As of recently, the NAB bank has had an extremely low level of cash and liquid securities. This report will define these risks and the possible hazards that these will pose to NAB and cover how these risks came to fruition. Therefore, this report will cover all the options available in order to solve this issue and propose a definite solution that is most preferable.
As a result of the insufficient funds, NAB faces many risks alone as well as enhanced risks that will threaten the economy of the bank.
Immediate risks to NAB include:
Liquidity risk
Funding risk
Without a large source of liquid assets, being a lack of cash and investors willing to buy securities, NAB will be unable to meet withdraw requests from depositors, thus causing this liquidity risk. Similarly, whilst in this predicament, NAB will face a high level of funding risk, without a reliable source of funding, NAB will not be able to make loans and subsequently any profits.
Lacking a steady amount of funds, other risks that face NAB will be enhanced, including:
Credit risk
Market risk
Operating risk
These risks are already an issue, however with such a low cash level, we will be unable to cover the losses that may arise from these risks. Therefore, enhancing the problem posed by these risks.
In order for NAB to subdue the issues associated with these risks, we need to raise at least $100 million capital. There are a multitude of ways to obtain such an amount of funding, such as:
Selling securities
Repurchase Agreements
Borrowing from other ADIs or the RBA
There are many different forms of securities that can be sold and each has its set of issues. Firstly, we can sell securities in the form of assets, such as mortgage repayments. This is a very low risk ...
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... from the mortgages being issued as securities, therefore a 10 year mortgage at an interest rate of 7.74% PA, from NAB.
The amount after 10 years would be:
Total Amount=Repayment Amount×[1+r/k]^(k×t)
Total Amount=1×〖10〗^8×〖[1+0.0774/12] 〗^(12×10)
Therefore, the total amount the mortgage-backed security is worth after the maturity date is $216,303,976.37, which implies that NAB would lose $116,303,976.37 in potential profits.
In conclusion, the current low cash level that is plaguing NAB at the moment gives arise to many forms of risk. In order to lower such risk, we need to raise at least $100 million capital, which is most ideally raised through the issuing of bond market securities, as it would result in the greatest amount of net profits. However, the other option of issuing mortgage-backed securities does eliminate the credit risks associated with mortgages.
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