《Risk Management and Basel II by - PowerPoint.ppt》由会员分享，可在线阅读，更多相关《Risk Management and Basel II by - PowerPoint.ppt（72页珍藏版）》请在三一办公上搜索。
1、1,Risk Management and Basel IIJaved H SiddiqiRisk Management DivisionBANK ALFALAH LIMITED,2,“Knowledge has to be improved,challenged and increased constantly or it vanishes”Peter DruckerRisk Management and Basel IIRisk Management DivisionBank Alfalah Limited Javed H.Siddiqi,3,Managing Risk Effective
2、ly:Three Critical Challenges,GLOBALISM,TECHNOLOGY,CHANGE,Management Challenges for the 21st Century,4,Agenda,What is Risk?Types of Capital and Role of Capital in Financial InstitutionCapital Allocation and RAPMExpected and Unexpected Loss Minimum Capital Requirements and Basel II PillarsUnderstandin
3、g of Value of Risk-VaRBasel II approach to Operational Risk managementBasel II approach to Credit Risk managementCredit Risk Mitigation-CRM,Simple and Comprehensive approach.The Causes of Credit RiskBest Practices in Credit Risk ManagementCorrelation and Credit Risk Management.Credit Rating and Tran
4、sition matrix.Issues and ChallengesSummary,5,What is Risk?Risk,in traditional terms,is viewed as a negative.Webstersdictionary,for instance,defines risk as“exposing to danger or hazard”.The Chinese give a much better description of riskThe first is the symbol for“danger”,while the second is the symb
5、ol for“opportunity”,making risk a mix of danger and opportunity.,6,Risk ManagementRisk management is present in all aspects of life;It is about the everyday trade-off between an expected reward an a potential danger.We,in the business world,often associate risk with some variability in financial out
6、comes.However,the notion of risk is much larger.It is universal,in the sense that it refers to human behaviour in the decision making process.Risk management is an attempt to identify,to measure,to monitor and to manage uncertainty.,7,Capital Allocation and RAPM,The role of the capital in financial
7、institutions and the different type of capital.The key concepts and objective behind regulatory capital.The main calculations principles in the Basel II the current Basel II Accord.The definition and mechanics of economic capital.The use of economic capital as a management tool for risk aggregation,
8、risk-adjusted performance measurement and optimal decision making through capital allocation.,8,Role of Capital in Financial Institution,Absorb large unexpected lossesProtect depositors and other claim holdersProvide enough confidence to external investors and rating agencies on the financial heath
9、and viability of the institution.,9,Type of Capital,Economic Capital(EC)or Risk Capital.An estimate of the level of capital that a firm requires to operate its business.Regulatory Capital(RC).The capital that a bank is required to hold by regulators in order to operate.Bank Capital(BC)The actual phy
10、sical capital held,10,Economic Capital,Economic capital acts as a buffer that provides protection against all the credit,market,operational and business risks faced by an institution.EC is set at a confidence level that is less than 100%(e.g.99.9%),since it would be too costly to operate at the 100%
11、level.,11,Risk Measurement-Expected and Unexpected Loss,The Expected Loss(EL)and Unexpected Loss(UL)framework may be used to measure economic capitalExpected Loss:the mean loss due to a specific event or combination of events over a specified periodUnexpected Loss:loss that is not budgeted for(expec
12、ted)and is absorbed by an attributed amount of economic capital,Losses so remote that capital is not provided to cover them.,500Expected Loss,Reserves,Economic Capital=Difference 2,000,0,Total Loss incurred at x%confidence level,Determined by confidence level associated with targeted rating,Probabil
13、ity,Cost,2,500,EL,UL,12,Minimum Capital Requirements,Basel IIAnd Risk Management,13,History,14,Comparison,15,Objectives,The objective of the New Basel Capital accord(“Basel II)is:To promote safety and soundness in the financial systemTo continue to enhance completive equalityTo constitute a more com
14、prehensive approach to addressing risksTo render capital adequacy more risk-sensitiveTo provide incentives for banks to enhance their risk measurement capabilities,16,MINIMUM CAPITAL REQUREMENTS FOR BANKS(SBP Circular no 6 of 2005),17,Overview of Basel II Pillars,The new Basel Accord is comprised of
15、 three pillars,Pillar I,Minimum Capital RequirementsEstablishes minimum standards for management of capital on a more risk sensitive basis:Credit RiskOperational RiskMarket Risk,Pillar II,Supervisory Review ProcessIncreases the responsibilities and levels of discretion for supervisory reviews and co
16、ntrols covering:Evaluate Banks Capital Adequacy StrategiesCertify Internal ModelsLevel of capital chargeProactive monitoring of capital levels and ensuring remedial action,Pillar III,Market DisciplineBank will be required to increase their information disclosure,especially on the measurement of cred
17、it and operational risks.Expands the content and improves the transparency of financial disclosures to the market.,18,Development of a revised capital adequacy framework Components of Basel II,Pillar 1,Pillar 2,Pillar 3,The three pillars of Basel II and their principles,Basel II,Continue to promote
18、safety and soundness in the banking systemEnsure capital adequacy is sensitive to the level of risks borne by banksConstitute a more comprehensive approach to addressing risksContinue to enhance competitive equality,Objectives,19,Overview of Basel II Approaches(Pillar I),Approaches that can befollow
19、ed in determination of Regulatory Capitalunder Basel II,Total Regulatory Capital,Operational RiskCapital,CreditRiskCapital,MarketRiskCapital,Basic IndicatorApproach,Standardized Approach,Advanced Measurement Approach(AMA),Standardized Approach,Internal Ratings Based(IRB),Foundation,Advanced,Standard
20、Model,InternalModel,Score Card,Loss Distribution,Internal Modeling,20,Operational Risk and the New Capital Accord,Operational risk is now to be considered as a fully recognized risk category on the same footing as credit and market risk.It is dealt with in every pillar of Accord,i.e.,minimum capital
21、 requirements,supervisory review and disclosure requirements.It is also recognized that the capital buffer related to credit risk under the current Accord implicitly covers other risks.,21,Operational riskBackground,Description,Three methods for calculating operational risk capital charges are avail
22、able,representing a continuum of increasing sophistication and risk sensitivity:(i)the Basic Indicator Approach(BIA)(ii)The Standardised Approach(TSA)and(iii)Advanced Measurement Approaches(AMA)BIA is very straightforward and does not require any change to the businessTSA and AMA approaches are much
23、 more sophisticated,although there is still a debate in the industry as to whether TSA will be closer to BIA or to AMA in terms of its qualitative requirementsAMA approach is a step-change for many banks not only in terms of how they calculate capital charges,but also how they manage operational ris
24、k on a day-to-day basis,Available approaches,Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes,people and systems or from external events.This definition includes legal risk,but excludes strategic and reputation risk,22,The Measurement methodologi
25、es,Basic Indicator Approach:Capital Charge=alpha X gross income*alpha is currently fixed as 15%Standardized Approach:Capital Charges=beta X gross income(gross income for business line=i=1,2,3,.8)Value of“Greeks”are supervisory imposed,23,The Measurement methodologies,Business LinesBeta FactorsCorpor
26、ate Finance18%Trading&Sales18%Retail Banking12%Commercial Banking15%Payment and Settlement18%Agency Services15%Asset Management12%Retail Brokerage12%,24,The Measurement methodologies,Under the Advanced Measurement Approaches,the regulatory capital requirements will equal the risk measure generated b
27、y the banks internal measurement system and this without being too prescription about the methodology used.This system must reasonably estimate unexpected losses based on the combined use of internal loss data,scenario analysis,bank-specific business environment and internal control events and suppo
28、rt the internal economic capital allocation process by business lines.,25,Understanding Market RiskIt is the risk that the value of on and off-balance sheet positions of a financial institution will be adversely affected by movements in market rates or prices such as interest rates,foreign exchange
29、rates,equity prices,credit spreads and/or commodity prices resulting in a loss to earnings and capital.,26,Convergence of Economies Easy and faster flow of information Skill Enhancement Increasing Market activity,Why the focus on Market Risk Management?,Leading to,Increased VolatilityNeed for measur
30、ing and managing Market RisksRegulatory focusProfiting from Risk,27,Value-at-RiskValue-at-Risk is a measure of Market Risk,which measures the maximum loss in the market value of a portfolio with a given confidenceVaR is denominated in units of a currency or as a percentage of portfolio holdingsFor e
31、.g.,a set of portfolio having a current value of say Rs.100,000-can be described to have a daily value at risk of Rs.5000-at a 99%confidence level,which means there is a 1/100 chance of the loss exceeding Rs.5000/-considering no great paradigm shifts in the underlying factors.It is a probability of
32、occurrence and hence is a statistical measure of risk exposure,28,Variance-covarianceMatrix,MultiplePortfolios,YieldsDuration,Incremental VaR,Stop Loss,PortfolioOptimization,VaR,Features of RMD VaR Model,Facility of multiple methods and portfolios in single model,Return Analysis for aiding in trade-
33、off,For Identifying and isolating Risky and safe securities,For picking up securities which gel well in the portfolio,For aiding in cutting losses during volatile periods,Helps in optimizing portfolio in the given set of constraints,29,Value at Risk-VAR,Value at risk(VAR)is a probabilistic method of
34、 measuring the potentional loss in portfolio value over a given time period and confidence level.The VAR measure used by regulators for market risk is the loss on the trading book that can be expected to occur over a 10-day period 1%of the time The value at risk is$1 million means that the bank is 9
35、9%confident that there will not be a loss greater than$1 million over the next 10 days.,30,Value at Risk-VAR,VAR(x%)=Zx%VAR(x%)=the x%probability value at riskZx%=the critical Z-value=the standard deviation of daily returns on a percentage basisVAR(x%)dollar basis=VAR(x%)decimal basis X asset value,
36、31,Example:Percentage and dollar VAR,If the asset has a daily standard deviation of returns equal to 1.4 percent and the asset has a current value of$5.3 million calculate the VAR(5%)on both a percentage and dollar basis.Critical Z-value for a VAR(5%)=-1.65,VAR(10%)=-1.28,VAR(1%)=-2.32 VAR(5%)=-1.65
37、()=-1.65(.014)=-2.31%VAR(x%)dollar basis=VAR(x%)decimal basis X asset value VAR(x%)dollar basis=-.0231X5,300,000=$-122,430 Interpretation:there is a 5%probability that on any given day,the loss in value on this particular asset will equal or exceed 2.31%or$122,430,32,Time conversions for VAR,VAR(x%)
38、=VAR(x%)1-dayJDaily VAR:1 dayWeekly VAR:5 daysMonthly VAR:20 daysSemiannual VAR:125 daysAnnual VAR:250 days,33,Converting daily VAR to other time bases:,Assume that a risk manager has calculated the daily VAR(10%)dollar basis of a particular assets to be$12,500.VAR(10%)5-days(weekly)=12,500 5=27,951
39、VAR(10%)20-days(monthy)=12,500 20=55,902VAR(10%)125-days=12,500 125=139,754VAR(10%)250-days=12,500 250=197,642,34,Credit Risk Management,Risk Management Division Bank Alfalah,35,Credit Risk,Credit risk refers to the risk that a counter party or borrower may default on contractual obligations or agre
40、ements,36,Standardized Approach(Credit Risk),The Banks are required to use rating from External Credit Rating Agencies(ECAIS).(Long Term),37,Short-Term Rating Grade Mapping and Risk Weight,38,MethodologyCalculate the Risk Weighted Assets,Solicited RatingUnsolicited Rating Banks may use unsolicited r
41、atings(if solicited rating is not available)based on the policy approved by the BOD.,39,Short-Term Rating,Short term rating may only be used for short term claim.Short term issue specific rating cannot be used to risk-weight any other claim.e.g.If there are two short term claims on the same counterp
42、arty.Claim-1 is rated as S2 Claim-2 is unrated,40,Short-Term Rating(Continue),e.g.If there are two short term claims on the same counterparty.Claim-1 is rated as S4 Claim-2 is unrated,41,Ratings and ECAIs,Rating DisclosureBanks must disclose the ECAI it is using for each type of claim.Banks are not
43、allowed to“cherry pick”the assessments provided by different ECAIs,42,Basel I v/s Basel II,Basel:No Risk Differentiation Capital Adequacy Ratio=Regulatory Capital/RWAs(Credit+Market)8%=Regulatory Capital/RWAs RWAs(Credit Risk)=Risk Weight*Total Credit Outstanding Amount RWAs=100%*100 M=100 M 8%=Regu
44、latory Capital/100 MBasel II:Risk Sensitive Framework RWA(PSO)=Risk Weight*Total Outstanding Amount=20%*10 M=2 M RWA(ABC Textile)=100%*10 M=10 M Total RWAs=2 M+10 M=12 M,43,44,Credit Risk Mitigation(CRM),Where a transaction is secured by eligible collateral.Meets the eligibility criteria and Minimum
45、 requirements.Banks are allowed to reduce their exposure under that particular transaction by taking into account the risk mitigating effect of the collateral.,45,Adjustment for Collateral:,There are two approaches:Simple ApproachComprehensive Approach,46,Simple Approach(S.A),Under the S.A.the risk
46、weight of the counterparty is replaced by the risk weight of the collateral for the part of the exposure covered by the collateral.For the exposure not covered by the collateral,the risk weight of the counterparty is used.Collateral must be revalued at least every six months.Collateral must be pledg
47、ed for at least the life of the exposure.,47,Comprehensive Approach(C.A),Under the comprehensive approach,banks adjust the size of their exposure upward to allow for possible increases.And adjust the value of collateral downwards to allow for possible decreases in the value of the collateral.A new e
48、xposure equal to the excess of the adjusted exposure over the adjusted value of the collateral.counterpartys risk weight is applied to the new exposure.,48,e.g.Suppose that an Rs 80 M exposure to a particular counterparty is secured by collateral worth Rs 70 M.The collateral consists of bonds issued
49、 by an A-rated company.The counterparty has a rating of B+.The risk weight for the counterparty is 150%and the risk weight for the collateral is 50%.,The risk-weighted assets applicable to the exposure using the simple approach is therefore:0.5 X 70+1.50 X 10=50 million Risk-adjusted assets=50 MComp
50、rehensive Approach:Assume that the adjustment to exposure to allow for possible future increases in the exposure is+10%and the adjustment to the collateral to allow for possible future decreases in its value is-15%.The new exposure is:1.1 X 80-0.85 X 70=28.5 millionA risk weight of 150%is applied to
