Quaker National Bank Case Study

I. POINT OF VIEW
It is the point of view of the executive vice president of Quaker Bank – Mr. Matthew Killian. II. STATEMENT OF THE PROBLEM
The crisis of the executive vice president – Mr. Killian is on how to properly manage risks of Quaker National Bank.

III. AREAS OF CONSIDERATION
First to consider is the bank’s judgment of the exposure to credit, interest rate and liquidity risk to be excessive in relation as to their capital strength and earnings performance. Second, the bank funded approximately 25% of its assets through large CDs, more than twice the peer bank average of about 12%. Third, Quaker’s financial reports and written policy statements regarding its interest rate and liquidity risk management which did not provide data and specific guidelines needed to make well-reasoned asset and liability management decisions. IV. ALTERNATIVE COURSES OF ACTION

Since Quaker National Bank has an excess credit risk, they should manage their capital properly. And since they have a higher credit risk and liquidity risk, they should decrease their liabilities and put up funds through the earning asset. Second is that Quaker National Bank shall match the assets and liabilities of Quaker Bank. Interest rates are due to change every time hence when one is matching assets and liabilities the interest rates of each period should be considered thus required. But when Quaker National Bank will not be able to match their assets and liabilities, they can mitigate the risk of economic loss arising from changes in the value of the underlying which is known as hedging. V. RECOMMENDATION

The chosen alternative is the second one, to match the assets and liabilities of Quaker Bank. Interest rates are due to change every time hence when one is matching assets and liabilities the interest rates of each period should be considered thus required. But when Quaker National Bank will not be able to match their assets and liabilities, they can mitigate the risk of economic loss arising from changes in the value of the underlying which is known as hedging. The changes of the hedging instrument (derivate) and the hedged item compensate each other. Alternatively, derivatives can be used by investors to increase the profit arising if the value of the underlying moves in the direction they expect, bearing extra risk by speculations. Financial institutions require some obligations of making future payments hence protection through matching. Quaker Bank should also pay out (liability) at a more favorable time in order to avoid losses.