AMITY GLOBAL BUSINESS SCHOOL, MUMBAI

SUMMER INTERNSHIP REPORT ON

MARKET RISK MANAGEMENT IN BANK OF BAHRAIN AND KUWAIT

SUBMITTED BY:

VIVEK KHEPAR

A30301912006

MBA (2012-14)

UNDER THE GUIDANCE OF

Prof: C.D. SHREEDHARAN

DECLARATION

I hereby declare that the work reported in this thesis titled “Market Risk Management in Bank of

Bahrain and Kuwait” is done by me as summer internship project at “Bank of Bahrain and

Kuwait during the period of 17th May 2013 to 31th July 2013 is original work and not copied

from anywhere.

I also declare that this project was done under the guidance of Prof. C.D Shreedharan

 

Signature of the Guide

Name:

Date:

CERTIFICATE

TO WHOMSOEVER IT MAY CONCERN

This is certify that Mr. Vivek Khepar, student of Amity Global Business School Mumbai (2012-

2014), has undergone a summer project training in Finance department at Bank of Bahrain and

Kuwait from 17thMay 2013 to 31st July 2013 and has done his research project on Market Risk

Management in Bank of Bahrain and Kuwait.

During the training period he was sincere, hardworking and showed keenness towards learning &

skill enhancement. His project work is excellent & I wish him success in his future endeavors.

Sign of Company Guide

Name: KVN Sambasivarao

ACKNOWLEDGEMENTS

The satiation and euphoric that accompany the successful completion of task would be

incomplete without the mention of the people who made it possible. So with immense gratitude I

acknowledge all those whose guidance and encouragement crowned my efforts with success.

Summer internship is one of the important aspects of the MBA curriculum. Through this

internship, I got to learn many skills that are required for the corporate world. Through this

acknowledgement, I would like to thank Mr. KVN Sambasivarao (VP- Risk & DCO) for his

valuable support and advice. I would also like to thank Prof C.D Shreedharan for his timely

advice and motivation.

I would like to thank Dr. SeemaTatwawadi the director of our college for her everlasting support

and motivation. I would like to thank all the faculty of AMITY GLOBAL BUSINESS SCHOOL

EXECUTIVE SUMMARY

Risk Management is the application of proactive strategy to plan, lead, organize, and control the

wide variety of risks that are rushed into the fabric of an organization’s daily and long-term

functioning. Like it or not, risk has a say in the achievement of our goals and in the overall

success of an organization. To identify the risks faced by the banking industry and the process of

risk management. It also examined the different techniques adopted by banking industry for risk

management.

Economic reforms and liberalization gave a new dimension to the playing field in financial

markets especially banks; in fact in many ways the rules of the game, too. By definition, they

tend to reduce the arbitrage opportunities as market imperfections are eliminated. Increased

competition from both domestic and foreign players puts pressure on the margins and reduces the

cushion for absorbing the losses even as the potential for business losses increases due to higher

market volatility. Just a few years ago market set up for banks were not as complex as it is today.

Interest rates were regulated, financial assets moved within a narrow band, foreign exchange rate

was pegged, by and large roles of all financial intermediaries were well defined and banks had a

stable and well known set of customers and counterparties to deal with.

Risk is inherent in any walk of life in general and in financial sectors in particular. Till recently,

due to regulated environment, banks could not afford to take risks. But of late, banks are exposed

to same competition and hence are compelled to encounter various types of financial and non-

financial risks. Risks and uncertainties form an integral part of banking which by nature entails

taking risks. There are three main categories of risks; Credit Risk, Market Risk & Operational

Risk.

Main features of these risks as well as some other categories of risks such as Regulatory Risk

and Environmental Risk. Various tools and techniques to manage Market Risk also mentioned

relevant points of Basel’s New Capital Accord’ and Risk Based Supervision (RBS), in managing

risks in banking sector.

CONTENTS

Sr. No Particulars Pg. No

Literature Review 1

Chapter 1-Introduction1.1 Company Profile 21.2 Presence in India 21.3 Business Mix 31.4 Vision 31.5 Subsidiaries 3

Chapter 2-Overview of the Banking Industry of India2.1 Introduction 4

2.2 Industry scenario of Indian Banking Industry 6

Chapter 3- Risk Management3.1 Meaning of Risk 8

3.2 Meaning of Risk Management 9

3.3 Risk Management Components 103.4 Risk Management Structure 113.5 Steps for implementing Risk Management in Banks 133.6 Benefits of Risk Management in Banks 153.7 Types of Risks 17

3.8 RBI Guidelines on Risk Management 20

Chapter 4- Market Risk Management

4.1 Meaning of Market Risk 21

4.2 Market Risk Management 224.3 Liquidity Risk 234.4 Managing the Liquidity Risk in the Bank 234.5 Meaning Interest Rate Risk 25

4.6 Types of Interest Rate Risk 25

4.6.1 Repricing risk 25

4.6.2 Yield curve risk 26

4.6.3 Basic risk 26

4.6.4 Option risk 27

4.7 Methods for interest rate risk measurement 274.7.1 Discrepancy analysis 28

4.7.2 Duration analysis 294.7.3 Value at risk 294.7.4 Simulation 31

Chapter 5 -Basel II Compliance & Risk Based Supervision

5.1 Basel II Compliance 335.1.1 Minimum Capital Requirement 335.1.2 Supervisory Review Process 345.1.3 Market Discipline 36

5.2 Reservations about Basel II 375.3 Risk Based Supervision Requirements 385.3.1 Background 385.3.2 Risk Based Supervision (RBS) – A New Approach 395.3.3 Features of RBS Approach 39

Chapter 6 - Basel III

6.1 Introduction 416.2 Implications of Basel III 416.3 Risk Impacts 426.4 Timeframe 436.5 Countering the Treasury Implications of Basel III 446.6 Basel III and liquidity management in banks 45

6.6.1 New liquidity risk measures under Basel III 456.6.2 Liquidity coverage ratio 466.6.3 Net funding stability ratio 46

6.7 Basel – III Impact on the Indian Banking System 466.7.1 Pros of Basel–III accord on Indian Banks 466.7.2 Cons of Basel–III accord on Indian Banks 47

RECOMMENDATIONS 48

CONCLUSION 49

BIBLIOGRAPHY 50