Lecture 4 slides.ppt

AC959 – Bank Strategy and Risk

Lecture 4:Introduction to risk management

in banking

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Aims of lecture

• Understand the structure of bank’s balance sheets and income structure

• Identify the key banking risks• Introduce management of key banking

risks

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Commercial bank balance sheet

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Investment bank balance sheet

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Capital structure: Manufacturing v Bank

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Bank income statement

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Barclays Profit and loss account 2000-2004

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Managing bank risks – generic areas

• Asset management• Liability management• Liquidity management• Capital management• Off-balance sheet (OBS) management

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Key banking risks

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Credit risk

“The risk that a counterparty defaults on some or all of its contractual obligations. In lending operations it is the likelihood that a borrower will not be able to repay the principal or pay the interest.”

[Casu, Giradone and Molyneux, 2006]


Counterparty risk

“The risk that a party in a financial transaction will default.”



Liquidity risk

“The risk that an institution is unable to meet its obligations as they become due.”



Interest rate risk

• “The risk of a decline in earnings due to the movements of interest rates.” [Bessis, 2002]

• “Risk arising from the mismatching of the maturity and the volume of banks’ assets and liabilities as part of their asset transformation function.” [Casu, Giradone and Molyneux, 2006]


Market risk

“The risk of losses arising from movements in market prices. This type of risk pertains in particular to trading in assets, liabilities and derivative products. This risk relates to changes in interest rates, exchange rates and other asset prices.”



Other risks

• Foreign exchange risk• Operational risk• Country risk/Sovereign risk

Lecture 4 slides.ppt

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