Risk Management in Banks & the Capital Implications

Course Objectives
Participants will be equipped to:
Identify and quantify credit, market, liquidity, and operational risks
Understand the systems and procedures needed by a bank to track, monitor and manage these risks
Relate the risks to the capital of a bank
Understand the importance of legal, reputational, and regulatory risks.
Target Audience
The workshop is designed for bankers and analysts but is also appropriate for a broader audience who wish to gain insight into the risk management process and how capital is allocated. The course is targeted at an intermediate level and assumes a basic understanding of banking products, especially derivatives.

There may be some overlap with this training workshop and Trading Risks in Financial Institutions and Credit Risk in Derivative Products. Overall, they are designed to be complementary. Trading Risks in Financial Institutions focuses on the credit and market risks in the trading activities of banks. The workshop, Credit Risk in Derivative Products, includes aspects of market risk. Please contact FitchTraining for further guidance.

FitchTraining offers programmes at an intermediate level and advanced level of continuing education. Although no prerequisite courses or experience is required to participate in this programme, working knowledge of financial statement analysis is required, as well as prior knowledge of the programme topic.

Content
ANALYTIC OVERVIEW
Overview
Why risk management is critical to banks
Value drivers and business model of a bank
Understanding differing perspectives: shareholders, regulators, and debt providers
Risk management
Major risk groups: credit, market, liquidity, operational
Management objectives – risk versus return
Capital allocation
Types of capital: shareholder, regulatory and economic capital
Economic capital: key management assumptions
Regulatory capital: Basel I versus Basel II
Managing capital structures: comparisons between banks
CREDIT RISK
Identifying and quantifying the risk
Seven categories of credit risk: lending, contingent, issuer, pre-settlement, settlement, country/transfer, other
Systems and procedures for quantifying and aggregating exposures
Bank rating models: classifying risks according to default and recovery probabilities; borrower and facility evaluations
Quantifying expected and unexpected losses.
Managing credit risk
Limits and safeguards – policy, process and procedures
Credit approval authorities and transaction approval process
Aggregating exposure limits by customer, sector and correlated credits
Credit mitigation techniques: collateral; termination clauses, re-set clauses, cash settlement, netting agreements
Documentation: covenant packages, ISDA and CSA and other collateral agreements
Portfolio techniques
Portfolio management objectives: balancing the risk appetite and diversification to maximise risk adjusted returns
Diversification, granularity and correlation concepts
Techniques to spread risk: syndication, sub-participation, whole loan sales, credit derivatives, securitisation
MARKET RISK
Identifying and quantifying the risk
Portfolio versus transaction approach
Trading Book v Banking Book.
Value at Risk (VaR): holding periods, confidence levels and disclosure
Volatility of trading profits
Systems and procedures for aggregating exposures
Managing the risk
Risk appetite and capital requirements
Capital treatment of market risk under Basel I and II
Key sensitivities to and interest rate and/or FX positions
Setting and monitoring transaction and portfolio limits
LIQUIDITY RISK
Identifying, defining and quantifying the risk
Types of liquidity risk: funding and transactional
Gap management: interest, currency, and maturity mismatches
Concepts of cash capital
Managing the risk
Asset and liability management techniques: gap limits and regulatory requirements
Contingency liquidity
Use of securitisation: impact on capital, credit quality and liquidity
OPERATIONAL AND OTHER RISKS
Identifying, defining and quantifying the risk
Distinguishing operational, legal, reputational and regulatory risk
“Know Your Customer”, money laundering and ultra vires issues
Managing the risk
Capital requirements under Basel II
Standardised versus models based approaches
Lessons learned from recent losses