Risk Management in Banking Sectors: This side is helps to analyse the risk management in banking sectors.

1. RISK
MANAGEMENT IN
BANKING SECTORS
BY: RUPESH NYAUPANE

2. Risk Management
The Major Risks Banks Face:
1. Liquidity risk
2. Interest risk
3. Market risk
4. Credit risk
5. Off-balance sheet risk
6. Foreign exchange risk
7. Operating risk

3. Cont………………
Liquidity Risk
Definition: Risk of not being able to honor bank’s financial commitments promptly
It arises from an uncertainty of the timing of cash flows
Liability-side risk results from unexpectedly high rates of
deposit redemption
Asset-side risk results from borrowers unexpectedly drawing
down loan commitment

4. Cont………….
 Useful measurements
 The net liquidity position, which measures sources and uses of liquidity
 Peer group financial ratios
 The financing gap, which show the degree to which loans are not financed by core fund

5. Cont……..
Liquidity risk management is carried out at
both the retail and wholesale
level
1. Demand deposit
2. Term deposit
3. Purchased money
4. Interbank borrowing
5. Repos

6. Cont…..
Liquidity Management
 Utilize liquidity monitoring tools through normal and stress periods
 Analytics rely on management’s judgment about ability to liquidate assets or use
them as collateral for borrowings
 Funding plan: use a variety of both short-term and long-term instruments
(including deposits, repurchase agreements, commercial paper, bank notes,
medium- and long-term debt,)

7. Cont……….
Interest Risk
 Definition: is the impact on banks earnings and market value of equity of changes
in interest rates
Refinancing risk
Reinvestment risk

8. Cont…..
Interest Risk (measurements)
 Gap analysis
 Duration analysis
 Simulation model

9. Cont….
 Matching average life of assets and liabilities reduces interest rate risk, but it is not
perfect hedge
 Immunization requires dynamic rebalancing of the portfolio, which may be costly

10. Cont…
Market Risk
 Definition: The risk of bank losses from movement of market prices on its
trading inventory.

11. Cont….
Market Risk Measurement
 Value-at-Risk
Measure the dollar amount of potential loss from adverse market
moves in an ordinary market environment
Used to compare risks across businesses, to monitor limits and to
allocate economic capital
Back-testing of VAR against actual financial results to evaluate the
soundness of the model.

12. Cont….
 Stress-testing:
Capture exposure to unlikely but plausible events in
abnormal markets (VAR – loss due to unlikely events in
normal markets)
 VAR and stress-testing are important determinants in capital
allocation for market risk

13. Cont…
Credit Risk
 Definition: The risk of loss due to the failure of a borrower,
endorser, guarantor or counterparty to repay a loan or honor
another predetermined financial obligation

14. Cont….
Credit Risk Measurement
 Traditional approach
Available collaterals
 Quantitative approach
Customers creditworthiness

15. Cont…
Credit Risk Management
 Ensure that credit risks are accurately assessed, properly approved, continually
monitored and actively managed
 Assess on- or off-balance sheet exposures including loans, derivative receivables and
lending-related commitments
 To measure these risks, estimates are made of both expected and unexpected losses for
each segment of the portfolio using statistical techniques
 Credit Policy Guideline

16. Cont…
Credit Risk Policy
 Formulate credit policies, limits, allowance adequacy and guidelines
 Independent from the groups that approve and support credit activities
 Manage problem credits

17. Cont…
Sound Practices for Managing Credit Risk
a) Establish an appropriate credit risk environment.
b) Operate under a sound credit-granting process.
c) Maintain an appropriate credit administration,
measurement and monitoring process.
d) Ensure adequate controls over credit risk.
Board of Directors should review credit risk strategy periodically.
Senior management should implement credit risk strategy approved by the Board.

18. Cont…
Off-balance Sheet Risk
 Definition of off-balance sheet activities: activities that do not appear on the current
balance sheet because it does not concern holding a currency primary claim(asset) or
issuing a current secondary(liability)
 Two categories: 1) Credit substitutes
2) Derivatives

19.  Foreign Exchange Risk
 The potential adverse impact on a bank’s earning and value of its equity
from foreign exchange rate movement
 Operating Risk
 It is business risk which includes organizational behavior, technological
systems and legal aspects of managing a bank
• Operational Risk arises as a result of failure of operating system in the bank due
certain reasons like fraudulent activities, natural disaster, human error, omission or
sabotage etc.

20.  Operational Risks Include
 Internal Fraud.
 External Fraud.
 Employment Practices and Workplace Safety.
 Clients, Products and Business Practices.
 Damage to Physical Assets.
 Business Disruption and System Failures.
 Execution, Delivery and Process Management.

21.  Internal Fraud
 Unauthorized Activity.
 Transactions not reported.
 Transaction type unauthorized.
 Mismarking of position.
 Theft and Fraud.
 Fraud/credit fraud/worthless deposits.
 Theft/extortion/embezzlement/robbery.
 Misappropriation of assets.
 Forgery.
 Account take-over/impersonation.
 Bribes/kickbacks.
 Insider trading.
 Money laundering.
 Willful blindness.

22.  External Fraud
 Theft and Fraud.
 Theft/robbery.
 Forgery.
 Check kiting.
 Identity theft.
 Systems Security.
 Hacking damage.
 Theft of information (with monetary loss).

23.  Operational Risk Management
 Maintain a system of comprehensive policies and a control framework
designed to provide a sound and well-controlled operational environment
 Reputational risk: put in place an additional structure to take account of
the potential for adverse reputational impact of transactions with clients.

24. THANK YOU