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F201-P&P of Banking :

Risk Management and Basel II


An Overview
Session 6 (Sep, 2016)

Prof Chowdari Prasad


Email id:
chowdari.prasad@ifimbschool.co
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PGDM 2016-18 : Term I


Level 1 Course (3 Credits)

What is Risk?
WHAT IS RISK :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 OUR CONTROL RISK IS SUPPOSED TO BE
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
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 UNCERTAINTIES RESULTING IN
ADVERSE OUTCOME, IN RELATION TO PLANNED OBJECTIVE OR EXPECTATIONS

What is Risk.?
FINANCIAL RISKS ARE UNCERTAINTIES RESULTING IN ADVERSE VARIATION
OF PROFITABILITY OR OUTRIGHT LOSSES. UNCERTAINTIES WHICH IMPACT
THE NET CASH FLOW OF BUSINESS UNFAVORABLE IS RISK. ZERO RISK
WOULD IMPLY NO VARIATION IN NET CASH FLOW.
RISK IS RELATED TO AMOUNT OF CAPITAL THAT THE FIRM REQUIRES TO
ACHIEVE A SUFFICIENT LEVEL OF PROTECTION AGAINST ADVERSE
CIRCUMSTANCES. RISK IS USED TO ADJUST THE RETURNS FROM BUSINESS
ACTIVITIES TO DETERMINE WHETHER ACTIVITIES ARE ADDING VALUE TO
BUSINESS. FINALLY RISK IS PROBABILITY THAT REALISED RETURN WOULD
DIFFERENT FROM THE ANTICIPATED / EXPECTED RETURN ON INVESTMENT.

RETURN THEREFORE SHOUL BE RELATED TO RISK BUSINESSES IS TO BE


MANAGED BY ENHANCEMENT IN RISK ADJUSTED RETURN ON CAPITAL
(RAROC). HIGHER THE RISK IN A BUSINESS, GREATER WOULD BE THE
CAPITAL REQUIREMENT AND RETURN EXPECTATIONS

10/31/16

IBS Challenges etc

10/31/16

IBS Challenges etc

Introduction : Risk
Management
Banks face financial / non-financial

Risks
Credit / Interest Rate / Forex / Liquidity /
Equity Price / Commodity Price / Legal /
Regulatory / Reputational / Operational
Risks etc
Risks are highly independent /
interdependent
Banks are required to:
Identify, measure, monitor and control
risks

Risk Management Function

Organisational Structure
Comprehensive Risk Measurement Approach
Risk Management Policies approved by Board
Guidelines and parameters used to govern
Strong MIS for reporting / monitoring etc
Well laid out procedures, effective control etc
Separate Risk Management Organisation.
Periodical Review and Evaluation

Risk Management Structure


Set risk limits after assessing risks /
capacities
Overall / Independent Risk Mgt
Committee
Empower one group with overall
responsibility
To identify, monitor and measure risk
profile
To develop policies and procedures,
verify the models for pricing

Loan Review Mechanism

An effective tool for constant evaluation


To bring about qualitative changes in admin
Mainly cover large corporate advances
Credit grading process, assessing loan loss
provision, portfolio quality, etc
Promptly identify problem a/cs; initiate action
Evaluate portfolio quality and isolate problems
Provide info for determining adequacy of loan
loss provisioning
Assess adequacy and nonitor compliance
Provide info to Top Mgt on credit
administration

Credit Risk

Market Risk

Operational Risk

Introduction to BIS

Basel I

Basel II

Three Pillars of Basel II

Tier I, II and III Capital

Second Pillar :
Supervisory Review Process

Four Key Principles of


Supervisory Review

The Third Pillar :


Market Discipline

Achieving Appropriate
Disclosure