Documente Academic
Documente Profesional
Documente Cultură
FICCI - IBA conference on Global Banking paradigm shift on October 5th 2005
Growth
Capital Adequacy
Profitabilit y
Differing requirements from various stakeholders Employees Borrowers Regulators Credit Rating agencies Counterparty banks Depositors Investors
Economic Capital is the financial cushion that a bank uses to absorb unexpected losses. The purpose of economic capital is to provide confidence to claim holders such as depositors, creditors and other stakeholders. The development of of sophisticated risk measurement tools offers banks the capability to calculate economic capital. The proposed New Basel Capital Accord is a major move towards aligning regulatory capital to economic capital.
-2.1% -226
What is the capital required for different business lines? What is the return provided by different business lines on capital invested? What is the expected impact of NPAs/ revaluation? Where should we grow? Are we generating enough internal capital to support growth?
Investments offer the highest contribution p.c.age on assets Which segment leads to high interest earnings? The credit function has the largest contribution towards fixed expenses Which credit segment contributes the highest? What is the position after allocating costs? Am I properly pricing for expected Losses?
5
Assets Cash & Short Term Funds Balances with Central Banks T Bills and other eligible securities Placement with and loans to other banks Bills of Exchange Loans & Advances Lease Rentals receivable within one year Lease Rentals receivable after One year Dealing Securities Equity & others Bonds Investment Securities Investment Properties Investments in Subsidiaries & Associates Accrued Intt Cheques Purchased Other Assets Other Assets Group balances receivable Property Plant & Equipment Total Assets 31/12/2003 1739 3305 5756 10987 2493 44222 96 72 587 916 17664 18580 804 1667 1073 2979 3331 7382 503 1807 100000
Credit Risk
Market Risk
Liquidity Risk
The bank runs asset liability mismatches due differing maturity profiles and lending and borrowing rates for credit, investments, deposits and subordinated debentures. Borrowing/ Lending/ Investing in Foreign Currency gives rise to foreign exchange risk
Future Environment
Credit Risk: Simple credit products (loans normally backed by collateral, few products) Market Risk: Simple market risk products (dealing in g-sec/ limited corporate bond market/ limited FX market) Operational Risk: Not a major concern
Market Risk: Multiple currencies Investments in securities across countries Investments in corporate bonds Swaps/ Options other derivatives
Operational Risk: Increasingly important with complex systems and processes, operations across time zones and markets
RAROC allows a bank to take a comprehensive risk view and forms the base for IRM
Risk-adjusted After tax income 1.75% Risk-adjusted Net income 2.20% Net Tax 0.45%
Average Lending assets 100,000 Credit Risk Capital 4.40 % Total capital 8.0 %
RAROC could be carried out for the bank as a whole or a business segment.
8
Organisation Structure
Measure, monitor and manage all the risks across the bank.
Bank wide integrated risk management infrastructure in terms of people, policies and systems
Common and consistent risk measurement and quantification methodologies across all risk categories Aggregation of risks and estimation of economic capital to assist in risk/ return decision making
9
Compliance
Lower capital costs Better decision making due to scenario analysis Risk adjusted pricing Loss reduction due to understanding of correlations Elimination of unwanted exposures
10
11
Performance Measurment
Controls on Risk takers
MIS
Risk Policy
Quantification
Risk reporting
IT Infrastructure
12
13
IRM Challenges identification of gaps in existing risk management practices Reviewing and improving existing
Market Risk
Risk Management Policies Management Information Systems Top Management Oversight Processes and Systems
Credit Risk Probability of Default Loss Given Default Exposure at Default Market Risk Trading Book (VaR) Interest Rate Risk on Banking Book
Operational Risk (evolving)
Requires collection of data over time, development of measurement models, back testing of models
15
Commodity Risk
Business Line 1
Business Line 2
Corporate II
Equity Risk
Retail Pool
Corporate I
RISK CATEGORY
CREDIT RISK
Correlations among risk silos
OPERATIONAL RISK
RISK SILO
16
IRM Challenges - modelling of correlations across risk categories & risk silos
Modelling correlations requires data and is not easy Fat tails in credit risk create problems
17
Internal risk scoring models for credit Portfolio Management Models Models for estimating VaR for Market risk Operational Risk databases Asset Liability Management System Data warehouse having interfaces for Analytical Modelling Reporting Options for developing Risk Management Systems In-house Off-the-shelf
Sizeable investments in IT infrastructure required for implementing Basel II
18
Thank you
CRISIL Investment & Risk Management Services CRISIL Limited dravishankar@crisil.com Ph.no: 91 22 56537371
19