Managing Risks in Commercial and Retail Banking

Series......Page 48
Title Page......Page 50
Copyright......Page 51
Preface......Page 55
PART One: Risk Management Approaches and Systems......Page 65
1.1 CONCEPT OF RISK......Page 66
1.2 BROAD CATEGORIES OF RISKS......Page 68
1.3 CREDIT RISK......Page 77
1.4 MARKET RISK......Page 84
1.5 OPERATIONAL RISK......Page 86
1.6 OPERATING ENVIRONMENT RISK......Page 96
1.7 REPUTATION RISK......Page 100
1.8 LEGAL RISK......Page 104
1.9 MONEY LAUNDERING RISK......Page 107
1.10 OFFSHORE BANKING RISK......Page 115
1.11 IMPACT OF RISK......Page 120
1.12 SUMMARY......Page 124
2.1 HOW CONTROL RISK ARISES......Page 129
2.2 EXTERNAL CONTROL AND INTERNAL CONTROL RISKS......Page 131
2.3 INTERNAL CONTROL OBJECTIVES......Page 137
2.4 INTERNAL CONTROL FRAMEWORK......Page 141
2.5 TASKS IN ESTABLISHING A CONTROL FRAMEWORK......Page 164
2.6 BUSINESS RISK AND CONTROL RISK RELATIONSHIP......Page 188
2.7 SUMMARY......Page 191
3.1 WHAT IS TECHNOLOGY RISK?......Page 195
3.2 RISKS IN ELECTRONIC BANKING......Page 197
3.3 SOURCES OF TECHNOLOGY RISK......Page 201
3.4 MANAGEMENT OF TECHNOLOGY RISK......Page 218
3.5 SUMMARY......Page 220
4.1 RISK MANAGEMENT CONCEPT......Page 223
4.2 RISK MANAGEMENT APPROACH......Page 226
4.3 RISK IDENTIFICATION APPROACH......Page 232
4.4 RISK MANAGEMENT ARCHITECTURE......Page 234
4.5 RISK MANAGEMENT ORGANIZATIONAL STRUCTURE......Page 238
4.6 SUMMARY......Page 257
5.1 RISK MANAGEMENT POLICY......Page 261
5.2 RISK APPETITE......Page 267
5.3 RISK LIMITS......Page 272
5.4 RISK MANAGEMENT SYSTEMS......Page 280
5.5 MANAGEMENT INFORMATION SYSTEM......Page 314
5.6 VERIFICATION OF RISK ASSESSMENT......Page 337
5.7 HUMAN RESOURCE DEVELOPMENT......Page 339
5.8 TOP MANAGEMENT COMMITMENT......Page 343
5.9 CAPITAL ADEQUACY ASSESSMENT AND DISCLOSURE REQUIREMENT......Page 347
5.10 RISK PRIORITIZATION......Page 351
5.11 SUMMARY......Page 354
PART Two: Credit Risk Management......Page 361
6.1 GENESIS OF CREDIT PROBLEMS......Page 362
6.2 CAUSES OF CREDIT RISK......Page 410
6.3 SUMMARY......Page 416
7.1 MARKET RISK AND CREDIT RISK RELATIONSHIP......Page 421
7.2 CREDIT RISK IDENTIFICATION APPROACH......Page 428
7.3 CREDIT RISK IDENTIFICATION PROCESS......Page 443
7.4 SUMMARY......Page 487
8.1 CREDIT RISK RATING CONCEPT......Page 493
8.2 CREDIT RISK RATING USES......Page 498
8.3 CREDIT RISK RATING PRINCIPLES......Page 536
8.4 SUMMARY......Page 559
9.1 RATING PRACTICES IN BANKS......Page 565
9.2 DESIGN OF THE RATING FRAMEWORK......Page 569
9.3 CONCEPTUAL ISSUES......Page 574
9.4 DEVELOPMENTAL ISSUES......Page 597
9.5 IMPLEMENTATION ISSUES......Page 617
9.6 RATING FRAMEWORK OVERVIEW......Page 637
9.7 SUMMARY......Page 641
10.1 INTERNAL RATING SYSTEMS IN BANKS......Page 646
10.2 NEED FOR DIFFERENT RATING MODELS......Page 652
10.3 NEED FOR NEW AND OLD BORROWER RATING MODELS......Page 656
10.4 TYPES OF RATING MODELS......Page 665
10.5 NEW CAPITAL ACCORD OPTIONS......Page 668
10.6 ASSET CATEGORIZATION......Page 674
10.7 IDENTIFICATION OF MODEL INPUTS......Page 677
10.8 ASSESSMENT OF COMPONENT RISK......Page 685
10.9 SUMMARY......Page 732
11.1 RATING METHODOLOGY DEVELOPMENT PROCESS......Page 736
11.2 DERIVATION OF COMPONENT RATING......Page 787
11.3 DERIVATION OF COUNTERPARTY RATING......Page 806
11.4 SUMMARY......Page 808
12.1 RISK RATING AND RISK MEASUREMENT MODELS......Page 811
12.2 CREDIT LOSS ESTIMATION—CONCEPTUAL ISSUES......Page 815
12.3 QUANTIFICATION OF RISK COMPONENTS......Page 830
12.4 CREDIT RISK MEASUREMENT MODELS......Page 879
12.5 BACK-TESTING OF CREDIT RISK MODELS......Page 895
12.6 STRESS TESTING OF CREDIT PORTFOLIOS......Page 899
12.7 SUMMARY......Page 907
13.1 GENERAL ASPECTS......Page 914
13.2 CREDIT MANAGEMENT AND CREDIT RISK MANAGEMENT......Page 916
13.3 CREDIT RISK MANAGEMENT APPROACH......Page 921
13.4 CREDIT RISK MANAGEMENT PRINCIPLES......Page 926
13.5 ORGANIZATIONAL STRUCTURE FOR CREDIT RISK MANAGEMENT......Page 947
13.6 CREDIT RISK APPETITE......Page 954
13.7 CREDIT RISK POLICIES AND STRATEGIES......Page 957
13.8 EARLY WARNING SIGNAL INDICATORS......Page 992
13.9 CREDIT AUDIT MECHANISM......Page 1007
13.10 CREDIT RISK MITIGATION TECHNIQUES......Page 1016
13.11 SUMMARY......Page 1037
14.1 PORTFOLIO CLASSIFICATION......Page 1043
14.2 PORTFOLIO MANAGEMENT OBJECTIVES......Page 1047
14.3 PORTFOLIO MANAGEMENT ISSUES......Page 1050
14.4 PORTFOLIO ANALYSIS TECHNIQUE......Page 1065
14.5 PORTFOLIO RISK MITIGATION TECHNIQUES......Page 1084
14.6 SUMMARY......Page 1098
15.1 LOAN PRICING CONCEPT......Page 1102
15.2 LOAN PRICING PRINCIPLES......Page 1104
15.3 LOAN PRICING ISSUES......Page 1108
15.4 LOAN PRICE COMPUTATION......Page 1120
15.5 SUMMARY......Page 1133
PART Three: Market Risk Management......Page 1136
16.1 MARKET RISK CONCEPT......Page 1137
16.2 MARKET RISK TYPES......Page 1139
16.3 MARKET RISK MANAGEMENT FRAMEWORK......Page 1145
16.4 ORGANIZATIONAL SETUP......Page 1150
16.5 MARKET RISK POLICY......Page 1159
16.6 MARKET RISK VISION......Page 1161
16.7 SUMMARY......Page 1169
17.1 LIQUIDITY RISK CAUSES......Page 1173
17.2 LIQUIDITY RISK MANAGEMENT ACTIVITIES......Page 1180
17.3 LIQUIDITY RISK MANAGEMENT POLICIES AND STRATEGIES......Page 1186
17.4 LIQUIDITY RISK IDENTIFICATION......Page 1192
17.5 LIQUIDITY RISK MEASUREMENT......Page 1200
17.6 LIQUIDITY MANAGEMENT STRUCTURE AND APPROACHES......Page 1220
17.7 LIQUIDITY MANAGEMENT UNDER ALTERNATE SCENARIOS......Page 1240
17.8 LIQUIDITY CONTINGENCY PLANNING......Page 1252
17.9 STRESS TESTING OF LIQUIDITY FUNDING RISK......Page 1258
17.10 LIQUIDITY RISK MONITORING AND CONTROL......Page 1276
17.11 SUMMARY......Page 1293
18.1 INTEREST RATE RISK IN TRADING AND BANKING BOOKS......Page 1299
18.2 INTEREST RATE RISK CAUSES......Page 1305
18.3 INTEREST RATE RISK MEASUREMENT......Page 1321
18.4 MATURITY GAP ANALYSIS......Page 1328
18.5 DURATION GAP ANALYSIS......Page 1338
18.6 SIMULATION ANALYSIS......Page 1357
18.7 VALUE-AT-RISK......Page 1362
18.8 EARNINGS AT RISK......Page 1380
18.9 INTEREST RATE RISK MANAGEMENT......Page 1394
18.10 INTEREST INCOME STRESS TESTING......Page 1404
18.11 INTEREST RATE RISK CONTROL......Page 1406
18.12 SUMMARY......Page 1410
19.1 EXCHANGE RISK IMPLICATION......Page 1416
19.2 EXCHANGE RISK TYPES......Page 1420
19.3 FOREIGN CURRENCY EXPOSURE MEASUREMENT......Page 1435
19.4 EXCHANGE RISK QUANTIFICATION......Page 1446
19.5 EXCHANGE RISK MANAGEMENT......Page 1452
19.6 EXCHANGE RISK HEDGING......Page 1470
19.7 SUMMARY......Page 1475
20.1 EQUITY EXPOSURE IDENTIFICATION......Page 1479
20.2 EQUITY EXPOSURE MANAGEMENT FRAMEWORK......Page 1484
20.3 EQUITY EXPOSURE RISK MEASUREMENT......Page 1487
20.4 SUMMARY......Page 1492
21.1 ASSET-LIABILITY REVIEW......Page 1495
21.2 LIQUIDITY RISK REVIEW......Page 1499
21.3 INTEREST RATE RISK REVIEW......Page 1510
21.4 FOREIGN EXCHANGE RISK REVIEW......Page 1514
21.5 EQUITY PRICE RISK REVIEW......Page 1517
21.6 VALUE-AT-RISK REVIEW......Page 1519
21.7 SUMMARY......Page 1520
PART Four: Operational Risk Management......Page 1523
22.1 OPERATIONAL RISK CONCEPT......Page 1524
22.2 OPERATIONAL RISK SOURCES......Page 1530
22.3 OPERATIONAL RISK CAUSES......Page 1541
22.4 OPERATIONAL RISK POLICY OBJECTIVES......Page 1561
22.5 OPERATIONAL RISK POLICY CONTENTS......Page 1564
22.6 OPERATIONAL RISK MANAGEMENT FRAMEWORK......Page 1569
22.7 SUMMARY......Page 1583
23.1 OPERATIONAL RISK IDENTIFICATION APPROACH......Page 1588
23.2 OPERATIONAL RISK IDENTIFICATION PROCESS......Page 1594
23.3 BUSINESS LINE IDENTIFICATION......Page 1596
23.4 OPERATIONAL RISK ASSESSMENT METHODS......Page 1613
23.5 OPERATIONAL RISK MEASUREMENT METHODOLOGY......Page 1629
23.6 OPERATIONAL RISK MEASUREMENT PROCESS......Page 1645
23.7 OPERATIONAL RISK MONITORING......Page 1661
23.8 OPERATIONAL RISK CONTROL AND MITIGATION......Page 1664
23.9 HIGH-INTENSITY OPERATIONAL RISK EVENTS—BUSINESS CONTINUITY PLANNING......Page 1671
23.10 BUSINESS CONTINUITY PLAN SUPPORT REQUIREMENTS......Page 1679
23.11 BUSINESS CONTINUITY PLANNING METHODOLOGY......Page 1682
23.12 OPERATIONAL RISK MANAGEMENT ORGANIZATIONAL STRUCTURE......Page 1692
23.13 SUMMARY......Page 1695
PART Five: Risk-Based Internal Audit......Page 1702
24.1 INTERNAL AUDIT SCOPE AND RATIONALE......Page 1703
24.2 RISK-BASED INTERNAL AUDIT POLICY......Page 1727
24.3 INTERNAL AUDIT DEPARTMENT STRUCTURE......Page 1732
24.4 SUMMARY......Page 1740
25.1 RISK-BASED INTERNAL AUDIT METHODOLOGY......Page 1743
25.2 RISK-BASED AUDIT PLANNING AND SCOPE......Page 1793
25.3 RISK-BASED AUDIT PROCESS......Page 1807
25.4 SUMMARY......Page 1863
PART Six: Corporate Governance......Page 1868
26.1 CORPORATE GOVERNANCE CONCEPT......Page 1869
26.2 CORPORATE GOVERNANCE OBJECTIVES......Page 1876
26.3 CORPORATE GOVERNANCE FOUNDATION......Page 1886
26.4 CORPORATE GOVERNANCE ELEMENTS......Page 1887
26.5 CORPORATE GOVERNANCE IN BANKS......Page 1914
26.6 TOWARD BETTER CORPORATE GOVERNANCE IN BANKS......Page 1938
26.7 SUMMARY......Page 1954
PART Seven: Lessons from the Asian and the United States' Financial Crises......Page 1959
CHAPTER 27: The Causes and Impact of the Asian and the United States’ Financial Crises......Page 1960
27.1 THE ASIAN FINANCIAL CRISIS CAUSES AND IMPACT......Page 1963
27.2 RISKS EMERGING FROM THE ASIAN FINANCIAL CRISIS......Page 1968
27.3 THE IMPACT OF THE U.S. FINANCIAL CRISIS......Page 1982
27.4 THE U.S. FINANCIAL CRISIS CAUSES AND THE CONCOMITANT RISKS......Page 1987
27.5 BASEL COMMITTEE ON BANKING SUPERVISION RESPONSE (BASEL III)......Page 2051
27.6 SUMMARY......Page 2058
About the Author......Page 2068
Index......Page 2071