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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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    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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    Risk Management Department

    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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    Risk Management Department

    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 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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    Risk Management Department

    Thank you


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