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.
This document outlines two methods for valuing collateralized debt obligations (CDOs): Moody's Binomial Expansion Technique (BET) and the Duffie-Garleanu methodology. The BET method models default and correlation in a CDO collateral pool to generate loss scenarios. It is implemented in an Excel VBA program. The Duffie-Garleanu methodology also models default and correlation to value contingent cash flows to CDO tranches. Both methods aim to calculate value at risk for CDO tranches.
This document introduces the stress test approach used by the Federal Reserve to regulate banks, comparing it to the previous Basel Accords approach. It discusses that the 2008 financial crisis showed the Basel Accords underestimated credit risk. In response, the Federal Reserve implemented the Dodd-Frank Act Stress Test (DFAST) and Comprehensive Capital Analysis Review (CCAR) to better evaluate capital adequacy. The stress test projects bank losses and capital levels under adverse economic scenarios, allowing regulators to ensure banks maintain sufficient capital buffers. The document argues stress testing is superior to the Basel Accords as it uses current economic conditions rather than historical data, and evaluates risks across the entire financial system rather than just individually.
The document discusses liquidity risk and its management in financial institutions. It defines liquidity risk and outlines some key methods to measure it, including gap analysis, liquidity ratios, net loans to assets ratio, and loans to deposits ratio. It then discusses important principles of managing liquidity risk, such as establishing corporate governance and policies, determining risk limits, internal controls, stress testing, contingency funding planning, and meeting regulatory reporting requirements. Effective liquidity risk management is important for financial institutions to reduce costs associated with liquidity shortfalls.
This document discusses concepts of liquidity and liquidity risk within the financial system. It distinguishes between three types of liquidity: central bank liquidity, funding liquidity, and market liquidity. It analyzes linkages between these liquidity types in normal and turbulent times. In turbulent times, increased funding liquidity risk can contaminate market liquidity and necessitate central bank intervention. However, central bank liquidity alone cannot address the root causes of liquidity risk, which stem from information asymmetries and incomplete markets. Supervision and regulation are needed to minimize these issues and distinguish between solvent and insolvent institutions.
This document summarizes a survey on liquidity management conducted with 16 major banks. It finds that treasurers are taking a longer-term approach to liquidity management to address persistent challenges from low interest rates and economic instability. Treasurers are seeking more efficient tools to improve cash visibility, forecasting, and pooling across regions and currencies in order to better deploy capital and mitigate risks. Advances in technology are helping treasurers enhance operational efficiencies and control over global liquidity positions.
Basel III is an international regulatory framework that strengthens bank capital requirements in response to the financial crisis. It builds on Basel II and introduces new regulations on bank capital, liquidity, and risk. The three pillars from Basel II are maintained: minimum capital requirements, supervisory review, and market discipline. Major changes include higher and better quality capital, countercyclical capital buffers, leverage ratio restrictions, and liquidity standards like the Liquidity Coverage Ratio. Implementation began in 2013 and will be fully phased in by 2019. The goals are to strengthen financial stability and banking sector resilience to economic stress.
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.
This document outlines two methods for valuing collateralized debt obligations (CDOs): Moody's Binomial Expansion Technique (BET) and the Duffie-Garleanu methodology. The BET method models default and correlation in a CDO collateral pool to generate loss scenarios. It is implemented in an Excel VBA program. The Duffie-Garleanu methodology also models default and correlation to value contingent cash flows to CDO tranches. Both methods aim to calculate value at risk for CDO tranches.
This document introduces the stress test approach used by the Federal Reserve to regulate banks, comparing it to the previous Basel Accords approach. It discusses that the 2008 financial crisis showed the Basel Accords underestimated credit risk. In response, the Federal Reserve implemented the Dodd-Frank Act Stress Test (DFAST) and Comprehensive Capital Analysis Review (CCAR) to better evaluate capital adequacy. The stress test projects bank losses and capital levels under adverse economic scenarios, allowing regulators to ensure banks maintain sufficient capital buffers. The document argues stress testing is superior to the Basel Accords as it uses current economic conditions rather than historical data, and evaluates risks across the entire financial system rather than just individually.
The document discusses liquidity risk and its management in financial institutions. It defines liquidity risk and outlines some key methods to measure it, including gap analysis, liquidity ratios, net loans to assets ratio, and loans to deposits ratio. It then discusses important principles of managing liquidity risk, such as establishing corporate governance and policies, determining risk limits, internal controls, stress testing, contingency funding planning, and meeting regulatory reporting requirements. Effective liquidity risk management is important for financial institutions to reduce costs associated with liquidity shortfalls.
This document discusses concepts of liquidity and liquidity risk within the financial system. It distinguishes between three types of liquidity: central bank liquidity, funding liquidity, and market liquidity. It analyzes linkages between these liquidity types in normal and turbulent times. In turbulent times, increased funding liquidity risk can contaminate market liquidity and necessitate central bank intervention. However, central bank liquidity alone cannot address the root causes of liquidity risk, which stem from information asymmetries and incomplete markets. Supervision and regulation are needed to minimize these issues and distinguish between solvent and insolvent institutions.
This document summarizes a survey on liquidity management conducted with 16 major banks. It finds that treasurers are taking a longer-term approach to liquidity management to address persistent challenges from low interest rates and economic instability. Treasurers are seeking more efficient tools to improve cash visibility, forecasting, and pooling across regions and currencies in order to better deploy capital and mitigate risks. Advances in technology are helping treasurers enhance operational efficiencies and control over global liquidity positions.
Basel III is an international regulatory framework that strengthens bank capital requirements in response to the financial crisis. It builds on Basel II and introduces new regulations on bank capital, liquidity, and risk. The three pillars from Basel II are maintained: minimum capital requirements, supervisory review, and market discipline. Major changes include higher and better quality capital, countercyclical capital buffers, leverage ratio restrictions, and liquidity standards like the Liquidity Coverage Ratio. Implementation began in 2013 and will be fully phased in by 2019. The goals are to strengthen financial stability and banking sector resilience to economic stress.
Under the Basel II framework, Standardized Approach for Credit Risk allows consideration of External Credit Ratings for the calculation of risk weighted assets/capital charge. This presentation provides an overview of the approach as prescribed for Indian Banking Industry by RBI.
This document provides a framework for analyzing concentration risk in the loan portfolios of Egyptian banks. It defines concentration risk, outlines best practices for managing it, and analyzes the effects of single name, industry, and country concentration. The document estimates that concentration risk triggers an additional capital requirement of around 50% for the top 20 exposures and 30% for the total corporate portfolio in Egyptian banks. It recommends Egyptian banks review their concentration risk using the analysis tools, reformulate their risk limits and portfolio management practices, and devise strategies to mitigate concentration risk over the short to medium term.
Kang Tae Soo -- Riksbank Macroprudential Conference Stockholm, Sweden, Nove...Macropru Reader
Kang Tae Soo -- Riksbank Macroprudential Conference Stockholm, Sweden, November 2014
....
http://www.riksbank.se/en/Financial-stability/Macroprudential-Policy-Conference-November-2014/
Macroprudential Policy Conference, November 2014
Sveriges Riksbank and the International Monetary Fund are jointly hosting the conference Macroprudential Policy - Implementation and Interaction with other Policies in Stockholm on 13-14 November.
The conference will bring together representatives of national authorities and international organizations to share their knowledge and experience in the evolving field of macroprudential policy.
The financial crisis showed that ensuring the health of individual components of the financial system is not sufficient to guarantee overall financial stability. Macroprudential policy recognizes the importance of systemic risk and the need to develop regulations that address systemic risk and help to build resilience in the entire financial system.
The document discusses liquidity risk management. It provides historical context on liquidity issues during the financial crisis. Key points discussed include:
- Traditional measures like balance sheet ratios are outdated and fail to capture risks
- Guidance from 2000 would have mitigated crisis impacts had it been adopted
- The 2010 interagency guidance outlines best practices for liquidity risk management, including governance, strategy, monitoring, contingency planning
- Areas of focus include diversified funding, liquid assets, stress testing, and scenario planning
This document provides an overview and summary of Basel III and its implications presented by Dr. Nabil Zaki. It includes an agenda, housekeeping notes, introduction of the speaker, and sections on Basel III capital requirements, capital buffers, liquidity standards including the Liquidity Coverage Ratio and Net Stable Funding Ratio. The presentation outlines the new Basel III regulations, including higher capital minimums, tighter definitions of capital, and new liquidity requirements for banks in response to the financial crisis.
Basel III is a global regulatory framework that aims to strengthen bank capital requirements and introduces new regulations on bank liquidity and leverage. It seeks to raise the quality of capital held by banks and strengthen their ability to absorb losses. The document outlines the key components of Basel III, including higher capital requirements, a new leverage ratio, and liquidity standards. It also discusses the potential macroeconomic impact and advantages of Basel III, as well as country-level implementations like in the US.
The document discusses sustainable external debt management. It defines external debt and outlines various types of risks including market, fiscal, country-specific, and operational risks. It then discusses measures for managing these risks, including through transparency, modifying debt structure, and stress tests. Various debt sustainability indicators are presented, including solvency, liquidity, burden, and structural ratios to monitor risk. Standard stress tests and identifying debt distress episodes are also covered.
Investing for Physicians | 4th Quarter Market ReviewLFGmarketing
The document summarizes global market performance for the fourth quarter of 2012. International developed stocks posted strong returns of 5.93%, while emerging markets stocks returned 5.58%. US stocks saw more modest gains of 0.25%. The report provides an overview of asset class performance including international stocks, emerging markets stocks, real estate investment trusts and bonds. It also includes a timeline of major economic and political events that occurred during the quarter.
The document discusses Basel regulations on bank capital requirements. It provides an overview of Basel I, Basel II, and Basel III. Basel I introduced uniform capital adequacy calculations but had limitations. Basel II aimed to address Basel I deficiencies by introducing operational risk and more risk-sensitive credit risk calculations. Basel III further strengthened regulations by requiring higher quality capital holdings and introducing leverage ratios. The implications for small- and medium-sized enterprises include potentially higher credit costs, an increased focus on risk ratings, and a need for greater financial transparency.
This document provides an overview and summary of the Basel III accords and their implementation in the United States. It discusses key provisions of Basel III including revised definitions of regulatory capital, capital buffers, risk-weighted assets, leverage ratios, liquidity requirements, and disclosures. It outlines which US banking organizations are subject to Basel III and to what extent based on their size. The document also discusses implications for banking organizations and options they should consider to evaluate their compliance with the new requirements.
(1) Diversified Funding: Problems with Steering Towards Long-Term Stable Funding; (2) Analysing the Best Internal Mechanism for Managing new Liquidity Requirements
Basel I and II are international banking accords that sought to harmonize banking standards across countries but had limitations. [1] Basel I, drafted in 1988, focused only on credit risk and gave banks leeway in their interpretation, allowing improper risks. [2] Basel II, drafted in 2004, was more complex and extensive but still ignored implications for emerging markets. [3] While neither ensured long-term stability, understanding their goals, criticisms and shortcomings is important for assessing their impact on the global financial system.
Thiet ke Bao cao thuong nien - Vina 2008 Viết Nội Dung
The document provides an annual report for the Vietnam Opportunity Fund (VOF) for the 2008 fiscal year. It can be summarized as follows:
1) VOF saw a decline in its net asset value over fiscal year 2008, dropping from USD3.28 per share at the end of June 2007 to USD2.06 per share at the end of June 2008, as Vietnam's economy slowed significantly in the first half of 2008 in response to inflationary pressures.
2) Vietnam's economy grew strongly in 2007 but overheated, leading the government to restrict credit growth and spending in early 2008 to curb inflation, which had negative impacts on the stock market and currency.
3) While the portfolio diversification
This document provides an overview of currency overlay management and contributions from experts in the field. It discusses the growth of cross-border investments exposing more assets to currency risk. Currency overlay aims to limit losses from currency movements while allowing gains. Though initially neglected, currency risk is increasingly managed actively. The document outlines frameworks for determining currency risk exposure and selecting overlay managers. Experts debate issues like hedging strategies and whether active management can generate excess returns. They provide perspectives on currency opportunities and inefficiencies. The conclusion is that both investors and sponsors should increase focus on currency risk and potential returns from active management.
This document summarizes a presentation on implementing the Net Stable Funding Ratio (NSFR) liquidity framework. It discusses:
1) An overview of the NSFR and how it differs from the Liquidity Coverage Ratio in measuring long-term versus short-term liquidity;
2) How to build the NSFR into funds transfer pricing (FTP) logic by updating FTP systems to incorporate long-term funding costs and risks;
3) Integrating the NSFR into existing FTP and liquidity management systems through a liquidity transfer pricing framework that allocates liquidity costs and benefits.
The document discusses the strong macroeconomic fundamentals and economic growth of the Philippines in recent years. It notes that GDP growth has accelerated to over 5% annually despite natural disasters, driven by robust private consumption, investment, and growth in the manufacturing and services sectors. Inflation has remained low and stable between 3-5% while interest rates are historically low. The stock market and competitiveness rankings have also improved significantly in recent years according to various reports. However, challenges remain in generating higher and more inclusive economic growth through productivity gains and better job creation.
Effects of public expenditure on economy production distributionBhaumiki
Public expenditure on education in India has remained below the target of 6% of GDP, reaching a maximum of only 4.3% of GDP. Government expenditure on education as a percentage of total government expenditure averages around 13.5%. However, achieving the 6% of GDP target for education would require a substantial increase in funding, as the GDP has been growing faster than the rate of increase in education spending. Analyzing trends in public expenditure is important for understanding challenges in meeting policy targets for education financing.
Public expenditure by governments has increased over time due to various factors:
1. Population growth has led to increased spending on public services like schools, housing, and healthcare.
2. Defense spending has risen to protect countries from foreign threats, consuming a large portion of budgets.
3. The expansion of administrative systems with more departments and elections has grown public administration costs.
4. Economic development through infrastructure projects, industries, and programs has required significant government funding.
This document presents an analysis of the financial ratios of Dhaka Electric Supply Company (DESCO) from 2007-2008 to 2011-2012. It includes a SWOT analysis of DESCO which identifies its strengths as the largest government electric supply company, weaknesses due to technological shortcomings, opportunities from increasing electricity demand, and threats from political instability. The document then analyzes several financial ratios of DESCO over the years such as current ratio, debt-equity ratio, operating expenses to revenue, gross margin, return on assets, earnings per share, and more to assess DESCO's financial position.
The document discusses different classifications of public expenditures. It outlines Mrs. Hicks' classification which separates expenditures into defense, civil, and development. Defense expenditure includes costs for defense equipment and wages for armed, navy, and air forces. Civil expenditure maintains law and order and administration of justice. Development expenditure promotes growth in agriculture, industry, trade, transport, and communication.
This document provides an overview of public budgets. It begins by defining what a budget is, including that it is a formal estimate of required resources for a given time period. It then discusses different definitions of budgets provided by various scholars. The document outlines the key components of a budget as public expenditures and public revenues. It also discusses different types of budgets, including operating and development budgets. The document further examines classifications of public expenditures by categories, sectors, general objects, and programs/activities. Finally, it introduces the concept of the canon of public expenditures as rules or principles that governments must follow when incurring expenditures.
The document discusses public finance and government budgeting. It provides definitions and concepts of public finance, including that it is the study of government income and expenditure. It describes the key components and constituents of public finance, including public expenditure, revenue, debt, and financial administration. It also discusses the role of fiscal policy and government in areas like economic stabilization and growth. It outlines the budgeting process and principles, instruments and types of fiscal policy like discretionary vs automatic stabilizers. Finally, it covers taxation policy, the characteristics of a good tax system per Adam Smith, and the main types of taxes.
Under the Basel II framework, Standardized Approach for Credit Risk allows consideration of External Credit Ratings for the calculation of risk weighted assets/capital charge. This presentation provides an overview of the approach as prescribed for Indian Banking Industry by RBI.
This document provides a framework for analyzing concentration risk in the loan portfolios of Egyptian banks. It defines concentration risk, outlines best practices for managing it, and analyzes the effects of single name, industry, and country concentration. The document estimates that concentration risk triggers an additional capital requirement of around 50% for the top 20 exposures and 30% for the total corporate portfolio in Egyptian banks. It recommends Egyptian banks review their concentration risk using the analysis tools, reformulate their risk limits and portfolio management practices, and devise strategies to mitigate concentration risk over the short to medium term.
Kang Tae Soo -- Riksbank Macroprudential Conference Stockholm, Sweden, Nove...Macropru Reader
Kang Tae Soo -- Riksbank Macroprudential Conference Stockholm, Sweden, November 2014
....
http://www.riksbank.se/en/Financial-stability/Macroprudential-Policy-Conference-November-2014/
Macroprudential Policy Conference, November 2014
Sveriges Riksbank and the International Monetary Fund are jointly hosting the conference Macroprudential Policy - Implementation and Interaction with other Policies in Stockholm on 13-14 November.
The conference will bring together representatives of national authorities and international organizations to share their knowledge and experience in the evolving field of macroprudential policy.
The financial crisis showed that ensuring the health of individual components of the financial system is not sufficient to guarantee overall financial stability. Macroprudential policy recognizes the importance of systemic risk and the need to develop regulations that address systemic risk and help to build resilience in the entire financial system.
The document discusses liquidity risk management. It provides historical context on liquidity issues during the financial crisis. Key points discussed include:
- Traditional measures like balance sheet ratios are outdated and fail to capture risks
- Guidance from 2000 would have mitigated crisis impacts had it been adopted
- The 2010 interagency guidance outlines best practices for liquidity risk management, including governance, strategy, monitoring, contingency planning
- Areas of focus include diversified funding, liquid assets, stress testing, and scenario planning
This document provides an overview and summary of Basel III and its implications presented by Dr. Nabil Zaki. It includes an agenda, housekeeping notes, introduction of the speaker, and sections on Basel III capital requirements, capital buffers, liquidity standards including the Liquidity Coverage Ratio and Net Stable Funding Ratio. The presentation outlines the new Basel III regulations, including higher capital minimums, tighter definitions of capital, and new liquidity requirements for banks in response to the financial crisis.
Basel III is a global regulatory framework that aims to strengthen bank capital requirements and introduces new regulations on bank liquidity and leverage. It seeks to raise the quality of capital held by banks and strengthen their ability to absorb losses. The document outlines the key components of Basel III, including higher capital requirements, a new leverage ratio, and liquidity standards. It also discusses the potential macroeconomic impact and advantages of Basel III, as well as country-level implementations like in the US.
The document discusses sustainable external debt management. It defines external debt and outlines various types of risks including market, fiscal, country-specific, and operational risks. It then discusses measures for managing these risks, including through transparency, modifying debt structure, and stress tests. Various debt sustainability indicators are presented, including solvency, liquidity, burden, and structural ratios to monitor risk. Standard stress tests and identifying debt distress episodes are also covered.
Investing for Physicians | 4th Quarter Market ReviewLFGmarketing
The document summarizes global market performance for the fourth quarter of 2012. International developed stocks posted strong returns of 5.93%, while emerging markets stocks returned 5.58%. US stocks saw more modest gains of 0.25%. The report provides an overview of asset class performance including international stocks, emerging markets stocks, real estate investment trusts and bonds. It also includes a timeline of major economic and political events that occurred during the quarter.
The document discusses Basel regulations on bank capital requirements. It provides an overview of Basel I, Basel II, and Basel III. Basel I introduced uniform capital adequacy calculations but had limitations. Basel II aimed to address Basel I deficiencies by introducing operational risk and more risk-sensitive credit risk calculations. Basel III further strengthened regulations by requiring higher quality capital holdings and introducing leverage ratios. The implications for small- and medium-sized enterprises include potentially higher credit costs, an increased focus on risk ratings, and a need for greater financial transparency.
This document provides an overview and summary of the Basel III accords and their implementation in the United States. It discusses key provisions of Basel III including revised definitions of regulatory capital, capital buffers, risk-weighted assets, leverage ratios, liquidity requirements, and disclosures. It outlines which US banking organizations are subject to Basel III and to what extent based on their size. The document also discusses implications for banking organizations and options they should consider to evaluate their compliance with the new requirements.
(1) Diversified Funding: Problems with Steering Towards Long-Term Stable Funding; (2) Analysing the Best Internal Mechanism for Managing new Liquidity Requirements
Basel I and II are international banking accords that sought to harmonize banking standards across countries but had limitations. [1] Basel I, drafted in 1988, focused only on credit risk and gave banks leeway in their interpretation, allowing improper risks. [2] Basel II, drafted in 2004, was more complex and extensive but still ignored implications for emerging markets. [3] While neither ensured long-term stability, understanding their goals, criticisms and shortcomings is important for assessing their impact on the global financial system.
Thiet ke Bao cao thuong nien - Vina 2008 Viết Nội Dung
The document provides an annual report for the Vietnam Opportunity Fund (VOF) for the 2008 fiscal year. It can be summarized as follows:
1) VOF saw a decline in its net asset value over fiscal year 2008, dropping from USD3.28 per share at the end of June 2007 to USD2.06 per share at the end of June 2008, as Vietnam's economy slowed significantly in the first half of 2008 in response to inflationary pressures.
2) Vietnam's economy grew strongly in 2007 but overheated, leading the government to restrict credit growth and spending in early 2008 to curb inflation, which had negative impacts on the stock market and currency.
3) While the portfolio diversification
This document provides an overview of currency overlay management and contributions from experts in the field. It discusses the growth of cross-border investments exposing more assets to currency risk. Currency overlay aims to limit losses from currency movements while allowing gains. Though initially neglected, currency risk is increasingly managed actively. The document outlines frameworks for determining currency risk exposure and selecting overlay managers. Experts debate issues like hedging strategies and whether active management can generate excess returns. They provide perspectives on currency opportunities and inefficiencies. The conclusion is that both investors and sponsors should increase focus on currency risk and potential returns from active management.
This document summarizes a presentation on implementing the Net Stable Funding Ratio (NSFR) liquidity framework. It discusses:
1) An overview of the NSFR and how it differs from the Liquidity Coverage Ratio in measuring long-term versus short-term liquidity;
2) How to build the NSFR into funds transfer pricing (FTP) logic by updating FTP systems to incorporate long-term funding costs and risks;
3) Integrating the NSFR into existing FTP and liquidity management systems through a liquidity transfer pricing framework that allocates liquidity costs and benefits.
The document discusses the strong macroeconomic fundamentals and economic growth of the Philippines in recent years. It notes that GDP growth has accelerated to over 5% annually despite natural disasters, driven by robust private consumption, investment, and growth in the manufacturing and services sectors. Inflation has remained low and stable between 3-5% while interest rates are historically low. The stock market and competitiveness rankings have also improved significantly in recent years according to various reports. However, challenges remain in generating higher and more inclusive economic growth through productivity gains and better job creation.
Effects of public expenditure on economy production distributionBhaumiki
Public expenditure on education in India has remained below the target of 6% of GDP, reaching a maximum of only 4.3% of GDP. Government expenditure on education as a percentage of total government expenditure averages around 13.5%. However, achieving the 6% of GDP target for education would require a substantial increase in funding, as the GDP has been growing faster than the rate of increase in education spending. Analyzing trends in public expenditure is important for understanding challenges in meeting policy targets for education financing.
Public expenditure by governments has increased over time due to various factors:
1. Population growth has led to increased spending on public services like schools, housing, and healthcare.
2. Defense spending has risen to protect countries from foreign threats, consuming a large portion of budgets.
3. The expansion of administrative systems with more departments and elections has grown public administration costs.
4. Economic development through infrastructure projects, industries, and programs has required significant government funding.
This document presents an analysis of the financial ratios of Dhaka Electric Supply Company (DESCO) from 2007-2008 to 2011-2012. It includes a SWOT analysis of DESCO which identifies its strengths as the largest government electric supply company, weaknesses due to technological shortcomings, opportunities from increasing electricity demand, and threats from political instability. The document then analyzes several financial ratios of DESCO over the years such as current ratio, debt-equity ratio, operating expenses to revenue, gross margin, return on assets, earnings per share, and more to assess DESCO's financial position.
The document discusses different classifications of public expenditures. It outlines Mrs. Hicks' classification which separates expenditures into defense, civil, and development. Defense expenditure includes costs for defense equipment and wages for armed, navy, and air forces. Civil expenditure maintains law and order and administration of justice. Development expenditure promotes growth in agriculture, industry, trade, transport, and communication.
This document provides an overview of public budgets. It begins by defining what a budget is, including that it is a formal estimate of required resources for a given time period. It then discusses different definitions of budgets provided by various scholars. The document outlines the key components of a budget as public expenditures and public revenues. It also discusses different types of budgets, including operating and development budgets. The document further examines classifications of public expenditures by categories, sectors, general objects, and programs/activities. Finally, it introduces the concept of the canon of public expenditures as rules or principles that governments must follow when incurring expenditures.
The document discusses public finance and government budgeting. It provides definitions and concepts of public finance, including that it is the study of government income and expenditure. It describes the key components and constituents of public finance, including public expenditure, revenue, debt, and financial administration. It also discusses the role of fiscal policy and government in areas like economic stabilization and growth. It outlines the budgeting process and principles, instruments and types of fiscal policy like discretionary vs automatic stabilizers. Finally, it covers taxation policy, the characteristics of a good tax system per Adam Smith, and the main types of taxes.
This document discusses public finance and the role of actuaries. It defines public finance as the economics of paying for governmental activities and administering those activities. It describes types of government expenditures and sources of funding. Charts show the size of governments and number of governments in the US. The document outlines actuarial principles of statistical frameworks, economic behavior, facts-based analysis, and risk transfer. It proposes actuarial roles in policy evaluation, long-term financing decisions, and advising on costs and benefits of policies, funding, and emerging societal risks.
Public finance refers to the revenue and spending of governments to achieve national objectives through a cycle of formulating fiscal policy, generating revenue from taxes and other sources, and expending funds through the national budget. The national budget allocation for 2011 in the Philippines totaled 1.645 trillion pesos, with the largest portions going to education, public works, and national defense. Government efforts to improve revenue include tax reforms and tighter spending controls under the 2011 budget.
This document discusses various topics related to public finance and taxation, including:
- Pure public goods and their key characteristics of non-rivalry and non-excludability. Public universities are given as an example.
- Definitions of budget, surplus budget, balanced budget, and deficit budget. Budgets are periodic estimates of revenue and expenses.
- Planning, programming, and budgeting system (PPBS), which is a formal, cyclic process for policy and strategy decision making involving planning, programming, and budgeting phases. It aims to assess costs and benefits of alternative programs.
- Incidence of taxation, referring to who ultimately bears the burden of a tax. Various factors like elasticity
The document discusses asset liability management (ALM) in banking. It covers several key topics in 3 paragraphs:
1) ALM refers to managing a bank's balance sheet to allow for different interest rate and liquidity scenarios. This involves assessing risks from changes in interest rates, exchange rates, and liquidity. ALM aims to quantify these risks and provide strategies to make credit, interest, and liquidity risks acceptable.
2) Common ALM techniques include gap analysis, duration analysis, scenario analysis, simulation, and value-at-risk to measure risks. Interest rate risk is a major focus, and tools like gap and duration analysis examine how changes in rates impact profits and asset values.
3)
Credit Risk Management and Loan Recovery in Nigerian Deposit Money Banksijtsrd
The quality of loan recovery in Nigerian deposit money banks is presently impaired with the incidence of a large portfolio of non performing loans. The position of the banks to also act as prime movers of economic development and to effectively manage their credit risk, has not been effective the study therefore examined the potency of credit risk management in addressing loan delinquency or high non performing loan of deposit money banks in Nigeria. In view of this, investigation was conducted on the effect of credit risk architecture on loan recovery. Primary data was used for the study and the ordinary least square was used for data analysis and it was concluded that effective credit risk architecture could enhance loan recovery of deposit money banks in Nigeria. Sunny B. Beredugo | Clifford I. Akhuamheokhun | Bassey Ekpo "Credit Risk Management and Loan Recovery in Nigerian Deposit Money Banks" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-5 | Issue-2 , February 2021, URL: https://www.ijtsrd.com/papers/ijtsrd38430.pdf Paper Url: https://www.ijtsrd.com/management/accounting-and-finance/38430/credit-risk-management-and-loan-recovery-in-nigerian-deposit-money-banks/sunny-b-beredugo
Basel 3 is an update to the Basel Accords that aims to strengthen bank capital requirements and introduce new regulatory requirements on bank liquidity and leverage. Key changes include tighter definitions of Tier 1 capital, a leverage ratio, countercyclical capital buffers, and new liquidity standards. The goals are to promote a more resilient banking system and reduce risk of financial crises. Basel 3 also seeks to address procyclicality concerns by promoting capital conservation and countercyclical buffers.
The Future of the International Monetary Fund: A Canadian Perspective
The CIGI/CIC Special Report on the future of the International Monetary Fund looks at the IMF’s role in the context of the global economic crisis and the new economic and financial governance architecture that is emerging. The authors recognize that IMF reform is an ongoing process, and suggest that the Fund can and should be an integral part of reinvigorating the international financial system. CIGI and the CIC brought together Canadian academics and policy experts to discuss how best to equip the IMF to contribute to the post-crisis world. The report makes recommendations regarding the IMF’s role in the international financial system, governance of the IMF, and IMF functional reforms. It also suggests that the IMF’s members continue to ensure the organization can achieve its goals.
The document discusses capital adequacy norms and concepts related to banking in India. Some key points:
- Capital Adequacy Ratio (CAR) refers to the ratio of a bank's capital to its risk assets and is used to protect depositor and shareholder interests.
- The Basel Committee prescribed international capital adequacy norms. In India, the Narasimham Committee recommended banks maintain a minimum CAR of 8-10%.
- CAR is calculated based on risk-weighted assets, with different asset classes assigned risk factors. Capital is divided into Tier 1 (core) and Tier 2 categories.
- Asset-liability management aims to manage a bank's balance sheet to allow for interest rate
This document is a report from the Senior Supervisors Group assessing risk management practices at major global financial institutions during recent market turmoil. It finds that firms with concentrated exposure to subprime mortgage securitizations suffered major losses, while those with comprehensive firm-wide risk identification and independent valuation practices fared better. It also notes challenges in managing liquidity needs and leveraged loan commitments. The report recommends supervisors strengthen regulatory frameworks and firms improve risk management, including senior oversight, stress testing, and liquidity planning.
The document provides guidelines for Asset-Liability Management (ALM) systems in banks, with a focus on interest rate risk and liquidity risk management. It outlines the key pillars of ALM as ALM information systems, organization, and processes. It describes approaches for measuring liquidity mismatches and interest rate sensitivity through tools like maturity ladder/gap analysis. It provides detailed guidance on classification of assets/liabilities into time buckets, monitoring liquidity ratios, and setting internal prudential limits for managing risks. Banks are expected to establish robust ALM functions and risk management systems to pre-empt potential risks to profitability and viability from volatility in markets.
This presentation broadly covers Mumbai University MMS Semester IV - Elective - Treasury Management.
It starts with History; factors leading to modern treasury management; main objectives; Integrated treasury; departments of treasury - Front, Middle and Back office.
www.abhijeetdeshmukh.com
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
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.
This document discusses risk management in banks. It outlines the three main categories of risks banks face: credit risk, market risk, and operational risk. It then discusses each of these risks in more detail. Credit risk is the potential that a borrower may default on obligations. Market risk relates to changes in market prices. Operational risk involves losses from inadequate internal processes or systems. The document also mentions regulatory risk and environmental risk as other risks banks face. It discusses tools for managing different types of risks and the importance of capital adequacy requirements.
The document proposes a policy framework to address shadow banking risks posed by non-bank financial entities. It identifies five economic functions that can generate such risks: 1) management of client cash pools, 2) loan provision dependent on short-term funding, 3) intermediation of market activities dependent on short-term funding, 4) facilitation of credit creation, and 5) securitization and funding of financial entities. It then outlines policy toolkits authorities can apply to entities engaging in these functions. Authorities are to share information on application of the framework to maintain consistency and minimize regulatory arbitrage across jurisdictions.
This document contains lecture notes on financial management for an MBA program. It covers the following key points in 5 units:
Unit 1 introduces the nature, scope, goals and functions of financial management. Unit 2 discusses investment decisions, capital budgeting techniques, and cost of capital. Unit 3 covers capital structure decisions and theories. Unit 4 examines dividend decisions, models and policies. Unit 5 focuses on working capital management, components, and current asset management. The functions of a financial manager are to make investment, financing, dividend, and liquidity decisions to maximize shareholder value.
ASSET-LIABILITY MANAGEMENT IN BANKS A DYNAMIC APPROACHAaron Anyaakuu
This document summarizes an article on asset-liability management in banks. It discusses how banks in India traditionally recorded assets and liabilities at book value, but liberalization exposed them to more risks like interest rate risk and liquidity risk. Central banks advised minimizing asset-liability mismatches. The article analyzes how banks have managed their asset-liability composition over the last decade to impact performance and profitability. It outlines the objectives, processes, and techniques of asset-liability management used by banks to control risks and maximize returns.
The document discusses several topics related to banking regulation:
1) The BCBS is proposing that banks be required to hold capital against the costs of credit default swap transactions to address regulatory arbitrage concerns.
2) Freddie Mac is suing 15 banks for LIBOR rate manipulation, alleging the banks conspired to artificially suppress rates to hide financial problems and boost profits.
3) A UK parliamentary commission report heavily criticized HBOS management and regulators for failures that led to the bank's collapse, calling its downfall a "cautionary tale."
This document analyzes the macrofinancial linkages between a commodity-based sovereign wealth fund's (SWF) strategic asset allocation (SAA) and its owner country's macroeconomic framework. It develops an analytical model based on Markowitz portfolio theory to determine the SAA, taking into account the SWF's objectives, investment constraints, and the country's economic characteristics and vulnerabilities. The model allows assessing whether the SAA adequately incorporates macrofinancial risks and whether the SWF's objectives are consistent with its constraints. An illustrative application of the model is also presented.
Ayman Refaat El-Far is seeking a challenging career with a leading regional bank. He has over 13 years of experience in corporate banking and financial analysis. Currently he is a senior relationship manager at National Bank of Abu Dhabi in Kuwait, where he manages a portfolio of $200 million and refers large business opportunities. Previously he held positions at Gulf Bank and Commercial International Bank in Egypt, where he analyzed industries, negotiated loans, and managed corporate client relationships.
This document is a thesis on liquidity management at Bank Al-Sharq in Syria. It begins with an introduction and acknowledgments. It then provides an abstract that outlines studying liquidity management procedures at Bank Al-Sharq when liquidity ratios fall below authorized limits, and the impact on bank profitability. The document also contains chapters on liquidity management in traditional banks, liquidity risks, the role of Syria's Central Bank in regulating liquidity ratios, and a specific analysis of liquidity management at Bank Al-Sharq. It concludes with recommendations for improving liquidity management and increasing profitability.
This document discusses international cash management. It covers topics like foreign exchange risk, currency risks from foreign direct investment, and international financial reporting standards. The benefits of good cash management are controlling financial risk, grabbing profit opportunities, and strengthening the balance sheet. Effective cash management involves planning, monitoring, and managing liquid resources, receivables, payments, investments, and foreign exchange. The objectives of international cash management are to maximize returns from short-term currency allocations and borrow at minimum cost while maintaining liquidity and minimizing risks.
The document provides an overview of mutual funds in India. It discusses the industry profile, organization of a mutual fund, advantages of mutual funds, types of mutual fund schemes, terms used in mutual funds like NAV, sale price, redemption price etc. It also discusses the company profile of Krish Finance which provides various financial services including stock broking, distribution of financial products, insurance broking etc. Finally, it outlines the methodology used for the study including data collection, research design and tools used for analysis like Sharpe ratio, Treynor measure and Jensen's alpha.
Proposition de la création d'un fond de capital de risque pour l'industrie to...Michel Rochette
Une proposition de recherche pour la création d'un fond de capital de risque pour l'industrie touristique au Québec. Ce document date de quelques années mais les idées seraient toujours pertinentes.
A research proposal to stude the creation of a capital risk fund for the Québec tourism industry. The document dates from a few years back but some of the ideas are still relevant.
Proposition d'une liste électorale informatiséeMichel Rochette
Une analyse que j'ai produite en 1995 à la suite d'un concours lancé par l'Institut Fraser. J'ai proposé et calculé les avantages pour l'État d'établir une liste électorale informatisée. C'est maintenant le cas au Canada.
An analysis that I produced in 1995 following a call for paper by the Fraser Institute. I proposed and calculate the advantages for a governement to establish a computerized electoral list. It is now the situation in Canada. Other countries should envision the same.
L'intérêt public: Étalon de la gouvernance étatiqueMichel Rochette
Un rapport dans le cadre de mes études doctorales sur la notion de l'intérêt public par rapport au rôle de l'État.
A report done as part of my doctoral studies on the notion of the "public interest" as used by the State. In French only.
Assurance-chômage au Canada: propositions de réformeMichel Rochette
Un rapport de recherche concernant des propositions de réforme au programme d'assurance-chômage au Canada. Le rapport date de quelques années mais les concepts sont toujours d'actualité.
Unemployment Insurance in Canada: proposals for reformMichel Rochette
A older public Policy research report on reforms to the Canadian Unemployment program as it used to be called/
Un rapport de recherche concernant un projet de réforme au programme d'assurance-chômage au Canada.
Operational and reputation risk: Essential components of ERM-MandarinMichel Rochette
An article on the Relationship of operational risk and reputational risk in madarin/
Un article sur la relation entre les risques opérationnels et réputationel en mandarin
Operational risk management is becoming an important part of corporate governance frameworks. It aims to proactively identify, assess, and manage risks to improve transparency, efficiency, and shareholder value while protecting reputation. Recent regulatory scrutiny and fines show the importance of properly managing operational risks. Actuaries are well-suited to lead operational risk management due to their understanding of risk assessment and financial impacts.
Operational and reputational risk: Essential components of ERMMichel Rochette
This document is the December 2006 issue of the newsletter for the Risk Management Section. It contains articles on various topics related to risk management written by different authors. The chairperson's corner discusses developments in the section including the Canadian Institute of Actuaries becoming a joint sponsor. It emphasizes the importance of combining efforts across actuarial organizations to advance risk management expertise. One article provides farewell remarks from the outgoing chair and announces the next volunteer opportunity for the section. The issue also includes a table of contents listing the titles of the various articles.
Michel Rochette is a professional risk manager who helps organizations implement enterprise risk management (ERM) frameworks. He has over 20 years of experience in risk management. His goal is to ethically advise firms on best risk practices rather than sell ERM solutions. In addition to his advisory work, Michel is recognized as a thought leader in the ERM field through his presentations, articles, training and intellectual contributions.
A presentation on the proposed ERM risk evaluation standard by the US Actuarial Standards Board.
Présentation de la norme ERM du Actuarial Standards Board des USA
The document discusses topics related to enterprise risk capital frameworks including modeling issues like correlation assumptions and stress testing. It addresses principles of capital framework development and management implications such as using the framework for strategic decisions and product development. Emerging issues like assessing systemic risk are also covered.
This document provides an overview of a presentation on public-private partnerships. The presentation will cover the definition of PPPs, different types of PPPs and how they have evolved over time. It will also discuss the public and private sector interests in PPPs and the role of the public sector. Key topics that will be addressed include risk appetite, identification, assessment, prioritization and the building blocks of enterprise risk management for PPPs. Case studies and general information on PPPs will also be presented.
This document discusses topics related to developing an advanced economic capital model. It covers the purpose and principles of capital models, major components, uses of the models, and approaches to building them. Specific topics covered include validation considerations, calibration approaches, modeling correlation in extreme events, and incorporating emerging risks. The overall goal of an economic capital model is to quantify an insurer's risk profile and determine its capital requirements.
The document discusses the roles and responsibilities of a Chief Risk Officer (CRO). It states that the CRO's main roles are to create a culture of risk awareness, formally consider risk in strategic decision making, and communicate about risk internally and externally. The CRO is responsible for developing the risk governance framework and coordinating with business lines on risk training, assessment, and metrics. Key skills for a CRO include analytical and quantitative skills, understanding business issues and supply chains, and strong communication abilities. The CRO reports regularly to the board, senior management, shareholders, and regulators on risk exposures and risk management activities.
This document summarizes key points from a presentation on climate risk given by Michel Rochette. The presentation covers physical evidence of climate change, observed and projected impacts such as rising temperatures and sea levels, government and industry efforts to address climate change, and risks to businesses from climate change including regulatory, investment, litigation, physical, and reputational risks. The presentation also discusses proposed disclosure requirements from organizations like the SEC, Carbon Disclosure Project, and Global Reporting Initiative regarding companies' climate-related risks and impacts.
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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.
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.
"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.
Vicinity Jobs’ data includes more than three million 2023 OJPs and thousands of skills. Most skills appear in less than 0.02% of job postings, so most postings rely on a small subset of commonly used terms, like teamwork.
Laura Adkins-Hackett, Economist, LMIC, and Sukriti Trehan, Data Scientist, LMIC, presented their research exploring trends in the skills listed in OJPs to develop a deeper understanding of in-demand skills. This research project uses pointwise mutual information and other methods to extract more information about common skills from the relationships between skills, occupations and regions.
Lecture slide titled Fraud Risk Mitigation, Webinar Lecture Delivered at the Society for West African Internal Audit Practitioners (SWAIAP) on Wednesday, November 8, 2023.
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Risk Management in the Exchange
Fund Account
Michel Rochette, Risk-Management Unit, Financial Markets Department
Mr. Michel Rochette can be reached at michel.rochette@enterprise-risk-advisory.com
rency liabilities and swaps that are used to fund them.
•
In managing the Exchange Fund Account (EFA),*
T
the Bank of Canada and the Department his article follows up on a paper published in
of Finance strive to limit the risks to which the last winter’s issue of the Review, which dealt
Government of Canada is exposed in financing with the Bank’s management of Canada’s
and investment operations that involve foreign official international reserves (De León 2000–
currencies. 2001). Its goal is to explain the methods that the Bank
has used to analyze and model the principal risks
• The EFA is exposed to various types of risk: credit inherent in the financing and investment operations of
risk, market risk, liquidity risk, operational risk, the EFA, and the rules put in place to manage these
and legal risk. The approach used to manage them risks.1
collectively has allowed risk to be held at a low Before examining the actual management of these
level. risks, it is important to clarify the nature and the goals
• The EFA governance process involves close
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of the Account
collaboration between the Department of Finance of the institutional framework that is used to manage
and the Bank of Canada. This collaboration covers the government’s official international reserves.
management of the Account and administrative
tasks. Financing and investment operations are The Nature and Goals of the EFA
carried out by the Bank in its role as fiscal agent In many countries, the official international reserves
for the government. are owned by either the central bank alone or by both
• The first step in managing the EFA’S risks the central bank and the government. For example, in
involves identifying, analyzing, evaluating, and Denmark and Switzerland, the reserves belong to the
central bank, whereas in the United States they are
modelling them. The second involves establishing
split between the Federal Reserve and the Treasury. In
guidelines to limit these risks, while the third Canada, these reserves belong to the government and
ensures day-to-day adherence to those guidelines, are held in a special account at the Bank of Canada in
as well as periodically proposing new risk-control the Minister of Finance’s name. This account is called
mechanisms. the Exchange Fund Account, and it is funded by cur-
rency swaps and direct foreign currency borrowings
in international capital markets by the government .2
The EFA’S goals and objectives are defined in the Minister
1. This analysis is part of a larger effort to analyze and manage the risks associated
with the transactions carried out by the Bank of Canada in its role as fiscal agent for
the federal government. In addition to direct EFA investment and financing operations,
these transactions include the EFA’s securities-lending operations and sale and
repurchase agreements, as well as the management of gold stocks (options and loans),
* In the context of this article, the term “Exchange Fund Account” is used to
the government’s Canadian-dollar debt and the Receiver General’s cash balances.
describe the liquid foreign currency assets held in the EFA and the foreign cur-
BANK OF CANADA REVIEW • WINTER 2001–2002 27
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of Finance’s annual report to Parliament on the opera- shows how these principles influence the various enti-
tions of the Account for 2000 (Finance Canada 2001, p. 1). ties responsible for managing the Account.
Since risk management is one of the major considera- Sound risk management also implies the implementa-
tions underlying the various operations of the EFA, it tion of an appropriate governance process. To achieve
is useful to review the fundamentals and specific fea- this, the decision-making framework and the roles
tures of its management regime. of the different stakeholders have been well defined
and adapted to the governance, organizational, and
Managing the EFA’s Risks: operational framework of the EFA (see Chart 1 and
Appendix).3 This framework provides for direction,
Principles, Internal Governance, accountability, and reporting of activities related to the
and Rules management of the EFA consistent with best practices.
One of the fundamental principles of sound financial Finally, sound risk management requires not only that
management is the maintenance of a balance between the risks be expressly identified and contained by
the desired return and the risk level: the return-risk clear operational rules, but also skilled personnel and
relationship. Every organization establishes this rela- adequate computer support. This is why the Risk-
tionship as a function of its financial goals and its pref- Management Unit was created in 1997 in the Bank of
erences in matters of risk. In the case of the EFA, the Canada’s Financial Markets Department. Overall, the
stated objective is to protect the reserves against risk results obtained in managing the risks of the EFA are
while minimizing the net cost of carry and maintain- consistent with the guidelines of the International
ing adequate liquidity in various currencies. Box 1
2. For more information on the government’s currency swap operations, see
3. For more information on EFA governance, see De León (2000-2001).
Kiff, Ron, and Ebrahim (2000–2001).
Box 1
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Principles Governing the Management of the EFA
General Specific
• The reserve assets and the liabilities that fund them • To ensure liquidity and to facilitate general interven-
are managed like portfolios, using an approach inte- tion operations, the EFA must hold sufficient high-
grating many of the principles applied by financial quality liquid assets.
institutions in the private sector, especially the
prudent management of risk. • The spread between the interest paid on funds raised
by the government to finance the EFA’S assets and the
• In the case of assets, considerable attention must be interest earned on those assets must be minimized.
paid to their liquidity, quality, and diversification, as
well as to credit ceilings set for the counterparties. • Foreign exchange reserves must be managed so that,
as much as possible, assets and liabilities are matched
• In the case of liabilities, the same attention must be
both in terms of currencies and durations.
paid to methods for raising capital, diversification of
the investor clientele, the costs of the different sources • A prudent structure and profile of maturities must be
of financing, and the maturity profile of the commit- maintained to limit refinancing requirements.
ments.
• Foreign currency borrowing that finances the EFA’S
• Exemplary risk-management practices must be
reserves must be conducted in a manner that protects
applied.
Canada’s reputation as a “successful borrower” in
international capital markets.
28 BANK OF CANADA REVIEW • WINTER 2001–2002
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Chart 1
Structure of EFA
Parliament
Minister of Finance
Department EFA Policy
Bank of Canada
of Finance Committee
Risk-Management
Committee
Operations Fund Risk Risk Fund Operations
managers managers managers managers managers managers
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EFA Investment
and Financing
Management
Committee
Monetary Fund (IMF) and with the performance of out the foreign currency investments and foreign cur-
other major industrialized countries (IMF 2000, 2001). rency liabilities of the Government of Canada to fund
the EFA, in the form of a balance sheet.
The EFA Balance Sheet As the table shows, the EFA’S investments and liabili-
From the legal and accounting perspectives, the EFA is ties are denominated in three currencies, the U.S. dol-
an autonomous entity with its own asset base. But lar, the euro, and the yen. These investments make up
examination of the official balance sheet published in the so-called liquid reserves of the EFA, and they are
the Minister of Finance’s report for the year 2000 recorded at par value. Risk analyses and the day-to-
reveals that its sole liability is “Advances” from the day management of the EFA are conducted on the
Consolidated Revenue Fund. This is because the basis of either the market value or, when the market
Account was originally created through an advance value is unknown, an estimate of fair value.
from the government, which also funds it (and is, in The table shows that, on 31 December 2000, assets and
the final analysis, its only creditor). Nonetheless, the liabilities in euros and yen were more or less matched,
government regularly incurs foreign currency liabili- but liabilities in U.S. dollars exceeded the correspond-
ties, the value of which must always be assessed ing assets by US$6.8 billion. This situation arose
against its foreign currency investments. Table 1 sets largely as a result of foreign exchange intervention
BANK OF CANADA REVIEW • WINTER 2001–2002 29
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Table 1 AAA by Standard & Poor’s, Moody’s, Fitch IBCA, and
The EFA’s Investments and Liabilities on Dominion Bond Rating Service.
31 December 2000 To limit the credit risks inherent in EFA operations,
US$ millions, par value
there are restrictions on the types of counterparties
Currency Assets Liabilities and on the types of transactions that the EFA may
U.S. dollar 20,730 27,512 undertake with these counterparties. Under this sys-
Euro 6,674 7,245 tem, the credit rating serves not only to determine the
Yen 506 492 choice of counterparties, but also the magnitude of the
Total 27,910 35,249
credit risk allowed.
Source: Finance Canada 2001, Table 4, p.10.
Note: These values differ from the entries in Table I2 of the Bank of Canada Banking and
Among the ceilings implemented, some are specific,
Financial Statistics, which are expressed at market value. That table also contains data on while others are more global. Overall, the ceilings gen-
gold holdings, special drawing rights, and the reserve position in the IMF, which are
not discussed in this article. erally vary according to the counterparty’s category
(sovereign government, public institution, suprana-
and important commitments to the IMF in 1998. This
tional organization, commercial financial institution)
imbalance, which reached about US$13.2 billion at its
and credit rating. Furthermore, they consolidate all
widest point, has been gradually reduced through a
the transactions undertaken with any given counter-
program of U.S.-dollar acquisitions—designed to equal-
party, they take into account actual and potential
ize assets and liabilities denominated in that currency—
exposure in the case of certain derivatives, and the
implemented jointly in 1998 by the Department of
term and type of transactions involving the eligible
Finance and the Bank of Canada (Finance Canada 2001).
counterparties. Specific ceilings ensure that risk is
spread among the counterparties, especially those in
Types of Risk the private sector, while global ceilings provide for a
Credit Risk
Table 2
The term “credit risk” refers to the possibility that a
counterparty to an EFA investment operation will Breakdown of Risk Exposure in the EFA on
29 June 2001
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(Following BIS 1988, 1994, and 1995 methodology)
case of a private corporation, non-repayment of debt
may result from bankruptcy or dissolution; in the case US$ millions
of a sovereign counterparty, from a moratorium on Category of counterparty Unweighted Risk-weighted Allocation
repayment of external debt, the institution of and weighting coefficient exposure exposure of risk
exchange controls, or repudiation. Credit risk also
OECD-member sovereign states
covers financial losses caused by a downgrading of and their fully guaranteed 74% in AAA
the counterparty’s credit rating if the portfolio is agencies (0%) 14,060 0 26% in AA
defined at market value. Other agencies of OECD-member
sovereign governments and 98% in AAA
To measure exposure to credit risk, the approach cur- supranational entities (20%) 11,500 2,300 2% in AA
rently used is that recommended to international Private financial institutions of 5% in AAA
OECD-member countries (20%) 4,485 897 95% in AA
banks by the Basel Committee on Banking Supervi-
sion (Bank for International Settlements 1988, 1994,
1995).4 This approach yields a risk-weighted expo-
sure (RWE). Using the RWE formula, the actual
exposure for each type of product is calculated each 4. These guidelines were set out in publications of the Basel Committee on
Banking Supervision (Bank for International Settlements 1988, 1994, 1995).
day using fair value, which is then broken down by
The 1988 guidelines set capital requirements for international banks at a level
counterparty. Finally, the potential exposure for consistent with the credit risk associated with balance-sheet transactions. In
derivatives used in managing market risk is added. 1994 and 1995, modifications were made to cover derivatives. Globally, this
approach allows the estimation of actual exposure based on market value, to
The results of these computations for the EFA are
which potential exposure for derivatives is added. This latter risk is estimated
presented in Table 2, which shows a breakdown of using projection factors recommended in the 1995 guidelines. The total obtained
RWE in June 2001. by this method is then weighted by a risk factor varying between zero per cent
for risks associated with securities issued in the domestic currency by OECD-
As the table illustrates, the overall credit risk of the member sovereign states and their fully-guaranteed agencies, 20 per cent for
Account’s operations is minimal, given the high pro- other agencies of OECD-member sovereign governments, supranational institu-
tions, and private banks of OECD-member countries, and 100 per cent for other
portion of the RWE allocated to organizations rated private sector organizations. Examples of these computations can be found in
Kiff, Ron, and Ebrahim (2001).
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similar dispersion of risk among broad categories of
counterparties. To minimize market risk associated with interest rate
fluctuations in the case of non-matching or incomplete
matching, EFA fund managers start by matching
assets and liabilities with the longest terms. Since total
To limit the credit risks inherent in
liabilities in U.S. dollars exceed the corresponding
EFA operations, there are restrictions assets, this matching has been only partial; i.e., only in
on the types of counterparties and on the long and medium term.
the types of transactions that the EFA
may undertake with these
counterparties. In the EFA, foreign reserves are
managed to ensure . . . that the assets
match the liabilities in currency and
duration. . . . Indeed, matching is an
Other methods of limiting credit risk include: bilateral integral means of managing market
netting agreements with the counterparties in the case risk for the EFA.
of swaps and forward foreign exchange contracts; a
system of collateral for transactions involving certain
derivatives (to be established soon) allowing for a fur-
ther decrease in associated credit risk; and a more
Furthermore, since the EFA was created to give the
thorough analysis of the credit risk presented by vari-
federal government access to liquid foreign currency,
ous entities (subsidiaries, brokerage houses, etc.) con-
the analysis of risk managers focuses on potential
nected to a single counterparty.
changes in the market value of the EFA’s assets and
Market Risk liabilities. Since variations in these values are often
Changed with the DEMO VERSION“market risk” refers to fluctuations in the
The term of CAD-KAS PDF-Editor (http://www.cadkas.com). caused by significant events in financial markets, the
values of securities arising from changes in interest Risk-Management Unit develops scenarios to measure
and exchange rates. In the case of the EFA, market risk and limit this aspect of market risk. For these pur-
has two sources: non-matching and partial matching poses, they sometimes use traditional methods and, in
of assets and liabilities. When assets and liabilities are some instances, apply “extreme value” theory.6
matched by term and currency, this risk is low, The so-called traditional scenario approach is gener-
because the impact of interest rate and exchange rate ally developed on the basis of observation and quali-
fluctuations on both assets and liabilities will cancel tative analysis of past events; for example, the Asian
each other out. crisis of 1997–98, the Russian debt restructuring in
Fund managers in the private sector begin by estab- 1998, and the collapse of U.S. Long-Term Capital
lishing benchmarks from which they deliberately Management in 1998. This approach allows for the
assume market risk in order to increase the yields development of scenarios on the basis of real events,
from their investments. In the EFA, foreign reserves but it is difficult to assign probabilities, and thus
are managed to ensure, as much as possible, that the requires judgment in estimating the probability of
assets match the liabilities in currency and duration. similar events that are likely to affect the value of the
In this way, market risk is minimized. Indeed, match- Account’s investments.
ing is an integral means of managing market risk for Scenarios based on extreme value theory are derived
the EFA. This goal has been met for the euro and the from the historical distribution of the probability of
yen, but not completely for the U.S.-dollar portfolio
(Table 1).5 6. The Bank’s staff consider the scenario method more suited to evaluating the EFA’s
market risks than the Value-at-Risk, or VaR, method recommended by the Basel
Committee. Indeed, this latter approach was developed for managing trading
5. The goal of matching assets and liabilities is pursued for each currency and accounts, and it generally relies on past values of volatility indexes and correlation
for each maturity group; i.e., 0 to 6 months, 6 to 12 months, 18 months to 2 years, coefficients, which unfortunately do not hold during periods of pronounced volatility
2 to 3 years, 3 to 4 years, 4 to 5 years, 5 to 7 years, 7 to 9 years, and 9 to 10 years. in financial markets.
BANK OF CANADA REVIEW • WINTER 2001–2002 31
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significant events.7 For example, the numbers shown denominated in U.S. dollars, euros, or yen—must be
in Table 3 correspond to some plausible scenarios (at a very liquid. First, given that the market for securities
given level of confidence) for shocks affecting the issued by the U.S. government and its many agencies
Canada-U.S. exchange rate on a single day. For exam- is considered the most liquid in the world, and that
ple, the single-day variation of the Canadian dollar the U.S. dollar is generally used in the Account’s for-
vis-à-vis the U.S. dollar over the past five years was eign exchange operations, the share of U.S. dollars in
1.36 per cent in only 0.1 per cent of the cases observed. the EFA’S liquid assets has been fixed at a minimum of
These statistics allow us to assess the results of statisti- 50 per cent. Also, the outstanding par value of such
cal sensitivity tests. securities must be at least US$500 million, and must be
issued by eligible counterparties. This rule must
always be respected, whether the investments are in
long- or short-term securities. Moreover, the Account
may not hold more than 10 per cent of the securities
issued by any one counterparty—a restriction which,
Table 3
incidentally, is found in various laws and regulations,
Extreme-Shock Scenarios Affecting the Canada-U.S. especially those applying to the securities industry
Exchange Rate Between 1995 and 2000 and private pension plans. Finally, the total amount of
Probability of occurrence Largest single-day depreciation observed securities unredeemable before maturity, for which
(per cent) (per cent)
there is no secondary market, cannot exceed 15 per cent
5.0 0.72 of the Account’s liquid assets.
2.5 0.89
1.0 1.16
0.1 1.36
Since the purpose of the EFA is to
provide general foreign currency
Changed with the DEMO VERSIONbe noted that, compared with other floating
It should of CAD-KAS PDF-Editor (http://www.cadkas.com). liquidity for the government and to
currencies, the Canadian dollar is relatively stable: it promote orderly conditions in the
rarely fluctuates more than one per cent over the foreign exchange market for
course of a single day.
Canadian dollars, it must be in a
Liquidity Risk position to rapidly sell securities and
Liquidity risk has two aspects. The first deals with the obtain liquid money to deal with
ability to sell certain assets at the appropriate moment.
This is crucial, since fund managers must be able to extreme market swings.
sell assets at fair value and obtain payment immedi-
ately through the settlement system. Since the pur-
pose of the EFA is to provide general foreign currency
liquidity for the government and to promote orderly Since the liquidity of investments is closely related to
conditions in the foreign exchange market for Cana- their maturity, there are rules governing the maxi-
dian dollars, it must be in a position to rapidly sell mum maturity of financial securities eligible to be
securities and obtain liquid money to deal with included in the EFA portfolio (Table 4). Also, the matu-
extreme market swings. rities of the government’s foreign currency liabilities
Moreover, various policies have been adopted to limit to fund the EFA must be spread so that no more than
liquidity risk. In keeping with these rules, the securi- one-third of them are redeemed or rolled over during
ties in which the EFA invests—eligible securities the upcoming year. Finally, in order to cope with any
eventuality, the EFA has several other means of rap-
7. For more information on extreme value theory, see Bensalah (2000). This idly increasing its liquid holdings, including its short-
approach essentially tries to model extreme events.
term U.S.-dollar commercial paper program, the
possession of assets denominated in euros and yen
(which also have very large secondary markets), and a
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Table 4 become familiar with the controls needed to remedy
Maximum Maturity of Financial Securities in them. This approach is consistent with the concept of
the EFA total quality management as implemented by many
financial institutions, and which the Bank applies to
Type of investment Maximum maturity analyzing the operational risk to which the EFA is
Securities having a secondary market 10.5 years exposed.
Liquidity-management securities issued
by a private sector institution and for
which there is a secondary market
(e.g., commercial paper) 1 year
Securities for which there is In the case of the EFA, the managers
no secondary market
(e.g., commercial deposits) 3 months consider direct losses and factors that
Gold lendinga 1 year
might have a financial impact on the
a. The goal of these operations is essentially to earn income on this type of non- operations managed by the Bank of
interest-bearing asset.
Canada.
US$6 billion line of credit with various foreign finan-
cial institutions.
In keeping with this approach, the Bank analyzes
Operational Risk
operational processes, establishes controls that are
Operational risk refers to the possibility of financial regularly reviewed, and closely monitors employee
losses being caused by a malfunction or crash of com- turnover and changes in the skill mix of the staff. The
puter systems, by employee error or fraud, by faulty Bank has also developed several indicators of sources
operational processes, or by external events over of risk and helps evaluate solutions and relevant tech-
which the organization has no control. nological applications. These include a new computer
In the private sector, the consequences of this risk are program for integrated (or “straight-through”)
Changed with the DEMO VERSION of CAD-KAS PDF-Editor (http://www.cadkas.com). operations. The Bank monitors the
usually evaluated in terms of the resulting direct and processing of
indirect losses from foregone earnings. In the case integrity of the financial data used by models and has
of the EFA, the managers consider direct losses and begun to monitor back-office operations. Finally,
factors that might have a financial impact on the oper- emergency measures have been put in place to deal
ations managed by the Bank of Canada. with extraordinary events.
There are two major approaches for measuring opera- Legal Risk
tional risk: “top-down” and “bottom-up.” The top- Like operational risk, legal risk has several aspects.
down approach yields an estimate of the financial The term refers to the possibility that duly concluded
impacts of different aspects of operational risk based contracts do not have legal force because they are not
on calculations of losses that the organization has supported by the necessary documents, do not carry
incurred in the past. This more actuarial approach is the required signatures, or because one or several of
probably best suited to modelling substantial and the signatories does not have the appropriate signing
infrequent losses resulting from failure of the controls authority. This risk also covers the situation of a pri-
in place. However, since the available data are not suf- vate sector financial institution failing to comply with
ficiently reliable for the calculations this method the requirements of the relevant regulatory body.
requires, it is not widely used at this time. Several
organizations are working to fill this gap. It is unlikely that a real legal risk will arise if the oper-
ation unfolds as expected. If one of the parties
As the name suggests, the bottom-up method follows defaults, however, this risk takes on a whole new
the opposite path. It starts from the different aspects of dimension, since it is at that moment that the courts
the operations performed by the organization and become involved to determine whether the rights
integrates all operational sectors from which risks are negotiated in the contracts can, in fact, be exercised.
likely to occur. In general, these sectors actively partic-
ipate in identifying the sources of risks, and they
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The methods used to control this type of risk have so in the EFA’S operations, as well as the means used to
far resembled those used in the private sector. One manage them.
essential aspect involves retaining all documentation In the area of market risk, the Bank is working on
relating to the different operations in order to be able increasing the sophistication of benchmarks and
to clarify the rights and obligations of each party as developing financial scenarios for measuring the
needed. For example, in the case of swap operations, impact of market developments on the value and
the government uses and keeps the documentation liquidity of the securities in the EFA. This should make
standardized by the International Swap Dealers it possible to develop a more integrated approach to
Association and closely follows its evolution. managing market risk and to facilitate an evaluation
of the net cost of carry of the EFA’S reserves in light of
Conclusion the various goals.
Efforts to manage risk in the EFA have been aimed at Finally, it is necessary to take account of the interde-
limiting credit risk by imposing ceilings to ensure a pendence of these risks, rather than to assume that
diversification of risk and containing exposure in they are independent of one another. For example,
terms of counterparties. Moreover, by monitoring and high volatility in financial markets affects the liquidity
perfecting methods and models for evaluating credit of the negotiated securities as well as the credit risk
risk, the Bank expects to be able to fine-tune its tools they present. Furthermore, the liquidity of these secu-
for analyzing and modelling the credit risks inherent rities depends on the reliability of the settlement and
payments systems, the orderly functioning of which is
considered in many countries to be a responsibility of
the central bank. Finally, the various legal aspects of
the contracts affect the ability to exercise the rights
they create and carry with them financial conse-
quences for the different contracting parties.
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Bibliography
Bank for International Settlements. 1988. International International Monetary Fund. 2000. Sound Practices
Convergence of Capital Measurement and Capital in the Management of Foreign Exchange Reserves.
Standards, Basel Committee on Banking Regula- (March).
tions and Supervisory Practices, amended July
———. 2001. Guidelines for Foreign Exchange Reserve
1994 and April 1995.
Management. (September).
Bensalah, Y. 2000. “Steps in Applying Extreme Value
Jensen, P.K. 2001. “Management of the Interest-Rate
Theory to Finance: A Review.” Bank of Canada
Risk on the Foreign-Exchange Reserve.” Monetary
Working Paper No. 2000-20.
Review, Danmarks Nationalbank (first quarter).
Crouhy, M., D. Galai, and R. Mark. 2001. Risk Manage-
Jorion, P. 2001–2002. Financial Risk Manager Handbook
ment. New York: McGraw Hill.
2001/2002. New York: Wiley (GARP Risk Manage-
De León, J. 2000–2001. “The Bank of Canada’s Man- ment Library).
agement of Foreign Currency Reserves.” Bank of
Kiff, J., U. Ron, and S. Ebrahim. 2000–2001. “The Fed-
Canada Review (Winter): 13–21.
eral Government’s Use of Interest Rate Swaps and
Finance Canada. 2001. 2000 Annual Report to Parlia- Currency Swaps.” Bank of Canada Review (Winter):
ment on the Operations of the Exchange Fund Account 23–34.
by the Minister of Finance and Report of the Auditor
General to the Minister of Finance on the Examination
of the Accounts and Financial Statements of the
Exchange Fund Account. Ottawa: Department of
Finance.
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Appendix
Roles and Responsibilities within the EFA
Minister of Finance EFA Investment and Financing
• Approve policies governing the investment and Management Committee (Bank of Canada
financing activities of the EFA. and Department of Finance)
• Approve policies for managing market, credit, • Consists of fund managers and representatives of
and liquidity risk, as well as operational and the Department of Finance and the Bank of Can-
legal risks. ada.
• Approve the EFA’S investment rules (current and • Evaluates investment and financing proposals
future activities). developed by the fund managers.
• Approve risk-management rules: level of toler- • Ensures that investment and financing activities
ance to risk and means envisioned to manage follow the rules in place.
risk. • Meets on a monthly basis.
• Present an annual report to Parliament on the
operations of the EFA. Fund Managers (Bank of Canada and
Department of Finance)
EFA Policy Committee (Bank of Canada
• Execute investment and financing operations in
and Department of Finance) conformity with the applicable regulations and
• Consists of senior representatives from the Bank policies.
and the Department of Finance. • Develop tactics for financing and investment
• Generally oversee the Account. operations.
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• Provides direction and
PDF-Editor to major
• Propose new investments and financing
policy initiatives. approaches.
• Review EFA operations. • Participate in monthly meetings of the EFA
• Make recommendations on policy changes. Investment and Financing Management Commit-
• Meets semi-annually. tee and attend quarterly meetings of the Risk-
Management Committee.
Risk-Management Committee (Bank of
Risk Managers (Bank of Canada and
Canada and Department of Finance)
Department of Finance)
• Consists of managers from the Department of
Finance, the Bank of Canada, and including two • Identify risks.
representatives with no connection to the opera- • Develop risk-management rules in collaboration
tions of the EFA, one from the Department of with the fund managers.
Finance and one from the Bank of Canada. • Analyze and model risks.
• Ensures that EFA operations reflect the policies, • Propose measures and management techniques
rules, and ceilings with regard to financial and for overall risk inherent in current and future EFA
operational risks. activities.
• Plays an advisory role for the elaboration of new • Monitor the EFA’S credit, market, and liquidity
rules and methods of managing certain risks and risks on a daily basis, and ensure that the fund
of appropriate performance measures. managers respect the rules in effect.
• Reviews the reports generated by the Risk-Man- • Participate in the monitoring of operational and
agement Unit. legal risks in collaboration with representatives
• Meets on a quarterly basis. of other departments of the Bank and other
branches of the Department of Finance.
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• Report to the fund managers daily, to the Gov- Operations Managers (Bank of Canada and
ernment Debt-Management Committee monthly, Department of Finance)
to the Risk-Management Committee quarterly, to
• Verify the transactions records before their final
senior officials from the Bank of Canada and the
approval.
Department of Finance semi-annually, and to the
Minister of Finance annually. • Confirm transactions with the counterparties.
• Approve transactions and enter the relevant
information in the systems.
• Record the different aspects of the transactions.
• Effect the payments provided for and register
income.
• Generate certain management reports.
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36 BANK OF CANADA REVIEW • WINTER 2001–2002
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