Canada Wide Savings, Loan and Trust Company Case Solution
The main subject under focus of our discussion pertains to the loan application submitted by Chris to Canada Wideand determine, whether the application would be beneficial for Canada Wideor not. If they decide to accept the loan application, what term could Adam Impose on the loan? Which could potentially increase the long-term benefit generated for the loanapplication in favor of CanadaWide.
Identification of Risks
It can be assessed that, certain risks could be faced by the financial institution, if they decide to approve the loan application from Chris inwhich the financial institution could be exposed to credit risk, raised by the ill assessment of potential applicant’s credit worthiness. Which would compromise the financial institution’s ability to generate high returns from the potential loan application. Furthermore, the borrower could default on the payment term, attributed to this inefficient investment planning which would compromise the borrower’s ability to make timely payments in favor of the financial institution which in turn could compromise Canada Wide’s ability to survive in the highly competitive and diverse market. However, it can be determined that, the most crucial risk pertains to the issue of assessing the credit worthiness of the borrower, for decision making purpose.
Method for Risk identification
Canada Wide could employ experts to assess the historic and current situation of the loan applicantand make appropriate estimation regarding its future prospect of growth. Which would enable the CEO of the financial institution to make effective decision, with respect to the loan application. Furthermore, Canada Wide could assess the condition of those markets, in which the applicant is trying to invest from the loan, which would be acquired from loan application which would enable the financial institution to determine the potential prospect for growth from those markets invested in. This would enable the CEO to make effective decision regarding the loan application.
Should Canada Wide make the loan?
After analyzing the case, it can be determined that Chris applying on behalf of Joseph Mitryk, who was a successful real estate agent in the Ottawa area, planned to invest the loan amount into three different mutual funds available in the market. Which included Global Equities in Europe, Asia, North America, standard and poor U.S stocks and Canadian bonds. Furthermore, it can be assessed that Joseph had already invested $1.5 million in Canadian bonds, which could be considered as collateral from the financial institution’s prospective. Moreover, it can be evaluated that, Joseph’s assessment of Europe and the United States market were fair and could account towards generating significant returns, if the market peaks, as it resolves from the debt crisis and economically recovers which could appreciate the capital value on equity assets invested in by Joseph and enable him to make timely payments in favor of the financial institution. Hence, it was recommended that, the CEO should accept the loan application submitted by Joseph’s representation, Chris.
What factors are most likely to impact Joseph Mitryk’s ability to repay the loan?
Certain factors could potentially affect Joseph’sability to repay the loan in the long run, which include political, macroeconomic, social and cultural factors. These factors could compromise Joseph’s ability to generate sufficient cash flows in the form of return from the market. In which, due to the volatility of the market, Joseph’s prediction about the market doesn’t come true and the equity market in Europe and the economic conditions in the U.S continuesto decline. Thiscould potentially cause significant losses in his favor and compromise his ability to make timely payment of interest on the principal loan amountwhich in turn could increase the bad debts of the financial institution in the market, exposing it to systematic risk and other certain risks in the market compromising its ability to continue its operations in the market.
Is there a better way to structure the loan to Mr. Mitryk? Would you impose any additional requirements?
Canada Wide could impose additional terms and conditions to raise the loan benefit in their favor. These conditions could include keeping the Canadian bond invested by Mitryk and his part of property, less mortgage payable on property as collateral,which should enhance the confidence of the institution’s management, that in worst case scenario, the financial institution could get significant portion of the loan back from the collateral. Furthermore, Canada Wide could set a cumulative interest rate on the principal amount. It would enable the lender to increase the amount of interest paid, as the time passes.
Would you change any of the loan terms? (Ex. higher interest rate, longer time to maturity, more collateral)?
Apart from higher interest rate, longer time to maturity, additional collateral and any additional changes to the current loan term would be beneficial for the financial institution..............................
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