In assessing the model risk of the bank, the model solution says "50% of the assets are held at market value and are thus subject to fluctuation. There is a mismatch between the nature of the assets and liabilities: Financial assets at fair value and for sale = 28,300m, liabilities at fair value = 8,680m. Net assets at fair value = 19,620m Financial assets at amortised cost = 23,800m, liabilities at amortised value = 41,700m. Net assets at amortised value = 17,900m" It goes on to then make conclusions from these facts. I don't understand how these conclusions follow: "Hence, any decline in market values over 10% will reduce assets below the liabilities; a decline of 17% or more will completely erode the shareholders' equity" Shareholders' equity is 1,080.
Hi. I think these are quite broad brush figures. We were looking at a 10% drop in the value of net assets - this will reduce net assets to 17,658 (less than net liabilities of 17,900) [note you have mislabelled this as net assets above] Similarly, a drop of 17% will erode the shareholders equity (which is 1,480).
