Other Scenarios - Stresses in the Loan Portfolio Sample for a Banking Sector

                         Other Scenarios - Stresses in the Loan Portfolio Sample for a Banking Sector

PART: 17

11.4.2. Stresses in the Loan Portfolio.

As at end 2000 just over 43% of the Bank’s loan portfolio is secured; most of this (76%) is by property in the USA, almost all of which is located in New York. Therefore the Bank is exposed to further stresses that may arise in the New York Area property market.  The Bank has a conservative attitude to risk and has calculated that the property market would need to fall by 15% before any exposures would exceed 100% of valuation.  The excess exposure in this case would be approx $225,300 if all cases defaulted and the Bank estimates the likelihood of this to be low. (If the property market fell by 30% the excess would be $2.08m and by 42% by $5.3m.)

In 2002, loans to residents are planned to grow to $47m of which at least 80% is to be secured on property in the USA with loan to value ratio of not more than 50%. Assuming there is a 30% drop in property values up to half the portfolio could be non-performing, and in these circumstances, the likely shortfall could be about $1.5m.  In addition, the Bank may experience interest loss on part of the portfolio. As an illustration of the possible impact on the revenue stream of the Bank an amount of $1.5m. bearing an interest rate of 4.5% p.a. equates to $237,500. Taking these figures together this would be in total 6% of the planned capital base.  However, the Bank estimates the probability of this happening to be low.