QuestionUse this information to answer questions 1-5You have recently joined a Bank, a large systemi

QuestionUse this information to answer questions 1-5You have recently joined a Bank, a large systemi

QuestionUse this information to answer questions 1-5You have recently joined a Bank, a large systemically importantfinancial institution that has two business units, Division 1 andDivision 2. Important financial characteristics of the two divisionsappear in the table below where all figures are reported in billions ofdollars. Note for clarity operational costs reflect operating expensesto run the business.DivisionAssetsRevenuesFunding CostsOperational CostsExpected Losses110016.57.52.56220020729.5In addition you are provided with the variance-covariance matrix forDivision 1 and 2 losses as shown below where variances arereported on the diagonal and covariances are off diagonal. The bankfaces only two risks for which it needs to measure its risk exposureagainst the Board tolerance; credit and operational. You mayassume that the matrix below is the same to apply for credit lossesas it is for total (credit plus operational) losses of each division.Variance-Covariance MatrixDivision 1Division 2Division 11.5Division 2430The bank has established a hurdle rate of 15% and the Board ofDirectors requires the bank to maintain its risk positions within a97.5% level of confidence. You know that a value of plus or minus1.96 standard deviations accounts for about 5% of all outcomesunder the standard normal distribution while a value of plus orminus 1.65 standard deviations accounts for about 10% of alloutcomes. The bank as a regulated entity must comply with Baselcapital standards and faces a required capital charge of 4% of assetsin each division.In addition, Division 1 and 2’s operational risk capital are estimatedto be $3B and $7B, respectively. You also determine that expectedoperational losses are $1B and $2B for Division 1 and 2,respectively. Along with that you find that the correlation betweencredit and operational losses for Division 1 is .833 and thecorrelation between credit and operational losses for Division 2is .75.1)What is the highest credit loss the bank would be willing to take foreach division given the information above? Full credit requires anumeric and verbal answer with specific terms used in riskmanagement to convey understanding and you must show all work2)What amount would you need to put aside for each division forcredit risk based on the information above?3)How do the two divisions compare in terms of financial performanceunadjustedfor risk? Specifically which division is better? Aquantitative response is required.4)Provide 2 measures for each division adjusting for risk and describethe performance differences between the divisions and state whatthese measures are.5)What is the total risk capital that should be assigned to Division 1separately and to Division 2 separately? What inference can youmake with respect to any diversification benefit?

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