Risk Management in Banks

[mandarrocks]

Risk is any uncertainty about a future event that threatens your organization's ability to
accomplish its mission. Risk management is a discipline for dealing with the possibility
that some future event will cause harm. It provides strategies, techniques, and an
approach to recognizing and confronting any threat faced by an organization in fulfilling
its mission.

Risk management does not aim at risk elimination, but enables the organization to bring
their risks to manageable proportions while not severely affecting their income. This
balancing act between the risk levels and profits needs to be well planned. Two distinct
viewpoints emerge - one that is about managing risks, maximizing profitability and
creating opportunity out of risks and the other that is about minimizing risks/loss and
protecting corporate assets. The management of an organization needs to consciously
decide on whether they want their risk management function to 'manage' or 'mitigate'

Credit risk is defined as the possibility of losses associated with diminution in the credit
quality of borrowers or counterparties. In a bank's portfolio, losses stem from outright
default due to inability or unwillingness of a customer or counterparty to meet
commitments in relation to lending, trading, settlement and other financial transactions.

Over the past few years, the new Basel norms for capital adequacy have been drawing a
lot of attention in international and Indian banking circles. The changes that the Bank for
International Settlements [BIS], based in city of Basel in Switzerland has been ushering
in over past few years will change the banking industry remarkably. The Basel
Committee on Banking Supervision is working with the Central banks around the world
to institutionalize better risk management practices and make banking a safer and more
robust business worldwide.

Credit risk corresponds to changes in the credit quality of a security, an issuer, or counter-
party. A crucial step in credit risk analysis is the modelling of a credit event with respect
to some issuer or counter-party.
Basel II follows a three-step paradigm on identifying the credit risk capital requirement of
a bank. Banks can choose from among the following approaches to estimate credit risk in
their portfolios:
(1) The Basic Standardised Approach
(2) The Foundation Internal-Rating Based Model (FIRB)
(3) The Advanced Internal Rating Based Model (AIRB)
The said models are covered in our study.

We then look at Seven steps to implementing Basel II, which cover Analyzing gaps,
Drawing an implementation roadmap, Implementing/Enhancing the Internal Rating
system, Creating infrastructure for data management, Building data analytics, Testing the
solutions, infrastructure and procedures and Preparing for supervisory certification

There are varies models that are used for the process of Credit Risk Modeling, the current
applications include, Setting of concentration and exposure limits, Setting of hold targets
on syndicated loans, Risk-based pricing, Improving the risk/return profiles of the
portfolio, Evaluation of risk-adjusted performance of business lines or managers using
risk-adjusted return on capital (RAROC); and Economic capital allocation.

[har1988]

Thank you very much... i needed this :-)