FINAL ONLINE SUMMATIVE ASSESSMENT

PROGRAMME Postgraduate Diploma in Risk Management

MODULE Introduction to Risk Management
YEAR 1
INTAKE July 2024
DATE 3 December 2024
 SECTION A [40 MARKS]
Read the case study below and answer ALL the questions that follow.

MANAGING RISK AND CAPITAL

Banks have travelled a hard road since the global financial crash of 2008. They have had to weave their way through the
wreckage of bad debt, volatile funding markets and an uncertain economic environment. Now, tough new rules under Basel
III and a host of local regulations will require banks to significantly increase capital and adhere to stringent new liquidity and
funding mandates. Meeting the new standards will put a big dent in banks’ return on equity and make it much harder for
them to exceed their cost of capital. As banks begin to come to grips with these new realities, many have been using an
incomplete map to guide their business. The pursuit of revenue and earnings growth with insufficient attention to the
balance sheet ran them into a ditch.

A comprehensive analysis by Bain & Company of approximately 200 banks around the world and interviews with more than
50 senior executives at more than 30 global institutions reveal how banks are modifying a broad range of practices they
relied on before the crisis in order to better compete in the new environment. During the pre-crisis years of benign credit
conditions and readily available liquidity, the disciplines of managing the balance sheet atrophied, becoming the almost
exclusive preserve at many institutions of a small team of highly skilled technocrats working from corporate headquarters.
Leading banks now recognize that the ability to fully account for risk, capital and liquidity in line decisions will be a source of
competitive advantage. As they come to terms with how to strengthen balance sheet disciplines, bankers need to recognize
the common set of challenges they face and the range of practices available to address them. In our executive surveys, we
have found large differences in the understanding of risk, capital and liquidity and their implications on the balance sheet,
both across business units and especially between the group-level functional specialists, on the one hand, and frontline
commercial managers, on the other.

This gulf reflects deeply ingrained habits and incentives that will be difficult to uproot. Distracted by the quarterly earnings
drumbeat, senior group leaders and line executives often have had little motivation to think like balance sheet custodians.
Because the organization’s reward systems are often aligned to the profit-and- loss statement, critical qualities of business
judgment can be missing. Lacking incentives to focus on risk- and capital-adjusted results, commercial managers either
pay token heed to capital deployment, or they rely on the metrics that “black box” models generate without fully
understanding what they mean. To successfully navigate the difficult journey ahead, industry leading banks are implanting
better balance sheet management capabilities throughout the organization—and particularly within their general
management ranks. They recognize that there are no technical shortcuts. While strong, supporting technical expertise is
necessary, it is not sufficient. If board members, senior executives and line managers do not anchor their business
decisions in a risk- and capital-adjusted mindset, even the best technology does not count for much. An effective approach
to managing through the balance sheet requires putting risk and capital at the heart of the bank’s strategy, the objectives
that management sets, how the organization is governed, and how the business is run and monitored on a daily basis.

During interviews, senior bank executives told us they were wrestling with how best to forge this joined-up view of the
business. Many spoke of the need to invest more board-level time and attention into defining the enterprise’s overall risk
appetite as the critical starting point for setting its portfolio and corporate strategy. Others told us that they are redefining
managerial roles and putting in place processes, policies and limits to give risk, capital and liquidity a central role in their
bank’s planning cycle. They described steps they were taking to shore up the structures, risk modeling and measurements,
information technology and compliance capabilities that are the underpinnings of the bank’s core budgeting and
management functions. Taken together, the comments from bankers across the industry suggest that views are coalescing
around new ways to think about running the bank with greater heed to the consequences of decisions on the balance sheet.
They are best captured in common disciplines that form the connective tissue for a top-to-bottom system of risk and capital-
adjusted decision making (RaCADTM) (see Figure 1).
The new orientation marks a welcome shift in bankers’ strategic mindset from a drive to maximize short-term return on
equity to a commitment to create sustainable, more valuable institutions. Among its chief virtues, it addresses two glaring
vulnerabilities laid bare during the credit meltdown. First, it helps guide how banks construct their business portfolios with
recognition that they may encounter rare, but potentially ruinous, “black swan” risks. Second, it instils a continuous
managerial rhythm that quickens the entire organization’s reflexes to mitigate risks when market conditions deteriorate.
Clearly, banks that embrace this new way of thinking about and taking action to manage risk and capital face major cultural
and behavioural challenges. For some, it means rediscovering disciplines that were lost in the heady days of the past
decade. For others, it requires learning from new beginnings. How any individual bank tackles its capital management
challenges depends on its specific business model, its strategic objectives and its unique starting point. Just as critical is
how to sustain these new disciplines once they have been developed.

Extracted from: https://www.bain.com/insights/managing-risk-and-capital/

Answer ALL the questions in this section.

Answer ALL the questions in this section.

QUESTION 1 (40 Marks)

1.1 With reference to the case study, demonstrate the variables and or factors that have shaped changes in (20 marks)
the risk management strategies implemented by financial institutions over the years. Support your response
with relevant examples of any institutions within this sector.
1.2 As highlighted in the case study, banks that embrace this new way of thinking about and taking action to (20 marks)
manage risk and capital face major challenges. Critically discuss these challenges using relevant examples
from the case study and other institutions.

SECTION B [60 MARKS]

Answer ANY THREE (3) questions in this section.

QUESTION 2 (20 Marks)

Sanlam, a leading financial services group headquartered in South Africa, has a substantial footprint across Africa and in
global markets. Operating through several business divisions, including insurance, investments, wealth management, and
asset management, Sanlam serves a diverse clientele across various regions. The Risk Executive, Mike Muguto, has
asked you to prepare a report outlining the variables you would consider when assessing and evaluating the organisation’s
individual risks and detailing the methods that can be used to measure these risks.

QUESTION 3 (20 Marks)

MTN Group, headquartered in Johannesburg, South Africa, is a multinational telecommunications company with a
significant presence in Africa, the Middle East, and South Asia. The company offers mobile and fixed-line voice services,
data services, digital and financial services, enterprise solutions, and wholesale services across its operating markets.
Considering the organisation, critically discuss the significance of risk analysis and suggest how this can be successfully
done. Make use of relevant examples.

QUESTION 4 (20 Marks)

Some of the developments that have occurred in the risk management field relates to the emergence of various standards
and frameworks that have been spearheaded by different stakeholders. Based on your understanding and using relevant
examples, evaluate the relevance of risk management standards.

QUESTION 5 (20 Marks)

A leading retail chain in South Africa, renowned for its extensive footprint across the African continent and operations in
international markets, serves millions of customers through a diverse range of offerings, including groceries, apparel, and
home goods. With reference to relevant examples, discuss why the organisation should allocate more resources to
strengthening its risk management practices.

END OF PAPER