Lincoln National Bank Case Analysis
I. Statement of the Problem Lincoln national bank had large loan losses in 1980’s, Mr. Vigil, the CFO didn’t want to repeat the mistakes LNB had in the past and want to create precautionary measures and avert future risks.
II. Objectives of the problem The objective is to help LNB review its past performance to avoid future problems and also to help the bank maximize shareholder’s wealth.
III. Areas of consideration
a. One area that needs to be considered is Credit risk or the potential variation in net income and market value of equity resulting from non-payment or delayed payment on loans and securities. If many borrowers’ loans defaulted then the interest income of the bank will decrease and it will not maximize profitability.
b. Another area that needs to be considered is the liquidity risk or the variation in net income and market value of equity caused by a bank's difficulty in obtaining cash at a reasonable cost from either the sale of assets or new borrowings.
c. Last area to be considered is the Operational risk or the measurement of the cost efficiency of the bank's activities; i.e., expense control or productivity; also measures whether the bank has the proper procedures and systems in place. LNB has an above-average personnel expense per employee. There is no meaningful way to estimate the likelihood of fraud or other contingencies from published data. A bank’s operating risk is closely related to its operating policies and processes and whether it has adequate controls.
IV. Alternative Courses of Action
1. First alternative course of action is to have a strong credit policies and control to up its standards and requirements before lending money to the borrower to avoid facing default problems. One advantage is to avoid lending money to illiquid borrower and also there will be provisions and allowance to net loss. The disadvantage is the bank will not be able lend money easily without checking the borrowers capacity to
II. Objectives of the problem The objective is to help LNB review its past performance to avoid future problems and also to help the bank maximize shareholder’s wealth.
III. Areas of consideration
a. One area that needs to be considered is Credit risk or the potential variation in net income and market value of equity resulting from non-payment or delayed payment on loans and securities. If many borrowers’ loans defaulted then the interest income of the bank will decrease and it will not maximize profitability.
b. Another area that needs to be considered is the liquidity risk or the variation in net income and market value of equity caused by a bank's difficulty in obtaining cash at a reasonable cost from either the sale of assets or new borrowings.
c. Last area to be considered is the Operational risk or the measurement of the cost efficiency of the bank's activities; i.e., expense control or productivity; also measures whether the bank has the proper procedures and systems in place. LNB has an above-average personnel expense per employee. There is no meaningful way to estimate the likelihood of fraud or other contingencies from published data. A bank’s operating risk is closely related to its operating policies and processes and whether it has adequate controls.
IV. Alternative Courses of Action
1. First alternative course of action is to have a strong credit policies and control to up its standards and requirements before lending money to the borrower to avoid facing default problems. One advantage is to avoid lending money to illiquid borrower and also there will be provisions and allowance to net loss. The disadvantage is the bank will not be able lend money easily without checking the borrowers capacity to