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Management
Edward H K Ng
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Why Bank Risk Management?
Since 1 January 2007, banks in many countries have started to embrace a new approach to risk management. Commonly termed Bal II, it requires banks to move away from regulatory dictates to internal empirical methods in quantifying risk, especially credit risk.Capital adequacy, for instance, will no longer be bad on loan
classification.Bal II not only prescribes a new paradigm towards risk definition, it requires specific parameters that banks have to u for risk quantification.The module will cover the plus the immen challenges that they po to banks.
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Readings –all uploaded
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Asssment methods
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Report (no hardcopy required) –due Week 5 5.00pm (40%)
–Final examination (50%)
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Attendance –10% with 2% deduction for each misd class
No part of the contents should be reproduced without permission 5of 29•Textbook –Foundations of
Banking Risk, Richard Apostolik, Christopher Donohue and Peter Went, Wiley Finance and GARP •Bring laptop with MS Excel for Week 3 and Week 4 (simulation exercis)
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Cour outline
•Week 1
–Banking Risks (pp 12 –18)–Managing Banks (Chapter 2)
–International Regulation of Bank Risks (pp 65 –77)
•Week 2
–Credit Risk (Chapter 4)
–The Credit Process and Credit Risk Management (Chapter 5)
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•Week 3
–Market Risk (Chapter 6)
•Week 4
–Operational Risk (Chapter 7)
•Week 5
–Regulatory Capital and Supervision under Bal II (Chapter 8)
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Banking Risks (pp 12 –18)Managing Banks (Chapter 2)
International Regulation of Bank Risks (pp 65 –77)
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Banking Risks
•Widely accepted definitions of risk
–Likelihood of undesirable event occurring –Magnitude of loss from unexpected event –Probability that “things won’t go right”–Effects of adver outcome
•Risks faced by banks
–Borrower’s late or non -payment
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–Demand for deposits at faster rate than bank has rerved for (bank run)
–Unfavourable change in market interest rate –Decline in value of curities investments –Human errors or fraud leading to loss
•Regulatory rerve capital or minimum capital requirement the key approach to preventing insolvency arising from risks
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•Bal Accords cornerstone of international risk-bad banking regulations •3 types of risk under Bal II
–Credit risk –Market risk –Operational risk
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•Credit risk
–Potential loss if borrower or counterparty fails to meet its obligations
–Banking book (asts held not for active trading) risk
•Market risk
–Interest rate risk –loss due to interest rate movements
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–Equity risk –loss due to adver change in stock price
–FX risk –loss due to adver exchange rate fluctuations
–Commodity risk –loss due to adver change in commodity price
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•Operational risk
–Loss resulting from inadequate or failed internal process, people, systems and external events –Includes legal risk
–Excludes strategic and reputational risk
•Other risk types
–Liquidity risk –loss due to inability to meet continuing obligations
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–Business risk –loss due to loss in competitive position
–Reputational risk –loss resulting from decrea in standing in public opinion
