risk management alm npas 2008
TRANSCRIPT
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Risk Management & Compliance
with RBI Guidelines
PGP Jan 2008-10
Oct 4, 2008
Prof Chowdari Prasad
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Commercial Banking PG Risk Management & Compliances 2
Risk Management
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Components of a Bank B/S
1. Cash & Balances with
RBI
2. Bal. With Banks &
Money at Call and
Short Notices
3. Investments
4. Advances
5. Fixed Assets
6. Other Assets
1. Capital
2. Reserve & Surplus
3. Deposits
4. Borrowings
5. Other Liabilities
AssetsLiabilities
Contingent Liabilities
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What is Risk?
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What is Risk? (2)
A Ship is very safe in ashore.
But, it is not meant for that.
A Ship has to sail bytaking RISK.
Banking too is no exception.
A Bank has to carryBusiness by taking
(Informed & calculated) RISK
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What is Risk? (3)
The threat that an event or action will
adversely affect an organization's ability to
achieve its business objectives and
execute its strategies successfully.
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Sources of Risk
Decision, Indecision Business cycles/Seasonality
Economic/Fiscal
changes Policy Changes
Market movements
Events
Political compulsions Regulations
Human resources,skill sets
Competition
Technology
Non-availability of
information
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Different Types of Risks
Banks and Financial Institutions, in the process ofcarrying their businesses, face various kinds of financial
and non-financial risks -
Credit Risk
Liquidity Risk
Interest Rate Risk
Market Risk
Off-Balance Sheet Risk
Foreign Exchange Risk
Country or Sovereign Risk .................
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Different Types of Risks (2)
Operational Risk
Technology Risk
Compliance (Regulatory) Risk
Legal Risk
Reputation Risk
Insolvency Risk
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Inter-dependence of Risks
These risks are highly interdependent and
events that affect each other
One area of risk can have ramifications for
a range of other risk categories.
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What is Risk Management?
A system by which an organization
- evaluates, deals with and monitors risk
-to achieve its strategies successfully. It is the art of approximation
It is a planned method of dealing with
uncertainties of possible danger of loss
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Why Risk Management?
All transactions undertaken have one or moreRisks. Risks are attached to Portfolio too.
Aggregated Risk determines Capital needs of a
Bank / Financial Institution Hence, one of the objectives of Risk
Management is to enhance Risk Adjusted
Return on Capital (RAROC)
RM facilitates implementation of Risk and
Business Policies simultaneously in a consistent
manner
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Risk Management Framework
Risk ProfilingRisk Identification
Risk Measurement
Risk PricingRisk Monitoring, Compliance and Control
Risk MitigationComprehensive Risk Management should address all
the risks faced by an organization and their interlinkages
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Risk Identification
Identifying various Risks associated at the
Transaction Level and
Examining its impact on the Portfolio and Capital
requirement. Risk identification helps Head Office of a Bank to
approve Products and their screening
procedures and appropriate safeguards; Fixing
Limit exposure - product-wise and amount wise
and provide necessary risk taking guidelines.
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Risk Measurement
Uses Quantitative measures of Risk
Seek to measure variations in Earnings,
Market value, Losses due to default, etc.
Quantitative Measures used are :
Sensitivity
Volatility
Downgrade potential
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Risk Pricing
Implies factoring risks into pricing
Pricing should take into account besides
Profit Margin, the following:
Cost of Funds
Operating Expenses
Loss Probabilities
Capital Charge
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Risk Monitoring and Control
Adequate internal control system formonitoring compliance of internal policiesand reporting risk exposures
Conduct periodic reviews, periodic
supervision and inspections Identification of large exposures and Risk
concentrations Top Management involvement - review
reports on Risk Profile and Capital needsregularly and evaluate to make necessaryadjustments to Banks Business Plans
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Risk Mitigation
Achieved by adopting strategies that
eliminate or reduce various risks
Uses variety of Financial Instruments and
techniques to mitigate risks Collateralizations, third party guarantee
Insurance cover, Institutional Credit
Guarantee Schemes Hedging and
Securitisation
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RISK MANAGEMENT ORGANISATION
The Board of Directors
The Risk Management Committee
Integrated Committee / RespectiveCommittees
The Middle Office / Support Groups
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RISK MANAGEMENT FRAMEWORK
OF BANKS IN INDIA
The broad parameters of risk managementfunction encompass: Board approves risk management policies in
consonance with the
broader business strategies capital strength management expertise and overall willingness to assume risk
guidelines to govern risk including detailed structure ofprudential limits
Periodical review and evaluation
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RISK MANAGENET- COMMITTEE
Risk Management Committee with the top Executives as
members - reports directly to the Board of Directors RMC will evaluate
overall risks faced by the bank and determining the level of risks which will be in the best
interest of the bank . The Risk Management Committee will:
identify, monitor and measure the risk profile ofthe bank
develop policies and procedures
identify new risks Fixing the quantitative prudential limits on various
segments of banks operations
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RISK MANAGEMENT COMMITTEES
Asset - Liability Management Committeedeals with different types of market risks
Credit Policy Committee (CPC) deals with
credit / counter party risk and country risk Market and Credit risks are managed in a
parallel two-track approach in banks