Download - Risk Management 40
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Risk Management Department
RISK MANAGEMENT
AN OVERVIEW
RISK MANAGEMENT
AN OVERVIEW
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Risk Management Department
What is Risk ?What is Risk ?
It is the potential that events expected or
unexpected, may have an adverse effect
on a financial institutions capital or
earnings. Risk is inherent in all businessand financial activities. The greater the
financial RISK associated with an activity
normally the greater potential to generate
a high return. This is not applicable for
Operational Risk
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Risk Management Department
Risk ManagementRisk Management
Risk Management is the process of
(i) identifying, (ii) measuring, (iii) monitoring
and (iv) Controlling risks
These four points are essential for risk
management
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Risk Management Department
Types of risks in BanksTypes of risks in Banks
Taking risks can almost be said to be themain business of a bank. A bank that is
run on the principle of avoiding all risks or
as many of them as possible, will be a
stagnant institution and will not progress.
The key is to Manage the Risk and not to
Avoid the Risk since almost always the
other side of the coin of Risk is Reward.The Types of risk run by a bank are given
in the next few slides.
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Types of risks in banksTypes of risks in banks
Credit Risk
Market Risk
Operational Risk
Liquidity Risk
Legal and Regulatory risk
Compliance Risk
Equity Risk
Interest Rate Risk
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Risk Management Department
Types of Risks ina bankTypes of Risks ina bank
Currency Risk
Commodity Risk
Counterparty Risk
Country Risk
Settlement Risk
Political Risk
Project Risk
Industry Risk
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Types of risk run by a bankTypes of risk run by a bank
Strategic Risk
Management Risk
Environment Risk
Sovereign Risk Basis Risk
Repricing Risk
Business Risk
Default Risk Price Risks
Technology Risk
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Market RiskMarket Risk
It is the possibility of loss due to erosion inincome or market value of an on or off balance
sheet position arising out of adverse changes in
the market variables, such as Interest rate
Foreign exchange rate
Equity price
Commodity price
A banks inability to meet its obligations as and whenthey fall due which is called Liquidity Risk is also a kindof market risk, as its impact can also vary with marketconditions
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Risk Management Department
Credit RiskCredit Risk
It is the possibility of loss due to inability or
unwillingness of a customer / counter-
party to honour commitments in relation to
lending, trading, hedging, settlement and
other financial transactions, or due todeterioration in the credit quality.
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Risk Management Department
Operational RiskOperational Risk
It is the possibility of loss due to inadequate or
failed internal processes, people & systems or
from external events. It includes legal risk (but
not limited to exposures to fines, penalties or
punitive damages resulting from supervisory
actions as well as private settlements), but
excludes strategic and reputational risk
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Risk ManagementRisk Management
Risk is omni present
Risks cannot be eliminated
Risks are to be managed
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Risk Management Department
Risk ManagementRisk Management
Goals / Objectives
The primary goal of risk management is not toavoid risks inherent in business but to steerthem consciously and actively.
The basic objectives of risk management is tostrike a balance between risk and returns.
For promoting a balance between risk andreturns, adoption of best practices in bankingsystem is necessary
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Risk Management Department
Risk ManagementRisk Management
Various Stages
Identification of Risk
Measurement of Risk
Monitoring & Controlof Risk
Mitigation of Risk
Maintenance of Capital Adequacy
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Risk Management Department
Whatdo Regulators look for?Whatdo Regulators look for?
A Risk Management Framework oriented towards
banks requirements, dictated by its size,
complexity of business, risk philosophy, market
perception and expected level of capital
A Risk Management System adaptable to changes
in business size, market dynamics and
introductions of innovative products in future
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Risk Management Department
Initiatives taken by RBI
for Risk Management in banks
Initiatives taken by RBI
for Risk Management in banks
RBI issued various circulars, guidelines and
guidance notes on various areas of risk
management to guide / prepare banks for
Basel compliance
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Risk Management Department
ImportantCirculars/
Guidelines/Guidancenotes
ImportantCirculars/
Guidelines/Guidancenotes ALM in Banks dated 10.12.1999.
Guidance notes on Credit Risk and Market Risk dated
12.10.2002.
Capital Charge for market risk dated 09.05.2003
Final Guidance note on Management of Operational
Risk dated 14.10.2005.
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Risk Management Department
Any questions?????
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Thank you