Adverse Outcome On Account of Uncertain Future: What Is Risk?

What is Risk?
Adverse outcome
on account of
uncertain future
TYPES OF RISKS
1. LIQUIDITY RISK
• Funding Risk
• Time Risk
• Call Risk
2. INTEREST RATE RISK
• Gap/ Mismatch Risk
• Yield Curve Risk
• Basis Risk
• Embed Option Risk
• Reinvestment Risk
• Net Interest Position Risk
TYPES OF RISKS
3. CREDIT RISK
• Default Risk
• Counter Party Risk
• Country Risk
4.MARKET RISK
• Price Risk
• Forex Risk
• Market Liquidity Risk
TYPES OF RISKS
6.OPERATIONAL RISKS
• Documentation Risk
• Systems Risk
• Compliance
• Competence Risk
• Communication Risk
• Cultural Risk
• Model Risk
• External Events Risk
• Legal Risk
• Fraud Risk
• Transaction Risk
•
RISK MANAGEMENT
RISK …………
• IDENTIFICATION
• MEASUREMENT
• PRISING
• MONITORING & CONTROL
• MITIGATION
RISK MANAGEMENT-TECHNIQUES
• SENSITIVITY
• BASIS POINT VALUE
• VARIANCE
• DOWN SIDE POTENTIAL
• DURATION
• VALUE AT RISK
BASEL-I
• HERSTATT RISK – 1974
• G-10 GROUP OF COUNTRIES FORMED BCBS
( BASEL COMMITTEE ON BANKING SUPERVISION)
UNDER THE AUSPICES OF BANK FOR
INTERNATIONAL SETTLEMENT
• BASEL – I RELEASED IN 1988 &
ENACTED BY G-10 COUNTRIES IN 1992
• IT COVERS CREDIT RISK ONLY (CAR=8%)
• CAR = CAPITAL / RWA X 100
• STRAIGHT JACKET TYPE OF RISK WEIGHTS
( 0,10,20,50,100) S0VEREIGN-O%, BANKS 20%
,COMPANIES-100%
• RISK WEIGHTAGES WERE ALLOTTED BASED ON
CATEGORY OF THE ACCOUNT AND NOT BASED ON
QUALITY
• MARKET RISK WAS INCLUDED IN BASEL -1 IN 1996
( IMPLEMENTED FROM 1998)
BASEL – II ( THREE PILLARS)
I CAPITAL CHARGE FOR Credit /. Market / Operational Risks
1 CREDIT RISK
A STANDARDISED ASPPROACH
B INTERNAL RATINGS BASED i Foundation approach
APPROACH ii Advanced Approach
2 MARKET APPROACH
A STANDARDISED ASPPROACH i Maturity Method
ii Duration Method
B INTERNAL MODELS METHOD
3 OPERATIONAL RISK
A BASIC INDICATOR APPROACH
B STANDARDISED APPROACH
C ADVANCED MEASUREMENT APPROACH
II SUPERVISORY REVIEW PROCESS
III MARKET DISCIPLINE
STANDARDISED APPROACH
A Independent assessment by External
Credit Assessment Institution
B One Notch below the Sovereign Rating
Sovereign Rating RISK WEIGHTRAGES
sovereign Banks Companies
AAA AA 0 20 100
A+ A- 20 50 100
BBB+ BBB- 50 100 100
BB+ B- 100 100 100
BELOW B- 150 150 150
STANDARDISED APPROACH - SPL. TREATMENT
01 SPL.CATEGORY LOANS RISK WEIGHTAGES
AGRL & SME 75%
HOUSING LOANS 35%
REAL ESTATE LOANS 100%
02 PAST DUE LOANS IF EXISTING PROVISION IS …
< 20% 20% & ABOVE

HOUSING LOANS 100 50%
OTHER LOANS 150% 100%
03 CREDIT CONVERSION FACTORS ARE APPLIED ON NON-FUND
BASED LIMITS
04 CAPITAL CHARGE IS MADE ON BALANCE IN THE LOAN A/C LESS
REALISABLE LUE OF LIQUID SECURITIES
05 CREDIT WORTHINESS OF GUARANTOR IS CONSIDERED WHIOLE
MAKING CAPITAL CHARGE FOR GUARANTEES
STANDARDISED APPROACH:
INTERNAL RATINGS BASED APPROACH
• RISK WEIGHTS ARE ASSIGNED BASED ON THE INTERNAL

RATING OF THE BORROWER
• THE INTERNAL RATING MODEL IS TO BE CLEARED/
APPROVED BY SUPERVISOR / RBI
• CAPITAL CHARGE COMPUTATION IS DEPENDENT ON THE
FORRLOWING FOUR PARAMETERS.
• FOUNDATION APPROACH :
FREEDOM TO COMPUTE 01 &/ OR 4 PARAMETERS ONLY
• ADVANCED APPROACH :
• FREEDOM TO COMPUTE ALL THE FOUR PARAMETERS
01 PD PROBABILITY OF DEFAULT
02 LGD LOSS GIVEN AT DEFAULT
03 ED EXPOSURE AT DEFAULT
04 EM EFFECTIVE MATURITY
MARKET RISK
I INTEREST RATE RELATED INSTRUMENTS ON Capital
TRADING BOOK Charge
A GENARAL MARKET RISK
i Net Position in the Trading Book
ii Horizontal Disallowances
iii Vertical Disallowances
iv Net Charge for Positions in Options
B SPECIFIC CHARGE FOR THE EXPOSURE
II EQUITIES ON TRADING BOOK
A GENARAL MARKET RISK 9%

B SPECIFIC CHARGE FOR THE EXPOSURE 9%
III FOREX / GOLD OPEN POSITION 9%
OPERATIONAL RISK:: BASIC INDICATOR APPROACH
• AVERAGE GROSS ANNUAL INCOME

(Positive) FOR THE LAST THREE
YEARS X 15% ( ALPHA FACTOR)
• GROSS INCOME =
• OPERATING PROFIT
+ OPERATING EXPENSES
- EXTRAORDINARY INCOME
- REALISED PROFITS FROM SALE OF
INVESTMENTS IN BANKING BOOK
OPERATIONAL INCOME : STANDARDISED APPROACH
• CAPITAL CHARGE = AVERAGE ANNUAL GROSS INCOME FOR THE

LAST THREE YEARS FOR EACH BUSINESS LINE
X BETA FACTOR OF THE CONCERNED BUSINESS LINE.
B CORPORATE TRADING & PAYMENT &

18% FINANCE SALES SETTLEMENT
B COMMERCIAL AGENCY
15% BANKING SERVICES
B RETAIL RETAIL ASSET
12% BANKING BROKERING MANAGEMENT
OPERATIONAL RISK : :ADVANCED MEASUREMENT APPROACH
A QUALITATIVE STANDARDS
01 O. R . M SHOULD BE AN INDEPENDENDENT FUNCTION
02 IT SHOULD BE INTEGRATE IN TO DAY TO DAY FUNCTIONING
03 PROPER DOCUMENTATION
04 REGULAR REPORTING
05 REGULAR REVIEW BY AUDITORS/ INJSPECTORS
06 VALIDATION OF THE SYSTEM BY SUPERVISORS (RBI)
B QUANTITATIVE TECHNIQUES
01 ORM SYSTEM SHOULD BE GRANULAR & CONSISTENT
02 CORRELATION ASSUMPTIONS SHOULD BE SOUND
03 THE KEY ELEMENTS IN THE SYSTEMS SHOULD MEET RBI STANDARDS
04 THE APPROACH SHOULD BE CREDIBLE,TRANSPARENT, WELL DOCUMENTED
AND VERIFIABLE
05 A BANK MUST USE SCENARIO ANALYSIS OF EXPERT OPINION IN CONJUGATION
WITH THE EXTERNAL DATA TO EVALUATE ITS EXPOSURE.
06 LOSS DATA FOR AT LEAST LAST 5 YEARS SHOULD BE VERIFIED
07 A BANK SHALL CALCULATE THE REGULATORY CAPITAL, AND THE EXPEXCTED
AND UN-EXPECTED LOSSES
PILLAR –II :: SUPERVISORY REVIEW PROCESS
SUPERVISOR IS REQUIRED TO ENSURE THE FOLLOWING

• BANKS HAVE ADEQUATE CAPITAL TO SUPPORT RISKS
• QUALITY OF BANK’S RISK MANAGEMENT & CONTROL
• BANKS TO OPERATE WITH A BUFFER OVER & ABOVE THE
MINIMUM CAR
• PROMPT CORRECTIVE ACTION TO ENSURE THAT THE CAR
OF THE BANKS IS RESTORED BACK TO TO MINIMUM LEVEL
THE SUPERVISOR IS REQUIRED TO CONCENTRATE ON:

• CREDIT CONCENTRATION RISK
• STRATEGIC RISK
• INTEREST RATE RISK IN THE BANKING BOOK
• RESIDUAL RISKS
PILLAR –III ::MARKET DISCIPLINE
• BANKS SHOULD MAKE QUARTERLY/SEMI-ANNUAL/ ANNUAL DISCLOSURES
SL RISK DISCLOSURES UNDER’…………

01 SCOPE OF APPLICATION
02 CAPITAL STRUCTURE
03 CAPITAL ADEQUACY
04 CREDIT RISK GENERAL DISCLOSURES
05 STANDARDISED APPROAH
06 INTERNAL .RATINGS.BASED APPROACH
07 CREDIT RISK MITIGATION STANDARD & IRB APPROACHES
08 SECURITIZATION STANDARD & IRB APPROACHES
09 MARKET RISK STANDARTIZED APPROACH
10 INTERNAL MODELS METHOD
11 OPERATIONAL RISK
12 EQUITIES BANKING BOOK POSITIONS
13 INTEREST RATE RISK BANKING BOOK
CREDIT RISK MANAGEMENT-
ORGANIZATIONAL STRUCTURE
• Board of directors
• Risk management committee
• Credit policy committee
• Credit risk management deprtment
RISK IDENTIFICATION-
TRANSACTIONAL LEVEL
• DEFAULT RATE
( RECOVERY RATE)
• CREDIT SPREAD RISK
( CHANGE IN THE RATING)
RISK IDENTIFICATION –
PORTFOLIO LEVEL
• CONCENTRATION RISK
• SYSTEMATIC RISK
RISK MEASUREMENT
• CREDIT RATING
• ESTIMATING THE EXPECTED LOAN
LOSSES
RISK MEASUREMENT MODELS
• ALTAMEN ‘Z’ SCORE MODEL
( WHETHER A COMPANY BECOMES
INSOLVENT IN12 MONTHS)
• J.P.MORGAN CREDIT
METRICS( Probability of migration of one
account to another category)
• CREDIT SWISS- credit risk +
(Actuarial calculations of expected defaults
and unexpected losses)
RISK PRICING
CALCULATION OF BPLR BASED ON
• COST OF CAPITAL
• PROBABLE LOAN LOSSES
• ESTABLISHMENT COSTS
• PROFIT MARGIN
Risk control- Transactionlevel
• Credit appraisal
• Credit analysis
• Credit audit
• Loan Review
• Monitoring the progress
RISK CONTROL-Portfolio level
• Credit policy
• Exposure norms
• Prudential Norms
• Delegation of Powers
• Avoiding the credit concentration
• Credit5 Derivatives

Adverse Outcome On Account of Uncertain Future: What Is Risk?

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Adverse Outcome On Account of Uncertain Future: What Is Risk?

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What is Risk?

HOUSING LOANS 35%

REAL ESTATE LOANS 100%

02 PAST DUE LOANS IF EXISTING PROVISION IS …

< 20% 20% & ABOVE

• RISK WEIGHTS ARE ASSIGNED BASED ON THE INTERNAL

i Net Position in the Trading Book

iii Vertical Disallowances

iv Net Charge for Positions in Options

B SPECIFIC CHARGE FOR THE EXPOSURE

II EQUITIES ON TRADING BOOK

A GENARAL MARKET RISK 9%

• AVERAGE GROSS ANNUAL INCOME

• CAPITAL CHARGE = AVERAGE ANNUAL GROSS INCOME FOR THE

B CORPORATE TRADING & PAYMENT &

SUPERVISOR IS REQUIRED TO ENSURE THE FOLLOWING

THE SUPERVISOR IS REQUIRED TO CONCENTRATE ON:

SL RISK DISCLOSURES UNDER’…………

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