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Risk Management Department

RISK MANAGEMENT

AN OVERVIEW

RISK MANAGEMENT

AN OVERVIEW

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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 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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Risk Management Department

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 Management Department

Risk ManagementRisk Management

Risk is omni present

Risks cannot be eliminated

Risks are to be managed

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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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Any questions?????

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Thank you