Business Planning: Banking
Open Book
1
,Table of Contents
Structure of a credit appraisal............................................................................................................................. 4
Additional information required for analysis: ...............................................................................................................13
Alternative funding arrangements (SM 21-23) ...............................................................................................................................14
Loan Term Sheet.............................................................................................................................................................. 15
Theories .............................................................................................................................................................. 17
UK Governance Code ...................................................................................................................................................... 17
Risk Committees .............................................................................................................................................................. 17
MiFID II .......................................................................................................................................................................... 18
Risks ................................................................................................................................................................................ 18
Financial risks ..................................................................................................................................................................................18
Other risks ....................................................................................................................................................................................... 20
Response to risk .............................................................................................................................................................................. 20
Hedging .............................................................................................................................................................. 21
Types of hedge accounting ..............................................................................................................................................21
Fair value hedge ...............................................................................................................................................................................21
Cash flow hedge ...............................................................................................................................................................................21
Net investment hedge ......................................................................................................................................................................21
Reporting ........................................................................................................................................................................ 22
Discontinuance ............................................................................................................................................................... 22
Sample Answer (QB 57.2) .............................................................................................................................................. 22
Differences between IAS 39 and IFRS 9 ........................................................................................................................ 23
Interest rate risk ............................................................................................................................................................. 24
Financial instruments ....................................................................................................................................... 25
Financial asset classifications ........................................................................................................................................ 25
Business model test......................................................................................................................................................................... 26
The contractual cashflows (“SPPI”) test ......................................................................................................................................... 26
Derecognition of financial assets .................................................................................................................................................... 27
Sample Answer (Classification of assets under IFRS 9 – QB 1, 52)............................................................................................... 28
Financial Asset reclassifications .................................................................................................................................... 29
Embedded derivative ...................................................................................................................................................... 30
Sample Answer (Embedded derivative interest rate cap/floor – SM 296) ................................................................................... 30
Financial liability classifications .....................................................................................................................................31
Derecognition of financial liabilities............................................................................................................................................... 32
Sample Answer (Classification of liabilities under IFRS 9, QB 46) ............................................................................................... 32
Financial instruments: Fair Value ................................................................................................................................. 33
Valuation techniques (absence of Level 1 input) ............................................................................................................................ 33
Sample Answer (FV under IFRS 13, QB 1) ..................................................................................................................................... 34
Financial instruments: Impairment .............................................................................................................................. 35
Sample answers ............................................................................................................................................................................... 36
BASEL ................................................................................................................................................................38
2
, Risk-weighted assets ...................................................................................................................................................... 38
Basel III Capital Requirements ...................................................................................................................................... 39
Leverage ratio – (SM 488) ............................................................................................................................................. 42
Liquidity coverage ratio (LCR) – (SM 489)................................................................................................................... 42
High Quality Liquid Assets (HQLA) ............................................................................................................................................... 42
Net stable funding ratio (NSFR) – (SM 490) ................................................................................................................ 43
Replacement of Basel II (SM 482) ................................................................................................................................. 43
Regulatory reporting ...................................................................................................................................................... 44
Disclosures ......................................................................................................................................................... 45
Audit and assurance for banks ......................................................................................................................... 48
Loans ............................................................................................................................................................................... 49
Analytical procedures ...................................................................................................................................................... 51
Financial assets ............................................................................................................................................................... 52
Financial liabilities ......................................................................................................................................................... 55
First Time audit .............................................................................................................................................................. 58
Credit Cards .................................................................................................................................................................... 59
Derivatives .......................................................................................................................................................................61
Hedge accounting ........................................................................................................................................................... 62
Internal controls over clients’ assets .............................................................................................................................. 63
Embedded derivatives .................................................................................................................................................... 65
Risks ................................................................................................................................................................................ 66
Fee and commission income .......................................................................................................................................... 67
Trading portfolio - Trading desk .................................................................................................................................... 68
Provisions and contingent liabilities.............................................................................................................................. 69
CASS Audits (SM 571, Kaplan 449, QB 404) ................................................................................................... 73
FCA CASS Rules.............................................................................................................................................................. 73
Audit approach .................................................................................................................................................. 75
Quantitative and qualitative analysis of investment ....................................................................................... 76
Ratios................................................................................................................................................................. 80
Ratios for bank................................................................................................................................................................ 80
Ratios for business credit appraisal ............................................................................................................................... 83
Ethics ................................................................................................................................................................. 84
ICAEW Code of Ethics .................................................................................................................................................... 84
FRC Ethical Standard ..................................................................................................................................................... 85
FCA’s 11 high principles.................................................................................................................................................. 87
Skilled persons review .................................................................................................................................................... 88
Questions Index ................................................................................................................................................ 89
3
, Structure of a credit appraisal
Summary of the application
[Company] is seeking a loan of [loan amount] to fund [purpose of loan].
The analysis of the loan application is organised as follows:
(1) Loan structure
(2) Affordability
(3) Viability
(4) Security
(5) Financial Stability
(6) Capital Structure
(7) Tracked Record of Management
Loan Structure
[Company] has applied for a [years of loan] of [amount of loan].
[Add grace period conditions and reason]
[Interest rate] – The interest rate proposed is [interest rate]%. The rate reflects the additional risks in (i.e.
funding the acquisition loan compared to a commercial mortgage, in trade finance loans compared to
other forms of secured loans).
4
Open Book
1
,Table of Contents
Structure of a credit appraisal............................................................................................................................. 4
Additional information required for analysis: ...............................................................................................................13
Alternative funding arrangements (SM 21-23) ...............................................................................................................................14
Loan Term Sheet.............................................................................................................................................................. 15
Theories .............................................................................................................................................................. 17
UK Governance Code ...................................................................................................................................................... 17
Risk Committees .............................................................................................................................................................. 17
MiFID II .......................................................................................................................................................................... 18
Risks ................................................................................................................................................................................ 18
Financial risks ..................................................................................................................................................................................18
Other risks ....................................................................................................................................................................................... 20
Response to risk .............................................................................................................................................................................. 20
Hedging .............................................................................................................................................................. 21
Types of hedge accounting ..............................................................................................................................................21
Fair value hedge ...............................................................................................................................................................................21
Cash flow hedge ...............................................................................................................................................................................21
Net investment hedge ......................................................................................................................................................................21
Reporting ........................................................................................................................................................................ 22
Discontinuance ............................................................................................................................................................... 22
Sample Answer (QB 57.2) .............................................................................................................................................. 22
Differences between IAS 39 and IFRS 9 ........................................................................................................................ 23
Interest rate risk ............................................................................................................................................................. 24
Financial instruments ....................................................................................................................................... 25
Financial asset classifications ........................................................................................................................................ 25
Business model test......................................................................................................................................................................... 26
The contractual cashflows (“SPPI”) test ......................................................................................................................................... 26
Derecognition of financial assets .................................................................................................................................................... 27
Sample Answer (Classification of assets under IFRS 9 – QB 1, 52)............................................................................................... 28
Financial Asset reclassifications .................................................................................................................................... 29
Embedded derivative ...................................................................................................................................................... 30
Sample Answer (Embedded derivative interest rate cap/floor – SM 296) ................................................................................... 30
Financial liability classifications .....................................................................................................................................31
Derecognition of financial liabilities............................................................................................................................................... 32
Sample Answer (Classification of liabilities under IFRS 9, QB 46) ............................................................................................... 32
Financial instruments: Fair Value ................................................................................................................................. 33
Valuation techniques (absence of Level 1 input) ............................................................................................................................ 33
Sample Answer (FV under IFRS 13, QB 1) ..................................................................................................................................... 34
Financial instruments: Impairment .............................................................................................................................. 35
Sample answers ............................................................................................................................................................................... 36
BASEL ................................................................................................................................................................38
2
, Risk-weighted assets ...................................................................................................................................................... 38
Basel III Capital Requirements ...................................................................................................................................... 39
Leverage ratio – (SM 488) ............................................................................................................................................. 42
Liquidity coverage ratio (LCR) – (SM 489)................................................................................................................... 42
High Quality Liquid Assets (HQLA) ............................................................................................................................................... 42
Net stable funding ratio (NSFR) – (SM 490) ................................................................................................................ 43
Replacement of Basel II (SM 482) ................................................................................................................................. 43
Regulatory reporting ...................................................................................................................................................... 44
Disclosures ......................................................................................................................................................... 45
Audit and assurance for banks ......................................................................................................................... 48
Loans ............................................................................................................................................................................... 49
Analytical procedures ...................................................................................................................................................... 51
Financial assets ............................................................................................................................................................... 52
Financial liabilities ......................................................................................................................................................... 55
First Time audit .............................................................................................................................................................. 58
Credit Cards .................................................................................................................................................................... 59
Derivatives .......................................................................................................................................................................61
Hedge accounting ........................................................................................................................................................... 62
Internal controls over clients’ assets .............................................................................................................................. 63
Embedded derivatives .................................................................................................................................................... 65
Risks ................................................................................................................................................................................ 66
Fee and commission income .......................................................................................................................................... 67
Trading portfolio - Trading desk .................................................................................................................................... 68
Provisions and contingent liabilities.............................................................................................................................. 69
CASS Audits (SM 571, Kaplan 449, QB 404) ................................................................................................... 73
FCA CASS Rules.............................................................................................................................................................. 73
Audit approach .................................................................................................................................................. 75
Quantitative and qualitative analysis of investment ....................................................................................... 76
Ratios................................................................................................................................................................. 80
Ratios for bank................................................................................................................................................................ 80
Ratios for business credit appraisal ............................................................................................................................... 83
Ethics ................................................................................................................................................................. 84
ICAEW Code of Ethics .................................................................................................................................................... 84
FRC Ethical Standard ..................................................................................................................................................... 85
FCA’s 11 high principles.................................................................................................................................................. 87
Skilled persons review .................................................................................................................................................... 88
Questions Index ................................................................................................................................................ 89
3
, Structure of a credit appraisal
Summary of the application
[Company] is seeking a loan of [loan amount] to fund [purpose of loan].
The analysis of the loan application is organised as follows:
(1) Loan structure
(2) Affordability
(3) Viability
(4) Security
(5) Financial Stability
(6) Capital Structure
(7) Tracked Record of Management
Loan Structure
[Company] has applied for a [years of loan] of [amount of loan].
[Add grace period conditions and reason]
[Interest rate] – The interest rate proposed is [interest rate]%. The rate reflects the additional risks in (i.e.
funding the acquisition loan compared to a commercial mortgage, in trade finance loans compared to
other forms of secured loans).
4
