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CAIIB - RISK MANAGEMENT – MODULE B

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CAIIB - RISK MANAGEMENT – MODULE B. G.R.Rao, Faculty, IIBF. WHAT IS RISK. EVERY ACTION HAS A REACTION IF REACTION IS FOR OUR BEENFIT; NO WORRY AND NO RISK IF IT IS AGAINST OUR INTEREST ONLY WE ARE WORRIED AND THAT IS RISK RISK IS THEREFORE POSSIBILITY OF A NEGATIVE RESULT FOR OUR ACTIONS

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what is risk
WHAT IS RISK
  • EVERY ACTION HAS A REACTION
  • IF REACTION IS FOR OUR BEENFIT; NO WORRY AND NO RISK
  • IF IT IS AGAINST OUR INTEREST ONLY WE ARE WORRIED AND THAT IS RISK
  • RISK IS THEREFORE POSSIBILITY OF A NEGATIVE RESULT FOR OUR ACTIONS
  • COULD BE DUE TO US OR BEYOND US
risk contd
RISK Contd…
  • RISK IS SUPPOSED TO HAVE BEEN DERIVATIVE OF “RISICARE” WHICH MEANS “TO DARE”
  • DARING IS TO TAKE STEPS RECOGNISING THE POTENTIAL FOR LOSS
  • EXTENT OF THIS BEHAVIOUR IS “TAKER” SPECIFIC
  • MORE RISK IS TAKEN IN VIEW OF POTENTIAL FOR HIGHER YIELD
risk contd4
RISK Contd…
  • DUE TO RISK EITHER , PROFITS AND CAPITAL MAY GROW MULTIFOLD OR BUSINESS MAY BE WIPED OUT
  • NEVERTHLESS WE CANNOT BE RISK FREE/AVERSE BANKER LIKE A SHIP IN A PORT
  • BANKING IS THEREFORE RISK MANAGEMENT
risk contd5
RISK Contd…
  • RETURN IS THEREFORE RELATED TO RISK
  • RETURNS FROM BUSINESSES ARE TO BE ADJUSTED FOR RISKS FOR COMPARABILITY-THIS IS RAROC
banking business
BANKING BUSINESS
  • BUSINESS IS BROADLY DIVIDED INTO ON BALANCE SHEET AND OFF BALANCE SHEET ACTIVITIES.
  • ON BALANCE SHEET ACTIVITIES ARE BANKING BOOK (DEPOSITS & ADVANCES) AND TRADING BOOK(INVESTMENTS)
  • BANKING BOOK HAS NO MARKET RISK
  • RISKS COMMON TO BOTH BOOKS ARE CREDIT, OPERATIONAL
risks contd
RISKS Contd..
  • MAJOR RISKS ARE
    • CREDIT RISK
    • MARKET RISK
      • INTEREST RISK
      • LIQUIDITY RISK
      • PRICE RISK
    • OPERATIONAL RISK
    • STRATEGIC RISK
    • REPUTATION RISK
rfisk management
RFISK MANAGEMENT
  • IDENTIFICATION
  • MEASUREMENT
    • SENSITIVITY
    • VOLATILITY
    • DOWNSIDE POTENTIAL
  • PRICING COVERING
    • COST OF RESORUCES
    • COSTOF OPERATIONS
    • RISK PREMIUM
    • CAPITAL CHARGE
  • MONITORING AND CONTROL
  • MITIGATION
    • TRANSFERING
basel 1 2
BASEL 1 & 2
  • THREE PILLARS
  • TWO TYPES OF CAPITALS
  • DIFFERENT METHODS OF MEASUREMENT OF RWA
market risk
MARKET RISK
  • HAS A COMPONENT OF CREDIT RISK IN ADDITION TO PRICE, LIQUIDITY AND INTEREST RATE RISKS
  • LIQUIDITY RISK CAN ALSO BE DUE TO MARKETS
  • RISK IN INVESTMENTS IS MEASURED THRO’ BPV, MODIFIED DURATION, VaR AND YIELD AND PRICE VOLATILITIES
monitoring control and mitigation
MONITORING & CONTROL AND MITIGATION
  • MONITORING
    • POLICY GUIDELINES FOR VARIOUS ACTIVITIES
    • CAPS FOR TRANSACTION SIZES, STOP LOSS LIMITS, GUIDLEINES ON PORTFOLIO SIZES BOTH TYPE AND INDUSTRY, EXPOUSRE NORMS
  • MITIGATION THROUGH DERIVATIVES
credit risk
CREDIT RISK
  • CREDIT SELECTION, PRUDENTIAL LIMITS
  • CREDIT RATING
  • CREDIT PRICING
  • CREDIT MONITORING THROUGH RATING MIGRATION
  • LOAN REVIEW MECHANISM
  • CREDIT DERIVATIVES AND SECURITIES AND SECURITISATION
operational risk
OPERATIONAL RISK
  • CAN BE CLASSIFIED BASED ON BOTH

SOURCE, IMPACT AND EVENT

  • RISK MITIGATION CAN BE THORUGH AUDIT, VARIOUS REPORTS
objective questions
OBJECTIVE QUESTIONS

Q. RAROC STANDS FOR

A. RISK ADJUSTED RETURN ON CAPITAL

B. RISK ADJUSTED RETURN ON COST.

C. RETURN ADJUSTED RISK ON CREDIT.

D NONE OF ABOVE.

Q.CREDIT DEFAULT SWAPS ARE

A. ONE OF CREDIT DERIVATIVES.

B. A KIND OF BANK GUARANTEE

C. A KIND OF LINE OF CREDIT.

D. STAND BY CREDIT.

objectives
OBJECTIVES

Q. THE BETA FACTOR FOR CALCULATING OPERATIONAL RISK UNDER STANDARDIZED APPROACH FOR RETAIL BANKING IS

A. 12%

B.18%

C.15%

D. NONE OF ABOVE.

Q. PROBABILITY OF OCCURRENCE =4; POTENTIAL FINANCIAL IMPACT =4; IMPACT OF INTERNAL CONTROL =0%

  WHAT IS ESTIMATED LEVEL OF OPERATIONAL RISK?

A. 3

B. 2

C. 0

D. 4

objective questions16
OBJECTIVE QUESTIONS
  • INORDER TO DEVELOP ACTIVE CREDIT RISK MANAGEMENT, BANK MUST HAVE 1.GOOD CREDIT RATING MODEL AND 2. CONDUCT MIGRATION STUDIES
  • both of the above are required
  • Only 1 is required
  • Only 2 is required
  • both are insufficient
slide17
A transaction where financial securities are issued against cash flows generated from a pool of assets is called
  • Credit default swap
  • Securitisation
  • Participation certificate
  • Credit linked notes
slide18
A bank expects fall in price of a security if it sells it in the market. What is the name of such risk?
  • Market risk
  • Operational risk
  • Asset liquidation risk
  • Market liquidity risk
slide19
Credit rating agencies fix interest rates on bonds and debentures issued by companies

a. true

b. False

c. Cannot say

d. Only RBI can fix rate

slide20
An 8 year 8% semi annual bond has a BPV of Rs 125.The yield on the bond has increased by 5 basis points. What is the profit or loss suffered in price due to increase in yield?
  • Rs 1000 profit
  • Rs 1000 loss
  • Rs 625 profit
  • Rs 625 loss
slide21
A decline in CRR will cause the yield curve to
  • Slope upward
  • Slope downward
  • Become flatter
  • Remain unchanaged
slide22
Given the rating migration of 100 a rated accounts in bank during a year as under, please answer the number of accounts who suffered rating migration.

A++ A+ A B+ B C Default

1 1 75 12 3 5 3

a. 2 b. 23 c. 25 d. 21

slide23
ABC financial corporation has lent Rs 1500 crores, at an average contractual rate of 14%. Past experience indicates that the probability of repayment is 0.90 what would be the expected return rate of the corporation if the recovery rate of principal and interest is 0.95

Expt. rate = p * r + q [ (1 + r) R -1]

Where p is probability of repayment q= 1-p

r is contractual rate and R is recovery rate

slide24

THANK YOU AND

WISHING YOU ALL

SUCCESS IN EXAMINATION

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