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Risk Management 40

Risk Management 40

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Published by: vrekhavasu on Jan 19, 2011
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Risk Management Department

What is Risk ?
It is the potential that events expected or unexpected, may have an adverse effect on a financial institution¶s capital or earnings. Risk is inherent in all business and 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
Risk Management Department

Risk 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

Risk Management Department

Types of risks in Banks
Taking risks can almost be said to be the main 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 ³Risk´ is ³Reward´. The Types of risk run by a bank are given in the next few slides.
Risk Management Department

Types of risks in banks
‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Credit Risk Market Risk Operational Risk Liquidity Risk Legal and Regulatory risk Compliance Risk Equity Risk Interest Rate Risk
Risk Management Department

Types of Risks in a bank
‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Currency Risk Commodity Risk Counterparty Risk Country Risk Settlement Risk Political Risk Project Risk Industry Risk
Risk Management Department

Types 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
Risk Management Department

Market Risk
It is the possibility of loss due to erosion in income 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 bank¶s inability to meet its obligations as and when they fall due which is called Liquidity Risk is also a kind of market risk, as its impact can also vary with market conditions Risk Management Department

Credit Risk
It is the possibility of loss due to inability or unwillingness of a customer / counterparty to honour commitments in relation to lending, trading, hedging, settlement and other financial transactions, or due to deterioration in the credit quality.

Risk Management Department

Operational 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

Risk Management Department

Risk Management

‡ ‡ ‡

Risk is omni present Risks cannot be eliminated Risks are to be managed

Risk Management Department

Risk Management
Goals / Objectives ‡ The primary goal of risk management is not to avoid risks inherent in business but to steer them consciously and actively. ‡ The basic objectives of risk management is to strike a balance between risk and returns. ‡ For promoting a balance between risk and returns, adoption of best practices in banking system is necessary
Risk Management Department

Risk Management
Various Stages ‡ ‡ ‡ ‡ ‡ Identification of Risk Measurement of Risk Monitoring & Control of Risk Mitigation of Risk Maintenance of Capital Adequacy

Risk Management Department

What do Regulators look for?
‡ A Risk Management Framework oriented towards bank¶s 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
Risk Management Department

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

Risk Management Department

Important Circulars/ Guidelines/Guidance notes
‡ 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.

Risk Management Department

‡ Any questions?????

Risk Management Department

‡ Thank you

Risk Management Department

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