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1. Given the following Balance Sheet of a Lebanese commercial bank: 2019

Balance Sheet
Assets	$ Million	Liabilities	$ Million
Cash & Required Reserves	20	Demand Deposits	55
Interbank Deposits (rated A)	40	Saving Deposits	100
Loans to Corporates (rated B)	160	Time Deposits	185
Investments in securities (rated BB)	40	Debentures	54
CDs issued by the Central Bank in L.L.	30	Convertible bonds	5
Loans to B rated sovereign borrowers	50	CoCos	6
Investments in US treasuries	25	Subordinated Debt (10 years maturity)	5
Loans to SMEs (unrated)	60	Perpetual Bonds	2
LGs extended to contractors rated CC (assuming 50% of the time these LGs are called upon	10	Common Stocks	10
LCs to corporates rated BB (assuming 30% historical default risk)	50	Preferred Stocks	3
Loans Commitment to corporates rated B-	20	Retained Earnings	0

1. Calculate the risk weighted assets (both on balance sheet and off-balance sheet), Common Equity Tier 1 (CET 1), Tier 1 and Tier 2 Capital, and Leverage Ratio. (5%)
2. Is this bank adequately capitalized based on: a) Basel 1 & 2 and b) Basel 3. (5%)
3. Given the current conditions in Lebanon what would you advise this Lebanese Commercial bank to do? (15%)

2. You are asked to come up with 5 Key Performance Indicators (KPIs) to assess the performance of the CEO and senior management of a commercial bank. Based on these KPIs, bonuses are paid when the annual financial results of the bank are released end of the year. Please prioritize the list of your KPIs so that the most important KPI in your view would be listed first, followed by the second most important one, etc. Briefly justify your selections and ranking of KPIs. (20%)

3. Assume a bank has estimated that the loss given default (LGD) on mortgage loans to be 20% of the outstanding loan value and the probability of default on such loans derived from internal and external sources is 5%. If the risk-free rate in the country (R) is 3%, and the risk premium (RP) that the bank demands on such loans to cover the risk of default is 2%, what would be the expected interest rate (r) that the bank should charge on the mortgage loan? (10%)

4. a) A corporate client of a bank submitted an application to borrow $2 million for one year. How would you price this loan if the prevailing prime rate is 8%, the marginal funding cost of the lending bank is 4%, the banks operating cost is estimated at 3%, while the default risk premium is 2% and the banks profit margin is estimated at 1%? (5%)

b) An applicant is requesting a 10 years housing loan of $100,000, current mortgage rate is 5%. The principal and interest payments are due from year one. The applicant lists the following information on the loan application:

Weight (%)

1. Annual income: $60,000 20%
2. Relations with banks: None 5%
3. Major credit cards: One 10%
4. Age: 35 5%
5. Annual debt service 0% 40%

Ratio before the loan

6. Deposit Accounts held: Demand deposit 10%
7. Occupation: Professional 10%

The weights of the credit scoring system are given. you are requested to plug in your assessment of the appropriate scores to the various factors in the loan application. You need to find the debt service ratio which together with the other scores would help you and give make a decision whether to accept or decline the housing loan application. (10%)

5. Assume you have estimated the following logistic regression based on data collected on home borrowers some of whom have previously defaulted on their loans. The estimated regression is:

Y = -2 + 0.4 E + 0.5 W+ 0.001 S

Where Y is the dependent variable: Y = 0 if loan has defaulted and Y = 1 if loan did not default

E stands for education; W stands for currently working and S stands for monthly salary measured in dollars

E = 0 if borrower attended only high school and E = 1 if he is a university graduate

W = 0 if borrower is not working and W = 1 if he is working

Use the above regression to decide if you would grant a loan to an engineer who wants to buy a home and is currently employed with a monthly salary of $2,000 (10%)

6. a) A borrower takes out a $500,000 loan maturing in 10 years to buy an apartment. After making installment payments for 3 years, the borrower faces financial difficulties and defaults with an outstanding balance left on the loan of $400,000. The bank forecloses on the apartment and is able to sell it for $350,000. Find the banks Loss Given Default (LGD), and its expected loss. (10%).

b) Before the loan was extended the bank assumed only a 50% probability of default based on internal analysis of similarly rated loans, using the same figures from part (a), find the banks expected loss. (10%)

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