Risk Management in Banks SBI EDX

 The science of Risk management has been developing and evolving continuously. Various other financial instruments such as interbank transaction, trade financing, foregin exchange transactions, financial futures, optins, swaps, bonds can also have credit risk. Credit Risk modelling.  Credit Exposure is the amount of risk during the life of a financial instrument. Upon default it is called exposure at default. In the event of default how large would be the expected outstanding obligations.  When banks assign PD to a borrower they are predicting the likelihood of default over a time period horizon.  LGD(Loss Given default)- is the share of the asset which is lost when a borowwer defaults.  Credit Risk Drivers: Deterioration   in credit quality of  a obligor may take place over a period of time owing to poor management, changes in the financials of unit, adverse changes in business cycles such as inflation, recession and competition.   The ...

 Syllabus 1. Types of Risk 2. Risk Management Process in Banks 3. Risk Management Framework  4. Three lines of Defence 5. Risk Apetite Setting For Financial Risks the risk reward ratio works. Like if we give loan to a low rated borrower we charge more rate of interest and if we invest in a stock which is highly volatile we expect more returns. But the Risk reward ratio does not work for non-financial risks.  What is Credit Risk- Possibility of Loss due to default by a counterparty or possibility of loss due diminution in the credit quality of borrowers or counterparty.  What is Market Risk- Possibility of loss due to change in Market Variables. Market variables are Interest Rate, Exchange rate, equity Price and commodity Price.  OPerational Risk - Possibility of default due to inadequate/failed Internal process, people, systems, or external events.  O t h e r M a t er i a l   R i sks under Basel Pillar 2 1 .Liqu i di t y  R i s k : Li q uidi t y ...

 With the introduction of the basel 3 accords after the 2007-2009 crisis some new concepts such as Leverage Ratio, Liquidity Coverage Ration or LCR, Net Stable Funding Ration NSFR, SIB or Systematically Important banks, and the capital buffers emerged.  BCBS Origin and Role Basel is a city in Switzerland. Where the representatives of G10 countries got together in 1974 to form BCBS- Basel Comittee on Banking Supervision. The trigger for setting up BCBS was the failure of Herstatt bank in Germany.  There were two main objectives for setting up BCBS:- 1. To enhance financial stability by improving the quality of banking supervision by central banks.  2. To monitor and ensure capital adequacy of the banks. To achieve these objectives BCBS releases accords which are known as Bassel accords. Today BCBS comprises of 45 members from 28 jurisdictions.  Basel Accords The primary risk that the banks face is the non-repayment or default on loan by a borrower and is called c...