1. Given its strategy, what kind of risks does Wellfleet Bank face?
Wellfleet Bank faces a variety of risk in its daily operations. Risk faced by Wellfleet Bank associated with this case study includes market risk when there are changes in interest rates, exchange rates and other prices. This is especially true for Wellfleet Bank because they are considering a $1 billion loan to Gatwick Gold Corporation (GGC), a South African gold producer. Additionally, operational risk are linked through Wellfleet Bank's daily activities that include auditing, monitoring and support systems. An example of operational risk for Wellfleet Bank would be when the group head of client relationships and the deputy group chief risk officer disagreed over a proposal, then the Chief Credit Officer would take the ultimate decision. Credit risk will be directly and indirectly affected by exchange rates, interest rates and gold prices. Moreover, foreign exchange risk and country or sovereign risk would directly impact Wellfleet Bank's operations because it is an international organisation that has expanded operations to 78 countries (Lange, Saunders, Anderson, Thomson & Cornett 2007, pp. 96).
Other risk faced by Wellfleet Bank includes interest rate risk when maturities of its assets and liabilities are mismatched. Off-balance-sheet risk as a result of their contingent assets and liabilities. Technology risk when there are technological investments. Liquidity risk when they are sudden surge in liability withdrawals. Insolvency risk when Wellfleet Bank does not have enough capital to offset sudden declines in the value of their assets (Lange et al. 2007, pp. 96).
Wellfleet Bank's strategy is to have different committees to monitor credit risk, market risk, operational risk, compliance risk, country risk, reputational risk, business risks threatening the consumer bank, and business risk in the corporate bank separately to keep them below preset limits.

2. Given Wellfleet’s new focus of large corporate deals and its need to recruit relationship managers from investment banks, what are the additional risks you anticipate will be introduced to the Bank?
Wellfleet's new focus of large corporate deals will increase exposure to foreign exchange risk and country risk because many of these deals might be international. The $1 billion loan to GGC is a good example of additional risk exposure because changes in exchange rates or interference from governments may significantly affect the outcome of the deal. While mismatches of foreign currency trading and foreign asset-liability positions may be profitable, unexpected outcomes and volatility may impose significant losses too. Wellfleet Bank may want to invest in strategies for hedging through matched foreign asset-liability books, forward contracts and foreign asset and liability portfolio diversification to mitigate this risk (Lange et al. 2007, pp. 359).
Additionally, foreign governments may limit or prevent domestic borrowers in its jurisdiction from repaying external lenders (Lange et al. 2007, pp. 263). There are strategies to deal with this risk that Wellfleet Bank may want to invest in for further international developments. For example, they may want to invest in country risk analysis (CRA) models to better identify between good and bad current sovereign loans or sovereign loan applicants (Lange et al. 2007, pp. 252).
Since Wellfleet Bank is trying to focus strongly on large transformational deals with clients, it is very important that client relationship managers are included directly in the process of the Credit Group Committee to help understand their needs. This will help Wellfleet Bank better satisfy their client's needs and prepare better platforms for future deals.

3. Calculate the Expected Loss, Economic Revenue and Economic Profit for the proposal. Clearly explain any assumptions you may make. Briefly comment on how management should interpret and use your results.
It is assumed that the counter party is rated 5B by Wellfleet's internal rating model and credit committee. This translates to a Probability of Default of 0.39%.
Wellfleet expects to earn a margin of 425 basis points in the first six months and 525 basis points thereafter. The upfront fee is 30 basis points which translates into $3,000,000.
The drawn amount would equal the limit which is requested to be $1,000,000,000.
Wellfleet's model indicates that the Loss Given Default for this transaction would be 52.25%.
Treasury assesses Capital Charge as $3,800,000
Group Finance provides the following overhead allocations to the transaction: cost ($500,000) and tax ($12,000,000).

Expected Lost
= Probability of Default × Exposure at Default ($) × Loss Given Default (%)
= 0.39% × $1,000,000,000 × 52.25%
= $2,037,750

Total Revenue
= Interest Income + Fee Income
= ($500,000,000 × 4.25%) + ($500,000,000 × 5.25%) + ($1,000,000,000 × 0.3%)
= $21,250,000 + $26,250,000 + $3,000,000
= $50,500,000

Risk-Adjusted Revenue (RAR)
= Total Revenue - Total Expected Loss
= $50,500,000 - $2,037,750
= $48,462,250

Economic Revenue
= RAR - Net Capital Charge
= $48,462,250 - $3,800,000
= $44,662,250

Economic Profit
= Economic Revenue - Cost - Tax
= $44,662,250 - $500,000 - $12,000,000
= $32,162,250

Although there is a significant positive economic profit from this transaction, management should also consider that GCC is the third largest gold producer and is extremely sensitive to changes in global prices. Additionally, their EBITDA was 800% in 2007 that rose from 200% in 2006 and 130% in 2003. GCC's debt protection is not impressive either with their EBIT to interest expense at -3.1% in 2007.
However, GCC has a diversified production base as well as being able to be efficient in their production (in the lower 50% of global cost curves on average across all their mines). Moreover, this deal would help Wellfleet Bank's corporate banking business growth greatly. Taking all these factors into consideration, the management team should interpret this as a positive step towards their future development.

4. Analyse the risk management processes at Wellfleet Bank. What suggestions might you make to the CEO about improving the process?
Wellfleet Bank's risk management function have complex hierarchal structures to ensure that the risk remained below preset limits (Mikes 2009). However, Mayfield (cited in Mike 2009, p. 5) mentioned that this may not be efficient because all risk interact with each other. For example, price changes may indirectly affect business risk and market risk at the same time. While Wellfleet Bank's strategies for the bigger picture involves large-scale transformational deals, CEO Alastair Dawes does not involve in the decision making process. According to Mikes (2009) several of Wellfleet Bank's competitors had already done away with committee decision-making in their corporate banking businesses and rely more on risk-adjusted performance metrics. While this system may not suit Wellfleet Bank, integrating the CEO's decisions into the Group Credit Committee might help Wellfleet Bank focus better on their organisational goals.
On the other hand, Wellfleet Bank's "Alpine Pass" process may be counterproductive for the organisation as a whole. Too much hierarchical management would delay decision making processes leading inefficiencies (Leibenstein 1987). This could be reduced by giving relationship managers more responsibilities within the small credit or lower risk sectors. By delegating smaller tasks to others, the credit officers can focus on larger and riskier deals.

References
Lange, H., Saunders, A., Anderson, J. A., Thomson, D., & Cornett, M. M. 2007, Financial Institutions Management 2e, McGraw-Hill Higher Education.
Leibenstein, H. 1987. Inside the firm: the inefficiencies of hierarchy. Cambridge, MA: Harvard University Press.
Mikes, A 2009, 'Risk Management at Wellfleet Bank: All That Glitters Is Not Gold', Harvard Business School Cases, p. 1, Business Source Premier, EBSCOhost, viewed 4 January 2014.