Bilal Owais Irfan

Risk Management in Banking

Risk Management is the process of measuring or assessing the actual or potential dangers of a particular situation.

RISKS FACED BY BANKS

Risk DimensionsCredit

Risk Has Two ComponentsUncertainty.Exposure.

TYPES OF RISK Operational.

Credit.

Reputational

Operational RiskThe risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.

Operational Risks IncludeInternal Fraud.External Fraud.Employment Practices and Workplace Safety.Clients, Products and Business Practices.Damage to Physical Assets.

Internal FraudUnauthorized Activity.Transactions not reported.Transaction type unauthorized.Mismarking of position.Theft and Fraud.Fraud/credit fraud/worthless deposits.Theft/extortion/embezzlement/robbery.Misappropriation of assets.Forgery.Account take-over/impersonation.Bribes/kickbacks.Insider trading.Money laundering.Willful blindness.

External FraudTheft and Fraud.Theft/robbery.Forgery.Check kiting.Identity theft.Elder financial abuse.Systems Security.Hacking damage.Theft of information (with monetary loss).

Employment Practices and Workplace SafetyEmployee Relations.Compensation, benefit, termination issues.Organized labor issues.Safe Environment.General liability (slips and falls).Employee health and safety rules. Workers compensation.Diversity and Discrimination.All discrimination types.Harassment.Equal Employment Opportunity (EEO).

Clients, Products and Business PracticesSuitability, Disclosure and Forgery.guideline violations.Suitability/disclosure issues.Retail consumer disclosure violations.Breach of privacy.Aggressive sales.Inadequate product offerings.Account churning.Misuse of confidential information.Lender liability.

Clients, Products and Business Practices (CONTINUED)Improper Business or Market Practices .Antitrust.Improper trade/market practice.Market manipulation.Insider trading (on firms account).Unlicensed activity.Money laundering.

Clients, Products and Business Practices (CONTINUED)Selection, Sponsorship and Exposure.Failure to investigate client per guidelines.Exceeding client exposure limits.Advisory Activities.Disputes over performance or advisory activities.

Operational Risk ChecklistEmployee training.Close management oversight.Segregation of duties.Employee background checks.Procedures and process.Purchase of insurance.Exiting certain businesses.Capitalization of risks.

Credit RiskRisk due to an uncertainty in a counterpartys ability to meet its obligations in accordance with agreed upon terms.

Credit Risks Include:Loans.Acceptances.Interbank transactions.Trade financing.Equities.Letters of credit.

Sound Practices for Managing Credit Risk

Establish an appropriate credit risk environment.Operate under a sound credit-granting process.Maintain an appropriate credit administration, measurement and monitoring process.Ensure adequate controls over credit risk.

Establish an Appropriate Credit Risk EnvironmentBoard of Directors should review credit risk strategy periodically.Senior management should implement credit risk strategy approved by the Board.

Operate Under a Sound Credit Granting ProcessCriteria should include thorough understanding of the borrower, purpose/structure of credit and its source of repayment.Establish overall credit limits at the level of individual borrowers/connected counterparties.Have a clearly established process for approving new credits/extension of existing credits.

Maintain a Credit Administration, Measurement and Monitoring Process (CONTINUED)System for monitoring overall composition and quality of the credit portfolio.Consider future changes in economic conditions when assessing individual credits.

Credit Risk ChecklistStringent credit standards for borrowers and counterparties.Strict portfolio risk management.Constant focus on changes in economic or other circumstances that can lead to a decline in the credit standing of a banks counterparties.

STANDARDS FOR CREDIT Based on five Cs

CharacterCapitalCapacityCollateralConditions

Reputational RiskReputational risk is the potential that negative publicity, whether true or not, will result in loss of customers, severing of corporate affiliations, decrease in revenues and increase in costs.

Improving relations with shareholders.Creating a more favorable environment for investment.Recruiting/retaining the best employees.Reducing barriers to development in new markets.Securing premium prices for products.Minimizing threats of legal actions.

Benefits of Effective Reputation Management