Chapter One: Analyzing and Managing Banking Risk

1.1 Bank Exposure to RiskBanking risks fall into four categories (Fig. 1.1):

A. Financial Risks (Pure & Speculative)

B. Operational Risks

C. Business Risks

D. Event Risks

1.2 Corporate Governance

Key Players:A. Systemic:1. Legal and regulatory authorities2. Supervisory authorities

B. Institutional1. Shareholders2. Board of directors3. Executive management4. Audit committee / internal auditors5. External auditors

C. Public / consumers:1. Investors / depositors

2. Rating agencies and media

3. Analysts

1.3 Risk-Based Analysis of Banks

Traditional analysis of a bank’s condition is based on quantitative supervisory tools (e.g. ratios).

Ratios relate to liquidity, capital adequacy, loan quality, and open foreign exchange positions.

However, ratios may not reflect real risk as their quality depend on time, completeness, and accuracy of data used to compute them.

New analysis adds transparency.