The document discusses various aspects of risk management and capital requirements under Basel II. It provides explanations of key concepts such as economic capital, regulatory capital, credit risk measurement approaches, operational risk approaches, and credit risk mitigation techniques. It also compares the standardized and internal ratings-based approaches for credit risk and provides examples of calculating risk-weighted assets and capital adequacy ratios.
The document discusses the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It outlines Basel I, introduced in 1988, which focused on credit risk. Basel II, introduced in 2004, takes a three pillar approach focusing on minimum capital requirements, supervisory review, and market discipline. It aims to make capital requirements more risk sensitive. Some benefits of Basel II include improved risk management and efficiency, while challenges include lack of historical data and difficulty accounting for diversity across countries.
Basel II is an international standard that aims to strengthen the regulation, supervision and risk management within the banking sector. It improves upon Basel I by making capital requirements more risk sensitive and aligning regulatory capital more closely with underlying bank risks. Basel II consists of three pillars that cover minimum capital requirements, supervisory review, and market discipline. Implementation of Basel II varies across countries and regulators but aims to modernize capital adequacy standards to be more comprehensive and risk sensitive.
This document discusses various risks faced by banks such as credit risk, liquidity risk, market risk, and operational risk. It summarizes Basel I, Basel II, and Basel III capital adequacy frameworks which establish minimum capital requirements for banks. It outlines the key components of Tier 1 and Tier 2 capital and how risk weighted assets are calculated to determine the capital adequacy ratio. The Reserve Bank of India requires banks to maintain a minimum capital to risk-weighted assets ratio of 9% under Basel II norms.
Asset liability management-in_the_indian_banks_issues_and_implicationsVikas Patro
This document discusses asset-liability management (ALM) in Indian banks. It provides background on the evolution of risk management practices in Indian banks over time in response to deregulation and other changes. It describes various types of risks banks face, such as interest rate risk, liquidity risk, and credit risk. Effective ALM is important for banks to manage these risks and balance risks with profits. The document outlines objectives to study the current status and impact of ALM practices in Indian banks.
The document provides an overview of Basel II, including its background, main elements, and implementation process. It discusses:
- The three pillars of Basel II - minimum capital requirements, supervisory review, and market discipline.
- The different approaches for calculating capital requirements for credit, operational, and market risk. This includes standardized and internal ratings-based approaches.
- The importance of the supervisory review process in Pillar 2 for banks to assess their capital adequacy beyond regulatory minimums.
- The role of enhanced disclosure in Pillar 3 to improve market discipline.
It emphasizes that countries should consider their own banking system's readiness before implementing Basel II and that there is no single approach, with
best material for ank exam 2014 ibps po best exam tips from gr8dreamz.com website, best material for ank exam 2014 ibps po best exam tips from gr8dreamz.com website, best material for ank exam 2014 ibps po best exam tips from gr8dreamz.com website,
The document discusses various aspects of risk management and capital requirements under Basel II. It provides explanations of key concepts such as economic capital, regulatory capital, credit risk measurement approaches, operational risk approaches, and credit risk mitigation techniques. It also compares the standardized and internal ratings-based approaches for credit risk and provides examples of calculating risk-weighted assets and capital adequacy ratios.
The document discusses the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It outlines Basel I, introduced in 1988, which focused on credit risk. Basel II, introduced in 2004, takes a three pillar approach focusing on minimum capital requirements, supervisory review, and market discipline. It aims to make capital requirements more risk sensitive. Some benefits of Basel II include improved risk management and efficiency, while challenges include lack of historical data and difficulty accounting for diversity across countries.
Basel II is an international standard that aims to strengthen the regulation, supervision and risk management within the banking sector. It improves upon Basel I by making capital requirements more risk sensitive and aligning regulatory capital more closely with underlying bank risks. Basel II consists of three pillars that cover minimum capital requirements, supervisory review, and market discipline. Implementation of Basel II varies across countries and regulators but aims to modernize capital adequacy standards to be more comprehensive and risk sensitive.
This document discusses various risks faced by banks such as credit risk, liquidity risk, market risk, and operational risk. It summarizes Basel I, Basel II, and Basel III capital adequacy frameworks which establish minimum capital requirements for banks. It outlines the key components of Tier 1 and Tier 2 capital and how risk weighted assets are calculated to determine the capital adequacy ratio. The Reserve Bank of India requires banks to maintain a minimum capital to risk-weighted assets ratio of 9% under Basel II norms.
Asset liability management-in_the_indian_banks_issues_and_implicationsVikas Patro
This document discusses asset-liability management (ALM) in Indian banks. It provides background on the evolution of risk management practices in Indian banks over time in response to deregulation and other changes. It describes various types of risks banks face, such as interest rate risk, liquidity risk, and credit risk. Effective ALM is important for banks to manage these risks and balance risks with profits. The document outlines objectives to study the current status and impact of ALM practices in Indian banks.
The document provides an overview of Basel II, including its background, main elements, and implementation process. It discusses:
- The three pillars of Basel II - minimum capital requirements, supervisory review, and market discipline.
- The different approaches for calculating capital requirements for credit, operational, and market risk. This includes standardized and internal ratings-based approaches.
- The importance of the supervisory review process in Pillar 2 for banks to assess their capital adequacy beyond regulatory minimums.
- The role of enhanced disclosure in Pillar 3 to improve market discipline.
It emphasizes that countries should consider their own banking system's readiness before implementing Basel II and that there is no single approach, with
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SoSeBa Bank - Risk Managment of a fictitious BankAlliochah Gavyn
The document discusses risk management at SoSeBa Bank in Mauritius. It introduces the bank and outlines its mission to provide banking services to the working class population. It then discusses key risks like credit, liquidity, and market risk that the bank needs to measure and manage. It provides an overview of banking regulations in Mauritius as well as international standards like the Basel Accords. The document emphasizes the importance of robust risk management practices like risk modeling, exposure limits, and stress testing for the long-term success of the new bank.
The Reserve Bank of India (RBI) recognizes the importance of risk management in the banking sector. In 1999, RBI issued guidelines for banks regarding asset liability management and managing credit, market, and operational risks. The major risks banks face are liquidity risk, interest rate risk, market risk, credit or default risk, and operational risk. RBI evaluates banks' financial soundness using the CAMELS framework, which assesses capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. RBI's guidelines require banks to establish comprehensive risk rating systems, develop value at risk methodologies, and integrate asset liability management and credit policy activities to better manage risks.
The document summarizes the history and development of the Basel Committee on Banking Supervision and the Basel Accords. It discusses how the Basel Committee was formed in 1974 in response to banking crises. It then describes the three Basel Accords - Basel I established minimum capital requirements in 1988, Basel II introduced additional risk-based requirements in 2004, and Basel III strengthened capital and liquidity standards following the 2008 financial crisis. The document provides details on the pillars and key provisions of each accord.
Basel 1 and Basel 2 promote banking safety and soundness. Basel 1 introduced risk-based capital requirements but had weaknesses. Basel 2 builds on Basel 1 with three pillars: minimum capital requirements calculated based on credit, market and operational risk; supervisory review of risk management; and market discipline through disclosure. It utilizes internal ratings-based and standardized approaches to determine capital requirements in a more risk-sensitive manner.
Today bankers and other financial service managers have learned to look at their asset and liability portfolios as an integrated whole. This type of coordinated and integrated decision making is known today as asset-liability management (ALM). This thesis is prepared on ‘The Hong Kong and Shanghai Banking Corporation’- HSBC, in Bangladesh. With its symbol of a Hexagon and the illustrative theme ‘The world’s local bank’ –HSBC is known to a lot of countries and territories of the world as a leading financial service institution. Although the history of its operation in our country is relatively new, yet HSBC already commands a great deal of respect and reputation in our banking community.
Every Financial Institute irrespective of its size is generally exposed to market liquidity and interest rate risks in connection with the process of Asset Liability Management. Failure to identify the risks associated with business and failure to take timely measures in giving a sense of direction threatens the very existence of the institution. It is, therefore, important that the strategic decision makers of an organization assume special care with regard to the Balance Sheet Risk management and should ensure that the structure of the institute’s business and the level of Balance Sheet risk it assumes are effectively managed, appropriate policies and procedures are established to control the direction of the organization. The whole exercise is with the objective of limiting these risks against the resources that are available for evaluating and controlling liquidity and interest rate risk.
Liquidity risk.in islamic vs conventional banksirum_iiui
Liquidity risk arises when a bank is unable to meet its short-term obligations due to difficulties obtaining cash at a reasonable cost or selling assets. It can cause insolvency even for technically solvent institutions. Liquidity risk for banks results from an impaired ability to match the maturities of assets and liabilities, creating either a surplus of cash that must be invested or a shortage that must be funded. For Islamic banks, liquidity risk is critical as they cannot borrow funds to meet liquidity requirements and assets are typically less liquid than conventional bank assets.
This presentation is the one stop point to learn about Basel Norms in the Banking
This is the most comprehensive presentation on Risk Management in Banks and Basel Norms. It presents in details the evolution of Basel Norms right form Pre Basel area till implementation of Basel III in 2019 along with factors and reason for shifting of Basel I to II and finally to III.
Links to Video's in the presentation
Risk Management in Banks
https://www.youtube.com/watch?v=fZ5_V4RW5pE
Tier 1 Capital
http://www.investopedia.com/terms/t/tier1capital.asp
Tier 2 Capital
http://www.investopedia.com/terms/t/tier2capital.asp
Basel I
http://www.investopedia.com/terms/b/basel_i.asp
Capital Adequacy Ratio
http://www.investopedia.com/terms/c/capitaladequacyratio.asp
Basel II
http://www.investopedia.com/video/play/what-basel-ii/?header_alt=c
Basel III
http://www.investopedia.com/terms/b/basell-iii.asp
RBI Governor - Raghuram G Rajan on the importance if Basel III regulations
https://youtu.be/EN27ZRe_28A
The document provides information on the Bank for International Settlements (BIS) and the Basel I accord. It discusses that BIS was established in 1930 by central banks and continues to serve as a forum for international cooperation on banking supervision. Basel I, released in 1988, was the first international banking accord that set minimum capital requirements for credit risk. It established risk weights for various types of assets and exposures. However, it only addressed credit risk and was later improved by Basel II and III.
Basel II is an international standard that establishes capital requirements for banks to guard against financial and operational risks. It consists of three pillars: minimum capital requirements to cover credit, market and operational risks; supervisory review to ensure adequate capital to cover all risks; and market discipline through disclosure requirements. While Basel II aims to make capital requirements more risk sensitive, Indian banks face challenges in implementing it due to lack of risk management expertise, need for technology investments, and restructuring of non-performing assets. A gradual implementation process will help ensure a smooth transition to the new framework.
The document summarizes the history and key aspects of Basel Accords, which are international standards for bank capital adequacy, stress testing, and liquidity risk. It outlines regulations pre-1988, Basel I in 1988, amendments in 1996 and proposed Basel II in 1999. Basel I first introduced capital requirements. Basel II in 2007 improved this with three pillars for minimum capital, supervision, and disclosure. It introduced risk-weighted capital requirements and recognized credit risk mitigants. However, both accords were criticized for issues like pro-cyclicality and regulatory arbitrage.
The Basel Accords are agreements established by the Basel Committee on Banking Supervision that provide recommendations on banking regulations and standards. The purpose is to ensure that banks have sufficient capital reserves to protect against unexpected financial risks. Basel I established initial capital requirements and risk weights. Basel II introduced refined risk management standards. Basel III was released in 2010 in response to the financial crisis to strengthen capital and liquidity standards for banks.
This document discusses risk management in Islamic banking and finance. It provides an overview of Islamic banking principles and history. It then examines the specific risks faced by Islamic banks, such as liquidity risk and credit risk. It also explores the development of Islamic financial contracts and instruments. The document then focuses on the Arab Finance House in Lebanon as a case study. It analyzes the bank's development, strategies, investments and financial highlights. It concludes by discussing the future prospects for the Arab Finance House, including plans for continued growth while adhering to Sharia principles.
The Basel II accord establishes three pillars for regulating banks' capital requirements:
1. Pillar I sets minimum capital standards to cover credit, market, and operational risks using standardized or advanced approaches.
2. Pillar II involves supervisory review of banks' risk management strategies and capital adequacy plans. Supervisors ensure banks hold capital above minimum levels.
3. Pillar III promotes market discipline through disclosure requirements for banks to publish details of their risk exposures and capital adequacy.
The objectives of Basel II are to promote banking system safety and soundness, enhance competitive equality, and make capital requirements more risk sensitive through a more comprehensive approach to risk management.
This document discusses capital requirements for banks and the Basel accords. It provides context for why capital requirements are needed due to risks banks face from loans and investments. It summarizes the objectives and key aspects of Basel I, which was an initial international agreement on capital standards in 1988. It then discusses weaknesses in Basel I that led to its revision and the introduction of Basel II in 2004, which aimed to make capital requirements more risk-sensitive. The document outlines the three pillars of Basel II - minimum capital requirements, supervisory review, and market discipline. It also provides details on the approaches to calculating capital requirements for credit, market and operational risks under Basel II.
This document is a self-study guide for understanding basic banking operations and risks. It begins by explaining the goals of banks are to generate profits while managing risks. It then provides overviews of the routine transaction flows in banks, how the central pool of funds is managed, and the various risks banks face, including credit, market, interest rate, liquidity, operational, legal, and reputation risks. The guide is intended to help non-banking staff gain a foundational understanding of banking.
Capital adequacy measures a bank's capital reserves relative to its risk-weighted assets and activities. It aims to ensure banks can absorb reasonable losses without becoming insolvent. The Basel Committee on Banking Supervision, formed in 1974 under the Bank for International Settlements, establishes capital adequacy standards known as the Basel Accords. Basel I covered only credit risk while Basel II and III expanded coverage of risks and strengthened requirements on capital, liquidity and leverage to promote banking sector and financial stability.
Basel III is a global regulatory framework that aims to strengthen bank capital requirements and introduces new regulatory requirements on bank liquidity and leverage. The document outlines the key elements of Basel III including the three pillars of capital adequacy, supervisory review, and market discipline. It discusses the challenges Indian banks may face in implementing the new capital, leverage, and liquidity requirements and how this may impact their profitability. The higher capital requirements under Basel III will be difficult for Indian banks, especially public sector banks, to meet and may require raising over 1.5 trillion rupees in additional capital.
The Capital Adequacy Ratio (CAR) is a ratio used by bank regulators to measure a bank's capital in relation to its risk. It is calculated by dividing a bank's capital by its risk-weighted assets. The minimum CAR required by regulators is 8%, with some countries requiring higher ratios. The CAR helps ensure banks can absorb reasonable losses and protects depositors, maintaining confidence in the banking system.
This document discusses risk management in the banking sector. It identifies four main types of risks that banks face: operational risk, credit risk, market risk, and regulatory risk. For each risk, it provides examples of the specific risks involved. It also discusses how risk management in banks has evolved from a focus on risk reduction to treating risk as an inherent part of the business that must be monitored. Regulatory responses aimed at improving risk management in the financial industry are also summarized.
The document then discusses the key aspects of Basel I and Basel II accords. Basel I, introduced in 1998, required banks to hold capital equal to at least 8% of total assets, measured according to their riskiness across four buckets (0%, 20%, 50%, 100%). Basel II, published in 2004, consists of three pillars - minimum capital requirements, supervisory review, and market discipline. It introduced a risk
This document provides an overview of financial regulation and its economic rationale. It discusses how government safety nets like deposit insurance can create moral hazard issues but are still necessary to prevent bank runs. It also describes different types of financial regulation, including restrictions on asset holdings, capital requirements, disclosure requirements, consumer protection laws, and international coordination challenges. The goal of regulation is to reduce asymmetric information problems while not unduly limiting competition.
The document discusses Mohammad Fheili, who has over 30 years of banking experience and currently works as an executive at JTB Bank in Lebanon. He has delivered over 1,500 hours of training to bankers and has published over 25 articles. The main document appears to be about an upcoming forum on de-risking that Fheili will be speaking at, as it covers topics like the challenges in compliance that are driving banks to de-risk, the implications of de-risking, and strategies for managing risk while continuing to serve clients.
SoSeBa Bank - Risk Managment of a fictitious BankAlliochah Gavyn
The document discusses risk management at SoSeBa Bank in Mauritius. It introduces the bank and outlines its mission to provide banking services to the working class population. It then discusses key risks like credit, liquidity, and market risk that the bank needs to measure and manage. It provides an overview of banking regulations in Mauritius as well as international standards like the Basel Accords. The document emphasizes the importance of robust risk management practices like risk modeling, exposure limits, and stress testing for the long-term success of the new bank.
The Reserve Bank of India (RBI) recognizes the importance of risk management in the banking sector. In 1999, RBI issued guidelines for banks regarding asset liability management and managing credit, market, and operational risks. The major risks banks face are liquidity risk, interest rate risk, market risk, credit or default risk, and operational risk. RBI evaluates banks' financial soundness using the CAMELS framework, which assesses capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. RBI's guidelines require banks to establish comprehensive risk rating systems, develop value at risk methodologies, and integrate asset liability management and credit policy activities to better manage risks.
The document summarizes the history and development of the Basel Committee on Banking Supervision and the Basel Accords. It discusses how the Basel Committee was formed in 1974 in response to banking crises. It then describes the three Basel Accords - Basel I established minimum capital requirements in 1988, Basel II introduced additional risk-based requirements in 2004, and Basel III strengthened capital and liquidity standards following the 2008 financial crisis. The document provides details on the pillars and key provisions of each accord.
Basel 1 and Basel 2 promote banking safety and soundness. Basel 1 introduced risk-based capital requirements but had weaknesses. Basel 2 builds on Basel 1 with three pillars: minimum capital requirements calculated based on credit, market and operational risk; supervisory review of risk management; and market discipline through disclosure. It utilizes internal ratings-based and standardized approaches to determine capital requirements in a more risk-sensitive manner.
Today bankers and other financial service managers have learned to look at their asset and liability portfolios as an integrated whole. This type of coordinated and integrated decision making is known today as asset-liability management (ALM). This thesis is prepared on ‘The Hong Kong and Shanghai Banking Corporation’- HSBC, in Bangladesh. With its symbol of a Hexagon and the illustrative theme ‘The world’s local bank’ –HSBC is known to a lot of countries and territories of the world as a leading financial service institution. Although the history of its operation in our country is relatively new, yet HSBC already commands a great deal of respect and reputation in our banking community.
Every Financial Institute irrespective of its size is generally exposed to market liquidity and interest rate risks in connection with the process of Asset Liability Management. Failure to identify the risks associated with business and failure to take timely measures in giving a sense of direction threatens the very existence of the institution. It is, therefore, important that the strategic decision makers of an organization assume special care with regard to the Balance Sheet Risk management and should ensure that the structure of the institute’s business and the level of Balance Sheet risk it assumes are effectively managed, appropriate policies and procedures are established to control the direction of the organization. The whole exercise is with the objective of limiting these risks against the resources that are available for evaluating and controlling liquidity and interest rate risk.
Liquidity risk.in islamic vs conventional banksirum_iiui
Liquidity risk arises when a bank is unable to meet its short-term obligations due to difficulties obtaining cash at a reasonable cost or selling assets. It can cause insolvency even for technically solvent institutions. Liquidity risk for banks results from an impaired ability to match the maturities of assets and liabilities, creating either a surplus of cash that must be invested or a shortage that must be funded. For Islamic banks, liquidity risk is critical as they cannot borrow funds to meet liquidity requirements and assets are typically less liquid than conventional bank assets.
This presentation is the one stop point to learn about Basel Norms in the Banking
This is the most comprehensive presentation on Risk Management in Banks and Basel Norms. It presents in details the evolution of Basel Norms right form Pre Basel area till implementation of Basel III in 2019 along with factors and reason for shifting of Basel I to II and finally to III.
Links to Video's in the presentation
Risk Management in Banks
https://www.youtube.com/watch?v=fZ5_V4RW5pE
Tier 1 Capital
http://www.investopedia.com/terms/t/tier1capital.asp
Tier 2 Capital
http://www.investopedia.com/terms/t/tier2capital.asp
Basel I
http://www.investopedia.com/terms/b/basel_i.asp
Capital Adequacy Ratio
http://www.investopedia.com/terms/c/capitaladequacyratio.asp
Basel II
http://www.investopedia.com/video/play/what-basel-ii/?header_alt=c
Basel III
http://www.investopedia.com/terms/b/basell-iii.asp
RBI Governor - Raghuram G Rajan on the importance if Basel III regulations
https://youtu.be/EN27ZRe_28A
The document provides information on the Bank for International Settlements (BIS) and the Basel I accord. It discusses that BIS was established in 1930 by central banks and continues to serve as a forum for international cooperation on banking supervision. Basel I, released in 1988, was the first international banking accord that set minimum capital requirements for credit risk. It established risk weights for various types of assets and exposures. However, it only addressed credit risk and was later improved by Basel II and III.
Basel II is an international standard that establishes capital requirements for banks to guard against financial and operational risks. It consists of three pillars: minimum capital requirements to cover credit, market and operational risks; supervisory review to ensure adequate capital to cover all risks; and market discipline through disclosure requirements. While Basel II aims to make capital requirements more risk sensitive, Indian banks face challenges in implementing it due to lack of risk management expertise, need for technology investments, and restructuring of non-performing assets. A gradual implementation process will help ensure a smooth transition to the new framework.
The document summarizes the history and key aspects of Basel Accords, which are international standards for bank capital adequacy, stress testing, and liquidity risk. It outlines regulations pre-1988, Basel I in 1988, amendments in 1996 and proposed Basel II in 1999. Basel I first introduced capital requirements. Basel II in 2007 improved this with three pillars for minimum capital, supervision, and disclosure. It introduced risk-weighted capital requirements and recognized credit risk mitigants. However, both accords were criticized for issues like pro-cyclicality and regulatory arbitrage.
The Basel Accords are agreements established by the Basel Committee on Banking Supervision that provide recommendations on banking regulations and standards. The purpose is to ensure that banks have sufficient capital reserves to protect against unexpected financial risks. Basel I established initial capital requirements and risk weights. Basel II introduced refined risk management standards. Basel III was released in 2010 in response to the financial crisis to strengthen capital and liquidity standards for banks.
This document discusses risk management in Islamic banking and finance. It provides an overview of Islamic banking principles and history. It then examines the specific risks faced by Islamic banks, such as liquidity risk and credit risk. It also explores the development of Islamic financial contracts and instruments. The document then focuses on the Arab Finance House in Lebanon as a case study. It analyzes the bank's development, strategies, investments and financial highlights. It concludes by discussing the future prospects for the Arab Finance House, including plans for continued growth while adhering to Sharia principles.
The Basel II accord establishes three pillars for regulating banks' capital requirements:
1. Pillar I sets minimum capital standards to cover credit, market, and operational risks using standardized or advanced approaches.
2. Pillar II involves supervisory review of banks' risk management strategies and capital adequacy plans. Supervisors ensure banks hold capital above minimum levels.
3. Pillar III promotes market discipline through disclosure requirements for banks to publish details of their risk exposures and capital adequacy.
The objectives of Basel II are to promote banking system safety and soundness, enhance competitive equality, and make capital requirements more risk sensitive through a more comprehensive approach to risk management.
This document discusses capital requirements for banks and the Basel accords. It provides context for why capital requirements are needed due to risks banks face from loans and investments. It summarizes the objectives and key aspects of Basel I, which was an initial international agreement on capital standards in 1988. It then discusses weaknesses in Basel I that led to its revision and the introduction of Basel II in 2004, which aimed to make capital requirements more risk-sensitive. The document outlines the three pillars of Basel II - minimum capital requirements, supervisory review, and market discipline. It also provides details on the approaches to calculating capital requirements for credit, market and operational risks under Basel II.
This document is a self-study guide for understanding basic banking operations and risks. It begins by explaining the goals of banks are to generate profits while managing risks. It then provides overviews of the routine transaction flows in banks, how the central pool of funds is managed, and the various risks banks face, including credit, market, interest rate, liquidity, operational, legal, and reputation risks. The guide is intended to help non-banking staff gain a foundational understanding of banking.
Capital adequacy measures a bank's capital reserves relative to its risk-weighted assets and activities. It aims to ensure banks can absorb reasonable losses without becoming insolvent. The Basel Committee on Banking Supervision, formed in 1974 under the Bank for International Settlements, establishes capital adequacy standards known as the Basel Accords. Basel I covered only credit risk while Basel II and III expanded coverage of risks and strengthened requirements on capital, liquidity and leverage to promote banking sector and financial stability.
Basel III is a global regulatory framework that aims to strengthen bank capital requirements and introduces new regulatory requirements on bank liquidity and leverage. The document outlines the key elements of Basel III including the three pillars of capital adequacy, supervisory review, and market discipline. It discusses the challenges Indian banks may face in implementing the new capital, leverage, and liquidity requirements and how this may impact their profitability. The higher capital requirements under Basel III will be difficult for Indian banks, especially public sector banks, to meet and may require raising over 1.5 trillion rupees in additional capital.
The Capital Adequacy Ratio (CAR) is a ratio used by bank regulators to measure a bank's capital in relation to its risk. It is calculated by dividing a bank's capital by its risk-weighted assets. The minimum CAR required by regulators is 8%, with some countries requiring higher ratios. The CAR helps ensure banks can absorb reasonable losses and protects depositors, maintaining confidence in the banking system.
This document discusses risk management in the banking sector. It identifies four main types of risks that banks face: operational risk, credit risk, market risk, and regulatory risk. For each risk, it provides examples of the specific risks involved. It also discusses how risk management in banks has evolved from a focus on risk reduction to treating risk as an inherent part of the business that must be monitored. Regulatory responses aimed at improving risk management in the financial industry are also summarized.
The document then discusses the key aspects of Basel I and Basel II accords. Basel I, introduced in 1998, required banks to hold capital equal to at least 8% of total assets, measured according to their riskiness across four buckets (0%, 20%, 50%, 100%). Basel II, published in 2004, consists of three pillars - minimum capital requirements, supervisory review, and market discipline. It introduced a risk
This document provides an overview of financial regulation and its economic rationale. It discusses how government safety nets like deposit insurance can create moral hazard issues but are still necessary to prevent bank runs. It also describes different types of financial regulation, including restrictions on asset holdings, capital requirements, disclosure requirements, consumer protection laws, and international coordination challenges. The goal of regulation is to reduce asymmetric information problems while not unduly limiting competition.
The document discusses Mohammad Fheili, who has over 30 years of banking experience and currently works as an executive at JTB Bank in Lebanon. He has delivered over 1,500 hours of training to bankers and has published over 25 articles. The main document appears to be about an upcoming forum on de-risking that Fheili will be speaking at, as it covers topics like the challenges in compliance that are driving banks to de-risk, the implications of de-risking, and strategies for managing risk while continuing to serve clients.
The document discusses the closure and conversion of term finance institutions in India in the early 2000s and arguments for and against reviving such institutions. It provides details on the roles and functions of development finance institutions (DFIs) and term finance institutions pre-2000s in India. It notes the problems with rising non-performing assets in commercial banks and argues for establishing a new National Development Bank to facilitate long-term financing and reindustrialization while relieving stress on commercial banks.
This document provides an overview of risk management and Basel II. It discusses key concepts such as types of capital, economic capital, regulatory capital, expected and unexpected loss. It also summarizes the three pillars of Basel II including minimum capital requirements, supervisory review process, and market discipline. Approaches for credit risk, operational risk and market risk management under Basel II are outlined. The document also covers topics like value at risk, credit risk mitigation, and best practices in credit risk management.
How Excessive Compliance, Complex Sanctions, and prohibitive penalties have driven banks to De-Bank so many clients just to spare themselves the hassle of enhanced due diligence.
I argue that much of what is proposed in the IFRS 9 document could have been accomplished through Pillar 2 of the Basel Accord in its 2006 release.
Pillar 2 was introduced to put to test Management Capabilities, and Regulatory Credibility. I argue that both failed that test which made the introduction of IFRS 9 a necessity.
Basel II is an international banking accord that establishes capital requirements for banks. It aims to create an international standard for how much capital banks need to put aside to guard against financial and operational risks. Basel II includes three pillars: minimum capital requirements, supervisory review, and market discipline. It addresses deficiencies in Basel I by incorporating additional risk categories like credit and operational risk. Implementing Basel II poses challenges for Indian banks like increased capital requirements, the need for risk management expertise and technology investments. However, gradual implementation could help Indian banks migrate smoothly to the new framework.
The document discusses the evolution of the role of underwriters from the 1980s to present. It describes how underwriting standards became loosened during periods of bubbles like the commercial real estate and dot-com booms, contributing to financial crises. In response, there has been a push to return to fundamentals of strict underwriting and risk management. The role of underwriters has evolved from general commercial lenders to specialized roles with underwriters leading deal teams to balance business interests and prudent credit standards.
The document discusses how lax lending standards during the 2007-2008 financial crisis contributed to its occurrence, and argues that a return to basic asset-based lending principles is needed. It outlines the basics of commercial lending such as understanding customers, risks, repayment ability, and using the five "C"s of credit analysis - character, capacity, capital, conditions, and collateral. Covenants and scrutinizing add-on acquisitions are also recommended to strengthen underwriting. Overall it advocates going "back to basics" in commercial lending to build a robust credit culture and prevent future crises.
Non-performing assets (NPAs) refer to loans that are in default or close to being in default. NPAs have become a major issue for Indian banks and financial institutions, totaling over Rs. 1.1 trillion. The origin of rising NPAs lies in poor credit risk management practices in banks. To resolve NPAs, the government established asset reconstruction companies (ARCs) to purchase NPAs from banks and resolve them to enable banks to focus on core operations and lending. ARCs operate under the legal framework of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002.
This document provides information about Mohammad Fheili and his expertise in stress testing credit risk. It includes his credentials, which show over 30 years of banking experience in risk management roles. It also discusses the importance of stress testing for understanding potential risks and their impacts under different scenarios. Stress testing helps banks evaluate whether their capital levels would be sufficient to withstand severe but plausible future events and credit environments. The document outlines various types of credit stress tests a bank can perform, including sensitivity analyses, scenario analyses using both historical and hypothetical scenarios, and tests focused on macroeconomic, market or worst-case events.
The document discusses Mohammad Fheili, an expert in banking and economics with over 30 years of experience. It includes his biography, noting his roles at various banks, experience teaching, and publications. The bulk of the document consists of an outline and slides for a presentation by Fheili on the economics of shadow banking and its inherent risks. The presentation covers topics like how large the shadow banking system is, the channeling and intermediation activities it replicates from traditional banking, and the risks created by its complexity and lack of regulation compared to traditional banking.
Active Management of the Debt Portfolio - 2013 NACUBO ConferenceRemy Hathaway
Presentation from 2013 NACUBO in Indianapolis with a focus on risk management. Co-presented with Thomas Richards (University of Missouri System) and Sherry Mondou (University of Puget Sound). My slides are pp3-12.
This document discusses liquidity risk and liquidity management in Islamic banks. It begins by outlining sources of liquidity risk for Islamic banks, including contractual forms like murabaha that can impact risk. While some Islamic banks have excess liquidity, others have faced liquidity crises. The document then examines current practices for managing both liquidity shortages and excesses, including reserves, maturity matching, and sukuk structures. It concludes by recommending the development of new liquidity management instruments and infrastructure to help smooth liquidity issues in Islamic banking.
This document discusses governance and performance of microfinance institutions (MFIs) in India. It analyzes how governance mechanisms influence various performance and risk measures using data from 60 MFIs. Governance is important for MFIs to achieve their dual goals of reaching poor clients and achieving financial sustainability. The document differentiates between financial performance metrics like return on assets and operational costs, and outreach metrics like number of active borrowers. It explores how board characteristics, ownership type, regulation, and lending innovations may impact these outcomes.
The document discusses financial intermediaries and their role in facilitating transactions between lenders and borrowers. It defines a financial intermediary as an entity that acts as a middleman in financial transactions. Banks are a key type of financial intermediary, as they accept deposits and provide loans. Other financial intermediaries mentioned include non-banking financial companies, mutual funds, insurance companies, and development financial institutions. The document outlines the various risks that financial intermediaries must manage, such as credit risk, liquidity risk, and systemic risk.
The document discusses several topics related to economics and finance:
1. It explains what Islamic finance is and how it works through mechanisms like Mudarabah and Murabahah that prohibit interest and conform with Sharia law.
2. It describes an infrastructure debt fund that would raise long-term funds for infrastructure projects through bond issuances.
3. It discusses India's priority sector lending requirements where banks must allocate a certain portion of their lending to priority sectors like agriculture and small businesses.
Compliance is about identifying the risks that the financial institution could encounter as a result of “Failing To Comply”.
Conduct & document comprehensive Risks Assessment; and the planned remedial measures in a manner appropriate to the requirements of the compliance rule!
This is my message.
A Summary of My Professional Qualifications. It is in Power Point Presentation format for easy and convenient access. Browse through it in "Slide Show Mode" and click on what you want to see.
The document appears to be a presentation given by Mohammad Ibrahim Fheili on evolving technologies and their implications for compliance. Some key points from the presentation include:
- Compliance processes have been transformed into data-rich decision making processes that rely heavily on collecting and updating client profiles, which can be overwhelming without technology and automation.
- Technology alone cannot improve compliance if the underlying compliance processes are inadequate, but it can help process data more efficiently.
- Digital transformation and automation can optimize KYC and CDD processes by enabling parallel processing, mobile access, and integrating previously siloed compliance sub-processes.
- However, over-reliance on technology also increases exposure to IT failures, so
a qualitative insider's look at the challenges confronted by members of Board of Directors in Governing as Technological Innovations fast forward and invaded the Banking/Financial Landscape; and as Compliance competes with Governance in Oversight.
This document discusses the importance of performance management for organizational effectiveness. It argues that performance management influences factors like employee development, teamwork, commitment and retention. It states that effective managers are able to understand how employees feel about their work and intervene when needed. The document provides details on how to develop an effective performance management system, including gaining input from senior management, employees and other stakeholders. It outlines key elements of strategic plans that can be used to develop performance measures and management. Overall, the document advocates for the use of performance management to motivate employees and improve business performance.
the article provide a snap shot about CRS but raises concerns about the OECD Tax Authorities intruding into the Financial Sector which is disturbing the peace!
It is a reader friendly, practical and easy to follow presentation on the challenges that Financial Institutions have to cope with for a healthy and sustainable growth.
The document discusses ISACA, an association for information systems audit, control, and security professionals. It states that ISACA was founded in 1969 by a small group recognizing the need for information and guidance in auditing computer system controls. Today, ISACA serves over 140,000 professionals in 187 countries. The rest of the document appears to be contact information for an event speaker.
This document contains a presentation by Mohammad Fheili on various topics related to risk management in banking. It begins with Mohammad Fheili's biography and experience in the banking industry. It then discusses how banking has become more complicated due to factors like increased automation, customer demands for transparency, and reduced customer intimacy. Several technological disruptions that are impacting banking are identified, including mobile internet, cloud technology, and artificial intelligence. Cyber risks and how they are rising are examined, with data showing increases in security incidents and intellectual property theft. The importance of skills, loyalty, and human capital accumulation for organizations is discussed. Models for risk management, including potential risks within and between modules, are presented. The impact of information technology
The document discusses risks in retail banking as the industry adapts to changes in technology, customer expectations, and competition. It notes that increased electronic services have reduced customer intimacy and switching costs, while greater data availability has increased demands for transparency. New competitors are entering through digital channels. The retail banking organization must transform to meet new challenges through customer-centric strategies, agile operations, and a workforce ready for change. Branches play a key role in managing risks and compliance requirements as a major source of transactions and customer interactions.
This document contains biographical information about Mohammad Fheili and outlines his experience in banking, risk management, and academia. It also discusses the importance of risk culture within organizations and how individual risk perceptions and ethics influence organizational culture. An effective risk culture is defined as one that enables and rewards informed risk-taking by individuals and groups.
Independent Study - College of Wooster Research (2023-2024) FDI, Culture, Glo...AntoniaOwensDetwiler
"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
The Impact of Generative AI and 4th Industrial RevolutionPaolo Maresca
This infographic explores the transformative power of Generative AI, a key driver of the 4th Industrial Revolution. Discover how Generative AI is revolutionizing industries, accelerating innovation, and shaping the future of work.
An accounting information system (AIS) refers to tools and systems designed for the collection and display of accounting information so accountants and executives can make informed decisions.
13 Jun 24 ILC Retirement Income Summit - slides.pptxILC- UK
ILC's Retirement Income Summit was hosted by M&G and supported by Canada Life. The event brought together key policymakers, influencers and experts to help identify policy priorities for the next Government and ensure more of us have access to a decent income in retirement.
Contributors included:
Jo Blanden, Professor in Economics, University of Surrey
Clive Bolton, CEO, Life Insurance M&G Plc
Jim Boyd, CEO, Equity Release Council
Molly Broome, Economist, Resolution Foundation
Nida Broughton, Co-Director of Economic Policy, Behavioural Insights Team
Jonathan Cribb, Associate Director and Head of Retirement, Savings, and Ageing, Institute for Fiscal Studies
Joanna Elson CBE, Chief Executive Officer, Independent Age
Tom Evans, Managing Director of Retirement, Canada Life
Steve Groves, Chair, Key Retirement Group
Tish Hanifan, Founder and Joint Chair of the Society of Later life Advisers
Sue Lewis, ILC Trustee
Siobhan Lough, Senior Consultant, Hymans Robertson
Mick McAteer, Co-Director, The Financial Inclusion Centre
Stuart McDonald MBE, Head of Longevity and Democratic Insights, LCP
Anusha Mittal, Managing Director, Individual Life and Pensions, M&G Life
Shelley Morris, Senior Project Manager, Living Pension, Living Wage Foundation
Sarah O'Grady, Journalist
Will Sherlock, Head of External Relations, M&G Plc
Daniela Silcock, Head of Policy Research, Pensions Policy Institute
David Sinclair, Chief Executive, ILC
Jordi Skilbeck, Senior Policy Advisor, Pensions and Lifetime Savings Association
Rt Hon Sir Stephen Timms, former Chair, Work & Pensions Committee
Nigel Waterson, ILC Trustee
Jackie Wells, Strategy and Policy Consultant, ILC Strategic Advisory Board
"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
KYC Compliance: A Cornerstone of Global Crypto Regulatory FrameworksAny kyc Account
This presentation explores the pivotal role of KYC compliance in shaping and enforcing global regulations within the dynamic landscape of cryptocurrencies. Dive into the intricate connection between KYC practices and the evolving legal frameworks governing the crypto industry.
The Rise and Fall of Ponzi Schemes in America.pptxDiana Rose
Ponzi schemes, a notorious form of financial fraud, have plagued America’s investment landscape for decades. Named after Charles Ponzi, who orchestrated one of the most infamous schemes in the early 20th century, these fraudulent operations promise high returns with little or no risk, only to collapse and leave investors with significant losses. This article explores the nature of Ponzi schemes, notable cases in American history, their impact on victims, and measures to prevent falling prey to such scams.
Understanding Ponzi Schemes
A Ponzi scheme is an investment scam where returns are paid to earlier investors using the capital from newer investors, rather than from legitimate profit earned. The scheme relies on a constant influx of new investments to continue paying the promised returns. Eventually, when the flow of new money slows down or stops, the scheme collapses, leaving the majority of investors with substantial financial losses.
Historical Context: Charles Ponzi and His Legacy
Charles Ponzi is the namesake of this deceptive practice. In the 1920s, Ponzi promised investors in Boston a 50% return within 45 days or 100% return in 90 days through arbitrage of international reply coupons. Initially, he paid returns as promised, not from profits, but from the investments of new participants. When his scheme unraveled, it resulted in losses exceeding $20 million (equivalent to about $270 million today).
Notable American Ponzi Schemes
1. Bernie Madoff: Perhaps the most notorious Ponzi scheme in recent history, Bernie Madoff’s fraud involved $65 billion. Madoff, a well-respected figure in the financial industry, promised steady, high returns through a secretive investment strategy. His scheme lasted for decades before collapsing in 2008, devastating thousands of investors, including individuals, charities, and institutional clients.
2. Allen Stanford: Through his company, Stanford Financial Group, Allen Stanford orchestrated a $7 billion Ponzi scheme, luring investors with fraudulent certificates of deposit issued by his offshore bank. Stanford promised high returns and lavish lifestyle benefits to his investors, which ultimately led to a 110-year prison sentence for the financier in 2012.
3. Tom Petters: In a scheme that lasted more than a decade, Tom Petters ran a $3.65 billion Ponzi scheme, using his company, Petters Group Worldwide. He claimed to buy and sell consumer electronics, but in reality, he used new investments to pay off old debts and fund his extravagant lifestyle. Petters was convicted in 2009 and sentenced to 50 years in prison.
4. Eric Dalius and Saivian: Eric Dalius, a prominent figure behind Saivian, a cashback program promising high returns, is under scrutiny for allegedly orchestrating a Ponzi scheme. Saivian enticed investors with promises of up to 20% cash back on everyday purchases. However, investigations suggest that the returns were paid using new investments rather than legitimate profits. The collapse of Saivian l
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
[4:55 p.m.] Bryan Oates
OJPs are becoming a critical resource for policy-makers and researchers who study the labour market. LMIC continues to work with Vicinity Jobs’ data on OJPs, which can be explored in our Canadian Job Trends Dashboard. Valuable insights have been gained through our analysis of OJP data, including LMIC research lead
Suzanne Spiteri’s recent report on improving the quality and accessibility of job postings to reduce employment barriers for neurodivergent people.
Decoding job postings: Improving accessibility for neurodivergent job seekers
Improving the quality and accessibility of job postings is one way to reduce employment barriers for neurodivergent people.
Economic Risk Factor Update: June 2024 [SlideShare]Commonwealth
May’s reports showed signs of continued economic growth, said Sam Millette, director, fixed income, in his latest Economic Risk Factor Update.
For more market updates, subscribe to The Independent Market Observer at https://blog.commonwealth.com/independent-market-observer.
OJP data from firms like Vicinity Jobs have emerged as a complement to traditional sources of labour demand data, such as the Job Vacancy and Wages Survey (JVWS). Ibrahim Abuallail, PhD Candidate, University of Ottawa, presented research relating to bias in OJPs and a proposed approach to effectively adjust OJP data to complement existing official data (such as from the JVWS) and improve the measurement of labour demand.
1. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
The Evolution of Modeling Risk &
Compliance
2. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Mohammad Fheili
“Over 30 years of Experience in Banking. Contact Details: mifheili@gmail.com (961) 3 337175
Mohammad has successfully delivered over 1,500 hours of
training to professional bankers.
He served as an Economist at ABL, and Senior Manager at
BankMed and Fransabank: and he currently serves in the
capacity of an Executive at JTB Bank in Lebanon.
In addition, He worked as an Advisor to the Union of Arab
Banks.
Mohammad also served as Basel II Project Implementation
Advisor to CAB and HBTF Banks in Jordan.
Mohammad received his college education (undergraduate
& graduate) at Louisiana State University (LSU), and has
been teaching Economics and Finance for over 25
continuous years at reputable universities in the USA (LSU)
and Lebanon (LAU).
Finally, Mohammad published over 25 articles, of those
many are in refereed Journals (e.g., Journal of Money
Laundering & Control; Journal of Operational Risk; Journal
of Law & Economics; etc.) and Bulletins.”
3. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Model Risk Management….The Yesteryears!
G.I.G.O.
• Garbage In, Garbage Out
G.I.G.O.
4. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
The Birth of An Early Model
• Model: A Simple mapping
of the Assets to their
corresponding Risk
Weights, which is given by
the Supervisor. …
• No crisis was born out of
Modeling Errors at the
time, the BCBS dropped
Model Risk Management
from Consideration.
< Basel I, or Standardized Approach >
5. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
The Regulator’s Perspective at the Time.
• Local Supervisors looked at the Regulated Financial Institution as:
Assets – Liabilities = Net Worth (Cushion)
Should the Bank encounter
a run‐on‐deposits, there is
the Central Bank as lender
of last resort to save the
day.
Should the Bank
encounter a Large
Scale Default, Deposit
Insurance will save the
day.
The more Capital the Bank
has, the more it is
cushioned against a
possible fall in the value of
its assets.
This is how THE REGULATOR intended to deal
with Financial Crisis since “Deposit Insurance”
and “Lender of Last Resort” have clear
implications on Financial Stability (Needless to
mention facilitating Financial Intermediation)
Capital Adequacy is a “Maintenance
Factor;” However, introduced under the
illusion of an otherwise: Safety (All
Financial Crisis proved else), Solvency
(Purely Accounting), etc.
6. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Asymmetric
World
MAXIMIZE PROFIT subject to:
RISK (Basically Credit),
REGULATIONS (Simple Computation of the Cook Ratio)
The Banking Model…. Early Years
• Banks equipped with Technological advancements,
endowed with Financial Innovations, started to search for ways
to capitalize on Imperfections in Regulations: Capital Arbitrage.
• Banks Ventured into “Internal Models” in the 1990s:
These models allowed banks to align the amount of risk they
undertook on a loan with the overall goals of the bank.
Internal models allowed banks to more finely differentiate
risks of individual loans than is possible under The Basel
Accord
If a loan is calculated to have an internal capital charge that is
low compared to 8% standard, the bank has a strong incentive
to undertake Regulatory Capital Arbitrage
Securitization is the main means used especially by U.S. banks
to engage in regulatory capital arbitrage
• For Banks, The Balance Sheet:
[A + CA] – [L + CL] = Net Worth (Not a Cushion!)
• Driven by a Desire to Free‐Up Capital, boost up their Liquidity,
and Profitability Banks re‐invented the Banking Model.
• Regulators were well aware of where
banks were going and Blessed the Move:
Securitization was, to a certain extent,
encouraged by regulators.
• Regulators Approved Internal Models without
the Proper Due Diligence.
• Capital Adequacy, at the time, did not
adequately account for Contingent Assets.
• And ….
7. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
MAXIMIZE PROFIT subject to:
RISK , REGULATORY, Compliance,
Reporting, Etc. Constraints
RISK . . .
Default
Liquidity
Maturity
Others . . .
REGULATORY . . .
Basel I
Basel II
Basel III
Basel IV (In the making)
TLAC Requirements
Sanctions Rules
USA_FATCA Requirements
OECD_CRS (1st Reporting 2017)
AML, Etc. . . .
Uses of Funds Sources of Funds
Reserves
Loans
Securities
Other
Investments
Fixed Assets
. . .
All Types of
Deposits
Borrowings
Other
Sources
Capital
. . .
Off-Balance Sheet
With every
Dollar in
Profit a Bank
Makes, it
MUST satisfy
all these
Regulatory
Constraints
first!
Legal Issues . . .
From
Originate‐To‐
hold To
Originate‐To‐
Distribute
(Decompose &
Redistribute)
CRS: Common Reporting Standards, essentially inspired by FATCA, is a framework between governments to exchange information obtained from local financial institutions to
combat tax evasions.
TLAC: The Proposed Minimum Total Loss Absorbing capacity requirements for Globally Systemically Important Banks (G‐Sibs). It aims to boost G‐Sibs’ capital and leverage
ratios, ensuring these banks are equipped to continue critical functions without threatening financial market stability or requiring taxpayer support.
Instead of to Off‐
Balance Sheet; now to
Unregulated Shadow
Banking with less
concerns over loan
monitoring & Follow up.
Deteriorated quality of Capital with the
Introduction of new instruments and Tier 3
The Banking Model…. got complicated
These Changes
matter much to
Model Assumptions.
8. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
MAXIMIZE PROFIT subject to:
RISK , REGULATORY, Compliance,
Reporting, Etc. Constraints
RISK . . .
Default
Liquidity
Maturity
Others . . .
REGULATORY . . .
Basel I
Basel II
Basel III
Basel IV (In the making)
TLAC Requirements
Sanctions Rules
USA_FATCA Requirements
OECD_CRS (1st Reporting 2017)
AML, Etc. . . .
Uses of Funds Sources of Funds
Reserves
Loans
Securities
Other
Investments
Fixed Assets
. . . Off-Balance Sheet
Legal Issues . . .
More Risky
Assets are
Unloaded to Off‐
Balance Sheet
In its Latest Version, IFRS 9 speaks of NPAs (non‐Performing Assets) instead of
only NPLs (Non‐Performing Loans).
More Investment in
Complex Financial
Derivatives on all Sides
of the Balance Sheet.
More Capital Requirements by The
Regulator; more Opportunities for capital
Arbitrage….
The Banking Model…. got complicated
These Changes
matter much to
Model Construction
& Assumptions.
Less Reliance on Deposit‐
Funding and More on Risky
Borrowing (…roll‐over)
All Types of
Deposits
Borrowings
Other
Sources
Capital
. . .
9. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
MAXIMIZE PROFIT subject to:
RISK , REGULATORY, Compliance,
Reporting, Etc. Constraints
Uses of Funds Sources of Funds
Reserves
Loans
Securities
Other
Investments
Fixed Assets
. . . Off-Balance Sheet
The Banking Model…. got complicated
All Types of
Deposits
Borrowings
Other
Sources
Capital
. . .
10. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
While Regulators were busy building
the railroads on which they will
require Bankers to Travel On.
Banks and Bankers were gearing
up for Dangerous Rock Climbing
– Excessive Risk Taking: MBS,
CDO, CDO2, etc.
Asymmetric
World
Basel 1, 1½, 2, 2½, 3, 3½ or 4 !
11. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
The Era of Shadow Banking
• Regulatory Compliance got Complicated yet Comprehensive with the
Introduction of The Basel II Accord: Internal Models were Legitimized, and a
Clear Curriculum was introduced to Graduate from one Model To The Next.
• Regulators continued to look at the Regulated financial Institution the same way
but things have changed:
Assets – Liabilities = Net Worth (Cushion and so they thought)
Not Much ChangeComplex
Securitization
Capital is gradually
failing to serve as a
Cushion with Loss‐
Absorbing Capacity
Driven by Excessive Regulations, Financial Intermediation Migrated to the
Opaque and Unregulated Banking Environment…. Internal Models Became
more Sophisticated and relied on Unreasonable assumptions…. Regulators
remained puzzled by the fast‐moving developments.
12. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
The Internal‐Model Maturity Qualifying Criteria
CriteriaCriteria Standardized ApproachStandardized Approach
Internal Ratings Based (IRB) ApproachInternal Ratings Based (IRB) Approach
FoundationFoundation AdvancedAdvanced
Ratings External Internal Internal
Risk Weights
Calibrated on the basis of
External ratings by the
Basel Committee
Function provided by the
Basel Committee
Function provided by the
Basel Committee
Probability of Default
(PD)- The likelihood that
a borrower will default
Over a given time period
Implicitly provided by the
Basel Committee; tied to risk
Weights based on external
Ratings
Provided by bank based
On own estimates
Provided by banks based on
Own estimates
Exposure At Default
(EAD) – the amount of
The facility that is likely
To be drawn if a default
occurs
Supervisory values set by the
Basel Committee
Supervisory values set
by the Basel Committee
Provided by the Bank based
On own estimates
Loss Given Default
(LGD) – the proportion
Of the exposure that will
Be lost if a default
occurs
Implicitly provided by the
Basel Committee; tied to risk
Weights based on external
Ratings
Supervisory values set
by the Basel Committee
Provided by the Bank based
On own estimates; extensive
Process and internal control
Requirements
13. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
CriteriaCriteria Standardized ApproachStandardized Approach
Internal Ratings Based (IRB) ApproachInternal Ratings Based (IRB) Approach
FoundationFoundation AdvancedAdvanced
Maturity: the remaining
Economic maturity of
The exposure
Implicit recognition
Supervisory values set By the Basel
Committee Or At National Discretion,
Provided by Bank based On own
estimates
Provided by Bank based on
Own estimates (with an
Allowance to exclude certain
Exposures)
Data Requirements
•Provision Dates
•Default Events
•Exposure Data
•Customer Segmentation
•Data Collateral Segmentation
•External Ratings
•Collateral Data
•Rating Data
•Default Events
•Historical Data to
Estimate PD (5 years)
•Collateral Data
Same as IRB Foundation, plus:
•Historical loss data to estimate
LGD (7 years)
•Historical exposure data to
Estimate EAD (7 years)
Credit Risk Mitigation
Techniques (CRMT)
Defined by the Supervisory
Regulator; including financial
Collateral, guarantees, credit
Derivatives, “netting” (on and
Off balance sheet), and real
Estate
All collaterals from Standardized
Approach; Receivables from goods
And services; other Physical
securities if Certain criteria are met
All types of collaterals if Bank
Can prove a CRMT by internal
estimation
Process requirement (Compliance
With Mini requirements Will be
subject to Supervisory review
Under Pillar II)
•Minimum requirements for
Collateral management
(administration/Evaluation)
•Provisioning Process
Same as standardized, Plus
minimum Requirements to ensure
Quality of internal ratings & PD
estimation and Their use in the
Risk Management process
Same as IRB Foundation, plus
Minimum requirements to
Ensure quality of estimation
Of all parameters
The Internal‐Model Maturity Qualifying Criteria
14. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Bankers/Banks Versus Regulators
• Banks: Migrated Financial
Intermediation to the Unregulated
Financial Sector in the pursuit of
Profits
• …and much more
A Danger the
Regulators
Overlooked at
the time
There isn’t a Single
BCBS Publication that
does not point to the
need to reduce Capital
Arbitrage.
• Regulatory Focus: Capital
Arbitrage and How to Limit
it.
• …and much more
15. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Lenders
Surplus Spending
Units ‐SSUs
• Individuals (Current
Income is GREATER than
Current Expenditures)
• Firms (Earnings in excess of
what the firm needs currently)
• Government (Current
Revenues are in excess of
planned Expenditures)
• Financial
Intermediaries (Funding
is currently GREATER than
investment)
Borrowers
Deficit Spending
Units ‐DSUs
• Individuals (Current
Income is LESS than Current
Expenditures)
• Firms (Earnings falls short of
what the firm needs currently)
• Government (Current
Revenues fall short of planned
Expenditures)
• Financial
Intermediaries (Funding
is currently LESS than
investment)
Traditional Banks
Dealers
Securitization
Money Market Mutual
Funds
Hedge Funds
Finance Companies and Other Non‐Bank Lenders
Money Money
Money
Money
Securities
Loans
Money
Money
Loans
Money
Loans
Money
Securities
Money
Securities
SecuritiesSecurities
Money
Securities
Money
Securities
Shows the Flow of Funds from LENDERS to BORROWERS; not the reverse
Model This !
Shadow Banking
16. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Regulations‐Induced Events
What’s been Happening since:
Regulations-Induced Events
17. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
• The Monetary Authority has not paid close attention to
Unregulated Financial Intermediations (e.g., Shadow Banking) as
major Economic Engines.
• The Monetary Authority overlooked the Link between Money and
Real Output: Steady growth in the various measures of money
coupled with volatile changes in real output.
• The Complexity and Cost (i.e., Burden) of Compliance are Rising
exponentially.
• The Basel Accord with a history of Incomplete Implementation:
Basel 1, 1½, 2, 2½, 3, 3½ or 4 !
• Nowadays the US Congress is considering Regulatory Reliefs for
certain size financial institutions (Senate Banking Committee
Chairman Richard Shelby).
Regulation‐Induced Events that Reshaped The Banking Model &
Regulatory Focus.
Regulations‐Induced Events
18. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
• The Structure of the Financial Landscape has turned Puzzling.
• Regulations are increasingly becoming very Complex.
• Regulators are increasingly becoming very Demanding.
• Risk Management has taken a backseat to strict Adherence to
ever increasing Regulatory Guidance.
• The Regulatory System is becoming overwhelmingly Complex and
Bureaucratic.
• De‐Risking (which is in effect Re‐Risking) is on the rise!
• The Banking Model has changed from Originate‐To‐Hold to
Originate‐To‐Distribute. In addition, the major changes in the
structure of Assets have not been well balanced (By Regulatory
Guidance or else) with changes in Liabilities.
• Basel’s Excessive Focus on Capital is significantly impacting the
Core of the Banking Industry: Converting Demand & Savings
Deposits into Productive Lending.
Regulation‐Induced Events that Reshaped The Banking Model &
Regulatory Focus.
Regulations‐Induced Events
19. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
• Internal Models will no longer be used as indicators of an FI’s Risk
Management Maturity. The Regulator will have the final say in the
assignment of Risk Weights.
• In April of 2011 a set of Supervisory Guidance was Jointly issued
by the Office of the Controller of Currency (OCC) and the Federal
Reserve on Model Risk Management and Validation.
• Model Validation has been treated as a Compliance activity as
opposed to a Risk Management Activity by many Financial
Institutions.
• Operational Risk, to date, remains at the bottom of the Priority
List of CROs and, equally alarming, that of Supervisory Authorities.
• The “Quant Jocks”: From Pricing Financial Derivatives in “Opaque
Banking” to CROs in the Regulated Banking.
• From “Velocity of Money” to the “Velocity of Collateral.”: Money
Creation has taken the Unregulated Path.
Next: Regulations
Regulation‐Induced Events that Reshaped The Banking Model &
Regulatory Focus.
Regulations‐Induced Events
20. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
And On The
Regulatory Front…
It takes so long for the rules to change that by the time they are
creeping into existence the markets have changed!
Regulations
21. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
The Basel Accordwith a History of Incomplete Implementation
Basel I
Basel II
Credit Risk
Credit Risk
Market Risk
Operational Risk
1986 proposed
1999 proposed
1988 effective
2007 effective
Basel III
Credit Risk
Market Risk
Operational Risk
Capital Quality
Additional Buffers
Liquidity: LCR, NSFR
2009 proposed
Kick Off in 2011
Amendments
Amendments
Basel 2 ½
Basel 1 ½
Amendments
Basel3½
Basel IV
2015 Anticipated
Kick Off in 20??
• Capital Requirements
• Liquidity Requirements
• Disclosure Requirements
• National Divergences
• Risk Sensitivity
• Use of Internal Models in
Decision Making
• Total Risks = Credit Plus
Market Risks
• Internal Models Emerged
• Later on, Tier 3 Capital
• Enhanced Pillar 2, 3
• Complex Securitization
obtained higher Risk
Weights.
• Trading Books
Regulations
• How Often the Banking Model has Changed
• How often Regulatory Guidelines have changed
• How complex the banking environment has become
• How technology has evolved
• How Many Crisis Have We Had.
22. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Basel III
2009 proposed
2011 effective
Capital
Capital Buffers
Conservation 2.5% & Countercyclical 2.5%
Risk Management
Liquidity
(LCR ≥ 100%) (NSFR > 100%)
Leverage ≥ 3%
Reporting
Less Reliance on External
Rating Agencies
• Increase in common equity requirements from 2% to 4.5%
• In crease in Tier 1 Capital (Going Concern) from 4% to 6%
• Tier 1 Capital can no longer include Hybrid Capital
instruments with an incentive to redeem through features
such as step‐up clauses. These will be phased out
• Tier 3 Capital will be eliminated (Previously used for
Market Risk)
• Credit Valuation Adjustment (CVA) Capital Charge must be
calculated to cover Mark‐to‐Market losses on counterparty
risk to Over‐The‐Counter (OTC) Derivatives.
• Stressed Parameters must be used to calculate counterparty
Credit Risk
• Effective Expected Positive Exposure (EPE) with stressed
parameters to be used to address general wrong‐way risk
(WWR) and counterparty credit risk
• Banks must ensure complete trade capture and exposure
aggregation across all forms of counterparty credit risk (not
just OTC derivatives) at the counterparty‐specific level in a
sufficient time frame to conduct regular stress testing.
• A multiplier of 1.25 is applied to the correlation parameter
of all exposures to financial institutions (meeting certain
criteria) (Asset Value Correlation – AVC)
• Additional Margining required for illiquid derivatives
exposures.
• 100% risk weight for Trade Finance.
• Contractual maturity mismatch
• Concentration of funding
• Available unencumbered assets
• Market‐related monitoring tools; asset prices and liquidity,
Credit Default Swap (CDS) spreads and equity prices.
• LCR by currency
• Results of stress tests should be integrated into regular
reporting to senior management
Basel II += +
++
Regulations
Basel III Changed the Rules of Engagement Dramatically!
Milestone
24. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Capital Requirements
for Credit Risk
Standardized Approach
Foundation IRB Approach
Advanced IRB Approach
Market Risk (in line with
1993 & 1996)
Standardized Approach
Internal VaR Models
Operational Risk
BIA – Basic Indicator Approach
SA - Standardized Approach
AMA - Advanced Measurement
Approach
Regulatory Framework
for Banks
Internal Capital Adequacy
Assessment Process
(ICAAP) And Risk Control
Self-Assessment (RCSA)
Risk Management
Supervisory Review &
Evaluation Process
(SREP)
Evaluation of Internal
Systems of Banks
Assessment of Risk Profile
Review of Compliance with
all Regulations
Supervisory Measures
Disclosure
Requirements of Banks
Transparency for market
participants concerning
the Bank’s Risk Position
(Scope of Application, Risk
Management, Detailed
Information on own funds,
etc.)
Enhanced Comparability
of Banks
Basel II Framework
Pillar 1: Minimum
Capital Requirements
Pillar 2: Supervisory
Review Process
Pillar 3: Market
Discipline
1999 proposed
Basel II
1999 proposed
2007 effective
Regulations
25. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Pillar 1: Minimum Capital Adequacy Ratios
Calculation
Of Exposure
Calculation
of PD/LGD
Calculation
of RWA
Adjustments for
Collateral Valuation
Adjustments for
Credit Mitigants
Netting Balance
Sheet Items
Calculations
Of Risk
Weights
Based on
PD/LGD
Supervisory Risk
Weights and LGD
Standardized Approach
IRB (Foundation)
IRB (Advance)
Value at
Risk
Standardized
Measurement
Methods
Interest Rate Risk
Equity Position Risk
Forex Risk
Commodities Risk
Treatment of Options
Support for all
Three Approaches
Basic Indicator Approach:
Capital is calculated as a
percentage of Gross Income
Standardized Approach:
line of Business Based
Exposure Indicators
Advanced Measurement
Approach: Capital
Computations as per LDA
Credit Risk Traded Market Risk Operational Risk
External/Internal
Rating
Systems
Pillar 2: Supervisory Oversight Pillar 3: Market Discipline
Usage of Metadata which
Enables transparency
Capital for other Risks
Rules-Based Engines Risk Assessment Reports
Capital Adequacy
Reporting
Flexible
Reporting
Quantitative
Reporting-IFRS 7
Qualitative
Reporting-IFRS 7
Basel II
1999 proposed
2007 effective
Regulations
Supervisory Review &
Evaluation Process (SREP)
Evaluate FI’s Internal Systems
Assess FI’s Risk Profile
Review FI’s Compliance with all
Regulations
Does the Knowledge Exist to do
All That?!
27. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
From Calculating the Credit Risk Capital Charge
to Modeling Credit Risk,
Regulations –Credit Risk
28. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
From Calculating the Operational Risk Capital Charge to Modeling
Operational Risk,
Regulations–Operational Risk
31. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Regulations–Market Risk
Calculating the Market Risk Capital Charge
32. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Regulations–Market Risk
Calculating the Market Risk Capital Charge
33. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Early Implementation:
BASIC APPROACH
Satisfactory Knowledge of Risk
Management: STANDARDIZED
APPROACHES
Sufficiently Mature Risk
Management: ADVANCED
APPROACHES
CAPITAL
CHARGE
BASEL II CAPITAL CHARGE (Pillar I: Minimum
Capital Requirements, Pillar II, etc.)
Risk Management Maturity
Improved Risk
Management
Practices
Lower Capital
Charge
The Incentive is in Capital Planning
Regulations
What Basel II
Promoted
What Basel III
Downplayed
34. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Truth Be Told, Basel
III tried to
Specifically respond
to the Crisis …
Sub‐Prime
Lending
Excessive Risk Taking
Housing Prices decline
resulting in sub‐prime
defaults
Sub‐Prime Defaults,
Securitized Assets &
Derivatives Trading
resulted in huge losses
Excessive Leverage &
Poor capital could not
absorb losses fully,
demanding fresh
equity infusion
Huge losses resulted in
a crisis of confidence
causing liquidity to
evaporate
Short‐term borrowing
demanded fresh
borrowing which failed
in liquidity crisis
Firms on the verge of
insolvency; threatening
system failure
Governments step in to
inject capital to
prevent systemic
failure
Capital Conservation &
Counter‐Cyclical
Buffers
Capital Conservation &
Counter‐Cyclical
Buffers
a) Less reliance on external ratings
agencies; b) Credit Valuation Adjustment
capital charge; c) Stress Testing
a) Higher quality & quantity of capital; b)
Leverage Ratio Introduced; c) 100%
weight for Trade Finance
Enhanced Supervisory
Review and Disclosure Two new Liquidity
Ratios
Correlation to financial
institutions will carry more
risk weights to prevent
systemic risk and an overall
collapse
In stressed market situations,
credit rating downgrades of
financial institutions and
securitized products further
lowered valuations and
increased losses.
Securitization
BUT
not Enough!
Regulations
35. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Basel 3½ or IV
2015 Anticipated
Kick Off in 20__
Amendments
Basel 3 ½
The Basel Accordwith a history of Incomplete Implementation
Implications
for Banks
• Capital Requirements
• Liquidity Requirements
• Disclosure Requirements
• National Divergences
• Risk Sensitivity
• Use of Internal Models in
Decision Making
Regulations
Next: Banking Environment
If Basel III tackled all
issues of concerns, why
are we getting ready to
welcome Basel IV (or III
½) ?
The Proposed New
Capital Regime is a
Seismic Shift
36. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Banking Environment
The Complexityof
Banking & Financial
Intermediation
• Induced By Excessive
Regulations
• Exploited By Bankers
with the Help of
Technology and
Innovations
37. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Credit Intermediation
Credit Intermediation has become more market‐based, and No Longer Institution‐Based
Sources of
Funds
Uses of
Funds
Individuals
(With Money to
warehouse)
Households/
Business
Borrowings
Non‐Intermediated
Direct Funding (No Intermediaries)
Households /
Corporations
(With Money to safe
keep)
Households/
Business
Borrowings
Banks “Originate and Hold Loans” Till Maturity.
Traditional Banking (Institution‐Based Intermediation)
Households /
Corporations /
Institutions /
Securities
Lenders / Pension
Funds
(With Money to Invest)
MMMF
Purchases
CP
ABCP
Repos, Etc.
ABS
Intermediation
ABS
Issuance
Loan
Warehousing
Loan
Origination
Household /
Business
Borrowings
Shadow Banking (Multiple and Market‐Based, and Layered Intermediations)
Note: MMF is Money Market Mutual Fund, CP is Commercial Papers, ABCP is Asset‐Backed CP, Repos is Repurchase Agreements, and ABS is Asset‐Backed Securities.
rapid balance sheet growth,
a market rise in leverage, and
a proliferation of complex and difficult‐to‐value financial products.
Banking Environment
38. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
ABS, MBS, CDO, CDO2 Camouflaged Risk
About the Underlying Asset.
• Housing prices became unrelated to their actual value.
• People bought homes simply to sell them.
• The easy availability of debt meant people charged too much for
the asset.
About the Banks.
• CDOs allowed banks to avoid having to collect on them when
they become due, since the loans are now owned by other
investors.
• Less discipline in adhering to strict lending standards, so that
many loans were made to borrowers who weren’t credit worthy
(ensuring disaster)
About the CDOs.
• CDOs became so complex that the buyers didn’t really know the
value of what they were buying.
• The Sophisticated Computer‐Based Models for CDOs Valuation is
based on the assumption that housing prices would continue to
go up. When prices went down, the computers couldn’t price the
CDOs.
• The Opaqueness and the complexity of CDOs created a market
panic: Overnight the market for CDOs disappeared!
Banking Environment
39. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Induced Risk & Complexity … but in the Shadow: Camouflaged By
The Rating Agencies and Overlooked by The Regulators.
• Despite the good intentions, ratings agencies and regulators were significant
contributors to the imbalances that culminated in financial crisis.
• The big three Rating Agencies’ (S & P, Moody’s, and Fitch) oligopoly prevailed
–
Without their ratings, companies could not sell debt instruments.
An inherent conflict of interest arose; issuers paid the companies for
ratings.
Many investors depended on those evaluations when purchasing debt
in lieu of a more thorough due‐diligence review.
Investors ran into further difficulties because the evaluations
frequently lagged material market development.
• The Ratings Agencies were complicit in the growing complacency of investors
leading up to the credit crisis.
Large structured‐product deals involving complex securities were very
profitable for ratings agencies.
Issuers had the ability to choose among potential raters,
leading to “ratings shopping.”
The rating agencies shift from an Investor‐Pay to an Issuer‐Pay
business model degraded the value of the evaluations
provided because the agencies faced little risk from inaccurate
ratings.
Banking Environment
Next: Compliance
40. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Compliance
The Never Easing
Pressure on Sanction
41. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Compliance By Fear …
Higher Probability of De‐
Risking
Non‐Compliance By
Mistake… Due to lack of
understanding … De‐Risking
is a more likely outcome.
Compliance
Since De‐Risking has been on the rise, it must
be that most of us have been complying ’By
Fear’.
We’re becoming increasingly good at COMPLIANCE
BUT not in Assessing & Addressing the RISK of:
• Compliance AND
• that of Non‐Compliance
Moving Risks to Opaque Banking has proven
to be Very Risky (e.g., Last Financial Crisis)
Compliance
42. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Assessment of The Magnitude of AML Risk
International Wires
Internet Banking
High cash Users
Suspicious Transactions Report
Politically Exposed Persons
Industry / Occupation
Nationality
Account Maturity
Compliance
Risk
Bank Clients
Bank Services
Bank Products
Geographies
Private Banking
International Correspondent
Banking
Offshore International Activity
Account Data
Transaction Data
Economic Sanctions
Non‐Non Cooperative Country
Territories
Country Watch List
Examples of Risk Measures
Compliance
43. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Assessment of Inherent AML Risk
Inherent
AML Risk
Customer
Base
Product /
Account
Transactional
Business
Strategy
Geography
Portfolio of Product Offerings:
• Sales Finance, Mortgages, Life Insurance,
Anonymous Saving Accounts, ….
• Maturity / Stability; Domicile /
Residency; PEP Status
• E‐Banking; Indirect Customers
Portfolio of Transaction Types:
• Domestic transfers, Cash deposits,
International Checks, International
transfers, …
• Mergers & Acquisition activity
• Business Strategy changes
• Expected growth; product portfolio
expansion; …
• Staff Turnovers
Examples of Risk Factors
Country Risk Rating Models
• Positive Factors (FATF, EU, BIS); Negative
Factors (Sanctions, NCCT, Offshore, …)
1
2
3
4
5
1
2
3
4
5
Policies & Procedures
Governance
Training
Risk Assessment
Customer Risk Rating
KYC, CIP, EDD
PEPs
Screening
Surveillance
Reporting
Record Keeping
Auditing Testing
Control Areas
Compliance
Knowledge Gap
44. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Knowledge Gap
Knowledge Gap
• Who Knows what?
• Is it enough?
• The Regulatory Guideline
Interpreter/Translator?
• The Model Developer?
• The Implementer?
• The User?
• How Wide is the Gap
between Quantitative
Finance and Technology
Skills?
45. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Knowledge Gap
The Players:Are They Adequately and Equally Knowledgeable: IT, Finance, Risk, Regulations, etc.?
Basel
Committee
(BCBS)
National
RegulatorThe Regulated
Banking
Institution
IT Model
Developer
Model
Users
Business
Units
Management
What’s At
Stake…
Modeling
Implementer
Model Risk Management
46. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Model Risk Management
The Financial Models
& Model Risk
Management (MRM)
47. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
The Unprecedented Volume of Global
Regulations has (and is) Placing Considerable
Demands on the Change Capacity of Banks
Exacerbated by the Dangers of Failing to
Effectively Interpret the Regulatory Agenda and
Manage External Stakeholders’ Expectations.
How Can You Control The Risks and Costs of
Regulations.
Model Risk Management
48. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
General
Ledger
Clients &
Settlement
P & L
Risk
Reporting
Core
Analytical
Engine
Model Risk Management
Other Models
Predictive
Models
Regulatory
Models
Asset‐Liability
Management
Models
Risk
Models
Business
Strategy
Analysis
Valuation
Models
Pricing
Models
Exposure
Measurements
B ACD
These Risks could
Exist Inside each
Module and in the
Interface between
Two or More
Modules
Interface Between
Two Modules
49. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Model Risks
• Poor Data Quality
• Incorrect Assumptions and
Methodology
• Bad Implementation
• Bad Usage
• Non‐Compatibility nor
Comparability Between Existing
and Newly Acquired Assets.
• No Internal Data for Newly
Developed/Introduced Products.
Model Risk is most simply defined as the
potential for adverse consequences from
decisions based on incorrect or misused
model outputs and reports.
It holds great relevance in today’s markets
because quantitative models are behind
practically all decision‐making in the
financial world – from trading and risk, to
asset liability management, investment
and regulations.
Model Risk is not an area that can be
ignored without consequences.
Model Risk Management
50. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
The Damage for not doing the Job Right
The Financial Institution The Amount Time / Reason
$4‐5 Billions
$1‐2 Billions
$14 Trillions
$5‐7 billions
Long‐Term Capital Management
(LTCM)
National Australian Bank
(NAB)
Global Financial Crisis (GFC)
JP Morgan
1997 / Model Assumptions
2001‐03/Rates Methodologies
2007/Correlation, Assumptions,
Data
2012 / Model Control, Usage
Model Risk Management
51. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
The Predictive Model that Caused the Recent Crisis
Estimated Actual
Ratings 3‐Year default Rate Dafault Rate
AAA 0.001 0.10
AA+ 0.01 1.68
AA 0.04 8.16
AA‐ 0.05 12.03
A+ 0.06 20.96
A 0.09 29.21
A‐ 0.12 36.65
BBB+ 0.34 48.73
BBB 0.49 56.10
BBB‐ 0.88 66.67
Source : Donald MAcKenzie, University of Edinburgh
CDOs Of Subprime‐Mortgage‐Backed
Securities Issued in 2005‐07, %
(Source: The Economist)
This time of growth in CDOs is the
era of “Quant Jocks”: Statistical
experts whose job is to write
computer programs that would
model the value of the bundle of
loans that made up a CDO.
Model Risk Management
52. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Model Risk Framework & Processes
• Independence of Various
Functions, in particular, the
model development, risk control
and audit functions
• Clear definitions of ownership
with accountability aligned with
incentives and authority
• Effective Change Management
Processes with checkpoints and
defined criteria at each stage
• Emphasis on documentation at
each stage in the model lifecycle
• Dissemination of Model Risk
scores and user education along
with model results
• Recognition of Models as a
“work‐in‐Progress” that need to
be continually re‐examined and
improved, rather than as a one‐
time effort
• Recognition of the fact that
quantitative finance and
technology skills are separate,
but require close collaboration.
Model Risk Management
53. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Model
Development
Model
Implementation
Model Use
Formalized Control
Framework
FIRST LINE of Defense:
Model Developers,
Owners, and Users
Independent Model
Validation Testing
Annual Model Review
Process
On‐Going Model Risk
Monitoring
Model Risk
Identification and
Measurement
SECOND LINE of Defense: Model Risk Management
Unit
Model Risk
Remediation and
Mitigation
GOVERNANCE and Oversight:
Senior Management and Board
of Directors
Model Use Risk
Escalation
Periodic Model Risk
Reporting
Model Risk Appetite
Model Risk Management
FrameworkEmbedded in Policies, Procedures, and Roles & Responsibilities
THIRD LINE of Defense: Internal Audit
Audits the contents of and compliance with MRM Policies, Procedures, and Standards with the 1st and 2nd Lines of Defense
Model Risk Management Framework
Model Risk Management
54. Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
INDEPENDENT Model Risk Management Staff
Annual Review Process: Primary Components
Annual Risk Assessment
• Re‐Assess each Model’s
inherent risk rating
• Proactively Identify Areas of
Elevated Model Risk
• Assess Relevance and
Sufficiency of Previous
Validation Procedures
• Re‐Measure the Materiality/
Significance of Outstanding
(i.e., Un‐remediated) Model
Risk Issues
• Re‐Evaluate Necessity of
Current Model Risk Mitigants
Action Items
• Affirm previous validation
testing procedures and
results, or
• Perform targeted updates of
previous validation testing
procedures, and/or
• Perform new targeted
validation testing
• Any identified model risk
issues should be measured
and subject to appropriate
remediation and risk
mitigation plans.
Changes in
Bank’s
BusinessChanges in
the Industry
& Economy
Changes in
Regulations
Changes in
Model Use
Performance
Monitoring
Information
Advances in
Industry
Modeling
Methodology
Model Risk Management