Price Risk like a Banker
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This document summarizes a presentation by Leonard Hugenholtz on financial risk management and its impact on decision making. Hugenholtz argues that financial risk, such as credit risk from a mortgage portfolio, has a greater impact on decision making than operational risk. He provides examples showing how losses from unexpected default rates and loss amounts can wipe out profits in a "bad year" for credit risk. However, operational risks from process failures are also important to manage. The key is that financial risks are willingly taken and can be transparently priced into products, while operational risks are minimized. Hugenholtz recommends that organizations improve risk management by defining risk appetite, implementing risk budgeting, and explicitly pricing risks.
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Jntu credit risk-management
Credit risk refers to the risk of a counterparty defaulting on their obligations. It is defined as the possibility that a borrower may fail to meet their obligations in accordance with the agreed terms. There are several components of credit risk, including the amount of the loan, quality of the loan, default risk, exposure risk, and recovery risk. Credit risk management is important for banks due to new financial transactions, decreasing government support, and regulatory capital requirements. Banks traditionally evaluated credit risk using the 5 C's of credit analysis and now also utilize internal credit rating systems.
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Retail businesses have a vital economic role that drives consumer spending and contributes to job creation. However, it’s no secret that these businesses often face challenges managing their finances, particularly inventory management. Luckily, KCB Retailer Finance steps in as a valuable solution for this.
KCB Bank is arguably one of the most reputable financial institutions in Kenya. The bank launched retailer finance as a viable option for retailing SMEs. The financial product enables businesses to expand and, consequentially, see rising profit margins.
In this article, I’ll guide you through KCB retailer finance, its features, the eligibility criteria, and how to apply for this loan. We’ll also check out the terms and conditions you must remember.
1. Overview of KCB Retailer Finance
KCB Retailer Finance is a financial product by KCB Bank that offers the unique financing needs of retailers to stock up their business. You effectively overcome financial constraints and grow your operations with KCB retailer finance.
At its core, retailer finance provides capital and financial resources to retailers to support their business activities. The financing aim to help retailers optimise their cash flow, invest in inventory, upgrade their equipment, and enhance their overall competitiveness in the market.
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Target Audience for the Retailer Finance
The target audience for KCB retailer finance is primarily businesses operating in the retail sector, ranging from small and medium-sized enterprises (SMEs) to large retail chains. This encompasses various types of retailers, including but not limited to:
No.1: Independent Retailers
KCB Retailer financing targets small, locally owned retail businesses operating as single stores or small chains. The financing supports them irrespective of whether they specialise in specific product categories or serve niche markets.
No. 2: Franchise Retailers
KCB Retailer Finance: Features, Eligibility, Application, and More
Retail businesses have a vital economic role that drives consumer spending and contributes to job creation. However, it’s no secret that these businesses often face challenges managing their finances, particularly inventory management. Luckily, KCB Retailer Finance steps in as a valuable solution for this.
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Price Risk like a Banker
- 1. Price Risk like a Banker How financial risk management achieves impact Leonard Hugenholtz IDA Risk Conference, December 2017
- 3. Assertion Financial Risk has more impact on decision making than Operational Risk
- 4. WHY?
- 5. Perspective Leonard Hugenholtz Financial Risk Manager NIBC – Asset Liability Management – Risk Modelling – Business Management – Operational Risk ABN AMRO – Interest Rate Risk – Risk Regulation Brand New Day – Financial Risk Manager OpsFin
- 6. Regulatory Gap Closure (ABN AMRO) Investment Decisions (Brand New Day) Project Risk Management (ABN AMRO) Three Stories
- 7. 1. Introduction 2. Mortgages 3. Comparison 4. Improvements 5. Conclusion Agenda
- 8. 2. MortgagesImage: FreeImages.com/Christer Rønning Austad
- 9. Banks are funded with: • Funding (liabilities) • Capital (equity) Bank use deposits to make loans: • Short dated funding versus long dated assets • Positive interest rate margin Banking
- 10. Banks group loans in portfolios. Example • € 1 billion mortgage portfolio • 5000 loans • Average loan: € 200.000,- Mortgages: Credit Risk
- 11. Mortgages: Credit Risk Mortgage Portfolio Performing Loans Defaults Probability of Default (PD)
- 12. Pricing example Mortgages (receive): 2.50% Funding (pay): 1.00% Default Rate: 1% Loss Given Default: 25% Mortgages: Credit Risk 1.50% Gross Margin 0.25% Expected Loss 1.25% Net Margin
- 13. Question Why do we need risk management?
- 14. Pricing example; bad year Mortgages (receive): 2.50% Funding (pay): 1.00% Default Rate: 5% Loss Given Default: 50% Mortgages: Credit Risk 1.50% Gross Margin 2.50% Realised Loss -1.00% Net Margin
- 15. -1.00% on € 1 billion is a € 10 million loss. This loss will be deducted from capital (equity) Gross return on this capital is € 12.5 mln / year Mortgages: Credit Risk
- 16. Mortgages: Operational Risk PaymentClosureOffer Client Intake Credit Assessment Mortgage process Process risks Fraud Offer not sent Payment late Over-crediting IT systems failure
- 18. Like credit risk, operational risk is mandatory Cover large events with capital (equity) Events have a value threshold Mortgages: Operational Risk
- 20. Risks are downside only Probability of Default ≈ Risk Likelihood Loss Given Default ≈ Risk Impact Smaller events are fine, larger events are crippling Comparison: Similarities
- 21. Comparison: Differences Financial Risk Taken willingly Internal to the product Transparently priced Events are worse BAU Operational Risk Minimized External to the process Pricing unclear Events differ from BAU
- 22. 4. ImprovementsImage: FreeImages.com/Kenneth Pedersen
- 23. Key differences Risk appetite Credit risk is taken willingly Risk budgeting Credit risk events connect to daily P&L Risk pricing Credit risk is priced into the product
- 24. Risk Appetite Happy flows require no management The organisation has the risk The department/project manages it
- 25. Risk Budgeting “Squeaky wheel gets the grease” Translate losses and controls into P&L Make informed trade-offs
- 26. Risk Pricing Risk management costs money Roll these costs into your product Explicitly transfer risk – at a good price
- 27. 5. ConclusionImage: FreeImages.com/Luis Fernando Lima Marinho
- 28. Conclusion Risk appetite Risk budgeting Risk pricing
- 29. Thank You Please ask questions!