Leading issues

It is now 30th of July 2016 and you, financial analysts, have had better times. Your company, an investment fund, is maintaining a portfolio of assets, which consists of a mixture of government and corporate bonds and shares. The European Banking Authority (EBA) has just published the latest stress tests of the banking institutions and Monte dei Paschi (MPS), an Italian bank to which your fund is invested (2% of the fund’s overall assets, both in corporate bonds and equity). Under the worst, most severe scenario in the stress test, MPS would end up with negative tier one capital ratio. This means that if the modelled scenario actually occurred, the bank would default.
Several panicking board members have already called you and demanded information on the extent of the fund’s exposure. Your team of analysts need to discuss the issue.

Address the following issues in your discussion:
1. Critically evaluate what implications will the stress tests have on the MPS’s stock and bond values in
short and long term. (LO2)
2. Synthesize various aspects of the current
macroeconomic situation and discuss its implications on the bank’s profits and its ability to raise capital. (LO3)
One student in the group should take a lead and write a statement (500 words) exploring the issues above.

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N.B
This assessment is designed to assess students’ abilities as outlined in learning outcomes 2 and 3.
LO2. Critically evaluate the pricing, profitability and credit risks taken during the lending cycle.
LO3. Synthesise and discuss the nature of market and operational risk.