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CAIIB - RISK MANAGEMENT

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CREDIT MONITORING THROUGH RATING MIGRATION. LOAN REVIEW MECHANISM ... Credit rating agencies fix interest rates on bonds and debentures issued by companies ... – PowerPoint PPT presentation

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Title: CAIIB - RISK MANAGEMENT


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
  • INTEREST RISK
  • LIQUIDITY RISK
  • PRICE RISK
  • OPERATIONAL RISK
  • STRATEGIC RISK
  • REPUTATION RISK

8
RFISK MANAGEMENT
  • IDENTIFICATION
  • MEASUREMENT
  • 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
  • MONITORING
  • 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.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

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
  • 1 1 75 12 3 5 3
  • a. 2 b. 23 c. 25 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
THANK YOU AND WISHING YOU ALL SUCCESS IN
EXAMINATION
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