Risk Management Guidelines for Commercial Banks & DFIs.
Table of Contents
Page No. Introduction
Defining Risk Risk Management Board & Senior Management oversight Risk Management Framework Integration of Risk Business Line Accountability Risk Evaluation / Measurement Independent Review Contingency Planning
1 1 2 3 3 4 4 4 4 5 5 7 8 8 9 9 10 10 13 14 15 15 17 17 18 18 18 19 20 20 21 21 21 22 24 24 24 25
Managing Credit Risk
Components of Credit Risk Management Board & Senior Management oversight Organization Structure Systems and Procedures Credit origination Limit setting Credit Administration Measuring Credit Risk Internal Risk Rating Credit Risk Monitoring & Control Risk Review Delegation of Authority Managing Problem Credits
Managing Market Risk
Interest Rate Risk Foreign Exchange Risk Equity / commodity price Risk Element of Market Risk Management Board and Senior Management Oversight Organization Structure Risk Management Committee ALCO Middle Office Risk Measurement Repricing Gap Models Earning at Risk &Economic Value of Equity Models Value at Risk Risk Monitoring Risk Controls Audit
25 27 28 28 30 30 30 31 31 33 34 34 35 36 37 37 38 38 38 39 39 39
Managing Liquidity Risk
Early Warning Indicators Board and Senior Management Oversight Liquidity Risk Strategy and Policy ALCO/ Investment Committee Liquidity Risk Management Process MIS Liquidity Risk Measurement & Monitoring Contingency Funding Plan Cash Flow Projections Liquidity Ratios & Limits Internal Controls Monitoring & Reporting Risk Exposures
Managing Operational Risk
Operational Risk Management Principles Board & Senior Management Oversight Operational Risk Function Risk Assessment and Quantification Risk Management & Mitigation Risk Monitoring Risk Reporting Establishing Control Mechanism Contingency Planning.
Defining Risk: 1.1.1 For the purpose of these guidelines financial risk in a banking organization is possibility that the outcome of an action or event could bring up adverse impacts. Such outcomes could either result in a direct loss of earnings / capital or may result in imposition of constraints on bank’s ability to meet its business objectives. Such constraints pose a risk as these could hinder a bank's ability to conduct its ongoing business or to take benefit of opportunities to enhance its business. Regardless of the sophistication of the measures, banks often distinguish between expected and unexpected losses. Expected losses are those that the bank knows with reasonable certainty will occur (e.g., the expected default rate of corporate loan portfolio or credit card portfolio) and are typically reserved for in some manner. Unexpected losses are those associated with unforeseen events (e.g. losses experienced by banks in the aftermath of nuclear tests, Losses due to a sudden down turn in economy or falling interest rates). Banks rely on their capital as a buffer to absorb such losses. Risks are usually defined by the adverse impact on profitability of several distinct sources of uncertainty. While the types and degree of risks an organization may be exposed to depend upon a number of factors such as its size, complexity business activities, volume etc, it is believed that generally the banks face Credit, Market, Liquidity, Operational, Compliance / legal / regulatory and reputation risks. Before overarching these risk categories, given below are some basics about risk Management and some guiding principles to manage risks in banking organization.
Risk Management. 1.2.1 Risk Management is a discipline at the core of every financial institution and encompasses all the activities that affect its risk profile. It involves identification, measurement, monitoring and controlling risks to ensure that a) The individuals who take or manage risks...
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