Tool O1
Can the deal structure be implemented?
It is essential for complex or non-standard transactions to check that the proposed structure of a deal can actually be implemented. The aim is to
- minimise operational risk by not booking an operationally difficult transaction
- avoid reputational risk and lender liability
- make sure the structure works in the stress scenario (Refer Tool O2)
Consideration should be given to the following issues:
| Operational | – Does the facility type fit into the Bank’s usual systems / expertise? – Will a heavy administrative burden outweigh the earnings? – Who will be responsible for administering the facility? |
| Accounting | – If a new product or facility type, can it be accounted for using the existing methodology, or do systems need to be adapted? – Do we need a sign off from Accounting / Control department? |
| Legal / Tax / Compliance | – Have we given sufficiently detailed instructions to lawyers / tax counsel? – Have we obtained satisfactory legal / tax opinions? – Do we need agreement to the opinions from our internal specialists? – Could the transaction cause reputational risk for the Bank? – Do we need a sign off from Compliance? |
| Collateral | – Have we tested the execution value of the collateral in the stress scenario? – Have we tested the ease of realising the collateral in the stress scenario? – Can the collateral be physically controlled by the Bank during the term of our exposure? |
| Monitering | – What needs to be monitored internally? – Do these requirements fit in with the usual monitoring systems? – Can the client fulfil our monitoring requirements? – Does the documentation allow for sufficient monitoring information to be provided? (Refer Tool M1) – Have we set internal triggers for the major risks? |
| Other | Is there any other aspect of the transaction which could result in increased legal, reputational or operational risk / expected loss or actual loss for the Bank? Re-consider deal risks (Refer Tool J3) |
Does the client have sufficient commercial interest in the transaction to ensure cooperation with the Bank in the stress scenario?
Does the mitigation provided by the structure adequately mitigate key risks?
In addition to testing the execution value of collateral in the stress scenario (see above), it is also crucial to test the mitigation provided by the deal structure. This can be done using the Stress Grid (Refer Tool O2)
Completing a stress grid helps with:
- Focusing on key risks and structure mitigants to be included in a credit proposal
- Preparing detailed and specific legal instructions for the lawyer
- Identifying gaps in the structure
