Foundations: Level 1

An introduction to the essential steps for identifying,

assessing, and managing financial risk

GARP’s Foundations of Financial Risk (Foundations)

is an ideal introduction to risk management. Written
by leading financial experts, the e-learning course
provides an overview of the field’s key topics, and
can be used as a self-study program or incorporated
into a firm’s training curriculum.
 Foundations takes a practice-oriented approach to risk
education. The course pays special attention to the ways
in which financial institutions operate and the impact of
international regulations.

FRM
FEATURES
Networking Education CPD Credits Chapters
TOPICS
etworking The course offers a range of benefits including:
Education CPD Credits Chapters Learn the essential steps for identifying,
ERP Contact Study materials Training ICBRR Conference
assessing, and managing financial risk in core
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• Credit
mbership Directory and tablet.
Handbook FBR Webcast Forum • Market
• Operations
E-Learning Tools: Interactive introductions,
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• Insurance
ofessionals Download
tutorials, and exit quizzes for each chapter
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ducation CPD
help students master the key learning point
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ownload Locations Exam Read Whitepaper

Flexible Structure: The course curriculum

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y materials
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is designed to accommodate both self-
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instruction or in-house training

FULL SERIES FEE:
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ducation CPD complete the program and pass a

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cumulative, self-assessed final exam receive

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a certificate of completion
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extbooks

Global Affiliate Individual Student

andbook FBR Webcast Forum

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Global Affiliate Individual Student

Participants must complete the course within six months 2

An Overview of Foundations
The course is designed as a stand-alone instructional
tool with the following learning objectives:

PREAMBLE CHAPTER 2
The New World of Banking Managing Banks
• Banking after the Global Financial Crisis • Balance Sheet and Income Statement

• The European Banking Crisis of 2010-2013 • Loan Losses

• The Rise of Shadow Banking • Asset and Liability Management

• Interconnectivity and Contagion • Corporate Governance

• International Bank Regulation

Key Learning Points

CHAPTER 1
1. Banks report their assets, liabilities, and the effects of
Functions and Forms of Banking their various business transactions in financial statements.
• Banks and Banking Financial statements provide a comprehensive view of
performance for shareholders, depositors, stakeholders,
• Different Bank Types
and regulators.
• Banking Risks
• Forces Shaping the Banking Industry 2. Banks treat performing and nonperforming loans
differently: banks build up reserves in their financial
statements to reduce the potential negative effects of
Key Learning Points nonperforming loans.

1. Banks provide three core services: deposit collection,
payment arrangement, loan underwriting, and may
also offer financial services such as cash, asset, and
risk management.
2. Banks play a cental role in facilitating economic
activity through three interrelated processess: financial
intermediation, asset transformation, and money creation.
3. Banks manage their assets and liabilities with the overall
objective of reducing risks while maximizing returns
to shareholders.
4. Bank corporate governance refers to the framework banks
use to manage their operations and deal with the often
conflicting interests of bank stakeholders.

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CHAPTER 3
Banking Regulation
• The Evolution of RIsk Regulation in Banking
• Foundations of Bank Regulation
• International Regulation of Bank Risks
• Deposit Insurance
Key Learning Points
1. When a bank lacks the funds to repay its depositors on
demand, the bank is in a liquidity crisis. The mere rumor
of a liquidity crisis could lead to a bank run when a large
number of depositors demand a return of their deposits
from one bank simultaneously. If a bank run spreads to
other banks, there is contagion that has the potential to
spread further panic and runs on other banks.
2. Bank regulation seeks to ensure that banks are operated
prudently, that non-systemic risk is reduced, and that
there are system-wide support mechanisms to assist
banks and provide stability before they reach a crisis.
Bank regulation achieves these objectives using two
main tools: licensing, the granting of the right to operate
a bank; and supervision, regulatory and recurring
monitoring of the bank’s operations and activities. obtain the loan (covenants).
3. The Basel Accords are the international regulatory
frameworks that govern the activities of banks. The three
Basel Accords acknowledge that the risk of the bank’s
assets and operations is related to, and can be minimized
by, a minimum regulatory capital standard. In the Basel
II Accord, this minimum regulatory capitol covers credit,
market, and operational risks. Basel III also recognizes the
importance of liquidity risk.
4. Deposit insurance provides protection for depositors
in case a bank suffers a liquidity crisis, and is intended
to reduce both bank runs and panics by reducing the
incentives for depositors to withdraw funds from a bank.
CHAPTER 4
Credit Risk
• Introduction to Credit Risk Lenders
• Lenders
• Borrowers
• Characteristics of Credit Products
• Types of Credit Process
• The Credit Process
• The Credit Analysis Process
Key Learning Points
1. One of a bank’s core risks is the possibility that borrowers
will not repay their loans on time, or at all.
2. Lenders distinguish between retail and commercial
borrowers and tailor products to meet each group’s unique
financial needs.
3. Loan products can be characterized by maturity,
repayment method, loan use, the different types of security
the borrower needs to provide the lender (collateral), or
the restrictions the borrower must agree to in order to
4. There is a wide variety of credit products, and similar
products can be used to meet both retail and commercial
borrowing needs.
5. The credit process contains several sequential steps.
including identifying the credit opportunity, evaluating
credits, and monitoring credits on an ongoing basis.
6. To analyze the borrower’s ability to repay, banks engage in
a complex credit analysis process that critically assesses
the financial position of the borrower using several
different methods and sources of information.
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CHAPTER 5 CHAPTER 6
The Credit Process and Market Risk
Credit Risk Management • Introduction to Market Risk
• Portfolio Management • Basics of Financial Instruments
• Techniques to Reduce Portfolio Risk • Trading
• Portfolio Credit Risk Models • Market Risk Measurement and Management
• Credit Monitoring • Market Risk Regulation
• Credit Rating Agencies
• Alternative Credit Risk Assessment Tools Key Learning Points
• Early Warning Signals
• Remedial Management 1. Market risk arises from the trading activities of banks and is
a consequence of movements in market prices.
• Managing Default
• Practical Implications of the Default Process 2. Market risk affects all financial instruments and can be
• Credit Risk and the Basel Accords general market risk, which reflects the market movements
of all comparable financial instruments, or a specific
risk, which reflects the risk that an individual financial
Key Learning Points instrument moves in day-today trading.

3. The basic financial instruments are currencies, equities,
1. Portfolio management involves determining the contents
bonds, loans, commodities, and derivatives. Banks can take
and the structure of the portfolio, monitoring its
either a long or a short position in financial instruments.
performance, making any changes, and deciding which
assets to acquire and which assets to divest.
4. The four different types of market risks are equity risk
(equities), interest rate risk (bond and loans), commodities
2. Key portfolio risks are concentration risk, correlation risk,
risk (commodities), and exchange rate risk (currencies).
and contagion risk.
A fifth type of market risk is credit price risk (credit). This
risk should not be confused with outright credit/default
3. Banks use various techniques to reduce the
risk, as discussed in the previous chapter. Credit price
overall risk of their loan portfolios.
risk is the risk that the price or value of a credit position
will change on a day-to-day basis. To reduce market risk
4. Effective credit monitoring is an important part of the
and the impact of market risk, banks can hedge their risk
credit process and enables a bank to recognize changes
exposures.
in the creditworthiness of credits within the portfolio and
minimize migration risk.
5. Value-at-risk (VaR) is a methodology that yields an
estimate of potential losses over a certain time period at
5. Credit rating agencies provide independent credit
a specific confidence interval. The estimate this process
assessments, which can be used to independently verify
creates quantifies some of the risk the bank takes.
a counterparty’s creditworthiness and also as a credit
monitoring tool.
6. The Basel II Accord provides two alternative processes for
market risk measurement: the Standardized Approach and
6. The Basel II Accord provides three primary
the Internal Models Approach.
approaches to measure the capital a bank has to
hold against its loan portfolio: the Standardized, the
Foundation Internal Ratings-Based, and the Advanced
Internal Ratings-Based approaches.

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CHAPTER 7 CHAPTER 8
Operational Risk Regulatory Capital
• What is Operational Risk? and Supervision
• Operational Risk Events • Bank Regulatory Capital
• Operational Loss Events • Types of Bank Regulatory Capital
• Operational Risk Management under Basel II
• Basel II and Operational Risk • Bank Capital under Basel II
• Pillar 2 - Supervisory Review
Key Learning Points • Pillar 3 - Market Discipline
• International Cooperation
1. Operational risks are inherent in business and reflect • Beyond Regulatory Capital
losses from inadequate or failed internal processes,
systems, human error, or external events.
Key Learning Points
2. The Basel II Accord identifies five different operational
risk events: internal process risk, people risk, legal risk,
1. The Basel II Accord provies a general framework for how
external risk, and systems risk. These risks are interrelated.
a bank’s over all capital should be structured, defines
“tiers” of eligible capital, and provides specific rules on the
3. Operational risk events are characterized by their
relationships between different tiers.
frequency and impact on the operations of the bank.
Banks focus their operational risk management on high-
2. Under Basel II, the eligible capital for regulatory purposes
frequency/low-impact risks and low-frequency/high
must be greater than or equal to 8% of the risk-weighted
impact risks.
asset value.

4. Operational risk inventory that collects information

3. Basel II addresses the shortcomings of the Basel II Accord.
on operational risk events can be either top-down or
It strengthens the quality of capital held by banks to
bottom-up.
ensure that they have capital that will retain its value when
needed, and it also increases the quantity of capital that
5. The Basel II Accord provides three different approaches
banks must hold.
to calculate operational risk capital: the Basic indicator
Approach, the Standardized Approach, and the Advanced
4. Pillar 2, supervisory review, ensures compliance with
Measurement Approach.
minimum capital requirements and encourages banks to
use the best risk management techniques and to address
risks beyond the scope of Pillar 1.

5. Pillar 3 focuses on disclosure requirements to provide

transparency with respect to a bank’s capital structure, risk
exposures, and capital adequacy.

6. Economic capital establishes the capital level a bank must

maintain to withstand large but unlikely losses so that it
can survive over the long term.

7. Banks use economic capital models to decide the

level and structure of capital. The development and
implementation of a well-designed economic capital
model can help a bank identify, understand, mitigate, and
manage its risks more effectively, leading ultimately to a
more effective and stable bank.

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CHAPTER 9
6. The required level of risk management and the
Insurance Risk controls that should be adopted are those that
• Introduction to the Insurance Industry reflect the materiality of the risks created by the
products that are sold.
• Property and Casuality Insurance
• Life Insurance 7. Insurers usually reinsure some of their risks with
• Reinsurance reinsurance companies that effectively assume some
of the risks that previously lay with the insurance
• Other Types of Risk
company.
• Regulation and Supervision - Solvency 2 in the
European Union 8. There is no international accord for insurers that is
equivalent to the Basel Accords for banks; however,
• The Role of Lloyd’s of London
there is a common regulatory approach within
• The Future of the Industry Europe, called Solvency 2; similarly to the Basel
II Accord for banks, in the Solvency 2 Directive,
advanced models are being used for the key insurance
Key Learning Points
risks as well as other risks (such as credit risk, market
risk, and operational risk).
1. Insurance is a contract between an insurer and a
policyholder, whereby the insurer undertakes to pay to 9. The Financial Stability Board has identified large
the policyholder a sum of money if a specified event insurance companies that it considers to be global
happens within a specified period of time. systemically important insurers (G-SIIs).

2. Insurance works on the principle of the sharing of losses 10. Lloyd’s of London is not an insurance company but a
of a few people through small contributions made by a society of members, both corporate and individual,
large number of people. who underwrite in syndicated and on whose behalf
professional underwriters accept risk.
3. There are two main types of insurance: property and
casualty (P&C) and life insurance (“life and pensions”). 11. The growing use of sophisticated modeling
techniques, external data and advanced analysis will
4. The main inherent risks of property and casualty increasingly influence the measurement of risk.
insurance insurers are underwriting risk, reserving risk,
and claims management risk.

5. The main inherent risks of life and pensions risk are

longevity risk, mortality and morbidity risks, persistency
risk, underwriting risk, and claims management risk.

TO LEARN MORE VISIT WWW.GARP.ORG/COURSES

NORTH AMERICAN OFFICE

CONTACT FOR MORE INFORMATION
William Liu
(201) 719-7219
william.liu@garp.com

EMEA OFFICE
CONTACT FOR MORE INFORMATION
Marion Le Bruchec
+44.207.626.9303
marion.lebruchec@garp.com

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Creating a culture of risk awareness®

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About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to
preparing professionals and organizations to make better informed risk decisions. Membership represents over 150,000 risk man-
agement practitioners and researchers from banks, investment management firms, government agencies, academic institutions, and
corporations from more than 195 countries and territories. GARP administers the Financial Risk Manager (FRM®) and the Energy Risk
Professional (ERP®) exams; certifications recognized by risk professionals worldwide. GARP also helps advance the role of risk man-
agement via comprehensive professional education and training for professionals of all levels.