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Adverse Outcome On Account of Uncertain Future: What Is Risk?
Adverse Outcome On Account of Uncertain Future: 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%
ii Horizontal Disallowances
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
• 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