Table of Contents

Acknowledgement...........................................................................................................................5 Abstract............................................................................................................................................6 Chapter One: Introduction...............................................................................................................7 1.1. 1.2. 1.3. 1.3.1. 1.3.2. 1.3.3. 1.4. 1.5. 1.6. 1.7. 1.8. Introduction:......................................................................................................................7 Background:......................................................................................................................7 Aims & Objectives:...........................................................................................................8 Research Aim:...............................................................................................................8 Research Objectives:.....................................................................................................8 Research Questions:......................................................................................................9 Primary Literature Review:...............................................................................................9 Research Significance:....................................................................................................11 Ethical Considerations:...................................................................................................11 Dissertation Structure:.....................................................................................................12 Conclusion:.....................................................................................................................12

Chapter Two: Literature Review...................................................................................................13 2.1. 2.2. 2.3. 2.4. 2.4.1. 2.4.2. 2.4.3. 2.4.4. 2.5. Introduction of Chapter two:...........................................................................................13 Risk:................................................................................................................................13 Factors of Risks:..............................................................................................................13 Types of Risks:................................................................................................................14 Strategic risks:.............................................................................................................14 Operational risk:..........................................................................................................15 Credit Risks:................................................................................................................16 Market Risks:..............................................................................................................17 Nature of Risks associated with banks:...........................................................................18 1

2.6. 2.6.1. 2.6.2. 2.6.3. 2.6.4. 2.7. 2.8. 2.9. 2.9.1. 2.9.2. 2.9.3. 2.10. 2.11. 2.12.

Need for risk management in banks:...............................................................................19 Reports and standards..................................................................................................20 Position Limits and Rules............................................................................................21 Strategies for investments and guidelines...................................................................21 Incentive Schemes.......................................................................................................22 THE NEW BASEL ACCORD.......................................................................................22 Risk Management...........................................................................................................23 Risk at different hierarchy levels of banks:....................................................................24 Micro level:.................................................................................................................24 Macro Level:...............................................................................................................24 Strategic level:.............................................................................................................25 Risk Management Flow Chart:....................................................................................26 Risk Management in Banks:........................................................................................27 Framework of Risk Management:...............................................................................28 Integration of Risk Management:............................................................................29 Accountability:........................................................................................................29 Risk Evaluation:.......................................................................................................30 Independent review:.................................................................................................30 Conclusion of Chapter Two:.......................................................................................30

2.12.1. 2.12.2. 2.12.3. 2.12.4. 2.13.

Chapter Three: Research Methodology.........................................................................................31 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. Introduction of Chapter three:.........................................................................................31 Research Onion:..............................................................................................................31 Philosophy behind the study...........................................................................................32 Research approach:.........................................................................................................32 Research Strategies.........................................................................................................32 Questionnaire:.................................................................................................................33 2

3.6.1. 3.7. 3.8. 3.9. 3.10. 3.11. 3.12. 3.13. 3.14.

Structure of Questionnaire:.........................................................................................33 Research Choice:.............................................................................................................34 Research Time Horizon:.................................................................................................34 Data analysis technique:..................................................................................................34 Data types:...................................................................................................................34 Sample Size:................................................................................................................35 Hindrances in Research:..............................................................................................35 Ethical Consideration of research:..............................................................................35 Conclusion of chapter three.........................................................................................35

Chapter Four: Data presentation & analysis..................................................................................37 4.1. 4.2. 4.3. 4.3.1. 4.3.2. 4.3.3. 4.3.4. 4.3.5. 4.3.6. 4.3.7. 4.3.8. 4.3.9. 4.3.10. 4.3.11. 4.3.12. 4.3.13. Introduction.....................................................................................................................37 Research background:.....................................................................................................37 Results presentation and discussion:...............................................................................37 Gender Distribution:....................................................................................................37 Age division:...............................................................................................................38 Components of Risk Management Internal Control system:......................................39 Main Source of Liquidity Risk:...................................................................................41 Tools for Liquidity Risk management:.......................................................................43 Liquidity Risk management and regulatory authority measures:................................45 Main sources of interest rate risk................................................................................46 Tools to mitigate interest rate risk...............................................................................48 Bank rating system......................................................................................................50 Main sources of operational risk:............................................................................51 Tools to mitigate operational risk:...........................................................................53 Tools to mitigate market risk:..................................................................................55 Risk Management and its impact on bank profitability:..........................................56 3

4.4.

Conclusion of Chapter Four:...........................................................................................57

Chapter Five: Recommendations & Conclusion...........................................................................59 5.1. 5.2. 5.3. 5.4. Introduction:....................................................................................................................59 Recommendations:..........................................................................................................59 Conclusion:.....................................................................................................................61 Conclusion to chapter five:.............................................................................................62

References......................................................................................................................................63 Appendices....................................................................................................................................71 Questionnaire:............................................................................................................................71 Figures:......................................................................................................................................75 Figures:

Acknowledgement
I would like to express my sincere thanks to _____________. Your support during this work was helping me to focus and to finish this project. I think I was able to overcome personal boundaries through your mentoring. I am glad to say I learned so much and was able to develop myself. I would like to express my thanks to the different banks that helped me and supported me with this work, my friends and my family, who always stood behind me.

Abstract

The 21st century developments have turned the world into a global economy through rapid technology developments. In this scenario banking sector the core element of the economy is also influenced significantly due to this global change. This study was conducted with aim to examine different risk management strategies adopt by banks to maximizing their profits or returns so that they minimizing their non- profitable or non-performing assets. Study has achieved number of objectives such as to explore the literature about risk and risk management strategies, to find out the techniques as adopted by the main Pakistani banks risk management, to find out the quality in lending decisions, to find out the risk management practice difference between larger banks and smaller banks, to look over the major steps taken to manage the risk in term of Basle II, to judge the improvements in risk management in management and to develop the detailed recommendations for improvements. This study has been conducted through survey and questionnaire is used as data collection tool. Both types of data are used primary as well as secondary to conduct this research. Study has concluded that no fit can be developed for risk management for all banks but the most important is the use of one most suitable risk management strategy that can reduce the risk factors of the banks.

Chapter One: Introduction 1.1.Introduction:

The first chapter of the study is to provide an introduction of whole research. Chapter discusses about the research aims and objectives and background of the research to understand the rationale behind this study. Chapter also discusses the primary literature review and research significance with perspective of all stakeholders. Research ethical considerations are also discussed and dissertation structure is provided. In the end chapter is concluded.

1.2.Background:
In every economy banking sector is known as backbone so the growth and health of banking sector is the preliminary condition of sustainable development in an economy. The 21st century developments have turned the world into a global economy through rapid technology developments. In this scenario banking sector the core element of the economy is also influenced significantly due to this global change. Generally banking is divided into two broad categories based on its services that are corporate banking and retail banking. The retail banking category covers all individual consumer related services including ATMs, account to account fund transfers, checking balance of account, credit card facilities, consumer bills and paying utility bills on behalf of customers (Crouhy et al., 2000). On other hand corporate banking include all services of the banks for corporate clients such as managing their cash balances and opening letter of credit and transferring their funds. The banking sector of Pakistan has seen a huge change due to privatization policy and in the result of this policy number of private banks emerged and grown in the market. Strengths of private sector in the banking industry of Pakistan have strengthened the customers and system has become more competitive and customer focused (Crouhy et al., 2000). The banking sector of the country is very sensitive and number of factors and events has impacts on the banking sector of Pakistan especially economical and political conditions are significant external factors. The banking sector of Pakistan is very lucrative this is the reason that number of international banks has started their operation in Pakistan in last few years and many banks have found joint ventures as a suitable international market entrance strategy. This whole scenario has increased the competition greatly and the survival for small banks has become very difficult. Risk factors have been increased and organizations that will be 7

able to manage their risks effectively will only be able to survive in the market. The risk management strategies have become very important and organizations are striving very hard to overcome their risk factors. In this scenario this study is being conducted to explore how can Banks adopt a prudent approach of Risk Management to minimize non-performing assets and maximize return? This will be very important in this current global scenario.

1.3.Aims & Objectives: 1.3.1.Research Aim:

The aim of the study is to examine different risk management strategies adopt by banks to maximizing their profits or returns so that they minimizing their non- profitable or nonperforming assets. In banking industry, the main source of revenue is to giving loan on higher interest rate and receiving deposits on lower interest rate. Higher the risk more return, so return interface with risk. So, banks can never avoid the risk because the risk taking is their business, but risk should be rational and calculated.

1.3.2.Research Objectives:
In order to achieve the research aim a list of objectives are defined. These research objectives will help to keep the study focused and objectivity of results will be ensured. To explore the literature about risk and risk management strategies. To find out the techniques as adopted by the main Pakistani banks risk management. To find out the quality in lending decisions. To find out the risk management practice difference between larger banks and smaller banks. To look over the major steps taken to manage the risk in term of Basle II. To judge the improvements in risk management in management. To develop the detailed recommendations for improvements.

1.1.1.Research Questions:
Generally, the research aims & objectives of the proposed research are to be related to the topic and these achieved through research questions, the research questions of this study are explained below: 8

Have credit exposure and lending decision quality changed significantly among major British banks in the last three years? Which types of techniques are adopted by major Pakistani Banks to manage and control risk? Is there any significant change in lending decisions in term of quality? How larger banks differ from smaller banks in risk management practice? What measures have been taken to meet the criteria of Basel II in Pakistani Banks? Is there a gradual improvement in regard of risk management in Pakistani banks?

1.1.Primary Literature Review:

Risks are defined by different authorities in different way such as risk is a measure of severity and probability of unfavorable affects (Apgar, 2006). Risk is a potential point of failure (Barton et al., 2002). In same way Beasley et al., (2005) also has described the risk as likelihood of unfavorable events linked with some bad outcomes. These were some simple definitions and explanations provided by different authors to develop a basic understanding of risk but they cannot address the nature of events and issues that cause risks for the entity and foundation of all these simple definitions is the negative consequence. Risk is defined with a broader perspective by Calandro and Lane, (2006). They have defined the risk as the occurrence of an event that has consequences for, or impacts on, projects. This definition has given a very wide approach and described that risks do not always produce negative outcomes rather sometimes risks also increase the efficiency of project (Calandro and Lane, 2006), and uncertain events can result in either increase or decrease of business profitability (Bessis, 2002). Two components basically define the risk factors of any bank. They are internal risk factors and external risk factors. These both types of risks jointly develop a risk portfolio of an organization. Commercial banks are having enough resources to support their activities and they are also maintaining their own profit and loss account and balance sheet (Caouette et al., 2008). These measures are taken to develop remedies for financial risks and to minimize their frequency. Every business wants to maximize its profits and this is only possible when it is having low cost of products and services with minimum risks. Banks are using different strategies to maximize their profits and also using risk management techniques to reduce the risk. These researchers had developed many researches to manage the risk and to averse the risk from business operations (Shiller, 2003). According to their findings risk management is having significant impact on the organization culture and 9

performance. There can b operational level or strategic level risk. Operational level risks are directly affecting the bank performance and profits on the other hand strategic level risks are having impact on business existence and working. Banks are now operating all around the world and having their existence though online and offline modes. Many banks are managing their risk through special risk management department under the supervision of risk managers. Every bank has its own techniques and procedure for risk management. The important question in risk management is that which risk should manage with which technique. Different rules and regulations are developed to support and measure the banking system all around the world. Many countries are using some local measures and some international measures to create harmony amongst the banking system. There is set of rules and regulations consists of recommendations for banking system in order to improve the quality of operations, capital requirements enhancement and effectiveness of risk management measures this set of consultative document s is known as New Basel Accord. This Accord provides guidelines for different transactions and usually for 3 years time period. It specifies different limits for different heads in the system. New Basel Accord covers the work in progress rules, measures for operations, extended converge and menu of options. Risk is inbuilt in any walk of life in general and in financial sectors in particular (Woods, 2007). Till recently, due to regulate environment, banks could not meet the expense of to take risks. But of late, banks are showing to same competition and hence are required to meet various types of financial and Non-financial risks. Risks and uncertainties form a basic part of banking which by nature entails taking risks (Bazerman et al., 2008). Risk management is a process which involves many aspects of modern and traditional risk management techniques, tools and strategies in both financial and non financial institutions. It consider entire field work of risk management data, policies, infrastructure and technology, it includes investment, hedging and mitigation.

1.2.Research Significance:
This study is being conducted with primary aim to explore that how can Banks adopt a prudent approach of Risk Management to minimize non-performing assets and maximize return? This study will be very important for all stakeholders and will produce number of benefits for all: Researcher will be major stakeholder of this study and this research will be very important for him to enhance his understanding about the banking sector and its functioning. This will enhance the knowledge of the researcher about the use of risk 10

management strategies in organization. This will be a great source of knowledge and it will develop the specialized skills and understanding of researcher about the corporate sector. The next very important beneficiary of the study will be banking sector as they will be able to evaluate their risk management strategies on the basis of findings of this research. Banking sector will design their future risk management plans in the light of recommendations developed by this research. Academia is the third core stakeholder of this research and findings of this study will contribute a lot in enhancing the knowledge base of related domain. This study will contribute a great value to literature and in future more studies will be possible on the basis of findings of this research.

1.1.Ethical Considerations:
Study will follow the ethical guidelines provided by university and will strictly adhere to them in order to ensure the reliability of this study. Harvard referencing style will be used to refer the data and plagiarism will be avoided at any cost. The anonymity of respondents will be ensured and their identities will be kept secret (Saunder et al., 2009). This will also enable them to share their views with full freedom and they will be explained about the research aims and objectives before taking their responses. They will be also explained about the research methods that will be used in this study in detail (Saunder et al., 2009). The data will be analyzed with the help of charts and diagrams and it will be presented honestly. The researcher is not responsible and he cannot be compel for any legal binding for the outcomes of his research work (concepts, theories and principles established by the researcher) to be true and follow the general criteria and formulas as already establish and consider as bench mark.

1.2.Dissertation Structure:
The whole research dissertation will be divided into five chapters. The first chapter will be introduction to give a detailed introductory view of the whole study. Research aims and objectives will be discussed with significance of this research. The second chapter of the research will be literature review in which a detailed critical review of the literature will be conducted. Research methodology will be discussed in detail in third chapter of the study and fourth chapter will be about the data presentation and analysis. Study will be concluded with recommendations in fifth chapter of the study. 11

1.3.

Conclusion:

Chapter has discussed about the research aims and objectives and background of the research to understand the rationale behind this study. Chapter also has discussed the primary literature review and research significance with perspective of all stakeholders. Research ethical considerations are also discussed and dissertation structure is provided. The next chapter of the study will be literature review to provide a theoretical foundation of the study.

12

Chapter Two: Literature Review 2.1.Introduction of Chapter two:

This study is related to risk management in banking sector in order to increase their profitability by reducing their costs. This chapter is having insight about different work of researchers and organizations to view this topic in the light of their researchers. This chapter discusses the risk, and different types of risks. There is discussion regarding factors effecting risk and market risk. Then there is insight about nature of risk associated with banks and importance of risk management for banking sector. There is also discussion related to Basel Accord regarding risk management in banking sector and risk management and different type of risks at different hierarchy levels.

2.2.Risk:
Risks are defined by different authorities in different way such as risk is a measure of severity and probability of unfavorable affects (Apgar, 2006). Risk is a potential point of failure (Barton et al., 2002). In same way Beasley et al., (2005) also has described the risk as likelihood of unfavorable events linked with some bad outcomes. These were some simple definitions and explanations provided by different authors to develop a basic understanding of risk but they cannot address the nature of events and issues that cause risks for the entity and foundation of all these simple definitions is the negative consequence. Risk is defined with a broader perspective by Calandro and Lane, (2006). They have defined the risk as the occurrence of an event that has consequences for, or impacts on, projects. This definition has given a very wide approach and described that risks do not always produce negative outcomes rather sometimes risks also increase the efficiency of project (Calandro and Lane, 2006), and uncertain events can result in either increase or decrease of business profitability (Bessis, 2002).

2.3.Factors of Risks:
Two components basically define the risk factors of any bank. They are internal risk factors and external risk factors. These both types of risks jointly develop a risk portfolio of an organization. External factors of risks include industry related factors and economic factors of the country and region. Global economy also has very strong impacts on the banking industry (Crouhy et al., 13

2000). The internal risk factors include factors such as ineffective monitoring, in efficient pricing mechanisms and deficient administration or loan policy of the bank (Institute of Risk Management, 2002). The internal factors can be controlled by the bank to control the risk portfolio but it is not possible to control the external factors of the industry and economy. So risks appeared due to external factors can only be minimized by having an effective diversification of assets and loans. The loan portfolio management and development of an efficient risk management system can help to control the external as well as internal risks of the bank in an effective way.

2.4.Types of Risks:
Risks can be categorized in different types on the basis of number of factors such as interpersonal and political conflicts, loss of commitment by management, untested staff, technologies, non-effective business processes, and short sighted goals and even on the basis of nature fury (Trepper, 1998; Butler, 2001). The risks factors associated with financial organizations especially in banking sector need a very strong commitment to be addressed effectively because any negligence from any level of employee can result in serious harms to the organization. Financial organizations need to assess their risks on continuous basis and need to develop a strong approach to address their risks (Institute of Risk Management, 2002). Global developments at one side if creating opportunities for financial sector on other hand they have created number of risks needed to be managed beyond the traditional risk factors affecting the performance of the bank. In this scenario it is the need of the hour that bank management evaluates every risk and understands all different types of them to deal with in an appropriate way.

2.4.1.Strategic risks:
Business operations of bank significantly increase the strategic risks because in order to deliver the expected products to customers with a great customer experience needs a great and effective business strategy. Strategic decisions in any organization are considered general in nature and they influence the every department and business function so they also affect other types of risks. Strategic risks can be referred when organization is failed to achieve its competitive advantage and core business aims that can lead to failure for the organization (Caouette et al., 2008). Organizations have great reliance on strategies to keep them on track and reap the maximum benefits from their operations. This high reliance of organization in result produces number of 14

risks for the organizations strategic success (Bandyopadhyay et al., 1999). The understanding of strategies is very important to ensure the strategic success for the management through addressing the strategic risks. The understanding of management to the strategy is depends upon different factors that much they are able to foresee the future for long term business advantages, ability to assess the capabilities and resources of organization and then compare them with competitors capabilities, asses own strengths in technical and financial areas and then develop a strong alignment between different business strategies (Bandyopadhyay et al., 1999). The existence of strategic risks is must in any organization because strategies cover a very broad business area and have their impacts on every function of the business (Caouette et al., 2008). The business strategy should be able to cope with different risks and then develop a strong plan to convert those risks into business opportunities. The management of strategic risks in an organization requires regular strategic evaluation and strong managerial planning to cope with different strategic matters. Strategic decisions in a bank can also include expansion business strategy and how in different geographical regions business functions will be expanded and economical opportunities associated with those (Lam, 2003). The lack of planning by management about the implementation of strategies lead to number of risks and then failure in the process of implementation of strategies create serious risks for the organization as whole. The management should clearly understand the impacts of strategic decisions on the organization and how their negative influences can be minimized through cutting and planning (Mann et al., 2001). The period, in which information technology was in growth, the banking sector was facing huge competition to adopt new technologies to enhance their operational capabilities. The competition in the industry was very immense that it was hard for small banks to survive without integrating the new technologies to provide highly effective business success (GARP, 2000). If bank fails to make strong plans to successfully implement the business strategy and have flaws in the strategic development and implementation process then this can create a huge strategic risk for the organization that can leads to strategic failure and serious threat for survival.

2.4.2.Operational risk:
In previous decade the definition of the operational risks for the organization is evolved very rapidly. Operational risks are referred to monetary losses to the bank due to its inadequate services, failure of internal business processes, failure of system and people due to internal or external reasons (BCBS, 2001). This definition is further developed by Pennathur, (2001) and he added more inadequate procedures, controls and obsolesces of technology as major causes of 15

failure. Operational risks and their causes were also defined by British Bankers Association (1997) and they have defined the operational risks in result of criminal activities, fraudulent activities, inadequate controls and procedures and human errors. These risks also include causes such as system breakdowns, shortcomings of technologies but they are not the risks created by business decisions such as pricing strategies, rather they also include legal risks to the bank due to failure to meet regulatory requirements and fulfill different duties produced in the result of different business relationships (Institute of Risk Management, 2002). These risks also include bad impacts on the reputation of the organization and many external factors also include natural disasters, fraudulent activities and terrorist attacks. Banking organizations face number of serious threats due to external and internal operational issues (Pennathur, 2001). The internal problems and losses incurred due to these problems are very difficult to measure by the bank than external losses and problems. The internal risks are created when bank over emphasized on a product and then ignores a specific product and business line. In this way an internal risks increased and then eventually becomes an external business risk for the bank. The advancement and complexity in the banking sector has significantly increased the number of risks for the banks and different factors have become very important for the sector to have better performance such as internal control in the form of internal audit, systems availability, data integrity, security and technology infrastructure (BCBS, 2001; Ashby and Young, 2001; Quick, 2000). The operational risks of bank have direct impacts on the financial position of the company and they negatively impact that position.

2.4.3.Credit Risks:
The credit risks are associated with the core services of the bank that are lending and borrowing. These risks are the probability of borrowers failure to meet his obligations. Number of reasons can result in the default of the borrower and that can be very serious risks on the profitability of the bank. These losses can be determined by calculating the loan assets of the bank according to their potential ratings for repayment of loans (Bessis, 2002). The market risks variables have strong influences on credit risks faced by the bank and credit risks are considered an inherent part of any banking activity. Bank can use the credit risk management strategy to minimize the expected risks associated with the lending and adjusted rate of return can be used to give a safe side to the bank against the possible risks under an acceptable parameter (Crouhy et al., 2000). Basically two core components create a credit risk for any bank that are first is risk quantity that is referred to outstanding amount of loan to the borrower and the other element is the quality of 16

risks. The quality is referred to the exposure to a particular industry or sector and probability of repayment of loan associated with a particular client. Credit can be said as an outcome of both exposure risks and default risks (Lam, 2003). Credit risks can be evaluated by using the credit ratings as useful measures. Credit risks can be finding in every function of the business including credit functions and treasury management functions. Banks can develop a portfolio analysis that can help the bank to identify any concentration of credit risks and recovery data and migration statistics can also be used to evaluate these risks (Bessis, 2002). The default of a customer is not an abrupt process that takes a long time to final failure and this can be foreseen through critically observing the data. Credit worthiness of any customer is very important to understand the quality of credit and value of securities also decrease but it is a gradual process (Bessis, 2002). The extreme situation of a credit risk is default. Bank can categorize its risks on the basis of its levels such as off balance sheet exposures of bank such as options, swaps and forward contracts can be classified as low risk, mediums risk and full risk items. The credit risk management includes estimates to determine the quantity of risks, use of credit rating to measure the risks, use of scientific pricing and use of portfolio management and loan review mechanism to have effective controls.

2.4.4.Market Risks:
The market variables and any changes occurring in these variables can also create number of risks for the bank. The change in market variables such as commodity prices, exchange rates and interest rate changes can have very strong impacts on the balance sheet of the company. Market risks can be associated as risks to the profitability of the bank due to number of changes in prices of securities in the market, changes in interest rates, changes in foreign exchange rates and levels of market volatility (Bessis, 2002). A very strong and comprehensive frame work is used for market risk management that includes interest rate management, liquidity management and monitoring, measuring framework and interest rate and foreign exchange market movement and determining the commodity price risks. The potential risks related to market can be minimized through effective stress testing and scenario analysis in the given portfolio of risks. The bank also need to identify the potential changes in the economy and industry overall.

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2.5.Nature of Risks associated with banks:

Commercial banks are operating in money and money is exposed to different types of risk. Commercial banks are having many kinds of financial and non-financial risk due to dealing in risk business (Casu, Giradone and Molyneux, 2006). In any country financial sector is considered the most important sector because of its role in Government and economy as well as in public dealings (Casu, Giradone and Molyneux, 2006). In last few years commercial banks are appeared as strong component of financial sector because they are now providing secondary services as well. Different researchers and publishers worked on this sector of economy and produced many papers and articles related to commercial banks. As, commercial banks are offering secondary services they are exposing themselves to non-financial risks as well (Casu, Giradone and Molyneux, 2006). These commercial banks are now integral part of any economy because they are providing funding capability, transaction efficiency and most importantly market knowledge. These features increased their importance which was not realized few years back (Casu, Giradone and Molyneux, 2006). Commercial banks are having enough resources to support their activities and they are also maintaining their own profit and loss account and balance sheet (Caouette et al., 2008). These measures are taken to develop remedies for financial risks and to minimize their frequency. There are some activities of commercial banks which are not directly part of balance sheet like services to consumer regarding loan management, underwriting facility (for initial public offering of share), providing assistance in contracts and best efforts placement and the most important one is management services related to investment and trust of clients (Doherty, 2000). These items are not part of the balance sheet thats why they are causing risk of them. Risk management in commercial banks carried out for activities which are not part of balance sheet as mention above. Non balance sheet activities are directly contributing towards the profit and loss ability of bank (Doherty, 2000). Balance sheet risks are mostly not associated with the banks. These risks are generally transferred to other parties. Balance sheet risks are the risk which cause by borrowing and lending activities. Banks are having clients at both end and most of time the act as intermediary like they are having clients who deposit their funds and known as supplier of funds. These funds lend to clients who are known as consumer of funds (Meulbroek, 2002). Clients are involved in borrowing and lending processes thats why the risks associated with these transactions are transferred to 18

clients. Banks are offering different kind of financial products are services in combination of these products commercial bank usually transfer their balance sheet risks to consumers and lenders (Duffie and Singleton, 2003). Now banking industry is working on dynamic prices and they can change the price at any course of working with the changes in market conditions and economy situation. Usually banks divide their risks into three categories namely (Meulbroek, 2002): Risks which need to managed by the bank level Risks whose exposure can be transferred to clients or other party Risk that cannot be occurred or reduced by best business practices

Some of risks are unnecessary risks and caused by routine business transactions. These risks can be minimized or eliminated by the banks if the opt of business practices which are fully measured and controlled by experts (Meulbroek, 2002). Risk dodging business model is helpful to overcome these types of risks. Bank can avoid these types of risk by implementing incentive method in which best performer is rewarded and least performer is account far. The other method to avoid these risks is bank should develop portfolios in order to create diversity in process and operations and this will help to reduce the error rate and avoid unexpected losses by balancing each other in portfolio of products. Oldfield and Santomero (1997) said that banks can avoid these risks by using standardized practices and avoid financial decisions which are not backed by proper information and data (Meulbroek, 2002).

2.1.Need for risk management in banks:

Every business wants to maximize its profits and this is only possible when it is having low cost of products and services with minimum risks. Banks are using different strategies to maximize their profits and also using risk management techniques to reduce the risk. In last few decades many researcher has contributed a lot in risk management namely; Santomero (1995), Sharfstein and Stein (1993), Smith, Smithson and Wolford (1990) and Stulz (1984). These researchers had developed many researches to manage the risk and to averse the risk from business operations. According to their findings risk management is having significant impact on the organization culture and performance (Duffie and Singleton, 2003). There can b operational level or strategic level risk. Operational level risks are directly affecting the bank performance and profits on the other hand strategic level risks are having impact on business existence and working. Banks are now operating all around the world and having their existence though online and offline modes. Many banks are managing their risk through special risk management department under the 19

supervision of risk managers. Every bank has its own techniques and procedure for risk management (Duffie and Singleton, 2003). The important question in risk management is that which risk should manage with which technique. Almost every bank is having risk management system and every system is having some important steps for implementation. Following are some important parts and steps for successful implementation of risk management system (Dunnett, Levy and Simoes, 2005): Compensations and incentive contracts Strategies for investments and guidelines Position Limits and Rules Reports and standards

These steps are aligned with each other in order to form a risk management system which is helpful to achieve business goals and objectives. Lets analyze above four different parts of risk management system in any bank:

2.1.1.Reports and standards

In any company or bank there are some standards for activities and financial reporting system. These standards are established by the market or business itself. Many of the standards that are used to measure the process and business quality are of international standards. Different Banks are operating all around due to which they have to follow international standards in order to remain competitive (Dunnett, Levy and Simoes, 2005). Traditional there are different tools that are used to manage the risk like standards of review, risk categorizations and underwriting standards. Portfolio of risks was developed in order to have the idea about different risk categorization into absorbable risks and non absorbable risk and risk mitigation plan (Horcher, 2005). Banks are dealing with finance and they have to develop financial reports on continuous basis and standardization of these reports is also an important task in order to save time and resources. There are different standard used for the development of these financial reports like rating agency evaluation, regulatory reports and outside audits etc. The standards are designed to make the harmony amongst different reports and maintain their credibility. These reports are developed for public and private sector organizations as well (Dunnett, Levy and Simoes, 2005). These financial reports deals with money and now most common principle for the developing financial reports is the GAAP (generally accepted accounting principles). These principles

20

provide standardized format for all kinds of financial report in order to create uniformity amongst the reports and ease for readers.

2.1.2.Position Limits and Rules

Position limit rules sets standard or minimum point for the quality of product and services. This minimum point is the eligibility criteria above which products and services are eligible and below this they considered them ineligible (Dunnett, Levy and Simoes, 2005). There are some other criteria as well for eligible products and investments that they must cover the position concentration with regards to risks, credit line and exposures to counter parties. These limits are established in eliminate risks and also used as risk mitigation. These limits automatically reduce the risks associated with the investment and usually applied to portfolio managers, lenders and traders. After some time periods a summary is developed regarding position of limits and available exposure with bank. These limits are used to limit the resources against investments and also limit the losses against investments.

2.1.3.Strategies for investments and guidelines

There are different types of guidelines and strategies used for investments. In banks the major risk associated with investments and every bank prescribe certain limit for exposure and investments which have to follow by managers (Dunnett, Levy and Simoes, 2005). These limits work as risk management system in order to reduce the risks on investment. Most of the investments are made by portfolio management in which different investments are pool together in order to form single big investment and risk mitigation plan is developed for portfolio instead of individual investment. There are more chance of failure for single investments in banks thats why portfolio of investments help to reduce the risks on investment by compensating ones losses with others profits.

2.1.4.Incentive Schemes
There is well established and well monitored internal control system is required for managing the incentive contracts (Dunnett, Levy and Simoes, 2005). These contracts are used as compensation for individual who borne risks and usually align with line mangers. These incentives schemes include setting off, allocation of costs, risk analysis and position posting. This technique helps to align the stake holders with the goals of managers in best possible way. Incentives technique is

21

also best for risk management because they encourage stakeholder to remain with bank at any stage and in any situation because of extra benefits (Dowd, 2005). Above are four important parts of the risk management system. These are very helpful to reduce the risk and eliminate the risk (Horcher, 2005). Everything is having accountability and limits in risk management system and in case of crossing these limits one will face breach of contract. These limits are designed to limit or eliminate the risks from the business. Proper planning and monitoring of risk management system allow banks to overcome all types of financial and non financial risks (Horcher, 2005).

2.2.THE NEW BASEL ACCORD

Different rules and regulations are developed to support and measure the banking system all around the world. Many countries are using some local measures and some international measures to create harmony amongst the banking system (Basel Committee, 2006). There is set of rules and regulations consists of recommendations for banking system in order to improve the quality of operations, capital requirements enhancement and effectiveness of risk management measures this set of consultative document s is known as New Basel Accord. This Accord provides guidelines for different transactions and usually for 3 years time period. It specifies different limits for different heads in the system (Basel Committee, 2006). New Basel Accord covers the work in progress rules, measures for operations, extended converge and menu of options. There are 3 pillars of New Basel Accord. First pillar is related to minimum capital requirements, second pillar is related to supervisory measures for different process and last one is related to market rules and regulations.

Comparison of New Basel Accord with Old one

Figure No. 2.3 Source: (Basel Committee, 2006) 22

These three components of new Accord provide more credibility and soundness of the banking system in the country (Basel Committee, 2006). This system is helpful to develop mitigation plan for credit risks and market risks. Market risks are related to occurrence of gap between market data and book records of banks and credit risks are associated with mishandling of the credit in bank and banking system (Basel Committee, 2006). New Accord provides accountability of the whole banking system.

2.3.Risk Management.
Every business is expose to certain risks thats why they are having risk management department which make strategies to avoid risk and plans for risk mitigations (Crouhy, Galai and Mark, 2001). Financial institutions including banks are more exposed to risks due to dealing in cash and money. They are having more chances of frauds than other businesses. In simple word risk management involves the controlling, monitoring, measurement and identification of risk in view to ensure the followings (Crouhy, Galai and Mark, 2001): In order to take risk there must be backed by sufficient capital Decision related to risk must be clear and explicit The total cost of risk and payoff must be calculated before Decision related to risk must be align with business objectives and strategies Risk must fall within the prescribed limits Risk taker must have the knowledge and understanding about their decisions

These are some important components related to risk management. It is one of the primary functions of the banks to manage the financial risk thats why they device strategies to cope with risk (Doherty, 2000). Banks usually developed strategies to optimize risk rewards trade-off rather than minimizing risks. Risk management in banking sector is very important because there are many types of risks which are forcefully imposed to banking sector (Chenhall, 2003). Banks generally develops three kinds of strategies to cope with risk. First one is transfer of risk from their end to client end, second one is risk absorption and last one is risk mitigation strategies (Chenhall, 2003).

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2.1.Risk at different hierarchy levels of banks:

As earlier discussed there are different types of risk associated with banks at different hierarchy levels of organization. In order to develop effective risk management system one must knows the type of risks and its implication at what level. Risks in financial institutions are categorized into three important heads as following:

2.1.1.Micro level:
These are very small level risks and usually created on the line risks. These risks are created on individual level. Most of time banks are not aware of these types of risks that their employees are taking risks on behalf of the bank (Baccarini and Archer, 2001). These risks include risk taken at loan origination functions and risks taken by front desk officers. It is very difficult for banks to devise strategies for these kinds of risks because these risks are usual taken into account when any catastrophe is happened. In order to minimize these risk banks should account for the responsible person and device strict rules for disobedience. These risks born at operational level and must be mitigating with operational level strategies.

2.1.2.Macro Level:
Macro level risks are the risks which arise at middle level management and their activities. These are one step ahead from micro level (Baccarini and Archer, 2001). Usually in banks these risks are categorized into branch level risks or risks which arise due to regular course of actions with in business territory. Frequency of these risks is comparatively low than micro level risks. But these risks are having greater impact on business profitability. In macro level risks usually middle level management is account far and these are taken place due to their mismanagement and overlooking the issues.

2.1.3.Strategic level:
These are most important and most critical type of risk and hierarchy level in banks. Risk at this level directly impact the existence of bank and affect their working capabilities. These risks are associated with board of directors and higher level management (Baccarini and Archer, 2001). These types of risks include failure of business operations, competitor entrance, expansion planning and aligning business activities with banks objectives and long term goals. Strategic level risks are very few in frequency but their impact can be seen at whole business unit. Instance measures are taken to mitigate these types of risk and higher level strategic development and 24

planning is required to compensate these types of risk in banks (Baccarini and Archer, 2001). Risk at strategic level mostly requires compensation plan in order to rectify the remedies and avoid the possible risk. As world is moving towards global economy competition in banks is increasing with incredible pace and they are introducing new and more customized products other than their primary functions (Casu, Giradone and Molyneux, 2006). Introduction of new products leads to more exposure to new kinds of risks to banks. In order to remain competitive as well as profitable banks needs to redefine their risk managements systems to foresee future risks and make remedial strategies. For these reasons they need to develop changing environment in the banks which is also a biggest challenge and risk for them. In current situation due to recent economic crises banks are now more conscious about their products and they are now less risk taking than before (Casu, Giradone and Molyneux, 2006). Risks at strategic level are more important than the risks at macro or micro level because banks need to revolve their system according to current market environment. In short risk management system is most important need of banks for their autonomy and survival.

2.2.Risk Management Flow Chart:

The concerns of stakeholders in the risk management process are very high in modern organizations. Organizations can work on their risk factors to enhance their capabilities to have more efficient control on them. Risk management is not a onetime activity rather it follows a well defined flow chart of activities. The appropriate concerns of stakeholders in risk management include: The identification of role of stakeholders in the organization. The influence level stakeholders have on the organization and its operations. The level on investment in the organization by the stakeholders and this has potential impacts on the risk factors of the organization. Figure 2.10

25

Source: [countrysideinsurance, 2011] The above figure describes the complete flow chart of risk management in an organization. This first step in the process of risk management is to identify the risks. This can be effectively performed through step by step evaluation of different areas in organization to understand their vulnerability to risks. In this identification process of risks different risks are identified. The next step in the process is to decide strategy whether to avoid the risks, hold the risks or transfer the risks [countrysideinsurance, 2011]. In case of risk avoidance strategy there are two further possibilities that whether organization will stop the production of that particular product or in other case vendors can also accept that particular risk. The next strategy is to hold the risk with the company. In this strategy organization utilize its resources and efforts to eradicate the risk factor from roots level [countrysideinsurance, 2011]. The third strategy of risk management is to transfer that risk. In this case organization can go for two different options in one case it can sign a contract with other firm to compensate the risk for a particular benefit that company provides to that firm and the second way is to get the risk ensured by some insurance company [countrysideinsurance, 2011].

2.1.Risk Management in Banks:

The re-evaluation and improvement capacities are core processes of risk management effectiveness in any organization. In order to have successful risk management in the organization around the clock it is needed to allot the responsibility to particular individuals or a group of individuals. That particular group should be responsible to conduct an analysis on 26

regular basis in which different risks should be identified and then up to date strategies and polices should be used to control these specific risks in the organization. The regular evaluation of the systems and processes is very important [Ashai, 2011]

Figure 2.11 RISK MANAGEMENT IN BANKING COMPANIES

Source: [Ashai, 2011] The above figure 2.11 shows that in first step team should be responsible to assess the risk factors and then identified risks should be evaluated in order to categorize them. Then a management approach should be defined for each particular risk and them their effectiveness is measured and so on. This shows that risk management is not one time activity rather it is continues process.

2.2.Framework of Risk Management:

The risk management framework is overall strategy of risk management that covers the scope of risk management in the bank and responsibilities of different individuals for risk management and use of systems and procedures for effective risk management process. The risk management 27

framework in the bank needs to be very efficient that can identify all possible risks that can influence the bank and it must be flexible to adopt any required change in the system and structure of the organization in order to control any particular risk. A risk management frame work that can contribute no of benefits in organizational success should covers: The risk management policies and strategies that must be well defined and covers number of areas such as identification of risks, acceptance of risks, measurement of risks, monitoring of risk factors, their reporting and control. The organizational structure needs to be very strong and that should be able to define the individual roles and responsibilities very clearly and efficiently regarding the individual functions and risks that they have to take. The risk management committee should be formed in order to conduct the risk management process and to evaluate the success of the system. The organizational structure should be supportive to have strict monitoring and control for risks exposed to organization. The committee must be able to review the risks and develop strategies in compliance with the organizational strategies. The members of risk management committee should not be involved in other activities in the organization. The management information system of the organization need to be very effective that can fulfill the organizational needs and address the expectations of the whole business unit. The system should define all the measures that can be effective to manage the deviations in the structure. The risk management framework should be able to review the organizational strategies, policies, systems and procedures on ongoing bases to manage the risks and implement the remedies to control the factors.

2.1.1.Integration of Risk Management:

The risks exposed to an organization should not be taken in isolation that any one event can result in number of risks to the organization and one risk can further give birth to other risks. In this way when an interaction is happened in risks it can result in increase of risk factors. The organizational management should now about all possible risk factors that can be exposed to organization while developing a risk management strategy. This needs to have a well defined

28

structure that identifies the interrelationships of different risks in the organization and how they can be controlled.

2.1.2.Accountability:
Banking organizations assign the risk management responsibilities to certain teams or committees and they are responsible to review the whole organizational structure and systems on continues basis. This is referred as internal audit and very important. The risk management is not limited to risk management committee rather they are responsible to form the risk management strategy of the organization and implementation of the strategy is ensured by number of departments and individuals in organization. The risks associated with different business lines should be clear to them and they must be able to develop their individual strategies as well.

2.1.3.Risk Evaluation:
The risk control cannot be successful if risk will not be measured successfully. The true evaluation of risk factors in organization helps to develop future strategies that can decide the future standing of the organization. The risk evaluation process should be able to express an aggregate exposure of risks to organization that can describe both short run as well as long run impacts of the risks. The quantitative measure is not possible for risks so a qualitative measure is used to evaluate the risk factors. The staff skills and capabilities in risk management are also very important to manage the risks in effective way that can reveal maximum benefits to the organization.

2.1.4.Independent review:
The team responsible to measure and control the risk management should not be involved in risk taking functions and they must be independent for the review. A complete independent analysis should be conducted to understand the effectiveness of risk management and identified issues should be discussed and a comprehensive strategy should be developed to control the risk factors. The review committee should have authority to conduct an independent analysis and should have sufficient expertise to control.

2.2.Conclusion of Chapter Two:

This study is focused to have insight about the adequate risk management policies of banks in order to reduce their risks and costs and increase their profitability. This chapter explains the risk, and different types of risks. Factors related to risk and market risk is also discussed in this 29

chapter. Then there is insight about nature of risk associated with banks and importance of risk management for banking sector. There is also discussion related to Basel Accord regarding risk management in banking sector and risk management and different type of risks at different hierarchy levels. Next chapter will give insight about the research methodology.

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Chapter Three: Research Methodology

3.1.Introduction of Chapter three:

Chapter two is regarding the literature analysis of impact of risk management in banking sector of Pakistan on its profitability. Different researches and journals are analyzed in this context. This chapter comprises discussion related to research methods. Research onion is the main base for the development of this strategy. Mark Saunders latest edition is analyzed from all perspectives. This chapter will discuss different philosophies, approaches, strategies and choices related to this particular topic. There is some discussion related to ethical considerations and limitation of the study as well.

3.2.Research Onion:

Figure 3.2 Source: Research onion by Saunders et al. (2009)

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3.3.Philosophy behind the study

In Research onion Saunders et al. (2009) has described 4 types of research philosophies. Positivism philosophy is applicable where there is need to find the truth and most applicable for scientific studies or related to natural studies. Realism philosophy deals with the approach where research wants to know the real behind the study and most importantly truth behind the study. Pragmatic philosophy is only used where research aim is to address to single type of question. Lastly interpretive philosophy is where the research aim is to interpret the phenomenon which is having human involvement and explain any method or theory (Saunders et al., 2009). In this study most appropriate philosophy is the interpretive strategy because research aim is to view the Pakistani banking system in terms of risk management and different trends. Interpretive strategy is best to review any system or collect the respondents views regarding any particular issue or study.

3.4.Research approach:
According to Saunders et al. (2009) there are mainly two research approaches that can be used for any study; whether it could be deductive or inductive method. Deductive method is top down method where theory is analyzed to come to a particular observation on the other hand inductive approach is down up approach where observation is analyzed in order to develop theories (Saunders et al., 2009). In this study aim is to review the banking sector of Pakistan with respect to risk management (observation) in order to develop any particular hypothesis. Best approach for this study is inductive approach which deals with observation to theory building. Particular observations are analysed in order to develop hypothesis and these hypotheses are tested to develop theories in inductive approach.

3.5.Research Strategies
Research strategies are the data collection tools and mainly used for primary data collection for study. Saunders et al. (2009) has explained many strategies for data collection. Experiment is used to test any matter in artificial environment with the help of statistical tools and most used for natural studies. Survey is most popular strategy and most used in social science to collect quantitative and qualitative data. This strategy collects data in written responses. Interview is another strategy which collects data in the form of verbal communication. Case study method is 32

one of the most reliable and valid method in this strategy particular case is analyzed with all perspectives in order to develop understanding related to particular topic. In this study survey questionnaire is selected as data collection strategy. Lets analyze the implication of this tool for this study:

3.6.Questionnaire:
Questionnaire collects primary responses from respondents in written format. According to Saunders et al. (2009) there are open ended and close ended question included in questionnaire. Aim of open ended question is to collect the responses which cannot be expressed in options and short format; which require detailed answer. On the other hand close end questions aim is to give more brief and concise results and these are very useful for statistical analysis. In this study around 13 questions are being asked which are developed with multiple options. Questionnaires are given to different managerial level people working in leading banks of Pakistan in order to get their opinion regarding risk management.

3.6.1.Structure of Questionnaire:
There are 13 questions in one question and every questionnaire is structured in order to collect generalised results which allow researcher to compare the results with each other. First two questions are related to respondents biography. 3rd question is related to components which are the main part of internet risk management system. 4th question is related to sources of liquidity risk for banks and different options are given in this question. Question 5th is related to tools for mitigation liquidity risk and question 6th is related to tools and method introduced by regulatory authorities. Question 7th is related to sources of interest rate risk and 8th is related tool to mitigate interest rate risk. A 9th question defines the basis for banking scoring and rating system. Question 10 is related to sources of operational risk and 11th ask for tools to mitigate operational risk. 12th is related to tools to mitigate market risk for banks. Last question is related to impact of risk management on profitability of the company. All of these questions are close ended questions with multiple options. These are designed to check overall impact of risk management system on profitability of the bank.

3.7.Research Choice:
In order to avoid any complications mono research strategy is used in this method. According to this method single strategy is used to collect the data responses that are questionnaire. More than 33

one method requires more time and money as well as creates more complications. In order to overcome these issues single method is selected as research strategy for this study.

3.8. Research Time Horizon:

In this study cross section approach is used which is comparison of different techniques and method in a certain time frame. In this study performance and risk management system of different banks in Pakistan is compared in order to check their profitability and approaches to mitigate different types of risk.

3.9.Data analysis technique:

In this study data is collected from various banks managerial level employees because risk management is done at managerial level instead of lower level. They are being asked about different sources of risks to their banks and their most appropriate technique to mitigate these risks. Data is presented in three different formats by using statistical analysis. Like first of all statistical discrepancy of data is checked, after that there is frequency distribution of each question followed by graphical representation. Every question is presented separately and its analysis is done with the presentation of data.

3.10. Data types:

Saunders et al. (2009) has introduces primary and secondary two main types of data that is used in any type of study. In order to increase reliability of the study it includes both primary and second data sources. Primary data is collected from different employees of leading banks in Pakistan regarding their risk management system. Secondary data is collected from following sources: Different websites of leading banks in Pakistan Annual reports of leading banks in Pakistan Trade journal and online articles related to risk management in banking sector Data ware houses and different online search engines regarding risk management in banking sector

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3.1.Sample Size:
In this study sample is selected based on random sampling method because of sources and time constraints. Employees are selected from different banks in order to avoid duplication and every member is having equal chances in this method.

3.2. Hindrances in Research:

Mainly there are two main problems in this research. First of all employees are reluctant to give responses regarding their risk management system. They are given fully assurance regarding their anonymity. Limited exposure of personal background is taken from respondents to increase response rate. Second hindrance in this study is limited volume of resources including time and money. Proper planning is made regarding utilization of these resources like time is manage by completing different section simultaneously and resources are used in most appropriate manners.

3.3.Ethical Consideration of research:

Study will follow the ethical guidelines provided by university and will strictly adhere to them in order to ensure the reliability of this study. Harvard referencing style will be used to refer the data and plagiarism will be avoided at any cost. The anonymity of respondents will be ensured and their identities will be kept secret. This will also enable them to share their views with full freedom and they will be explained about the research aims and objectives before taking their responses. They will be also explained about the research methods that will be used in this study in detail. The data will be analyzed with the help of charts and diagrams and it will be presented honestly. The researcher is not responsible and he cannot be compel for any legal binding for the outcomes of his research work (concepts, theories and principles established by the researcher ) to be true and follow the general criteria and formulas as already establish and consider as bench mark.

3.4.Conclusion of chapter three

This chapter discusses different philosophies, approaches, strategies and choices related to this particular topic. In research philosophy interpretive strategy is selected and inductive research approach is used to develop this study. Primary and secondary data is used in this study to make it more reliable. Next chapter provides insight about the data presentation and discussion of results with statistical analysis.

35

Chapter Four: Data presentation & analysis

4.1.Introduction
This chapter provides insight about the data presentation and discussion of results with statistical analysis. In this chapter data is presented in the form of different statistical analysis in order to make comprehensive.

4.2.Research background:
Basic theme behind this study is to review the banking sector of Pakistan in terms of their risk management policies. This study analyze different types of risks like liquidity risk, market risk, operational risk and interest rate risk faced by different leading banks of Pakistan. There are some questions designed to check their tools to mitigate these risks.

4.3.Results presentation and discussion:

In this study data is presented in three different formats by using statistical analysis. Like first of all statistical discrepancy of data is checked, after that there is frequency distribution of each question followed by graphical representation. Every question is presented separately and its analysis is done with the presentation of data. Lets analyze every question one by one:

4.3.1.Gender Distribution:
This question is designed for respondent gender responses. There are around 26 people from different banks selected as sample. They are being asked about their risk management system and current practices regarding risk management. The ratio of male respondents is comparatively high than the female because most of the banks are having more male people at different managerial position rather than female. Female are mostly seen in customer service and marketing departments. In this study male are little higher than of the study (n = 20; 76.92%) are less than one forth of study (n = 6; 23%). Following tables show gender descriptive and frequency distribution analysis of this question: Gender Distribution (Descriptive Analysis) N Valid Missing 26 0 36

Median 1.00 Mode 1 Figure 4.3.1-A

Gender Distribution (Frequency Distribution) Frequency Valid Male Female Total 20 6 26 Percent Valid Percent Cumulative Percent 77.00 100.0

77.00 77.00 23 23 100.0 100.0 Figure 4.3.1-B

These statistics gender participation of the study and results indicates that male is in dominance than female. It is also observed that male respondents are keener to give their views about their organization than female.

4.3.2.Age division:
In banks most of the promotions are made on the basis of seniority and experience because it requires analytical abilities to analyze different situation. Most of time inexperience employees are unable to handle this kind of situation due to lack of understanding in the methods. Risk management is usually done at management level in banks. Banking sector jobs are one of the highest paid jobs in industry with total compensation and basic salary plan. People use to stay in this sector as much as can. In this sector there are some within sector job shift but other sector are very few. In this question results are showing minimum and maximum experience of employees. In respondent person having minimum experience is 4 years and maximum experience is 11 years. Average experience of respondents is 6.71 years and 2.38 is standard deviation from mean. Following table shows Age division descriptive analysis of this question:

Age division (Descriptive Analysis) N Minimum Maximum Mean Std. Deviation 37

Number of years worked 26 for Royal Mail Valid N (list wise) 26

4 Figure 4.3.2

11

6.71

2.38

Result of this question shows the employees experience in the company /bank and their ability to analyze different critical situations.

4.3.3.Components of Risk Management Internal Control system:

Banks usually maintain their own risk management system for internal controlling of risk. Every system consists of some components. This question is designed to check the most important component present in risk management system of Banks. There are 9 respondents in study who claimed that their banks most important internal risk management component is risk monitoring and control (n = 9; 34.62%) on the other hand 3 respondents said that risk models is part of internal control system (n = 3; 11.54%). 5 respondents are in viewed that risk factors and risk identification tools are important part of inter risk management system (n = 5; 19.23). On the whole majority of the respondents said that risk identification is the important part of internal risk management system of their bank (n = 8; 30.77%). Following tables shows Components of Risk Management Internal control system descriptive analysis and frequency distribution analysis of this question:

Components of Risk Management Internal Control system (Descriptive Analysis) N 26 0 Median 3.00 Mode 1 Figure No. 4.3.3-A Valid Missing

Components of Risk Management Internal Control system (Frequency distribution) Frequency Valid Risk monitoring and control 9 % 34.62 Valid % 34.62 Cumulative Percent 34.62 38

Risk measuring methodology and models Risk factors and identification tools Roles and responsibilities Risk definition Total

3 5 1 8 26

11.54 19.23 3.85 30.77 100.0

11.54 19.23 3.85 30.77 100.0

46.16 65.39 69.24 100

Figure No. 4.3.3-B

Components of Risk Management Internal Control system (Graphical Representation)

Figure No. 4.3.3-C

4.3.4.Main Source of Liquidity Risk:

Banks are facing many types of risk internal and externally like liquidity risk, interest rate risk, market risk and operation risk. This question is designed to check the respondents views regarding the liquidity risk sources. There are 3 respondents in study who claimed that their bank considered the downgrading in the credit rating of their banks (n =3; 11.54%) on the other hand 8 respondents said that OBS credit exposure which consist of credit lines and guarantees is the main source of liquidity risk for the bank (n = 8; 30.77%). 5 respondents are in viewed that no performing loans are also main source of liquidity risk for bank (n = 5; 19.23). On the whole majority of the respondents said that large deposits dependency is the only source of liquidity risk for bank (n = 9; 34.62%). Following tables shows main sources of liquidity risk for bank descriptive analysis and frequency distribution analysis of this question:

Sources of liquidity risk (Descriptive Analysis) N Valid Missing 26 0 39

Median 3.00 Mode 5 Figure No. 4.3.4-A

Sources of liquidity risk (Frequency distribution) Frequency Valid Creditworthy rating downgrade 3 OBS credit exposure (guarantees, credit 8 lines, etc.) Non-performing loans Loan portfolio concentration Large deposits dependency Total 5 1 9 26 Figure No. 4.3.4-B % 11.54 30.77 19.23 3.85 34.62 100.0 Valid % 11.54 30.77 19.23 3.85 34.62 100.0 Cumulative Percent 11.54 42.31 61.54 65.39 100

Sources of liquidity risk (Graphical Representation)

Figure No. 4.3.4-C

4.3.5.Tools for Liquidity Risk management:

There are different tools used by banks for risk mitigation. It is difficult to use same type of tools and measures to mitigate all types of risk. This question provides insight about liquidity risk mitigation tools. There are 5 respondents in study who claimed that their bank is using daily pay-sheet regarding cash maintenance and its scheduling for liquidity risk mitigation (n =5; 19.23%) on the other hand 7 respondents said that limits regarding liquidity gaps is best for liquidity risk mitigation (n = 7; 26.92%). 4 respondents are in viewed that inflow and outflow cash stimulation can reduce liquidity risk (n = 4; 15.93%). On the whole majority of the respondents said that assets (liquid) portfolio management system is best to mitigate liquidity

40

risk (n = 8; 30.77%). Following tables shows main tools for liquidity risk mitigation for bank descriptive analysis and frequency distribution analysis of this question: Tools for Liquidity Risk management (Descriptive Analysis) N 26 0 Median 3.00 Mode 3 Figure No. 4.3.5-A Tools for Liquidity Risk management (Frequency distribution) Frequency Valid Daily pay-sheet and short term cash flow 5 schedule Liquidity gap limits High liquid assets portfolio maintenance Inflows / outflows simulation techniques In-house liquidity indicators Total 7 8 4 2 26 % 19.23 26.92 30.77 15.39 7.69 100.0 Valid % 19.23 26.92 30.77 15.39 7.69 100.0 Cumulative Percent 19.23 46.15 76.92 92.31 100 Valid Missing

Figure No. 4.3.5-B

Tools for Liquidity Risk management (Graphical Representation)

Figure No. 4.3.5-C

4.3.6.Liquidity Risk management and regulatory authority measures:

Every country is having some regulatory bodies to manage the affairs of banking and other financial institutions. Most of them are having central bank for regulations and policy development of financial institutions including banking sector. This question provides insight about the liquidity risk management and proposed measure for liquidity risk management by regulatory authorities. There are 7 respondents in study who claimed that regulatory authority is turned to more stringent regulations for liquidity risk mitigation (n =7; 26.92%) on the other hand 2 respondents said that regulatory authorizes are providing consultative material to reduce 41

the liquidity risk in bank (n = 2; 7.69%). 6 respondents are in viewed that offices are attending bank on regular basis of liquidity risk management inspection (n = 6; 23.08%). On the whole majority of the respondents said that central bank allows bank to extend short term funding facilities in order to reduce liquidity risk (n = 11; 42.31%). Following tables shows main tools proposed by regulatory authorities for liquidity risk management in bank descriptive analysis and frequency distribution analysis of this question: Liquidity Risk management and regulatory authority measures (Descriptive Analysis) N 26 0 Median 2.00 Mode 1 Figure No. 4.3.6-A Liquidity Risk management and regulatory authority measures (Frequency distribution) Frequency Valid Extend short-term funding opportunities 11 Turn to more stringent regulation on 7 liquidity risk management Produce consultative materials on liquidity 2 risk management Regularly attend examination Total the banks with 6 26 Figure No. 4.3.6-B % 42.31 26.92 7.69 23.08 100.0 Valid % 42.31 26.92 7.69 23.08 100.0 Cumulative Percent 42.31 69.23 76.92 100 Valid Missing

Liquidity Risk management and regulatory authority measures (Graphical Representation)

Figure No. 4.3.6-C

4.3.7.Main sources of interest rate risk

One of the most important risks for banking sector is interest rate risk which can cause problem due to its fluctuations. There are many factors which increase the interest rate risk. This question provides insight about the different factors causing interest rate risk for bank. There are around 6 42

respondents who said that optionality risk is one important type of interest rate risk (n =6; 23.07%) on the other hand 3 respondents said that yield curve risk also an important source to increase the interest rate risk (n = 3; 11.54%). 7 respondents are in viewed that re-pricing of the products and services is an important source of interest rate risk (n = 7; 26.92%). On the whole majority of the respondents said that interest rate basis are important source of interest rate risk because change in base causes change in interest rate (n = 10; 38.46%). Following tables shows main sources of interest rate risk in bank descriptive analysis and frequency distribution analysis of this question: Main sources of interest rate risk (Descriptive Analysis) N 26 0 Median 2.00 Mode 2 Figure No. 4.3.7-A Main sources of interest rate risk (Frequency distribution) Frequency Valid Optionality risk Basis risk Yield curve risk Re-pricing risk Total 6 10 3 7 26 Figure No. 4.3.7-B % 23.07 38.46 11.54 26.92 100.0 Valid % 23.07 38.46 11.54 26.92 100.0 Cumulative Percent 23.07 61.53 73.07 100 Valid Missing

Main sources of interest rate risk (Graphical Representation)

Figure No. 4.3.7-C

4.3.8.Tools to mitigate interest rate risk

Every bank is using different measure to cope with interest rate risk because interest rate risk is always remain in financial sector and effect the performance directly or indirectly. This question provides insight about the different tools used by banks to mitigate interest rate risk. There are around 6 respondents who said that exposure limits on interest rate gaps best to control interest 43

rate risk (n =6; 23.07%) on the other hand 3 respondents said that gap analysis of different duration in business may help to reduce the interest rate risk (n = 3; 11.54%). 4 respondents are in viewed that analysis of gaps dues to re-pricing of the products and services is best tool to mitigate interest rate risk (n = 4; 15.39%). On the whole majority of the respondents said that basis risk analysis in which analysis is developed on the different basis of interest which is also one of major source of interest rate risk is the best tool to mitigate the risk (n = 11; 42.31%). Following tables shows main tools to mitigate interest rate risk descriptive analysis and frequency distribution analysis of this question: Tools to mitigate interest rate risk (Descriptive Analysis) N 26 0 Median 4.00 Mode 4 Figure No. 4.3.8-A Tools to mitigate interest rate risk (Frequency distribution) Frequency Valid Interest rate exposure limits 6 Duration gap analysis 3 Capital requirement approach based on 2 Basel II Basis risk analysis (mismatches in 11 4 26 Figure No. 4.3.8-B Tools to mitigate interest rate risk (Graphical Representation) % 23.07 11.54 7.69 42.31 15.39 100.0 Valid % 23.07 11.54 7.69 42.31 15.39 100.0 Cumulative Percent 23.07 34.61 42.3 84.61 100 Valid Missing

different base rates) Re-pricing gap analysis Total

Figure No. 4.3.8-C

4.3.9.Bank rating system

Every country is having some governmental and some not governmental institute which rate the performance of banks. This question provides insight about the basis of rating agency on which 44

usually these institute rate the bank. There are around 7 respondents who said that rating agencies usually rate on the basis of generic model defined by the bank and their system (n =7; 26.92%) on the other hand 4 respondents said that experts opinions are equally important to rate any bank (n =4; 15.39%). On the whole majority of the respondents said that majority of companies rate the bank on the basis of their past performance and different strategies towards society and environment and their level of activities (n = 15; 57.69%). Following tables shows basis for rating different banks by different agencies descriptive analysis and frequency distribution analysis of this question:

Bank rating system (Descriptive Analysis) N 26 0 Median 1.00 Mode 1 Figure No. 4.3.9-A Bank rating system (Frequency distribution) Frequency Valid Statistical models Generic models Expert opinions Total 15 7 4 26 Figure No. 4.3.9-B Bank rating system (Graphical Representation) % 57.69 26.92 15.39 100.0 Valid % 57.69 26.92 15.39 100.0 Cumulative Percent 57.69 84.61 100 Valid Missing

Figure No. 4.3.9-C

4.3.10.Main sources of operational risk:

Every bank is rendering some sort of services and products for its customers, so they are in verge of operational risk too. This question provides insight about the sources of operational risk to bank. There are around 3 respondents who said that banks who are not having proper activities at 45

branch level are facing operation risk (n =3; 11.54%) on the other hand 4 respondents said that sometimes banks system go down due to technical faults this create mess in customers and also one of the major sources of operational risk (n = 4; 15.39%). 6 respondents are in viewed that problems in transaction processing is also causing problems in operations and working of banks (n = 6; 23.07%). On the whole majority of the respondents said that introduction of new products and services create operational risk due to increase in competitiveness sin banking sector from the last few decades all around the world (n = 11; 42.31%). Following tables shows main sources of operational risk descriptive analysis and frequency distribution analysis of this question: Main sources of operational risk (Descriptive Analysis) N 26 0 Median 3.50 Mode 5 Figure No. 4.3.10-A Main sources of operational risk (Frequency distribution) Frequency Valid Improper activities of branches System downtime Transaction breaks Employee turnover New products and services Total 3 4 6 2 11 26 % 11.54 15.39 23.07 7.69 42.31 100.0 Valid % 11.54 15.39 23.07 7.69 42.31 100.0 Cumulative Percent 11.54 26.93 50.00 57.69 100 Valid Missing

Figure No. 4.3.10-B Main sources of operational risk (Graphical Representation)

Figure No. 4.3.10-C

4.3.11.Tools to mitigate operational risk:

Operation risks are associated with day to day operations of bank thats why they are using different tools to mitigate the operation risk. There are several tools available with banks and this question is designed to check respondents opinion regarding best one. There are around 2 46

respondents who said that banks are using contingency planning to mitigate operational risk (n =2; 7.69%) on the other hand 5 respondents said that risk mapping is another option available with banks regarding operational risk mitigation (n = 5; 19.23%). 7 respondents are in viewed that their bank is using balance sheet scorecard method to mitigate the operational risk (n = 7; 26.92%). On the whole majority of the respondents said that limits is the best technique to control any risk and banks are using operational risk limits to mitigate operational risk (n = 11; 42.31%). Following tables shows tools to mitigate operational risk descriptive analysis and frequency distribution analysis of this question: Tools to mitigate operational risk (Descriptive Analysis) N 26 0 Median 2.50 Mode 2 Figure No. 4.3.11-A Tools to mitigate operational risk (Frequency distribution) Frequency Valid Contingency planning Operational risk limits Risk mapping Balance Scorecards Self-assessment survey Total 2 11 5 7 1 26 Figure No. 4.3.11-B Tools to mitigate operational risk (Graphical Representation) % 7.69 42.31 19.23 26.92 3.85 100.0 Valid % 7.69 42.31 19.23 26.92 3.85 100.0 Cumulative Percent 7.69 50.00 69.23 96.15 100 Valid Missing

Figure No. 4.3.11-C

4.3.12.Tools to mitigate market risk:

Banks are also facing risks from outside of organization like from their competitive and marketing changes these risks are categorized as market risk sources. Banks are using different tools to mitigate the market risk and this question is designed to select the best tool based on respondents views. There are around 7 respondents who said that banks are using profit and loss 47

monitoring method for market risk mitigation (n =7; 26.92%) on the other hand 5 respondents said that back testing method is also available with banks for market risk mitigation (n = 5; 19.23%). 4 respondents are in viewed that their bank is using sensitivity analysis to mitigate the market risk (n = 4; 15.39%). On the whole majority of the respondents said that limits is the best technique to control any risk and bank are using limits to control different market forces (n = 8; 30.77%). Following tables shows tools to mitigate market risk descriptive analysis and frequency distribution analysis of this question: Tools to mitigate market risk (Descriptive Analysis) N 26 0 Median 2 Mode 1 Figure No. 4.3.12-A Tools to mitigate market risk (Frequency distribution) Frequency Valid Limits setting up P&L monitoring Back-testing procedure Value-at-Risk calculation Sensitivity analysis Total 8 7 5 2 4 26 Figure No. 4.3.12-B Tools to mitigate market risk (Graphical Representation) % 30.77 26.92 19.23 7.69 15.39 100.0 Valid % 30.77 26.92 19.23 7.69 15.39 100.0 Cumulative Percent 30.77 57.69 76.92 84.61 100 Valid Missing

Figure No. 4.3.12-C

4.3.13.Risk Management and its impact on bank profitability:

Risk management system is having dual impact on bank profitability first one it is increase in revenues and second one is decrease in losses. Every risk method is having its own implications. There are around 7 respondents who said that risk management system increase the stability in banks earning and reduce major gaps in earning (n =7; 26.92%) on the other hand 2 respondents said that risk management system helps to support the capital and its proper allocation (n = 2; 48

7.69%). 3 respondents are in viewed that risk management system allow them to follow different regulations prescribed by regulatory bodies (n = 3; 11.54%). On the whole majority of the respondents said that risk management method allows bank to make control over different type of losses due other factors. (n = 8; 30.77%). Following tables shows impact of risk management on banks profitability descriptive analysis and frequency distribution analysis of this question: Risk Management and its impact on bank profitability (Descriptive Analysis) N 26 0 Median 2 Mode 2 Figure No. 4.3.13-A Risk Management and its impact on bank profitability (Frequency distribution) Frequency Valid Stabilizing volatility of Banks earnings 7 Making control over excessive financial 14 losses Supporting efficient capital allocation 2 Meeting mandatory requirements from 3 Regulatory authorities Total 26 Figure No. 4.3.13-B Risk Management and its impact on bank profitability (Graphical Representation) % 26.92 53.85 7.69 11.54 100.0 Valid % 26.92 53.85 7.69 11.54 100.0 Cumulative Percent 30.77 80.77 88.46 100 Valid Missing

Figure No. 4.3.13-C

4.4. Conclusion of Chapter Four:

In this chapter data is presented in three different heads statistical discrepancies, frequency distribution and graphical presentation. Each question is presented in these three formats. There are 13 questions which are asked from 26 employees of different leading banks in Pakistan regarding their risk management system. Next chapter is designed to recommend and conclude this study.

49

50

Chapter Five: Recommendations & Conclusion 5.1.Introduction:

Previous chapter of the study has provided detailed data analysis in order to examine the risk management strategies being used in banking industry. This is the final chapter of the study and develops recommendations to have improvements on the basis of major findings of the research. Chapter also has concluded the study.

5.2.Recommendations:

Banks usually maintain their own risk management system for internal controlling of risk. Every system consists of some components. In most of the banks risk management is used as part of internal control system in banks but this is not an industry wide practice so in order to improve the efficiency and make it a standard activity it must be followed in the whole industry. Banking sector need to understand the importance of risk management in the organization it should not be treated as some simple business function rather it is a very important element to ensure the sustainable profitability of the business. Banks are facing many types of risk internal and externally like liquidity risk, interest rate risk, market risk and operation risk. Risk monitoring and control is considered most important component of risk management system of organization and risk definition is also given significant importance. Banks are not giving enough importance to risk measuring and definition of roles and responsibilities in organization. These are two very important segments of risk management as organizational structure needs to be very strong and that should be able to define the individual roles and responsibilities very clearly and efficiently regarding the individual functions and risks that they have to take. The organizational structure should be supportive to have strict monitoring and control for risks exposed to organization. The risk management committee should be formed in order to conduct the risk management process and to evaluate the success of the system. The committee must be able to review the risks and develop strategies in compliance with the organizational strategies. The members of risk management committee should not be involved in other activities in the organization. The risk control cannot be successful if risk will not be measured successfully. The true evaluation of risk 51

factors in organization helps to develop future strategies that can decide the future standing of the organization. The risk evaluation process should be able to express an aggregate exposure of risks to organization that can describe both short run as well as long run impacts of the risks. The quantitative measure is not possible for risks so a qualitative measure is used to evaluate the risk factors. The staff skills and capabilities in risk management are also very important to manage the risks in effective way that can reveal maximum benefits to the organization. Large dependency of the bank on deposits is a major cause of credit risks for the banks. Mostly banks face credit risks when banks start to depend largely on their deposits and dont search of different strategies. This happens because banks can manage their internal factors but it is not possible to control the external factors of the industry and economy. So risks appeared due to external factors can only be minimized by having an effective diversification of assets and loans. The loan portfolio management and development of an efficient risk management system can help to control the external as well as internal risks of the bank in an effective way. There are different tools used by banks for risk mitigation. It is difficult to use same type of tools and measures to mitigate all types of risk. Study has revealed that banks are using different tools for liquidity risk management but they are not giving importance to develop their own in-house capabilities. Internal indicators for liquidity management can benefit the bank significantly as they give customized understanding to the organization regarding their system and risks vulnerability. The internal audit plays very important role in this regard. Banking organizations assign the risk management responsibilities to certain teams or committees and they are responsible to review the whole organizational structure and systems on continues basis. This is referred as internal audit and very important. Every country is having some regulatory bodies to manage the affairs of banking and other financial institutions. Most of them are having central bank for regulations and policy development of financial institutions including banking sector. Regulatory authorities in Pakistan are giving significant importance to consultative measures and regular examinations of the system. They need to put more focus on the consultative measures as they can help to enable the banks address the risks before they become harmful for the institution. Every bank is using different measure to cope with interest rate risk because interest rate risk is always remain in financial sector and effect the performance directly or indirectly. In order to control the risks associated with interest rates Basel II should be strictly followed. Every country is having some governmental and some not governmental institute which rate the performance of banks. Sometimes bank has its own rating system. Rating system in banking industry is not giving 52

enough importance to expert opinion in the rating process but it is very much important as it determines the use of expert knowledge in the system. Number of factors can be responsible for a specific rating and this cannot be identified by the other ratings systems to understand the causes of decisions. Every bank is rendering some sort of services and products for its customers, so they are in verge of operational risk too. This question provides insight about the sources of operational risk to bank. The banking sector in Pakistan has major operating risk from new entrants. Competition in the industry has become very tough and organizations are offering new products on continues bases in order to survive. In this scenario financial institutions need to be very careful because any wrong action from them can leads the whole institution in serious threat. So banks can avoid these risks through regular evaluation of the market and by strengthening their research and development departments to support the new product development to capitalize market opportunities. Operation risks are associated with day to day operations of bank thats why they are using different tools to mitigate the operation risk. There are several tools available with banks and this question is designed to check respondents opinion regarding best one. Currently in industry operational risk limits are widely being used but improvements can be produced by having more focus on contingency planning and internal surveys in the organization to identify and mitigate the operational risks. Banks are also facing risks from outside of organization like from their competitive and marketing changes these risks are categorized as market risk sources. Banks are using different tools to mitigate the market risk the most important tool is through setting the limits on different measures. The limit setting is very important tool because it let the management now about any concentration in any sector and enables them to control that successfully.

5.3.Conclusion:
This study was conducted with aim to examine different risk management strategies adopt by banks to maximizing their profits or returns so that they minimizing their non- profitable or nonperforming assets. Study has revealed that banking industry is very complex but backbone of the any economy. The 21st century developments have turned the world into a global economy through rapid technology developments. In this scenario banking sector the core element of the economy is also influenced significantly due to this global change. The banking sector of Pakistan has seen a huge change due to privatization policy and in the result of this policy number of private banks emerged and grown in the market. Strengths of private sector in the banking industry of Pakistan have strengthened the customers and system has become more 53

competitive and customer focused (Crouhy et al., 2000). Risk factors have been increased and organizations that will be able to manage their risks effectively will only be able to survive in the market. The risk management strategies have become very important and organizations are striving very hard to overcome their risk factors. Study has revealed that in most of the banks risk management is used as part of internal control system in banks but this is not an industry wide practice. Study has revealed that organizational structure needs to be very strong and it should be able to define the individual roles and responsibilities very clearly and efficiently regarding the individual functions and risks that they have to take. Study has revealed that regulatory bodies and internal audit also can play very important role in the risk management strategy of the bank. They can enable the bank to work according to the market expectations within the organizational controls. Study has revealed that banks can achieve high profitability through effective risk management strategy as rate of nonperforming loans are very rapidly increasing. Banks can use their risk management strategy to understand the competitors moves and then develop their strategies in order to gain a sustainable competitive advantage on the basis of that market knowledge.

5.4.Conclusion to chapter five:

This is the final chapter of the study and develops recommendations to have improvements on the basis of major findings of the research. Chapter also has concluded the study.

54

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Appendices Questionnaire:

(How can Banks adopt a prudent approach of Risk Management to minimize non-performing assets and maximize return?)
1. Gender: a. Male
b. Female

2. Age: a. 20-30
b. 31-40 c. 41-50 d. >50

3. Which components are formulated in the risk management internal regulation? a. Risk monitoring and control
b. Risk measuring methodology and models c. Risk factors and identification tools d. Roles and responsibilities e. Risk definition

4. What are the main liquidity risk sources of the Bank?

a. Creditworthy rating downgrade b. OBS credit exposure (guarantees, credit lines, etc.) c. Non-performing loans d. Loan portfolio concentration e. Large deposits dependency 63

5. Which type of tool does your Bank use to mitigate liquidity risk? a. Daily pay-sheet and short term cash flow schedule b. Liquidity gap limits c. High liquid assets portfolio maintenance d. Inflows / outflows simulation techniques e. In-house liquidity indicators

6. Which type of instrument / measure introduced by the regulatory authority would help the banking system to be more efficient from the liquidity risk point of view?
a. Extend short-term funding opportunities b. Turn to more stringent regulation on liquidity risk management c. Produce consultative materials on liquidity risk management d. Regularly attend the banks with examination

7. What are the main interest rate risk sources of the Bank?
a. Optionality risk risk of incurring losses as a result of altering cash flows of financial instruments due to embedded options being sensitive to interest rates movements b. Basis risk risk of incurring losses as a result of different basis for interest rates accruing, floating or fixed in the same or different currencies c. Yield curve risk risk of incurring losses as a result of movements in a slope and shape of yield curve (e.g. re-pricing mismatches hedged against parallel movements)

64

d. Re-pricing risk risk of incurring losses as a result of movements in base interest rates due to re-pricing mismatches (e.g. fixed rate long-term loans shortterm retail deposits / floating rate interbank funds)

8. Which type of tools does your Bank use to manage interest rate? a. Interest rate exposure limits b. Duration gap analysis c. Capital requirement approach based on Basel II d. Basis risk analysis (mismatches in different base rates) e. Re-pricing gap analysis

9. Banks rating/scoring systems based on ?

a. Statistical models b. Generic models c. Expert opinions

10. What are the main operational risk sources of risk for your Bank? a. Improper activities of branches b. System downtime c. Transaction breaks d. Employee turnover e. New products and services 11. Which type of tools does your Bank use to manage operational?

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a. Contingency planning b. Operational risk limits c. Risk mapping d. Balance Scorecards e. Self-assessment survey

12. Which type of tools does your Bank use to manage market risk? a. Limits setting up b. P&L monitoring c. Back-testing procedure d. Value-at-Risk calculation e. Sensitivity analysis 13. What is the impact of developing the Banks risk management practices on its profitability? a. Stabilizing volatility of Banks earnings b. Making control over excessive financial losses c. Supporting efficient capital allocation d. Meeting mandatory requirements from Regulatory authorities

Thanks for your participation!!!

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Figures:
Figure 2.10

Figure 2.11 RISK MANAGEMENT IN BANKING COMPANIES

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Figure 3.2

Figure No. 4.3.3-C

Figure No. 4.3.4-C

Figure No. 4.3.5-C

Figure No. 4.3.6-C

Figure No. 4.3.7-C

Figure No. 4.3.8-C

Figure No. 4.3.9-C

Figure No. 4.3.10-C

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Figure No. 4.3.11-C

Figure No. 4.3.12-C

Figure No. 4.3.13-C

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