CAIIB
- RISK MANAGEMENT
– MODULE B
G.R.Rao, Faculty, IIBF
WHAT IS RISK
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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
RISK Contd…
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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
RISK Contd…
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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
RISK Contd…
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RETURN IS THEREFORE RELATED TO
RISK
RETURNS FROM BUSINESSES ARE TO
BE ADJUSTED FOR RISKS FOR
COMPARABILITY-THIS IS RAROC
BANKING BUSINESS
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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
RISKS Contd..
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MAJOR RISKS ARE
– CREDIT RISK
– MARKET RISK
INTEREST RISK
 LIQUIDITY RISK
 PRICE RISK
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– OPERATIONAL RISK
– STRATEGIC RISK
– REPUTATION RISK
RFISK MANAGEMENT
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IDENTIFICATION
MEASUREMENT
– SENSITIVITY
– VOLATILITY
– DOWNSIDE POTENTIAL
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PRICING COVERING
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COST OF RESORUCES
COSTOF OPERATIONS
RISK PREMIUM
CAPITAL CHARGE
MONITORING AND CONTROL
MITIGATION
– TRANSFERING
BASEL 1 & 2
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THREE PILLARS
TWO TYPES OF CAPITALS
DIFFERENT METHODS OF
MEASUREMENT OF RWA
MARKET RISK
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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
MONITORING & CONTROL AND
MITIGATION
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MONITORING
– POLICY GUIDELINES FOR VARIOUS
ACTIVITIES
– CAPS FOR TRANSACTION SIZES, STOP
LOSS LIMITS, GUIDLEINES ON
PORTFOLIO SIZES BOTH TYPE AND
INDUSTRY, EXPOUSRE NORMS
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MITIGATION THROUGH DERIVATIVES
CREDIT RISK
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CREDIT SELECTION, PRUDENTIAL LIMITS
CREDIT RATING
CREDIT PRICING
CREDIT MONITORING THROUGH RATING
MIGRATION
LOAN REVIEW MECHANISM
CREDIT DERIVATIVES AND SECURITIES
AND SECURITISATION
OPERATIONAL RISK
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CAN BE CLASSIFIED BASED ON BOTH
SOURCE, IMPACT AND EVENT
RISK MITIGATION CAN BE THORUGH
AUDIT, VARIOUS REPORTS
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.
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
OBJECTIVE QUESTIONS
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a.
b.
c.
d.
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
A transaction where financial securities
are issued against cash flows
generated from a pool of assets is
called
a. Credit default swap
b. Securitisation
c. Participation certificate
d. Credit linked notes
A bank expects fall in price of a security
if it sells it in the market. What is the
name of such risk?
a. Market risk
b. Operational risk
c. Asset liquidation risk
d. Market liquidity risk
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
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?
a.
Rs 1000 profit
b.
Rs 1000 loss
c.
Rs 625 profit
d.
Rs 625 loss
A decline in CRR will cause the yield
curve to
a. Slope upward
b. Slope downward
c. Become flatter
d. Remain unchanaged
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
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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
THANK YOU AND
WISHING YOU ALL
SUCCESS IN EXAMINATION