4 Risk Mangement introduction.ppt

7/29/2019 4 Risk Mangement introduction.ppt

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Session- 4

February 14, 2013Shyam Ji Mehrotra1

Risk Management

Introduction


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What is risk?

Uncertainty about rains, flight delayed, income

not genrated

When such events happens, it could result into

loss.

February 14, 2013Shyam Ji Mehrotra

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Not an insurance against fire- put out fire andrisk is mitigated

How historian talk about AC and BC ( after Christ

and before Christ), risk managers talk about Pre

Lehman and Post Lehman

Risk is Vedic recitation; every one talks but no

one really understands

Dynamic vs static dimensions Understand and appreciate risk in banking

business

Risk Management-dimensions

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Counter party failing

to repay loan Counter party failing

to service a loan

Credit

Interest

Exchange rate

Commodity risk

Equity price

Liquidity risk

Market Risk

Failed system,Process & People

Legal risk

Operational

Risk

Risk Type



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Defined as the potential that a bank borrower orcounterparty will fail to meet its obligations in

accordance with agreed terms

Either failing to repay the loan or service as per

loan agreement

Credit risk



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Direct lending- repayment is not made Non fund- funds not forthcoming on crystallization

of LC/BG

Series of payment due from bonds are not

forthcoming on due dates Security trading- settlement not forthcoming

Cross border exposure- currency movement nottaking place

Credit risk-examples



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Losses in on and off balance sheet itemsarising from movement in market prices

Main market risks are

Interest rate risks

Exchange rate risks

Commodity price risks

Liquidity risks

Price risks

Market risk



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Potential impact on Net Interest Income (NII) orNet Interest Margin (NIM) or Market value of

equity by unexpected changed in interest rate.

Main interest rate risks are:

Mismatch or Gap risk

Basis risk

Embedded option risk

Reinvestment risk

Interest rate risk



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Direct or indirect loss due to failed Internal process or

People or

System or

External events

Include legal risk as well

Operational Risk



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Identify & analyze RiskEvents which trigger the risk

Potential threats

Measure Risk

Assess vulnerability of critical assets

Quantify the likely loss because of exposure

Monitor Risk

Communicate risk tolerance Mitigate Risk

Avoid or reduce

Share or retain

Integrated risk management process

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Comprehensive guidelines for risk management

by RBI

Risk Based supervision guidelines

Setting of ALCO in each bank

Integrated Risk Management Committee

Capital Adequacy guidelines

Risk Management- regulator

perspective

Thursday, February 14, 20131

1 Prof. shyam Ji Mehrotra

4 Risk Mangement introduction.ppt

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