1. CAIIB - RISK MANAGEMENT – MODULE B
G.R.Rao, Faculty, IIBF

2. 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

3. 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

4. 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

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

6. 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

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

8. 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

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

10. 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

11. 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

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

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

14. 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.

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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 profit
Rs 1000 loss
Rs profit
Rs loss

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

22. 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
a b c d. 21

23. 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

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