Skip to content

CMA Final · Risk Management in Banking and Insurance · Sovereign Risk and Insolvency Risk

A bank's balance sheet shows total assets of Rs 1,000 crore, with Rs 940 crore of liabilities to depositors and creditors. A sudden credit event forces write-downs on Rs 80 crore of assets with zero recovery. Considering only these figures, what is the bank's position?

The bank becomes technically insolvent with negative net worth of Rs 20 crore. Net worth was Rs 60 crore, but an Rs 80 crore write-down leaves assets of Rs 920 crore against liabilities of Rs 940 crore. Losses exceeded capital, so liabilities exceed assets.

  1. ATechnically insolvent, with negative net worth of Rs 20 croreCorrect
  2. BSolvent, with net worth of Rs 60 crore
  3. CTechnically insolvent, with negative net worth of Rs 80 crore
  4. DSolvent, with net worth of Rs 140 crore

Explanation

Initial net worth = 1,000 - 940 = Rs 60 crore. After the write-down assets are 920 crore against liabilities of 940 crore, so net worth = -Rs 20 crore. Rs 60 crore ignores the loss, while -80 deducts the loss without first using the existing capital cushion.

Did you get it right without looking?

One question tells you little. A timed set on Sovereign Risk and Insolvency Risk shows your real accuracy, how long you take and where you lose marks.

Practise Sovereign Risk and Insolvency RiskFree diagnostic mock

More Sovereign Risk and Insolvency Risk questions