core activities.
b. Identify the main types of assets and liabilities for each bank. Examine the compositions
of the assets and liabilities from 2007 to 2020 for each bank (you may want to focus on
four types of assets and liabilities: three largest types of assets and liabilities and include
the other smaller types in one group). Explain potential risk exposure due to the asset and
liability structure.
c. Compare and discuss changes in asset and liability compositions over the sample period.
Analyze the asset and liability compositions of the banks. Explain how the asset and
liability compositions have changed over the sample period, especially during the crisis
periods. Explain how you think the global financial crisis and the European debt crisis
affected the asset and liability compositions.
d. Critically analyze liquidity and credit risk management of the banks and discuss the
impact of the global financial crisis, the European debt crisis, and the current Covid-19
recession on the performance of the banks. Explain how the three crises affected the banks’
profitability and risk management.
Note: This assignment requires an in-depth analysis on the financial statements of the
banks you have selected. The information required (financial reports, market and industry
analysis etc.) can be downloaded from the banks’ websites and other sources. In
undertaking the analysis on banks’ liquidity and credit risk management, you are
recommended to apply concepts discussed in this class as a starting point. In order to gain
a better understanding about the banks’ risk management, not only do you need to analyze
key risk indicators, but also identify trends in those indicators.
Assignment Question 2:
What are the significant risk events for Chinese banks in the past several decades? You can
comment on credit risk, liquidity risk, market risk, or other risk categories at your choice.
What is the cause of the risk events and what lesson do we learn? How banks could better
address these risks in the future?
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Assignment Question 3:
Assume that you work as a credit-risk analyst at a newly-opened U.S. commercial bank
whose target clients are mainly U.S. publicly-listed firms. Your supervisor would like
you to develop a credit scoring model for credit risk evaluation. The essentials of
developing a linear credit scoring model is to determine the set of factors causing or
related to defaults and decide on the relative importance of these factors. So the typical
procedure is to: 1) generate a list of potential determinants of credit risk, based on
economic theories, common sense and business experience; 2) calibrate these potential
factors in determining defaults with historical data representative of your target clients.
As a starting point, you try to discover the potential determinants of credit rating by S&P
to facilitate the building of your own credit scoring model. S&P ratings about U.S.-listed
firms could be requested from S&P, and firm characteristics potentially relevant for
credit risk could be downloaded from Compustat – a data vendor affiliated with S&P.
Assuming that you decided to sample the data for two years only, 1990 and 2010, which
were assembled in the provided excel file. Specifically, the file contains the following
variables:
• S&P Rating: original rating for each firm-year provided by S&P.
• S&P rating, numerical value: the transformed numerical value of the rating.
• For the description of ratings and the transformation of the original rating to
numerical values, please refer to the sheet “SP_Rating_Details”.
• Ln(S&P rating, numerical value) : log transformed value of the numerical
rating values
• Other firm characteristics as defined in Altman credit scoring model. You can
refer to the textbook for their definition. The only exception is that book value
rather than the market value of the equity is used to calculate Capital Ratio (Book
equity/Long term debt).
Please complete the following tasks:
a) Run a regression of Ln(S&P rating, numerical value) on the five firm characteristics,
separately for 1990 data and 2010 data. If you don’t know how to run a multiple
regression, please refer to the guidance in the attached PDF file:
https://faculty.fuqua.duke.edu/~pecklund/ExcelReview/Use%20Excel%202007%20Regr
ession.pdf
b) Compare the two credit scoring models as suggested by 1990 data and 2010 data with
the one estimated by Professor Altman and listed in the textbook. Please also compare the
two credit scoring models estimated by you. Please discuss the possible reasons why they
differ and the lessons for your credit scoring model development.
c) The list of these five firm characteristics is surely not exhaustive in terms of potential
credit risk determinants. Could you think of other factors relevant for credit risk and
explain why they are relevant?
d) Now take the 2010 data, calculate the predicted rating value (Ln(S&P rating,
numerical value)) based on your regression coefficients, i.e., Predicted value of Ln(S&P
rating, numerical value) = intercept + coefficient of X * X (there are five Xs here). Then
generate the difference between actual and predicted values of Ln(S&P rating, numerical
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value). Now assuming S&P ratings provide a correct description of firms’ credit quality,
a positive value of difference means the model underestimates the actual credit quality of
the firm, and the opposite holds for a negative difference.
Please sort the observations into 5 (roughly equally-sized) groups by the difference
between actual and predicted ratings, and report the average values for each group for the
following variables: a) the difference, b) the numerical rating score (not the log one), c)
five firm characteristics.
Based on the average values of the above variables for those groups, you should be able
to see the performance of the model across firms with different characteristics, i.e., the
model could explain the credit quality of specific types of firms very well (with very
small difference btw predicted and actual ratings), but very badly for some types of firms
(with very big difference btw predicted and actual ratings).
What could you learn from this exercise to help you search for potential factors relevant
for credit risk?
(Note: Although these tasks are listed one by one, you should integrate all these tasks
coherently in your report and presentations. Your overall mission is to develop a credit
scoring model – determining the list of factors relevant for credit risk, assigning the
relative importance, and being aware of issues in this modeling procedure.)
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Group Assignment - Peer Assessment Evaluation
Purpose
This document assists the teaching staff in ensuring that all students receive a fair mark.
It allows us to determine that the ‘group mark’ each individual receives for his or her
group’s Written Report reflects each person’s respective contribution to the assignment.
Put another way, the main purpose of the evaluation is to reward high performing
students and to penalize underperforming students.
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Completion
▪ Write your name in the first row and underline.
▪ If you list a percentage other than an equal share for any group member, please
provide your reasons (e.g., XX did extra research or YY did not attend meetings
regularly). You may use more space than that provided.
TOTAL MARKS