RISK MANAGEMENT -- SBI CBO - BANK INTERVIEWS - IBPS PO- CLERK-RRB PO ASS...

Risk management:

Major risks identified in
banking business:

1)  Liquidity Risk 2) Interest Rate Risk 3)
Credit Risk 4) Market Risk    5)   Operational Risk

Guidelines to banks for
managing these risks:

RBI / ALM Guidelines: Liquidity
Risk, Interest Rate Risk

RBI/Basel II Guidelines: Credit
Risk, Market Risk,   &   Operational Risk.

1)   
Liquidity Risk: Risk to inability
of a bank to meet its contractual obligations due to mismatch in inflows/ out
flows from assets and liabilities.

2)   
Interest Rate Risk:  Risk due to adverse movements in interest
rates impacting profitability.

3)   
Credit Risk: Risk on account of
possible default by the borrower/ counter party in meeting commitments.

4)   
Market Risk: Risk of adverse
deviations due to marking to market value of the trading portfolio due to
market movements.

5)   
Operational Risk:  Risk of loss due to inadequate or failed
internal process, people, systems or external factors.  Examples of such events are internal,
external frauds, negligence, data loss etc.

6)   
Exchange Risk:  Risk on account of adverse fluctuation in
forex rates.

7)   
Settlement Risk(
Herstatt Risk):  Risk of counterparty default after the deal is
put through and before the settlement. 
Also known as Hersttat Risk due to the famous Herstatt Bank incidence
where many American banks suffered due to default by Herstatt Bank, Germany
which was put under liquidation without notice before it could settle the deals
it had agreed upon.

Risk
management Basel II – RBI Guidelines:

1988	Basel I accord put in place by G 8 Countries to avoid situations like the Herstatt Bank incident.	Addressed Minimum Capital adequacy and credit Risk. Capital charge for Credit
1996	Basel I modified	Market Risk to be identified, Quantified and capital charge provided for.
2004	Three Pillars of Basel II norms defined: Minimum Capital, Supervisory process. Market disclosures.	Banks to provide Capital Charge for Operational Risk also.
RBI Guide Lines	Time Frame Indian banks with overseas Presence and foreign banks in India to migrate to Basel II by 31/03/2008. All other banks except RRBs, UCB by 31/03/2008.	Basel  Norms Pillar I: Minimum capital Adequacy Basel II Norm – 8%, RBI – 9% Pillar II: Supervisory Process RBI Supervises through On-site & Off site methods. Pillar III: Market disclosures.

Capital
charge / Capital Calculations:

1)    Credit Risk: Indian banks have
to adopt standardized method for calculations as per Basel/ RBI
Guidelines.  Here, risk weights are
assigned as per RBI guidelines/Approved external rating agencies and 9% of the
RWA is arrived at as the Minimum Capital Requirement for credit risk.

2)    Market Risk: Indian banks have
to adopt standardized (Duration) method as per RBI guidelines Capital Charge
arrived at using Duration method and capital requirement arrived at by multiplying
the capital charge by 12.5

3)    Operational Risk: Indian banks have
to adopt Basic indicator approach as per RBI Guidelines Capital Charge arrived
at Basic indicator method of applying 15% (alpha) on the average gross income
of past three positive years.  Once
capital charge is arrived, capital requirement is arrived by multiplying
capital charge by 12.5

4)    Minimum Capital
Requirement =
Capital for Credit Risk + (Capital Charge for Market Risk x 12.5) + (Capital
charge for Operational Risk x 12.5)