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 COULD BE DUE TO US OR BEYOND US

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 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 Contd… RETURN IS THEREFORE RELATED TO RISK RETURNS FROM BUSINESSES ARE TO BE ADJUSTED FOR RISKS FOR COMPARABILITY-THIS IS RAROC

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.. MAJOR RISKS ARE CREDIT RISK MARKET RISK OPERATIONAL RISK INTEREST RISK LIQUIDITY RISK PRICE RISK OPERATIONAL RISK STRATEGIC RISK REPUTATION RISK

RFISK MANAGEMENT IDENTIFICATION MEASUREMENT PRICING COVERING SENSITIVITY VOLATILITY DOWNSIDE POTENTIAL PRICING COVERING COST OF RESORUCES COSTOF OPERATIONS RISK PREMIUM CAPITAL CHARGE MONITORING AND CONTROL MITIGATION TRANSFERING

BASEL 1 & 2 THREE PILLARS TWO TYPES OF CAPITALS DIFFERENT METHODS OF MEASUREMENT OF RWA

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 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 SELECTION, PRUDENTIAL LIMITS CREDIT RATING CREDIT PRICING CREDIT MONITORING THROUGH RATING MIGRATION LOAN REVIEW MECHANISM CREDIT DERIVATIVES AND SECURITIES AND SECURITISATION

OPERATIONAL RISK CAN BE CLASSIFIED BASED ON BOTH SOURCE, IMPACT AND EVENT RISK MITIGATION CAN BE THORUGH AUDIT, VARIOUS REPORTS

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 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 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

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

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

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

An 8 year 8% semi annual bond has a BPV of Rs 125 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

A decline in CRR will cause the yield curve to Slope upward Slope downward Become flatter Remain unchanaged

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

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

SUCCESS IN EXAMINATION THANK YOU AND WISHING YOU ALL SUCCESS IN EXAMINATION