Learning Objectives: Describe key elements of an effective lending or financing policy. Explain the importance and challenges of setting exposure and concentration limits. Describe the scope and allocation processes of a bank’s credit facility and explain bank-specific policies and actions to reduce credit risk. Discuss factors that should be considered during the credit asset classification process. Describe and explain loan loss provisions and loan loss reserves.
Questions:
24.4.1. Old Crow Regional Bank has noticed an uptick in the demand for healthcare-focused loans. The bank has a robust small business lending team but has made few loans in the healthcare industry. The healthcare industry tends to have predictable revenues and business models. However, the lending officers experience is in consumer loans and they lack substantial experience in the healthcare sector. What approach should the bank take to address the heightened demand for healthcare loans?
a. Decline healthcare loan applications due to the lending officers' insufficient experience.
b. Maintain current lending policies without any adjustments for healthcare sector-specific risks.
c. Proceed with new loan applications cautiously while offering training to lending officers.
d. Channel deposits toward consumer loans to align with the staff's expertise.
24.4.2. New World Healthcare obtained a loan from Old Crow Regional Bank in 2020 to purchase new magnetic resonance imaging (MRI) machines. At the time, New World Healthcare was a stable company with a long operational history, excellent financial performance, and until recently, had always paid on time. However, recent market downturns within the healthcare sector have resulted in declining sales and cash flow challenges, and as a result, the company has defaulted on its last two quarterly loan payments. New World Healthcare’s latest financial statements indicate a notable rise in operational expenditures alongside a decrease in profit margins. Given these circumstances, how would you classify this loan within the bank's credit asset categorization process?
a. Substandard
b. Doubtful
c. Specially Mentioned or Watch
d. Standard or Pass
24.4.3. During a recent portfolio review, a regional bank’s risk management team noticed that the financial results of Hoffman Development had deteriorated significantly over the last year due to unfavorable macroeconomic conditions. Hoffman Development has a loan outstanding with the bank that was considered high quality at the time of origination. Despite Hoffman Development’s poor results, the loan is not credit-impaired. The relevant loan information is shown below:
Under IFRS 9, how should the loan be classified, and what is the credit loss we should recognize?
a. Performing: $58,500
b. Underperforming: $58,500
c. Performing: $400,000
d. Underperforming: $20,000
Answers:
Questions:
24.4.1. Old Crow Regional Bank has noticed an uptick in the demand for healthcare-focused loans. The bank has a robust small business lending team but has made few loans in the healthcare industry. The healthcare industry tends to have predictable revenues and business models. However, the lending officers experience is in consumer loans and they lack substantial experience in the healthcare sector. What approach should the bank take to address the heightened demand for healthcare loans?
a. Decline healthcare loan applications due to the lending officers' insufficient experience.
b. Maintain current lending policies without any adjustments for healthcare sector-specific risks.
c. Proceed with new loan applications cautiously while offering training to lending officers.
d. Channel deposits toward consumer loans to align with the staff's expertise.
24.4.2. New World Healthcare obtained a loan from Old Crow Regional Bank in 2020 to purchase new magnetic resonance imaging (MRI) machines. At the time, New World Healthcare was a stable company with a long operational history, excellent financial performance, and until recently, had always paid on time. However, recent market downturns within the healthcare sector have resulted in declining sales and cash flow challenges, and as a result, the company has defaulted on its last two quarterly loan payments. New World Healthcare’s latest financial statements indicate a notable rise in operational expenditures alongside a decrease in profit margins. Given these circumstances, how would you classify this loan within the bank's credit asset categorization process?
a. Substandard
b. Doubtful
c. Specially Mentioned or Watch
d. Standard or Pass
24.4.3. During a recent portfolio review, a regional bank’s risk management team noticed that the financial results of Hoffman Development had deteriorated significantly over the last year due to unfavorable macroeconomic conditions. Hoffman Development has a loan outstanding with the bank that was considered high quality at the time of origination. Despite Hoffman Development’s poor results, the loan is not credit-impaired. The relevant loan information is shown below:
Under IFRS 9, how should the loan be classified, and what is the credit loss we should recognize?
a. Performing: $58,500
b. Underperforming: $58,500
c. Performing: $400,000
d. Underperforming: $20,000
Answers:
