5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
-
Upload
mayank0963 -
Category
Documents
-
view
220 -
download
0
Transcript of 5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
-
7/31/2019 5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
1/14
6/5/2012 1
RISK MANAGEMENT IN
BANKSBy
Shyam Ji Mehrotra
-
7/31/2019 5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
2/14
6/5/2012 2
Overview
ofBank Financial Management
-
7/31/2019 5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
3/14
6/5/2012 3
Wind of change
Competition is opening opportunity as wellthreats
To raise capital time and again to meet
CRAR norms - Now Basel IIIVarious risk in banking business
Credit risk
Market risk covering liquidity risk, interest raterisk, forex-risk
Operational risk
Complexity of risk
-
7/31/2019 5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
4/14
6/5/2012 4
Bank Financial ManagementObjectives
Optimize shareholders wealth
Stabilize and Increase net interest margin(NIM)
Improve ROA as well as ROE
Improve market share (Top line)
-
7/31/2019 5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
5/14
6/5/2012 5
Bank Financial Management
FinancialManagement
Bank FinancialManagement
Working capital
decision
Liquidity and interest rate
management decisionsCapital budgetingdecisions
Credit and costmanagement decisions
Financing decisions Funding decisions
Dividend distributionmanagement decisions
Capital accountmanagement decisions
-
7/31/2019 5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
6/14
6/5/2012 6
Five critical Management variables
Variables Nature
I Liquidity Management
II Interest rate risk management
III Capital account management
IV Cost (Productivity ) Management
V Credit risk management
All Profitability management
-
7/31/2019 5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
7/14
6/5/2012 7
CAMEL MODEL
C Cost management and credit riskmanagement
A The A in asset and liability managementrefers to liquidity management
M Managerial expertise (or hump of thecamel) in dealing with all five criticalfinancial management variablessimultaneously
E Equity or capital account management
L The L in asset and liability management
refers to Interest Rate risk management
-
7/31/2019 5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
8/14
6/5/2012 8
Financial Risk
Definition of risk likely loss given an event
Identify various type of risk Credit risk
Market risk
Operational risk
Measure risk quantify the likely loss because of exposure
Integrated risk management system
-
7/31/2019 5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
9/14
6/5/2012 9
Credit risk
Defined as the potential that a bankborrower or counterparty will fail to meetits obligations in accordance with agreed
terms
Either failing to repay the loan or serviceas per loan agreement
-
7/31/2019 5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
10/14
6/5/2012 10
Credit risk-examples
Direct lending- repayment is not made
Non fund- funds not forthcoming oncrystallization of LC/BG
Series of payment due from bonds are notforthcoming on due dates
Security trading- settlement not
forthcoming Cross border exposure- currency
movement not taking place
-
7/31/2019 5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
11/14
6/5/2012 11
Market risk
Losses in on and off balance sheet itemsarising from movement in market prices
Main market risks are
Interest rate risks
Exchange rate risks
Commodity price risks
Equity price risks
Liquidity risks
-
7/31/2019 5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
12/14
6/5/2012 12
Interest rate risk
Mismatch or Gap risk
Basis risk
Embedded option risk
Reinvestment risk
Price risk
-
7/31/2019 5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
13/14
6/5/2012 13
Operational Risk
Direct or indirect loss due to failedinternal process or people or system orfrom external events
Include legal risk as well
-
7/31/2019 5674_172_137_916_39_RISK MANAGEMENT IN BANKS-1
14/14
6/5/2012 14
Risk mitigationIntegrated risk management process
Identify risk
Set objectives relative to risk Measure and monitor risk
Communicate risk tolerance
Control risk