Financial English Unit 6: Bank Risk Management
Unit 6: • Revision of Unit 5 • Background information of Unit 6 • Text • Exercises • Assignment
Revision of Text A • Review of Unit 5 • Dictation • Exercises Check-up Blanks filling
Dictation Dictation! You are going to hear 5 sentences. Each will be read three times. Write down the sentences according to what you hear. 1. 2. 3. 4. 5. Check-up
Dictation Key to Dictation: 1. Typically a borrower issues a receipt to the lender promising to pay back the capital. 2. Trading of currencies and bonds is largely on a bilateral basis. 3. Banks take deposits from those who have money to save. 4. Today’s financial crisis is described the current financial crisis as an even that occurs once in 100 years. 5. The Bank of Japan assigned $25 billion to maintain the liquidity of the Japanese market. The government of the country also held a special meeting with the participation of the chairman of the nation’s central bank and ministers for economy and finance.
Check-up II. Fill in the blanks. 1.Home loans are available for____________ like buying a luxurious new house or a new car, etc. Student loan as it itself shows is that it is provided basically to students for _______. Students who want to study more but can not _______can get apply for such loans and continue their studies. 2.When a banker evaluates a borrower’s character, he likes to see the latter’s ties to the community such as long residence, _____________and ________________.
Check-up 3. While applying for a loan, current assets such as________ or goods can increase your loan chances. 4. If you want to get a loan, there is a tip you should follow: first ________ by phone. Ask the receptionist in the bank or the loan department for _________who would handle your loan request. Of course it would be better, but not necessary to get a ___________from a friend or advisor such as your lawyer or accountant.
Check-up 1.Home loans are available forgeneral home purposes like buying a luxurious new house or a new car, etc. Student loan as it itself shows is that it is provided basically to students forhigher education. Students who want to study more but can not affordcan get apply for such loans and continue their studies. 2.When a banker evaluates a borrower’s character, he likes to see the latter’s ties to the community such as long residence, family ties and home ownership.
Check-up 3. While applying for a loan, current assets such asinventoryor goods can increase your loan chances. 4. If you want to get a loan, there is a tip you should follow: first make an appointment by phone. Ask the receptionist in the bank or the loan department for the name of theappropriate person who would handle your loan request. Of course it would be better, but not necessary, to get a referral from a friend or advisor such as your lawyer or accountant.
Unit 6: • Revision of Unit 5 • Background information of Unit 6 • Text • Assignment
Unit 6: • Part I: • 6.1 Brief Introduction • Part II: • 6.2 Key Risk Management
Text : Background Information 本文旨在介绍银行运营过程中常见的几种风险，以及相应的应对措施。自有资本占比低这一特点决定了银行本身具有较强的内在风险性。而各国内外部的经济环境的复杂性使得银行更加无法摆脱各种风险的威胁。这就对银行风险管理提出了更高的要求。主要的银行风险包括信贷风险、市场风险、（上述两种风险重点讲授）利率风险、操作风险等。不同的风险有不同的表现形式，本章主要介绍上述几种风险的防范及管理措施。当然，随着经济的发展，新情况不断涌现，银行业还可能面临更多更大的风险。
Text : Background Information 本章重点难点: 通过本章学习，学生应该掌握 1.银行运营过程中常见的五种风险 2.应对上述五种风险的措施
Text : Background Information 表内业务就是指在资产负债表上反映的业务。比如银行存款、贷款等。
Text : Background Information 表外业务是指商业银行所从事的、按照现行的会计准则不记入资产负债表内、不形成现实资产负债但能增加银行收益的业务。表外业务是有风险的经营活动，形成银行的或有资产和或有负债，其中一部分还有可能转变为银行的实有资产和实有负债，故通常要求在会计报表的附注中予以揭示。
Text : Background Information 期权性风险是一种越来越重要的利率风险，来源于银行资产、负债和表外业务中所隐含的期权。一般而言，期权赋予其持有者买入、卖出或以某种方式改变某一金融工具或金融合同的现金流量的权利，而非义务。
Text : Background Information 流动风险是指出借方(贷款方)想要收回多于速动资产所能提供的资金时产生的风险。
Text • Listening • Language Points
Listening Text Bank Risk Management Listen carefully to the first part of the text and then try to translate it.
Text : Bank Risk Management 6.1 Brief Introduction We are indeed witnessing dramatic shifts in the structure of financial markets all over the world in recent years. Since the summer of 2007, there had been a continuous deterioration of conditions in financial markets. For instance, we have seen significant disruption in several key sectors of our financial system, such as normally creditworthy companies having difficulty issuing commercial paper, dramatic increases in interbank lending rates, and significant concerns about money market funds "breaking the buck."
Text : As a result of these ongoing upheavals, we are experiencing substantial institutional changes, in which some long-standing financial institutions have either failed, sought government assistance, or were forced to merge with other institutions.
Text B: A number of studies analyzing the causes of the current turmoilimpute shortcomings in the risk management practices of financial institutions. It is absolutely clear that many financial institutions need to undertake a fundamental review of risk management. They now realize that ignoring risk management in any aspect of the banking business usually creates problems later on. Risk management shortcomings need to be addressed not only to improve the health and viability of individual institutions, but also to maintain stability for the financial system as a whole.
Text B: Banking, by its nature, entails taking a wide array of risks. Banks need to understand these risks as well as adequately measure and manage them. The key risks faced by banks as well as how to manage the risks will be discussed below.
Text : Language Points disruption n. 中断, 分裂, 瓦解, 破坏 1. a disruption of telephone service during the hurricane 飓风中电话的中断. 2. The state was in disruption. 国家处于分崩离析之中. 3. These were the products of the disruption of the united front of the two parties. 这是两党统一战线破裂了的结果.
Text : Language Points upheaval n. 动乱; 大变动 1. It was faced with the greatest social upheaval since World War ll. 它面临第二次世界大战以来最大的社会动乱。 2. The development of science, especially that of electric industry brings about the upheaval of the industrial look. 科学的发展,特别是电子工业的发展,使工业的面貌发生了巨大的变化。
Text : Language Points turmoil n. 骚乱 currency turmoil 货币混乱 1. The London Stock Exchange is in turmoil today. 今天伦敦证券市场一片混乱。 2. This turmoil has been a lesson to us. 这次动乱从反面教育了我们。
Text : Language Points impute vt.把...归咎[归罪]于; 把...归因于; 把...转嫁于 1. I impute his failure to laziness. 我把他的失败归咎于他的懒惰。 2. They imputed the accident to the driver's carelessness. 他们把这次车祸归咎于司机的疏忽。
Text : Language Points absolutely adv.完全地;肯定地; 绝对地 1. He is absolutely wrong. 他完全错了。 2. It's absolutely impossible. 这绝对不可能。
Text : Language Points fundamental adj.基础的, 基本的, 根本的; 原始的,初级阶段的; 1. a fundamental change 根本变化 2. the fundamental rules of grammar 语法的基本规则 3. The research is at it’s fundamental stage. 研究正处于初级阶段。
Listening Text 6.2 Key Risk Management Listen carefully to the second part of the text and then try to translate it.
Text : Language Points 9.2 Key Risk Management CREDIT RISK MANAGEMENT The extension of loans is the primary activity of most banks. Lending activities require banks to make judgments related tothe creditworthiness of borrowers. These judgments do not always prove to be accurate and the creditworthiness of a borrower may decline over time due to various factors. Consequently, a major risk that banks face is credit risk or the failure of a counterparty to perform according to a contractual arrangement.
Text : Language Points This risk applies not only to loans but to other on- and off-balance sheet exposures such as guarantees, acceptances and securities investments. Serious banking problems have arisen from the failure of banks to recognize impaired assets, to create reserves for writing off these assets, and to suspend recognition of interest income when appropriate
Text : Language Points Large exposures to a single borrower, or to a group of related borrowers are a common cause of banking problems in that they represent a credit risk concentration. Large concentrations can also arise with respect toparticular industries, economic sectors, or geographical regions or by having sets of loans with other characteristics that make them vulnerable to the same economic factors (e.g., highly-leveraged transactions).
Text : Language Points To evaluate the credit risk, banks must first obtain certain basic information that usually is available in a meeting with the potential borrower, such as the integrity of the borrower, his ability to repay and his financial position, how much money is being sought, the purpose of the loan, how long it is needed, and how it will be repaid, etc. Each part of this information should have a reasonable relationship to the other parts. For example, a company seeking loan to conduct coffee importation business will only need three-month financing.
Text : Language Points Since the normal period of time for the company to ship and process the materials as well as to sell the finished products to a coffee company will be within 90 days. So if the company seek a three-year loan to conduct the business, it will be highly unreasonable. For this, banks are required to establish objective credit and investment function which are grounded in sound principles, meanwhile the maintenance of prudent written lending policies, loan approval and administration procedures, and appropriate loan documentation are essential to a bank's management of the lending function.
Text : Language Points Banks should also have a well-developed process for ongoing monitoring of credit relationships, including the financial condition of borrowers. A key element of any management information system should be a data base that provides essential details on the condition of the loan portfolio, including internal loan grading and classifications. When guarantees or collateral are provided, the bank should have a mechanism in place for continually assessing the strength of these guarantees and appraising the worth of the collateral.
Text : Language Points Lastly, banks can deal with the credit risk by credit rationing. That is, banks refuse to make loans even though borrowers are willing to pay the stated interest rate or even a higher rate. Credit rationing takes two forms. The first occurs when a lender refuses to make a loan of any amount to a borrower even if the borrower is willing to pay a higher interest rate. The second occurs when a lender is willing to make a loan but restricts the size of the loan to less than the borrower would like.
Text : Language Points You may be puzzled by the first type of credit rationing. Even if the potential borrower is a credit risk, the bank may extend the loan but at a higher interest. Is that what you think? In fact, borrowers with the riskiest investment projects are exactly those that are willing to pay the highest interest rates. If the borrower took on a high-risk investment and succeeded, the borrower would become extremely rich. But a lender wouldn’t want to make such a loan precisely because the investment risk is high. The likely outcome is that the borrower will not succeed and the lender will not be paid back. So the bank would therefore rather not make any loans at a higher interest rate.
Text : Language Points Generally speaking, the larger the loans, the greater possibilities to the occurrence of credit risk. If a bank gives you a 20,000 yuan loan, you are likely to take actions that enable you to pay it back because you don’t want to hurt your credit rating for the future. However, if the bank lends you 10 billion yuan, you are more like to go to Macao for gambling. The larger your loan, the greater your incentives to engage in activities that make it less likely that you will repay the loan. Since more borrower repay their loans if the loan amounts are small, financial institution ration credit by providing borrowers with smaller loans than they seek, thus to some extent to avoid credit risks .
Text : Language Points MARKET RISK MANAGEMENT Banks face a risk of losses in on- and off-balance sheet positions arising from movements in market prices. Established accounting principles cause these risks to be typically most visible in a bank's trading activities, whether they involve debt or equity instruments, or foreign exchange or commodity positions. One specific element of market risk is foreign exchange risk. Banks act as "market-makers" in foreign exchange by quoting rates to their customers and by taking open positions in currencies. The risks inherent in foreign exchange business, particularly in running open foreign exchange positions, are increased during periods of instability in exchange rates.
Text : Language Points To finance trade without any financial risk requires obtaining a rate in advance at which the cash flows in each currency, for every date, can be matched. More specifically, covering the rate risk requires obtaining financing for the complete duration of the financing need. Covering the exchange risk involves obtaining a rate at which the conversion of currencies will eventually be made. The financing and the exchange risk problems can be solved simultaneously by denominating the financing in the currency of the expected inflows and borrowing an amount equal to the total inflows. Alternatively, the financing may be done for the required amount and time in any currency, while the exchange risk is covered in the forward market by selling the inflow currency against the outflow currency for the specific dates when the inflows are expected.
Text : Language Points In addition, banks should posses the ability to accurately measure and adequately control market risks. Where there is a potential risk, banks should provide an explicit capital cushion for the price risks to which banks are exposed, particularly those arising from their trading activities. Introducing the discipline that capital requirements impose can be an important further step in strengthening the soundness and stability of financial markets. There should also be well-structured quantitative and qualitative standards for the risk management process related to market risk. Bank management should have set appropriate limits and implemented adequate internal controls for their foreign exchange business.
Text : Language Points LIQUIDITY RISK MANAGEMENT Liquidity risk arises from the inability of a bank to accommodate decreases in liabilities or to fund increases in assets. When a bank has inadequate liquidity, it cannot obtain sufficient funds, either by increasing liabilities or by converting assets promptly, at a reasonable cost, thereby affecting profitability. In extreme cases, insufficient liquidity can lead to the insolvency of a bank.
Text : Language Points Therefore, liquidity risk management is of paramount importance. A liquidity shortfall at a single institution can have system-wide repercussions. Financial market developments in the past decade have increased the complexity of liquidity risk and its management. The market turmoil that began in mid-2007 re-emphasized the importance of liquidity to the functioning of financial markets and the banking sector. In advance of the turmoil, asset markets were buoyant and funding was readily available at low cost. The reversal in market conditions illustrated how quickly liquidity can evaporate and that illiquidity can last for an extended period of time.
Text : Language Points The purpose of liquidity management is to ensure that the bank is able to meet fully its contractual commitments. Crucial elements of strong liquidity management include good management information systems, central liquidity control, analysis of net funding requirements under alternative scenarios, diversification of funding sources, and contingency planning. On the other hand, banks should manage their assets, liabilities and off-balance sheet contracts with a view to maintaining adequate liquidity. Banks should have a diversified funding base, both in terms of sources of funds and the maturity breakdown of the liabilities. They should also maintain an adequate level of liquid assets.
Text : Language Points INTEREST RATE RISK MANAGEMENT Interest rate risk refers to the exposure of a bank's financial condition to adverse movements in interest rates. This risk impacts both the earnings of a bank and the economic value of its assets, liabilities and off-balance sheet instruments. The primary forms of interest rate risk to which banks are typically exposed are: (1) repricing risk, which arises from timing differences in the maturity (for fixed rate) and repricing (for floating rate) of bank assets, liabilities and off-balance sheet positions;(2) yield curve risk, which arises from changes in the slope and shape of the yield curve;
Text : Language Points (3) basis risk, which arises from imperfect correlation in the adjustment of the rates earned and paid on different instruments with otherwise similar repricing characteristics; and (4) optionality, which arises from the express or implied options imbedded in many bank assets, liabilities and off-balance sheet portfolios. Although such risk is a normal part of banking, excessive interest rate risk can pose a significant threat to a bank's earnings and capital base. Managing this risk is of growing importance in sophisticated financial markets where customers actively manage their interest rate exposure.
Text : Language Points Banks should have systematic and effective control over interest rate risk, including effective board and senior management oversight, adequate risk management policies and procedures, risk measurement and monitoring systems, and comprehensive controls. In addition, Banks should submit sufficient and timely information to supervisors who can in return help them to evaluate the level of interest rate risk.
Text : Language Points OPERATIONAL RISK MANAGEMENT The most important types of operational risk involve breakdowns in internal controls and corporate governance. Such breakdowns can lead to financial losses through error, fraud, or failure to perform in a timely manner or cause the interests of the bank to be compromised in some other way, for example, by its dealers, lending officers or other staff exceeding their authority or conducting business in an unethical or risky manner. Other aspects of operational risk include major failure of information technology systems or events such as major fires or other disasters.
Text : Language Points For this, the senior management of banks should work out and execute effective internal control and auditing procedures as well as have policies for managing or mitigating operational risk (by insurance or contingency planning). For the risks from technological failures or unexpected events, banks should have adequate and well-tested business resumption plans for all major systems, with remote site facilities, to protect against such events.