Using IT for Risk Management in Banks and Basel II

Presentation by : K. G. Chari

Guide : Dr. Bhatia

Professor Finance
SIMSR

5th SIMSR-ASIA Marketing Conference

3rd January 2010
 Using IT for Risk Management in Banks and Basel II

 Title of Thesis : Using IT for Risk Management in Banks and Basel II

 Name Of the Candidate : Mr. K. Gopalachari

 Name & Designation of : Dr. B. Bhatia

Guide Professor - Finance
K. J. Somaiya Institute of Management Studies
& Research
Vidyanagari, Vidyavihar
Mumbai 400 077

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Using IT for Risk Management in Banks and Basel II

 Frank Sortino and Stephen Satchell

Say that People do not possess a set of predefined preferences for every
contingency.

Rather, preferences are constructed in the process of making a choice of

judgement.

The context and procedures involved in making choices or judgements

influence the preferences.

In practical terms, this implies that their behaviour is likely to vary across
situations that economists consider identical.

This means that no single predetermined risk measure, no matter how

and apparently correct it is, will suffice in all situations.
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Using IT for Risk Management in Banks and Basel II

 How can we handle these psychological realities of investment risk,

which at first glance seem pathologically untraceable?

 We must acknowledge that “Risk, like beauty, is in the eye of the

beholder”

 Based on the above statement it is clear that a lot of work and research
is needed for Risk Management in different areas.

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Using IT for Risk Management in Banks and Basel II

 CASE STUDY I

 UBS – Zurich

 They lost Billions of Dollars as Subprime loans loses

 They also have a case of customer Secrecy dispute with the US Tax
authorities.

 Although UBS is not the only bank to have stretched the limits of Risk
“its overweening ambition” is what essentially bankrupted the company.

 How did they recover ***********

Source : Risk Professional April 2009

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Using IT for Risk Management in Banks and Basel II

Implementation of

 Improved control Systems

 Reduction of Risk Concentration

 De-Risking the Balance Sheet

(Transfer of upto $60 Billion of security and other assets from UBS to other
separate funds)

 Introduction of responsible and long term value oriented incentive plans

Source : Risk Professional April 2009

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Using IT for Risk Management in Banks and Basel II

 CASE STUDY II

 Black Rock (Asset Management )

 Organization which prospered during 2008 when most of the other

organizations were going downhill

 The Vice Chairman Bennett Golub was a firm believer of Risk

Management

 Based on the famous author’s Nasim Nicholus Taleb book

“The Black Swan” wherein the main theme is
inevitability of the improbable
Source : Risk Professional April 2009

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Using IT for Risk Management in Banks and Basel II

 Bennett Golub gave a black swan to each of his team members and also
installed a large one in his room

 Indicating to his members “ Be prepared for the inevitable”

 Results

 Even though the net Income declined by 21% to 8.55 Million

 The asset under management slid by 4%
to $1.31 trillion from $1.36 trillion.

They were able to get 39% healthy Operating margins.

Source : Risk Professional April 2009

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Using IT for Risk Management in Banks and Basel II

 To summarize - In the current scenario Market Risk in Banks

is a dominant factor and it covers

 Liquidity Risk
 Interest Rate Risk
 Currency Risk
 Equity
 Mutual fund
 Commodity Risks
 Etc.

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Using IT for Risk Management in Banks and Basel II

Objectives of this Research

Use Knowledge of IT to :

Propose a Computerized system for Risk In Banks

and implementation of Basel II

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Using IT for Risk Management in Banks and Basel II

 Present Scenario

 Though quite a few people have done research on these topic and even
some software houses have developed software addressing this area for
Banks, there is still a lot of room for further research in the areas of
Treasury Risk Management, Credit Risk Management, Risks in Equity
and Mutual Funds to name a few.

 The main focus of the Research will be to see how IT could help in the
following area of
 Methods to Identify the Potential Risk.
 How to evaluate the impact and prioritize the risk
 Mitigation and contingency steps for the identified Risks.
 Action Plan
 Implementation of Basel II Accord
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Using IT for Risk Management in Banks and Basel II

ONLY

DEATH
&
TAXES

ARE CERTAIN

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Using IT for Risk Management in Banks and Basel II

If you know your

ENEMY

and know

YOURSELF

you need not fear the result of a

Hundred Battles.

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Using IT for Risk Management in Banks and Basel II

Risk Management

It is an

INVESTMENT
and an
INSURANCE.

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Using IT for Risk Management in Banks and Basel II

Risk Management Budgets have survived the IT Budget squeeze

2007 2008 2009 2010

North America 115.9 119.9 116.7 119.7

Europe 131.3 134.9 130.3 133.3

Asia Pacific 76.6 83.3 85.8 90.3

Rest of the World 19.0 19.0 20.5 21.2

in Billion US $ Source: Celent

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Using IT for Risk Management in Banks and Basel II

 Reactive Strategy

- Don’t Worry, I will think of something

- Fire Fighting
- Breakdown Maintenance
- Chaos
- Undocumented
- Person Dependant

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Management

 If you do a great Job of Planning, Analysis and Project

Management & avoid Problems in Maintenance, it is not
Appreciated.

 Crisis management
On the contrary, if you help solving a big crisis arising
due to poor planning, by putting in a lot of efforts, it is
appreciated.

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Using IT for Risk Management in Banks and Basel II

 Proactive Strategy

 Repeatable, Systematic and Comprehensive method of

- Planning
- Analyzing
- Mitigating

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What Types of Risk are there?

 Known - That which is known since it has happened earlier.

 Unknown – Not visible, but can be identified if structured

method is followed.

 Unknowable – Cannot be anticipated unless it happens like

Govt. Regulations or Natural Disasters

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Risk Management

Risk Identification
Risk
Assessment Risk Analysis
Risk Prioritisation
Risk
Management
Risk Reduction

Risk Control Emergency Planning

Action

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Risk Identification

 Common Methods

- Brainstorming sessions
- Encourage others to voluntarily report risks
- Past Project Experiences
- Checklist developed over a period of Time
- Similar Projects

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Quantifying Risks

P Puppies Tigers
R HIGH
O
B
A
B
I
L
I Kittens Alligators
T LOW
Y

IMPACT

LOW HIGH
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Classifying Risks

Tigers:
 High probability High impact.
 Must be neutralized urgently.
Alligators:
 Low Probability High Impact.
 Dangerous animal but can be dealt at later stage.
Puppies:
 High Probability Low Impact.
 Take care in case of trouble.
 Keep under watch.
Kittens:
 Low Probability Low Impact.
 Can be ignored.

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Using IT for Risk Management in Banks and Basel II

 Basel II Accord
 The research paper will focus on Basel II accord which is in
the process of implementation for standardized procedures
in Risk Management in all countries of the world except
possibly China who have still not accepted it.

 Mr. S. K. Bagchi (Vice President and Chief Credit Faculty

, Bank of Baroda Staff College) says Basel II Accord
focuses on internal methodologies, supervisory reviews,
market discipline, flexibility and risk sensitivity with
incentives for good risk management through a number of
approaches.

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Using IT for Risk Management in Banks and Basel II

 Ms. Saloni P. Ramakrishna principal architect (risk and

compliance solutions), i-flex Solutions :

 “Some of the benefits that can be expected from a well

implemented Basel programme are competitive
advantage through better pricing, access to cheaper
funds through improved credit rating, greater
transparency and, above all, a well-oiled risk
management system.”

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Using IT for Risk Management in Banks and Basel II

 The research paper will try and explore the possibility of how
IT and its strategy can be used for the implementation and
maintenance of the Basel II Accord.

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Using IT for Risk Management in Banks and Basel II

 Software Products in Risk Management

 A few Software houses have developed products addressing various

functions in Banks, but very few have addressed the issue of Risk
Management and Basel II

 One of the solutions addressing the above is from I-Flex Solutions a

leading software house which has developed a software product with the
following features:

 The Risk Management solutions enable institutions to gain a better

understanding of their current risk exposure; and quickly and
comprehensively evaluate their credit risk, market risk and operational
risk. Institutions can make informed business decisions and achieve end-
to-end capital and multi-jurisdictional compliance objectives.

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Using IT for Risk Management in Banks and Basel II

 The areas covered are : (I-flex Solutions)

- Retail credit risk

- Corporate credit risk
- Market Risk
- Asset liability Management
- Basel II
- Economic capital

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Using IT for Risk Management in Banks and Basel II

 Nucleus Software addresses and gives support in

Banking solutions but have not come across features to
address Basel II

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Using IT for Risk Management in Banks and Basel II

 Objectives of the Study

 To study the various parameters of Risk identification and

mitigation steps

 To see how IT can help in the Risk management in general

and Implementation of procedures in particular

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Using IT for Risk Management in Banks and Basel II

 Data Collection

 The research will be based on data collected from

 Primary Source
- RBI Publications
- Finance Ministry Directives
- Any other Govt. official Data
 Secondary Source
- Bank Managers
- Mutual Fund Managers
- Equity Fund Managers

 Other Sources from Books, Periodicals, Articles, Journals etc.

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Using IT for Risk Management in Banks and Basel II

 Benefits of the Research

 It will help in finding new trends in Risk Management

 It will help in knowing the extent to which Risk is acceptable

to Banks and Financial Institutions.

 To help Banks and Financial Institutions to set up processes

and reduce their losses due to Risks

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Using IT for Risk Management in Banks and Basel II

Thank you

For

No Questions ??????
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