Back to the Future in Financial Risks of Banking - A Dimensional Test Approach. Murthy Yerraguntla Srilatha Ganapati Vasu Nagendran N Infosys Limited (NASDAQ: INFY). Abstract.
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Back to the Future
in Financial Risks of Banking
- A Dimensional Test Approach
Srilatha Ganapati Vasu
Infosys Limited (NASDAQ: INFY)
Today’s banking world faces the toughest challenges than any industry and they must take calculated risks to outshine the competitors. Failure to balance between risks and profit results definite catastrophe in terms of financial liability, stakeholders wealth and trust. This is precisely why the Financial Risk Management and control has gained more prominence in the recent past. It has become one of the core disciplines to identify measure and monitor profile of the banks. Supervisory Committees such as Basel have been coming up with more rigorous control measures to safeguard the banks and stakeholders from the pangs of financial risk.
Every financial player in the market must provide accurate and timely updates to the regulatory bodies and abide by the rules of compliance. In order to comply with this, banks rely upon software applications to generate reports and assure the risks are hedged appropriately. Testing plays a crucial role in ensuring that the various risks have been thoroughly analyzed and observations are reported to management.
Types of major Risks
Sub-categories of Risk
Major Bank Failures
A brief history of Basel Committee
Basel I Capital Accord
Basel II Capital Accord
Fig 1 – Pillars of Basel II
Transformation of QA profile during Basel I
Scope of QA during Basel 1
Transformation of QA profile during Basel II
Scope of QA during Basel 2
QA Progression into Two dimensional
Are we there yet???
QA: Market Risk Charge is zero for some records in Source system
Business : All the records reported are for historical data. Source is Basel1 compliant and VaR estimates will not be available. IMA implemented only after 1998.
QA : There are 100 mismatches in the Location field between Source and Target.
Business : This is branch roll up which is common across OTC instruments. Not an issue. BAU
Introduction to Basel Capital Accord III
QA with Key Objectives of Basel III
QA at the end of Basel III
Fig 3 – Changes done to Basel II
Did we meet the objectives?