As a mature responsible financial manager, please, consider the following: You a

Question

As a mature responsible financial manager, please, consider the following: You are the manager of a commercial bank. You have been presented with an opportunity to invest in risky projects involving commercial real estate in a major urban center. What would be the impact of the most recent financial regulations on you and your institution if you proceed with these risky investment projects? As a mature responsible financial manager, please, consider the following: You are the manager of a commercial bank. You have been presented with an opportunity to invest in risky projects involving commercial real estate in a major urban center. What would be the impact of the most recent financial regulations on you and your institution if you proceed with these risky investment projects? As a mature responsible financial manager, please, consider the following: You are the manager of a commercial bank. You have been presented with an opportunity to invest in risky projects involving commercial real estate in a major urban center. What would be the impact of the most recent financial regulations on you and your institution if you proceed with these risky investment projects?

Explanation / Answer

If a commercial bank is investing in a risky project, it should make provisions for the same in its balance sheet. Higher risks will call for higher provisioning.

In view of Basel norms, the commercial banks should not take excessive debt to invest in the risky project of commercial real estate. The norms also stipulates that the bank should not rely on too much short term debt to invest in the project.

In case of a downturn, the value of real estates fall very quickly. So the bank will have to have a safety net in terms of leverage ratio. Leverage ratio is the relative amount of capital to total assets. The bank should have a leverage ratio of 3%.

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