The Royal Bank of Scotland is one of the oldest banks in the UK, founded in 1727. It provides banking and financial services globally through divisions like Global Banking & Markets, Corporate Banking, Retail, Wealth Management, Ulster Bank and Citizens. The bank employs over 137,000 people worldwide and had $38.8 billion in revenue. Philip Hampton serves as the Chairman of the Board of RBS.

1. RISK MANAGEMENT IN INVESTMENT BANKING
(A STUDY ON RISK MANAGEMENT IN INVESTMENT BANKING – THE
ROYAL BANK OF SCOTLAND)
PROJECT REPORT
(A Report Submitted in Partial Fulfillment of the Requirements for the Degree of
Master of Business Administration in Pondicherry University)
Submitted by
Ms Jeniffer Queen. D
Enrollment No: 0211390138
MBA Human Resource Management
DIRECTORATE OF DISTANCE EDUCATION
PONDICHERRY UNIVERSITY
PONDICHERRY – 605 014
APRIL 2013

2. CERTIFICATE OF THE GUIDE
This is to certify that the Project Work titled “Risk Management in
Investment Banking (A study on Risk Management in Investment Banking – The
Royal Bank of Scotland)” with regard to Royal Bank of Scotland is a bonafide
work of Ms Jeniffer Queen. D Enroll No 0211390138.
Carried out in partial fulfillment for the award of degree of MBA in Human
Resource Management of Pondicherry University under my guidance. This
project work is original and not submitted earlier for the award of any degree /
diploma or associate ship of any other University / Institution.
Signature of the Guide
Name and Official Address of the Guide
Guide’s Academic Qualifications,
Designation and Experience
Place:
Date:

3. STUDENTS’ DECLARATION
I, Ms Jeniffer Queen D hereby declare that the Project Work titled “Risk
Management in Investment Banking (A study on Risk Management in Investment
Banking – The Royal Bank of Scotland)” is the original work done by me and
submitted to the Pondicherry University in partial fulfillment of requirements for
the award of Master of Business Administration in Human Resource
Management is a record of original work done by me under the supervision of
Dr.Robert Bellarmine of Loyola College, Chennai.
Enrollment No: 0211390138
Date:
Signature of the Student

4. TABLE OF CONTENTS
Contents
Acknowledgements
Executive Summary
List of Tables
List of Figures
Chapter I
1. INTRODUCTION
1.1 Research Methodology and Analysis
1.2 Chapter plan
Chapter II
2. PROFILE OF THE ORGANIZATION
2.1 An overview
2.2 The Key Data – Royal Bank of Scotland plc
2.3 Profile of the various units
2.4 Board of Members
2.5 Key facts of the Organization
Chapter III
3. REVIEW OF LITERATURE
3.1 Risk Management - Definition
3.2 Types of Risks
3.3 Objectives of Risk Management
3.4 Principles of Risk Management
3.5 Risks in Investment Banking sectors
Chapter IV
4. ANALYSIS AND INTERPRETATION
4.1 Major Risks
4.2 Inference of Hypothesis
4.3 Types of Risk Analysis
4.4 Significance of Interpretation
Chapter V
5. SUMMARY AND CONCLUSIONS
5.1 Findings and Suggestions

5. 5.2 Conclusion
5.3 Questionnaire
BIBLIOGRAPHY
APPENDIX
CHAPTER I
INTRODUCTION

6. I N T R O D U C T I O N
The world of finance has always had an intuitive understanding of risk. The risks
that emerge from the increased variety and complexities of banking business, as
well as from the various new drivers of growth has pushed the contours of risk
management in banks much beyond what would probably have existed in the
more traditional forms of banking activity of accepting deposits and lending in
relatively stable environments. Internationally, the last two decades or so have
witnessed significant changes in the profile of the banking sector, as well the
nature of risk management in banks. What perhaps has changed the nature of
risk management, particularly are, inter-alia, advances in technology that have
aided quantitative approaches to risk management, like models etc., and the
increasing volumes of transactions in derivatives and other structured products
that are so complex that they are often labeled "exotic".
In brief remarks, I intend to first, highlight few of the broader and more general
issues currently engaging the financial risk management fraternity and then I will
elaborate tools and techniques used by Royal Bank of Scotland to mitigate risks.

7. I. Some general perspectives on Risk Management
Quantification of risk and model risk:
As mentioned earlier, significant developments in the area of quantification
of risk, has shifted focus to statistical aspects of risk management, especially to
risk modeling and other computational techniques of risk measurement. During
the last decade there has been a proliferation of academic research on the use of
VaR for market risk assessment. Such models have to be used with some care
and serious examination of the data used, especially the use of historical data for
forecasting future scenarios, the assumptions behind the models, estimation
errors etc. Further, if intraday positions are not captured it would expose banks
to such risks.
Similarly in respect of Credit Risk, there is no single ‘‘best practice’’. Model for
credit risk capital assessment, although the Basel 2 ‘‘Internal Rating Based’’
methodology provides a portfolio model. Bank managements will have to focus
on the determinants of credit risk factors, the dependency between risk
factors, the integration of credit risk to market risk, data integrity issues like
consistency of data over long periods, accuracy and so on.
Institutions are already mapping events to operational loss categories and
building warehouses of operational risk data for implementation of Advanced
Measurement Approaches. Many data availability and reliability issues still need
resolving. An internal loss experience for the important (low frequency, high
severity) operational risk types is rare and any relevant data are likely to be in
the form of risk self-assessments and/or external loss experiences.

8. Extreme events and stress testing: One of the key roles of the risk
management process is to manage extreme events, such as those associated
with the tails of statistical distributions and could have probability of occurrence
as low as one percent. These are low probability but high loss instances
associated with extreme operational events such as rogue trading or accounting
fraud. The importance of stress testing to assess the impact of not only these
events but also the impact of various scenarios is engaging the attention of
risk management personnel, academicians and bankers alike
Risk based capital and back-testing: An important reason as to why the
quantitative techniques have received so much attention, is not because of the
intellectual satisfaction it can give to the academician but a rather mundane
reason that it can be used to convince the regulator that given the risks as
measured by these techniques the amount of capital required could be far less
than that may be stipulated under broad brush, standardized techniques. An
immediate linkage between the risk models, the quantum of risk that is
measured by use of these models and the capital that is required to support
these risks immediately emerge. Estimates of capital being sufficient to meet the
risk can be only as good as the models are and the credibility of the models
would ultimately depend upon their actual performance. Back testing the
models to gauge and reduce the variance between the deviations of the
actual numbers from those projected are largely relied upon to give a degree of
comfort to both management of banks and supervisors alike.

9. II. Recent initiatives in Risk Management
Over the years various steps have been taken to strengthen the Risk
Management Architecture, both at the bank specific level as well as a broader
systemic level.
Credit risk:
One of the important issue is that bank resources and supervisory resources
have concentrated on credit risk modeling of commercial and industrial
portfolios, with relatively fewer resources devoted to risk quantification in the
retail credit area. The possible reasons could be (i) from a systemic
perspective, it makes economic sense to devote more resources to
evaluating the risk factors of larger loans (ii) there is a long history of ratings
agency evaluations for publicly traded firms which , along with the extensive
data available for publicly traded firms,
Provided an extremely useful benchmark for the development of
Quantification methods for commercial portfolios.
However, despite this commercial side emphasis, retail credit is a
substantial part of the risk borne by the banking industry, and can not be
ignored. Recognizing this, over the last decade or so, the industry and
Academia have devoted significant resources to developing more
Sophisticated credit-scoring models for measuring this risk. Like their
counterparts on the commercial side, these models also rely heavily on
quantitative analysis.
Derivatives:
There has been a spurt of derivatives exposures in the off balance sheet
exposures. The composition of derivatives portfolio of the banking system has
also undergone a significant transformation. Forward foreign exchange contracts
which accounted for around 80% of total derivatives in March 2007

10. declined steadily and stood at almost 43% in March 2008 while the share of
interest rate contracts went up from 19% to 54% during the same period.
Foreign currency options have recorded noticeable increase during the last year.
The share of single currency interest rate swaps in total derivatives of the
banking system has risen sharply from 25% in March 2006 to 63% in March
2009.
The risks arising on account of OBS activities of banks are controlled through a
combination of both banks’ internal risk management and control policies and
risk mitigation mechanism imposed by the regulators. The board approved
internal control policies covering various aspects of management of risks arising
both on and off balance sheet exposures constitute the first line of defense to the
bank. Holding of minimum defined regulatory capital for all OBS exposures,
collection of periodic supervisory data and incorporating transparency and
disclosure requirements in bank balance sheet are some of the major
regulatory initiatives undertaken to control and monitor OBS exposures of the
banking system.
The rapid proliferation of derivatives exposures inevitably poses a challenge
on account of the downside risks associated with them, if not managed
properly. There are issues relating to use of structured products, valuation,
counterparty related issues, risk management and reporting issues and last
but not the least, training and skill development. While derivatives facilitate risk
hedging and risk transfer to institutions more willing to bear the risks, the
tendency of participants to use derivatives to assume excessive leverage, and
lack of prudential accounting guidelines are matters of concern.
One of the features of in the derivative market relates to concentration risk
in respect of both the market makers (banks) and the corporate. The combined
share of top 15 banks has steadily grown from around 74% in March 2008 to

11. 82% of total OBS exposures of the banking system in March 2009, of which
70% is accounted for by foreign banks.
Financial Conglomerates:
There is increasingly a need to extend the framework of risk management to the
group wide level, particularly among financial conglomerates. The rapid
expansion of financial services, both in terms of volumes and variety have, as it
is, posed a challenge for financial stability. This is made all the more
difficult by the organizational dimension which perhaps provides scope for
regulatory arbitrage. While this could appear beneficial to the organization in
the short run, it only heightens systemic risk that in turn exposes the
institution to externalities which have a cost.
It has, therefore, become necessary not only for the supervisor to have a
"conglomerate" approach to regulation and supervision but also for banks
themselves to put in place risk management systems at global levels.

12. NEED OF THE STUDY
• To educate the Investors who are subjected to Risk in Investment banking
• Awareness about the various uses of Risk management which would help
the Investors to reduce risk.
• Awareness of risk level which will help the Investors to take appropriate
decisions on their Investments.
OBJECTIVES OF THE STUDY
Primary Objectives:
• To study about the risk management and surveillance limit that has been
extended to clients in Royal Bank of Scotland with respect to Investment
Banking operations.
Secondary Objectives:
• To study about the growth of Investment banking.
• To study about the risk involvement in Investment banking for various
client classification.
• To study about the clients’ risk position in each category.

13. METHODOLOGY AND SAMPLES
RESEARCH METHODOLOGY
Research is the process of systematic and in depth study or search for
any particular topic, subject or area of investigation, backed by the collection,
compilation, presentation and interpretation of relevant details or data. It is a
careful search of inquiry into any subject or subject matter, which is an endeavor
to discover or find out valuable facts, which would be useful for further application
or utilization. Research may involve a scientific study or experimentation and
result in discovery or invention, which would aid scientific development or
decision-making.
SOURCES OF DATA:
 Primary Data
 Secondary Data
 PRIMARY DATA
Primary Data are those data, which are collected afresh and for the first
time, and thus happen to be original
Primary Data for this study was collected by preparing a well-structured
questionnaire. The questionnaire was distributed to the customer and the
responds are received from the customers. Primary Data for this study.
 SECONDARY DATA

14. Secondary Data are those data which are collected by someone else and
which have already passed through the statistical process.
Secondary Data for this study was collected from the records of the
company, business journals, magazines, newspapers and textbooks on
the subject. Also to a certain extent observation, personal discussions and
exchange of views in an informal way.
PERIOD OF STUDY:
The study was undertaken for a period of 4 months starting from February
2013 to May 2013.
TOOLS OF ANALYSIS
 Percentage Analysis
 Chi-Squared Test

15. SCOPE AND SIGNIFICANCE
The findings of the study will be useful to THE ROYAL BANK OF SCOTLAND in
order to mitigate risk and increase reputation. Risk management becomes an
important criterion for any banking business. A banker client relationship or client
perception about the bank can be changed when the risk management is misled.
Hence it becomes vital to make an effective risk management process.
The study also brings the various gray areas in which the bank has
to pay more attention to and these are the uncertainties, which make the client
dissatisfied.
The study will also be helpful for RBS to minimize risk and hence
increase profitability.
The surveillance limits extended by the bank to their clients are also
discussed in this project.

16. CHAPTER PLAN
Chapter I
In this chapter we have given an Introduction of the Project study, Need of
the Study, Objectives, Scope and significance. It also speaks about the
methodology used, sources of data collected and the tools used to interpret
these data.
Chapter II
This Chapter briefs the profile of “THE ROYAL BANK OF SCOTLAND
PLC” vice-a-vice Business Description, Industry classification, Employees,
Earnings, Financial Ratio Analysis, Recent stock performance, Products and
services and Board of Directors
Chapter III
Explains about Risk management and defines risks. It also explains the
types of Risks, Objectives and its Principles.
Chapter IV
In this chapter, we have analyzed and Interpreted the data which was
collected through Primary and secondary sources. Suggestions and
recommendations are given for the findings.
Chapter V
We have concluded the study in this chapter along with Annexure
Bibliography and Questionnaire.

17. CHAPTER
II
Profile of the Organization

18. ROYAL BANK OF SCOTLAND – A PROFILE
The Company Profile Report provides a comprehensive summary of the
organization. The Profile contains the following information:
 Company Business Description
 Industry Classification (Major and Sub Industry)
 Number of Employees
 Earnings/Dividends
 Financial Ratio Analysis
 Recent Stock Performance
 Sales (recent years until 2009)
 Shareholder Information

19. A Bank with Blue Blood! The Royal Bank of Scotland Group is a leading
financial services provider that can trace its roots back to the sixteenth
century. Founded, by royal charter, in 1727, it is one of the oldest banks in the
UK, and also has a presence in Europe, USA and Asia. Based in Edinburgh,
UK, this $38.8 billion bank employs about 137,000 people. In August2005,the
company and Bank of China agreed to establish an exclusive strategic
partnership offering services across a range of business activities, building on
Bank of China's distribution strength and RBS's product skills.
The Royal Bank of Scotland Group public limited company. The Group's
principal activity is providing a range of banking, insurance and other financial
services. The Group's operation focuses on such areas as Global Banking &
Markets, Corporate Banking, Retail, Wealth Management, Ulster Bank and
Citizens.

20. Global Banking & Markets provides a range of debt financing, risk
management and investment services to its customers.
Corporate Banking provides banking, finance and risk management services
to corporate customers through its network of relationship managers.
Retail provides a range of banking products and related financial services to
the personal, premium and small business markets across several distribution
channels.
Wealth Management provides private banking and investment services to its
global clients.
Ulster Bank Group caters for the banking needs of business and corporate
customers.
Citizen focuses in retail and corporate banking through its branch network in
the United States.

21. BOARD OF MEMBERS
• Chairman - Philip Hampton
Appointed to the Board as Deputy Chairman on 19 January 2009, and to
the position of Chairman on 3 February 2009, Philip has held the position
of chairman of J Sainsbury plc since 2004. Previously, he was group
finance director of Lloyds TSB Group plc from 2002 to 2004, group finance
director of BT Group plc from 2000 to 2002, group finance director of BG
Group plc from 1997 to 2000, group finance director of British Gas plc
from 1995 to 1997, group finance director of British Steel plc from 1990 to
1995, an executive director of Lazards from 1981 to 1990 and a non-
executive director of RMC Group plc from 2002 to 2005. Philip is the
former chairman of UK Financial Investments Limited, the company
established to manage the UK Government's shareholding in banks
subscribing to its recapitalization fund, and has also been a non-executive
director of Belgacom SA (the Belgian telecom group) since 2004.
• Chairman – Philip Hampton
Appointed to the Board as Deputy Chairman on 19 January 2009, and to
the position of Chairman on 3 February 2009, Philip has held the position
of chairman of J Sainsbury plc since 2004. Previously, he was group
finance director of Lloyds TSB Group plc from 2002 to 2004, group finance
director of BT Group plc from 2000 to 2002, group finance director of BG
Group plc from 1997 to 2000, group finance director of British Gas plc
from 1995 to 1997, group finance director of British Steel plc from 1990 to
1995, an executive director of Lazards from 1981 to 1990 and a non-
executive director of RMC Group plc from 2002 to 2005. Philip is the
former chairman of UK Financial Investments Limited, the company
established to manage the UK Government's shareholding in banks

22. subscribing to its recapitalization fund, and has also been a non-executive
director of Belgacom SA (the Belgian telecom group) since 2004.
• Group Chief Executive - Stephen Hester (48)
Appointed to the Board on 1 October 2008, and to the position of Group
Chief Executive on 21 November 2008. Stephen Hester was chief
executive of The British Land Company PLC. He was previously chief
operating officer of Abbey National plc and prior to that he held positions
with Credit Suisse First Boston including chief financial officer, head of
fixed income and co-Head of European Investment Banking. In February
2008, he was appointed non-executive deputy chairman of Northern Rock
PLC, a position he relinquished on 1 October 2008. He is also a trustee of
The Royal Botanic Gardens, Kew Foundation.
• Deputy Chief Executive - Gordon Pell (59)
Appointed to the Board in March 2000, Gordon Pell was formerly group
director of Lloyds TSB UK Retail Banking before joining National
Westminster Bank Plc as a director in February 2000 and then becoming
Chief Executive, Retail Banking. He is also a director of Race for
Opportunity, and a member of the FSA Practitioner Panel. He was
appointed chairman of the Business Commission on Racial Equality in the
Workplace in July 2006 and deputy Chairman of the Board of the British
Bankers Association in September 2007.
• Group Finance Director - Guy Whittaker (52)
Appointed to the Board in February 2006, Guy Whittaker joined RBS after
spending 25 years with Citigroup. He was formerly the Group treasurer
based in New York and prior to that had held a number of management
positions within the financial markets business based in London.

23. • Non-Executive Directors
Appointed to the Board in September 2004, Joe MacHale is
currently a non-executive director and chairman of the remuneration
committee of Brit Insurance Holdings plc, and a trustee of MacMillan
Cancer Support. He held a number of senior executive positions with JP
Morgan between 1979 and 2001, and was latterly chief executive of JP
Europe, Middle East Africa Region.
Appointed to the Board in June 2002, Colin Buchan was educated
in South Africa and spent the early part of his career in South Africa and
the Far East. He has considerable international investment banking
experience, as well as experience in very large risk management in the
equities business. He was formerly a member of the group management
board of UBS AG and head of equities of UBS Warburg, and was the
former chairman of UBS Securities Canada, Inc. He is Chairman of
Standard Life Investments Limited, a director of Standard Life plc, Merrill
Lynch World Mining Trust Plc, Merrill Lynch Gold Limited, Royal Scottish
National Orchestra Society Limited and Black Rock World Mining Trust
Plc.
Appointed to the Board in September 2004, Archie Hunter is a
chartered accountant. He was Scottish senior partner of KPMG between
1992 and 1999, and President of The Institute of Chartered Accountants
of Scotland in 1997/1998. He has extensive professional experience in the
UK, and in North and South America. He is currently chairman of
Macfarlane Group plc, a director of Edinburgh US Tracker Trust plc, and a
governor of the Beatson Institute for Cancer Research.

24. Appointed to the Board on 1 October 2008, John McFarlane is
former chief executive officer of Australia and New Zealand Banking
Group Limited. Previously he was a group executive director of Standard
Chartered and was head of Citicorp/Citibank in the UK and Ireland. He is
currently a non-executive director of Westfield Holdings Limited and a
director of Old Oak Holdings Limited. He is a former President of the
International Monetary Conference and a former Chairman of the
Australian Bankers Association. He has previously served as a director of
the London Stock Exchange and a member of the Auditing Practices
Board.
Appointed to the Board on 1 October 2008, Arthur Ryan is the
former chairman, chief executive officer and President of Prudential
Financial Inc. Previously he held senior positions with Prudential
Insurance and the former Chase Manhattan Bank NA. He is currently a
non-executive director of Regeneron Pharmaceuticals Inc. and an active
member of numerous community boards. He was a founding member of
the Financial Services Forum.

25. • Group General Counsel and Group Secretary / Head of Legal
- Miller McLean (59)
Miller McLean was appointed Group Secretary in August 1994. He is a
trustee of the Industry and Parliament Trust, non-executive chairman of
The Whitehall and Industry Group and president of the Chartered Institute
of Bankers in Scotland.

26. SUMMARY
Name Age Since Current Position
Philip Hampton 59 2009 Chairman of the Board
Stephen Hester 53 2008 Group Chief Executive, Executive Director
Bruce Van Saun 55 2009 Group Finance Director, Executive Director
Ellen Alemany 57 Chief Executive - Citizens and Head of Americas
Suneel Kamlani 2013 Co-CEO - Markets
Ross McEwan 55 2012 Chief Executive - UK Retail
Peter Nielsen 2013 Co-CEO - Markets
John Owen 2013 Chief Executive - International Banking
Chris Sullivan 55 2009 Chief Executive - UK Corporate Banking
Ron Teerlink 52 2009 Group Chief Administrative Officer
Nathan Bostock 52 Head - Restructuring & Risk
Aileen Taylor 40 2010 Group Secretary
Sandy Crombie 64 2009 Senior Independent Non-Executive Director
Alison Davis 51 2011 Independent Non-Executive Director
Tony Di Iorio 69 2011 Independent Non-Executive Director
Penny Hughes 53 2010 Independent Non-Executive Director
Joseph MacHale 62 2004 Independent Non-Executive Director
Brendan Nelson 63 2010 Independent Non-Executive Director
Sheila Noakes 63 2011 Independent Non-Executive Director
Arthur Ryan 70 2008 Independent Non-Executive Director
Philip Scott 59 2009 Independent Non-Executive Director

27. Key facts of the Organization
o The Group has over 40 million customers worldwide, over half of which
(25 million) are in the UK.
o Founded in 1727 – meaning RBS have over 280 years of financial
services experience.
o RBS have more locally based business banking Relationship
Managers than any other bank in the UK. RBS has extensive
geographical reach across Britain through our network of 3,800
relationship managers based at our 2,278 branches and 118 business
centers.
o RBS retained a top position in 2008 and NatWest has again joint
second for customer satisfaction amongst main high street banks.
o Citizens was ranked the tenth-largest commercial banking organization
in the US based on deposits as at 30 September 2008 and is a top tier
bank in its New England and Mid Atlantic regional markets. Find out
more
o RBS continues to provide support to marginal businesses. Since its
launch, roughly 1,000 customers a month have opened our basic
business bank account helping the neediest businesses get off the
ground.
o RBS last year increased the time customers are given to catch up on
their mortgage repayments if they fall behind to 6 months – double the
government’s recommended 3 months.
o Money Sense advisers are in 1,000 of our branches, helping people to
manage their money better. Consultations with these advisers have
had a variety of impacts – for example, some customers have been
able to reduce their monthly home insurance payments, while others
even have avoided having to sell their homes.

28. o The Group's 20 mobile banks made 25,000 stops last year, serving
around 100,000 customers in 350 remote communities across the UK.
It is the largest network of its kind in the country.
Comparative Analysis
(As of May 01 2013)
Past 90 days
1 week 1 month 6 months 1 year 5 years
Royal Bank of Scotland Group PLC +3.51% +11.36% +11.16% +21.26% -89.41%
FTSE 100 Index +0.30% +0.62% +11.56% +11.00% +5.98%
GB/FINANCIALS +1.09% +1.56% +13.52% +20.97% --
GB/COMML BANKS +1.27% +0.92% +12.69% +19.97% --

29. CHAPTER III
REVIEW OF
LITERATURE

30. DEFINITION OF RISK
Risk is a concept that denotes the precise probability of specific eventualities.
Technically, the notion of risk is independent from the notion of value and, as
such, eventualities may have both beneficial and adverse consequences.
Risk can be defined as the likelihood of occurrence of an undesirable event
combined to the magnitude of its impact
RISK = HAZARD X EXPOSURE
WHAT IS RISK MANAGEMENT?
The process of identification, analysis and either acceptance or mitigation of
uncertainty in investment decision-making. Policies, procedures, and practices
involved in identification, analysis, assessment, control, and avoidance,
minimization, or elimination of unacceptable risks.
Essentially, risk management occurs anytime an investor or fund manager
analyzes and attempts to quantify the potential for losses in an investment and
then takes the appropriate action (or inaction) given their investment objectives
and risk tolerance.
Simply put, risk management is a two-step process - determining what risks exist
in an investment and then handling those risks in a way best-suited to your
investment objectives. Risk management occurs everywhere in the financial
world. It occurs when an investor buys low-risk government bonds over more
risky corporate debt, when a fund manager hedges their currency exposure with

31. currency derivatives and when a bank performs a credit check on an individual
before issuing them a personal line of credit.
The term risk management is a relatively recent (within the last 20 years)
evolution of the term "insurance management." The concept of risk management
encompasses a much broader scope of activities and responsibilities than does
insurance management. Risk management is now a widely accepted description
of a discipline within most large organizations. Basic risks such as fire,
windstorm, employee injuries, and automobile accidents, as well as more
sophisticated exposures such as product liability, environmental impairment, and
employment practices, are the province of the risk management department in a
typical corporation. Although risk management has usually pertained to property
and casualty exposures to loss, it has recently been expanded to include
financial risk management—such as interest rates, foreign exchange rates, and
derivatives—as well as the unique threats to businesses engaged in E-
commerce. As the role of risk management has increased, some large
companies have begun implementing large-scale, organization-wide programs
known as enterprise risk management.

32. TYPES OF RISK
a. Human Risk: Many Industries are service industries which depend mostly on
the quality of their staff for success. By and large, every company needs
personnel to operate. The loss of an important/key employee due to
resignation/death/sickness could be a major risk to the performance of the
company. A company could also incur heavy losses due to frauds committed
by its staff.
b. Operational Risk: Operational risk definitions have been broadly divided into
those that say it is “everything except market and credit risk” and those that
claim it is “losses due to failures in the operational process”. Some definitions
extend operational risk to include all uncontrollable risks to the firm. In a
recent article in Risk, Jameson (1998) reviewed operational risk definitions
and indicated that the definition most frequently given in telephone interviews
is "Every risk source that lies outside the areas covered by market risk and
credit risk". Uncertainty related to losses resulting from inadequate systems
or controls, human error or management.
Table: Example financial losses attributed to Operational risk

33. c. Reputation Risk: Reputation Risk means damage done directly or indirectly
to a Business through circulation of rumors/unfounded/unfavorable
information about the Company. The Company deals with this type of
situation by appropriately assessing the sources, size and nature of the
information.
d. Procedural Risk: From failures of accountability, internal systems and
controls, organization, fraud, etc.
e. Financial Risk: This refers to the risk of bankruptcy arising from the
possibility of a firm not being able to repay its debt on time. Higher the dept-
equity ratio of a firm, higher the financial risk faced by it. Liquidity risk and
wrong capital structure are the prime reason for Financial risk.
f. Technical Risk: System Risk is the risk associated with computer stoppages
or any malfunctioning, defects or improper use of computers. With the
implementation of our “Rules for Information Asset Protection (Security
Policy),” the respective departments have formulated their own rules suitable
for their operations and are actively enforcing all the security measures in
place.
g. Natural Risk: Threats from weather, natural disaster, accident, disease, etc.
The production may be disrupted due to fires, flood, etc. The firm may not be
able to produce the budgeted quantity at the budgeted price. The plant and
machinery may not work efficiently or breakdown frequently affecting
production. Essential basis resources required to run the BAU might be
unavailable due to climate change etc. which result in slow down in the
business.

34. h. Political Risk: From changes in tax regimes, public opinion, government
policy, foreign influence, etc. Investment risk associated with the changes in
government policies that may have a dramatic effect on financial instruments.
For example, if federal legislation is passed removing the tax-exempt status
of tax-deferred buildup of the cash values in Life Insurance policies and
Annuities one of the primary reasons for purchase of these products would be
eliminated.
Diagram: Factors impacted because of Political Risk

35. RISK MAP
Diagram: Risk Map

36. RISK MANAGEMENT PROCESS
Risk management needs to be looked at as an organizational approach, as
management of risks independently cannot have the desired effect over the long-
term. This is especially necessary as risks result from various activities in the risk
attached to them. The risk management function involves a logical sequence of
steps. These steps are
a. Determining Objectives: Determination of objectives is the first step in
the risk management function. The objective may be to protect profits, or to
develop competitive advantage. The objective of risk management needs to
be decided upon by the management, so that the risk manager may fulfill his
responsibilities in accordance with the set objectives.

37. b. Identifying Risk: Every organization faces different risk, based on its
business, the economic, social and political factors, the features of the
industry it operates in – like the degree of competition, the strengths and
weaknesses of its competitors, availability of raw material, factors internal to
the company like the competence and outlook of the management, state of
industry relations, dependence on foreign markets for inputs, sales, or
finances, capabilities of its staff, and other innumerable factors. Each
corporate need to identify the possible sources of risks and the kinds of risks
faced by it. For this, the risk manager needs to develop a fundamental
understanding of all the firm’s activities and the external factors that
contribute to risk. The risk manger especially needs to identify the sources of
risks that are not so obvious.
c. Risk Evaluation: Once the risks are identified, they need to be evaluated
for ascertaining their significance. The significance of a particular risk
depends upon the size of the loss that it may result in, and the probability of
the occurrence of such loss. On the basis of these factors, the various risks
faced by the corporate need to be classified as critical risks, important risks
and non-so-important risks. Critical risks are those that may result in
bankruptcy of the firm. Important risks are those that may not result in
bankruptcy, but may cause severe financial distress. The non-so-important
risks are those that may result in losses which the firm may easily bear in the
normal course of business.
d. Treat & Control risk: Based on the risk tolerance level of the firm, the
risk management policy needs to be developed. The time frame of the policy
should be comparatively long, so that the policy is relatively stable. A policy
covered, or in other words, how much risk the firm is ready to bear.
Generally, the level of secondary risk acceptable to a firm depends on the
degree of primary risk faced by it. A firm facing low primary risk may be more

38. open to bear secondary risk than a company that faces a high degree of
primary risk. The policy may specify that a specific percentage, say 50%, of
all risk are to be covered or that not more than a specific sum can be at risk at
any point of time. The development of Value at Risk (VaR) model provides a
solution.
e. Communicate and Monitor: The function of risk management needs to
be reviewed periodically, depending on the costs involved. The factors that
affect the risk management decisions keep changing, thus necessitating the
need to monitor the effectiveness of the decisions taken previously.
Sometimes, the decisions taken earlier may not prove to be correct, or the
changing circumstances may make some other option more effective. A
periodic review ensures that the risk management function remains flexible,
and the tools, techniques and instruments used to manage risk change
according to the changing circumstances. In effect, review helps the risk
manager analyze whether the risk management function is achieving the set
objectives or not, and to find an alternative course of action if the results are
not in accordance with expectations.
f. Set Strategy: Based on the policy, the firm then needs to develop the
strategy to be followed for managing risk. The tenure of a strategy is shorter
than a policy, as it needs to factor in various variables that nature of risk to be
managed and the timing. It also specifies the tools, techniques and
instruments that can be used to manage these risks. A strategy also deals
with tax and legal problems. It may specify whether it would be more
beneficial for a subsidiary to manage its own risk, or to shift it to the parent
company. It may also specify as to how it will be most beneficial to shift the
losses to a branch located at a particular location. Another important would
try to make profits out of risk management or would it stick to covering the
existing risks. While the strategy is to be designed within the guidelines lay

39. down by the top management, and in a manner that best satisfies the
objectives of risk management, the actual leeway available to the manager for
making the decision changes from company to company. In some corporate,
the guidelines may only specify the broad framework to be followed while
making the risk management decision, giving him a lot of scope for deciding
about the specific technique and instrument to be used for managing a
specific risk. On the other hand, some corporate lay down rigid and detailed
guidelines that needs to be followed while making risk management
decisions, leaving the manager very little scope for exercising his judgment.
Finally, the willingness to take risks, to shift production centers, to change the
product mix, to use derivative products, etc.

40. OBJECTIVES OF RISK MANAGEMENT
 To identify and prioritize potential risk events
 The primary objective of risk management is to ensure that the risks facing
the business are appropriately managed. This gives stakeholder’s
confidence to deal with or invest in the business.
 Help develop risk management strategies and risk management plans
 Use established risk management methods, tools and techniques to assist
in the analysis and reporting of identified risk events
 Find ways to identify and evaluate risks
 Develop strategies and plans for lasting risk management strategies.
 To improve awareness of their likelihood of occurrence and potential
impact.
 To develop and implement appropriate mitigation plans
 For a clear measure and understanding of how individual irks sources
contribute to a company’s consolidated risk.
 For a clear measure of the company’s appetite for risk.
 To develop open platforms, integrated systems and components for
improved risk management.

41. PRINCIPLES OF RISK MANAGEMENT
• Risk management should create value.
• Risk management should be an integral part of organizational processes.
• Risk management should be part of decision making.
• Risk management should explicitly address uncertainty.
• Risk management should be systematic and structured.
• Risk management should be based on the best available information.
• Risk management should be tailored.
• Risk management should take into account human factors.
• Risk management should be transparent and inclusive.
• Risk management should be dynamic, iterative and responsive to change.
• Risk management should be capable of continual improvement and
enhancement.

42. CHAPTER IV
Analysis & Interpretation

43. Analysis And Interpretation of Royal Bank of Scotland employees’ response
Let us look upon the various analysis carried out and the discussed
interpretations:
=> Age Range
Age Percentage (%)
Less than 25 56
26-35 36
36-50 4
above 50 4
Interpretation
Out of 100 respondents 56% belongs to Age group of >25years and 36%
belongs to 26-35years and less than 8% belongs to <36years.
Inference
Most of the employees in Investment banking fall below the age bucket of
35years and very less people are < 36 years old.

44. 60%
30%
7%
3%
Less than 25
25-30
30-50
above 50
=> Client Type

45. Risk should be Percentage
(%)
Interbanks 84
Financial Institutions 60
Corporates 60
Interpretation
Out of 100 respondents 84% handles Interbank client (like JP Morgan, CITI Bank
etc) 60% handles Financial Institutions (GE Financials, Mellon Omnibus etc) and
another 60% handles Corporate clients (Coca-cola, Amdocs etc)
Inference
More business in Investment banking sector are dealt with Interbanks when
compared with that of FI and Corporate clients.

46. => View about Risk management
View about Risk Percentage
(%)
Completely avoided 8
Maximum Risks to maximize returns 16
Take Risks in correct appetite 76
Interpretation
Out of 100 respondents 76% says that Risk should be taken in the correct
appetite, 16 claims that Maximum risk should be taken to get maximized returns
and only 8% claims that Risk should be completely avoided
Inference
Most of the employees feel that Risk has to be taken in the correct appetite /
Level which suites the organization and its operation.

47. => More Profitability
Investment and Focus Percentage
(%)
Low Investment with high number of clients 24
Medium Investment with select section of clients 52
Large Investment with a few clients 24
Interpretation
Out of 100 respondents 52% says that Medium level of Investment has to be
made with selected section of clients rather than Investing Large amounts with
few clients (24%) or Investing low amounts with high number of clients.
Inference
Most of the employees in Investment banking say that we have to do business
with selected number of clients with medium Investment.

48. => Technical Risk
Rating Percentage (%)
1 - Very Low 4
2 - Low 4
3 - Medium 48
4 - High 36
5 - Very High 8
100
Interpretation
Out of 100 respondents 56% belongs to Age group of >25Years and 36%
belongs to 26-35Years and less than 8% belongs to <36years.
Inference
Most of the employees in Investment banking falls below the age bucket of
35Years and very less people are <36years old.

49. => Human Risk
Rating Percentage (%)
1 - Very Low 0
2 - Low 4
3 - Medium 32
4 - High 48
5 - Very High 16
Interpretation
Out of 100 respondents 56% belongs to Age group of >25Years and 36%
belongs to 26-35Years and less than 8% belongs to <36years.
Inference
Most of the employees in Investment banking falls below the age bucket of
35Years and very less people are <36years old.

50. => Operational Risk
Rating Percentage (%)
1 - Very Low 0
2 - Low 4
3 - Medium 8
4 - High 72
5 - Very High 16
100
Interpretation
Out of 100 respondents 56% belongs to Age group of >25Years and 36%
belongs to 26-35Years and less than 8% belongs to <36years.
Inference
Most of the employees in Investment banking falls below the age bucket of
35Years and very less people are <36years old.

51. => Reputation Risk
Rating Percentage (%)
1 - Very Low 4
2 - Low 8
3 - Medium 16
4 - High 28
5 - Very High 44
100
Interpretation
Out of 100 respondents 56% belongs to Age group of >25Years and 36%
belongs to 26-35Years and less than 8% belongs to <36years.
Inference
Most of the employees in Investment banking falls below the age bucket of
35Years and very less people are <36years old.

52. => Procedural Risk
Rating Percentage (%)
1 - Very Low 4
2 - Low 24
3 - Medium 44
4 - High 24
5 - Very High 4
100
Interpretation
Out of 100 respondents 56% belongs to Age group of >25Years and 36%
belongs to 26-35Years and less than 8% belongs to <36years.
Inference
Most of the employees in Investment banking falls below the age bucket of
35Years and very less people are <36years old.

53. => Financial Risk
Rating Percentage (%)
1 - Very Low 0
2 - Low 8
3 - Medium 12
4 - High 24
5 - Very High 56
100
Interpretation
Out of 100 respondents 56% belongs to Age group of >25Years and 36%
belongs to 26-35Years and less than 8% belongs to <36years.
Inference
Most of the employees in Investment banking falls below the age bucket of
35Years and very less people are <36years old.

54. => Project Risk
Rating Percentage (%)
1 - Very Low 4
2 - Low 16
3 - Medium 44
4 - High 20
5 - Very High 16
100
Interpretation
Out of 100 respondents 56% belongs to Age group of >25Years and 36%
belongs to 26-35Years and less than 8% belongs to <36years.
Inference
Most of the employees in Investment banking falls below the age bucket of
35Years and very less people are <36years old.

55. => Natural Risk
Rating Percentage (%)
1 - Very Low 12
2 - Low 44
3 - Medium 28
4 - High 8
5 - Very High 8
100
Interpretation
Out of 100 respondents 56% belongs to Age group of >25Years and 36%
belongs to 26-35Years and less than 8% belongs to <36years.
Inference
Most of the employees in Investment banking falls below the age bucket of
35Years and very less people are <36years old.

56. => Political Risk
Rating Percentage (%)
1 - Very Low 8
2 - Low 52
3 - Medium 16
4 - High 20
5 - Very High 4
100
Interpretation
Out of 100 respondents 56% belongs to Age group of >25Years and 36%
belongs to 26-35Years and less than 8% belongs to <36years.
Inference
Most of the employees in Investment banking falls below the age bucket of
35Years and very less people are <36years old.

57. => More Impact
Types of Risk Percentage
Human 52
Operational 72
Reputation 40
Procedural 36
Project 12
Financial 52
Technical 32
Natural 8
Political 8
Interpretation
Out of 100 respondents 72% say that Operational risk is more critical than any
other risk in Investment banking while 52% of the employees say that Human
and Financial risk is also critical in the business. Then comes Reputation,
Procedural, Technical and at last comes Natural and Political risk.
Inference
Most of the employees in Investment banking say that Operational risk is very
critical in Investment banking Industry.

58. STATISTICAL TOOLS APPLIED
The two primary types of risk analysis processes are:
 Qualitative - A simplified process of identifying the major threats to which
an enterprise is exposed. For example, if one's IT enterprise is located
within "tornado alley," there is an implied threat of a tornado occurring that
could subsequently cause an impact to assets or processes. Further, if the
assets or processes are located in a hardened facility, then the actual
vulnerability to the threat of a tornado could be mitigated or dramatically
reduced. Basically, one must qualify which risks are worth protecting
against. This process is more intuitive and generally can be accomplished
in an abbreviated fashion by answering three basic questions:
1. What could happen?
2. How likely is it to occur?
3. What is the impact?
Qualitative answers to one or more of these questions usually can provide
sufficient information to allocate resources and dollars to protect an
enterprise's assets or processes. More complex enterprises or those with
limited budgets require a more advanced form of risk analysis.
 Quantitative—Today's risk management requires a direct correlation to the
value of the assets that require protection. Organizations increasingly
want to know what the cost/benefit is to protecting an asset or process.
CFOs also want to know what the return on investment (ROI) is for
investing in risk reduction/mitigation strategies. To find this information, an
advanced risk analysis technique, known as a quantitative approach, is
used to provide statistical insight to risk prediction and impact. This
method requires that one establish a monetary value for the assets and
processes, estimate the probability of a threat occurring, and determine

59. the ROI for implementing safeguards to reduce the impact caused by that
threat occurring.
Chi-Square Test
Chi-Square is a statistical test commonly used to compare observed data with
data we would expect to obtain according to a specific hypothesis. For example,
if, according to Mendel's laws, you expected 10 of 20 offspring from a cross to be
male and the actual observed number was 8 males, then you might want to know
about the "goodness to fit" between the observed and expected. Were the
deviations (differences between observed and expected) the result of chance, or
were they due to other factors. How much deviation can occur before you, the
investigator, must conclude that something other than chance is at work, causing
the observed to differ from the expected. The chi-square test is always testing
what scientists call the null hypothesis, which states that there is no significant
difference between the expected and observed result.
The formula for calculating Chi-Square(X2
) is:
That is, Chi-Square is the sum of the squared difference between observed (O)
and the expected (E) data, divided by the expected data in all possible
categories.

60. Table: Chi-Square Testing Table

61. Technical risk in Investment Banking
Technical Risk Number
Observed
Number
Expected
Deviation D2 Chi-sq
Rating (O) (E) (D = O-E) (O-E)2 D2/E
1 2 10 -8 64 6.4
2 2 10 -8 64 6.4
3 24 10 14 196 19.6
4 18 10 8 64 6.4
5 4 10 -6 36 3.6
Totals 50 50 0 424 29.6
** 1 being low and 5 being very high
Interpretation
Out of 50 respondents 74% belongs to income group of below 5lakhs, 21%
belongs to income group of about 5%
Inference
Most of the respondant belongs to the income bracket of less than 5Lakhs

62. CHAPTER V
Summary & Conclusions

63. SUGGESTIONS AND RECOMMENDATION
• The Bank can take steps to decentralize the risk conditions which were set
by RBS as the bank treats all the clients equally when they are in risk.
• The bank can educate the clients about the risk by conducting risk
awareness classed.
• The bank can make classroom trainings and release books on risk
management to educate the clients.

64. QUESTIONNAIRE
On
Risk Analysis &
Risk Management

65. Please read the following questions and select any option according to your
opinion:
1. Please provide us with the following information
Your Name:
Your Designation:
Your Organization:
2. How long have you been working in this Organization?
3. What are the key strengths of this Organization? Please list and
provide examples of at least 3.
4. Please share comments pertaining to the risks which can be faced in
an organization.
5. What risks are you mostly concerned? Please clearly state one risk
and then briefly describe.
6. Compared to others, how do you rate your willingness to take
financial risks?
○ Extremely low risk taker.
○ Very low risk taker.
○ Low risk taker.
○ Average risk taker.
○ High risk taker.
○ Very high risk taker.
○ Extremely high risk taker.
7. How easily do you adapt when things go wrong financially?
○ Very uneasily.
○ Somewhat uneasily.
○ Somewhat easily.
○ Very easily.
8. When you think of the word 'risk' in a financial context, which of the
following words comes to mind first?
○ Danger.
○ Uncertainty.
○ Opportunity.
○ Thrill.

66. 9. Have you ever invested a large sum in a risky investment mainly for
the "thrill" of seeing whether it went up or down in value?
○ No.
○ Yes, very rarely.
○ Yes, somewhat rarely.
○ Yes, somewhat frequently.
○ Yes, very frequently.
10.If you had to choose between more job security with a small pay rise
and less job security with a big pay rise, which would you pick?
○ Definitely more job security with a small pay rise.
○ Probably more job security with a small pay rise.
○ Not sure.
○ Probably less job security with a big pay rise.
○ Definitely less job security with a big pay rise.
11.When faced with a major financial decision, are you more concerned
about the possible losses or the possible gains?
○ Always the possible losses.
○ Usually the possible losses.
○ Usually the possible gains.
○ Always the possible gains.
12.How do you usually feel about your major financial decisions after
you make them?
○ Very pessimistic.
○ Somewhat pessimistic.
○ Somewhat optimistic.
○ Very optimistic.
13.What degree of risk have you taken with your financial decisions in
the past?
○ Very small.
○ Small.
○ Medium.
○ Large.
○ Very large.
14.What degree of risk are you currently prepared to take with your
financial decisions?
○ Very small.
○ Small.
○ Medium.
○ Large.
○ Very large

67. Imagine that you are borrowing a large sum of money at some time in the
future. It's not clear which way interest rates are going to move - they might
go up, they might go down, no one seems to know. You could take a
variable interest rate that will rise and fall as the market rate changes. Or
you could take a fixed interest rate which is 1% more than the current
variable rate but which won't change as the market rate changes. Or you
could take a mix of both.
15.How would you prefer your loan to be made up?
○ 100% variable.
○ 75% variable, 25% fixed.
○ 50% variable, 50% fixed.
○ 25% variable, 75% fixed.
○ 100% fixed.
16.Insurance can cover a wide variety of life's major risks - theft, fire,
accident, illness, death etc. How much coverage do you have?
○ Very little.
○ Some.
○ Considerable.
○ Complete.
17.If you would like us to reach you, please provide us your contact
information below.
This questionnaire is scored on a scale of 0 to 100. When the scores are
graphed they follow the familiar bell-curve of the Normal distribution shown
below. The average score is 50. Two-thirds of all scores are within 10 points of
the average. Only 1 in 1000 is less than 20 or more than 80.

68. Summary of the Replies
Having contacted 60 employees of the Organization – Royal Bank of Scotland,
the various feedback and responses are displayed below:

69. Bibliography
Books used for Reference:
A Practical Guide to Risk Management
Thomas S. Coleman
Research Foundation Publications, (Jul 2011): 1-212
Risk Management vs. Risk Measurement
Thomas S. Coleman
Investment Performance Measurement Feature Articles, 2011, Vol. 2011, No. 1
Value at Risk and Conditional Value at Risk: A Comparison
Deborah Kidd, CFA
Investment Risk and Performance Feature Articles, 2012, Vol. 2012, No. 1
Risk Management: A Review
Sébastien Lleo, CFA
Research Foundation Literature Reviews, Risk Management: A Review
(February 2009): 1-51
On a New Approach for Analyzing and Managing Macrofinancial Risks
Robert C. Merton, Monica Billio, Mila Getmansky, Dale Gray, Andrew W. Lo, and
Loriana Pelizzon
Financial Analysts Journal, March/April 2013, Vol. 69, No. 2:22-33.
Risk Management in Banking
Joël Bessis (Author)
Websites used for Reference:
https://en.wikipedia.org/wiki/Investment_banking
http://www.answerbag.com/q_view/1976673
http://www.fincad.com/pdfs/survey-corporate-2012.pdf
http://www.atkearney.com/paper/-/asset_publisher/dVxv4Hz2h8bS/content/seven
-tenets-of-risk-management-in-the-banking-industry/10192