Real Case Structuring Question - Banking

A leading bank’s clients are not paying back their loans. What options does the bank have?

Objective - I will assume the bank wants to stem losses from this portfolio in the near term and improve performance in the longer term

Short-term

  1. If loans are unsecured - Take a hit on the P&L statement - essentially loan write offs where applicable to ensure investors are aware of the losses

  2. If it is a secured loan then - re-possess assets from the debtors and sell them to recover losses (e.g.,home foreclosures)

  3. Stop issuing new loans immediately for the impacted portfolio

  4. Cut the line of credit (where applicable) to customers with a similar risk profile (e.g., lower credit limit on credit cards)

Long term - Process improvement to ensure this doesn’t happen again

  1. Re-evaluate criteria for risk assessment - update model to include new risk factors that may have affected outcomes (e.g., over-reliance on tourism industry)

  2. Use newer forms of assessment - e.g., partner with platforms that incorporate data you don’t have access to (e.g., A.I tools that help detect pattern recognition/predict outcomes)

  3. Stop loans for this segment completely (e.g., low income housing)

Solution here will depend on risk appetite and level of resources available

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