muzafar's part.pptx

7/30/2019 Muzafar's Part.pptx

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*


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*Value at Risk

VAR summarizes the predicted maximum loss

(worst loss) over a target horizon within a given

confidence level.

Three Approaches to VAR

* Parametric method

*Historical Simulation

* Monte Carlo method


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*Substitutes of VAR

* Maturity Mismatches

*Sensitivity Analysis

*Risk Monitoring

* Evaluate the performance ofbanks risk strategies/policiesand procedures.

* Monitoring function should be independent of taking riskunits

* Information system to support compliance with board policy

* The board on regular basis should review reports

* Banks aggregate market risk exposure

* Market risk policies

* Findings of internal/external auditors


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*Risk Control

* Enforcement of official lines of authority

* Segregation of duties

*Audit

* Review function can be performed by a number of

units in the organization including internal

audit/control department or ALCO support staff.


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*

*Liquidity risk

It is the potential for loss to an institution arising

from either its inability to meet its obligations or tofund increases in assets as they fall due without

incurring unacceptable cost or losses.


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*Early Warning Indicators of Liquidity Risk

* A negative trend or significantly increased risk in

any area or product line.

* Concentrations in either assets or liabilities.

*Deterioration in quality of credit portfolio.

* A decline in earnings performance or projections.

*Rapid asset growth funded by volatile large deposit.


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*Board and Senior Management Oversight

* To position banks strategic direction and tolerance

level for liquidity risk.

* To appoint senior managers who have ability to

manage liquidity risk and delegate them the

required authority to accomplish the job.

* To continuously monitors the bank's performance

and overall liquidity risk profile.

* To ensure that liquidity risk is identified, measured,

monitored, and controlled.


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*Responsibilities of Senior Management

*Develop and implement procedures and practices

that translate the board's goals, objectives, and risktolerances into operating standards

* Adhere to the lines of authority and responsibilitythat the board has established for managingliquidity risk.

*Oversee the implementation and maintenance ofmanagement information and other systems thatidentify, measure, monitor, and control the bank'sliquidity risk..


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*Liquidity Risk Strategy

* Composition of Assets and Liabilities.

*Diversification and Stability of Liabilities.

* Access to Inter-bank Market.

*ALCO/Investment Committee

* Responsible for managing the overall liquidity

* ALCO should meet monthly

* ALCO delegates day-to-day operating

responsibilities to the bank's treasury department


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*Management Information System

*MIS is essential for sound liquidity management

decisions

* Data should be appropriately consolidated,

comprehensive yet succinct, focused, and available

in a timely manner

* Bank liquidity is primarily affected by large,

aggregate principal cash flows, detailed informationon every transaction may not improve analysis.

muzafar's part.pptx

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