logging in or signing up Challenges in Risk Management in Banks Yerramraju Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINT lite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: Embed: Flash iPad Dynamic Copy Does not support media & animations Automatically changes to Flash or non-Flash embed WordPress Embed Customize Embed URL: Copy Thumbnail: Copy The presentation is successfully added In Your Favorites. Views: 2148 Category: Education License: All Rights Reserved Like it (4) Dislike it (0) Added: September 22, 2010 This Presentation is Public Favorites: 1 Presentation Description No description available. Comments Posting comment... By: raj1977 (26 month(s) ago) Sir, your presentation is very usful, can you please send it to me. My email is rajyadavjnu@gmail.com. Thanks Saving..... Post Reply Close Saving..... 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YERRAM RAJU REGIONAL DIRECTOR PRMIA,HYDERABAD CHAPTER yerramr@gmail.com; Hyderabad@prmia.org The Professional Risk Managers’ International Association RISK MANAGEMENT- THE EMERGING CONTEXT & CHALLENGES AHEAD:ANDHRA BANK FORUM TALK-180910 To-day’s Agenda : To-day’s Agenda Financial Risk Management –The ‘what and why’ of it Analytics of Risk Management The Roles of the Board and Senior Managers Emerging Context The Lessons of Crisis and Challenges Hell Broke! : Hell Broke! Tsunami 2005 Bird Flu Swine Flu Floods and torrential rains Dark Clouds on Iceland Flights from across Pacific canceled for a month Three ATR Domestic flights meet with sudden accidents Two Air Bus crash land Recession in US Sovereign Debt trap in EU Lost my sleep! : Lost my sleep! Three branches report frauds of huge magnitude – Press and Media flash the news Gold ornaments in six branches reported spurious across two regions Twenty percent of branches migrate to lower ratings in inspection and audit Six large firms lent by the Bank declare wash out Credit card and Housing subsidiaries down in their business. Sensex crashes by 30% - a market correction after a continuous up beat for six months? “The essence of risk management lies in maximising the areas we have some control over the outcome while minimising the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us” : “The essence of risk management lies in maximising the areas we have some control over the outcome while minimising the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us” Peter L.Bernsten - Against the Gods : What Is Risk? Risk, in traditional terms, is viewed as negative. Oxford defines risk “as the possibility of meeting danger or suffering harm or loss”. The Chinese give a pictorial description for risk: The first is a symbol for ‘danger’ while the second is the symbol for ‘opportunity’ making risk a mix of danger and opportunity. : Risk in business is directly linked to Political stability – National – International Economic Development – National – International Social Status – Domestic and International – physical – financial and social infrastructure Technological Advancement Risk Perception Depends on : Risk Perception Depends on Aggressive / Conservative Approach Competitiveness and Innovativeness Size of balance sheet/off-balance sheet Selection of constituents Selection of Products Supervisory/regulatory compliance requirements Slide 9: This again depends on Strength of Human resources, their attitude, skill and knowledge in understanding the whole gamut of business - various markets – their linkages – under currents – instruments – safeguards, etc., etc., as the currency is fungible and the risks get transferred fast Slide 10: EVOLUTION OF BANKING SINCE 1950 Present Scenario in Banks : Present Scenario in Banks Change in business Model of banks From Buy and hold model to originate to distribute model due to innovative financial instruments and new players in the market Risk Management and Financial Stability – Basel II and Beyond Dynamic World !!!! : Dynamic World !!!! Pressure to increase offerings Explosion of electronic commerce Customer’s control over banking Rapid spread of information The “NEW” Retail Banks: : The “NEW” Retail Banks: State of Dynamism: Customer Acquisition & Management MultiChannel Management Online Banking Bancassurance Fast changing position Hierarchy of Financial Risks : Hierarchy of Financial Risks Portfolio Concentration Risk Transaction Risk Counterparty Risk Issuer Risk Trading Risk Gap Risk Financial Risks Operational Risk Market Risk Credit Risk “SpecificRisk” GeneralMarket Risk Issue Risk * From Chapter-1, “Risk Management” by Crouhy, Galai and Mark Breaking Down the Bank {Portfolio along organizational Dimensions : Breaking Down the Bank {Portfolio along organizational Dimensions Business Poles Business Lines Lending and Collecting Deposits Individuals and SBFs Combankg Retail Fin Services Mid-Corportes Large Corporates Advisory Services Mergers & Acquisitions LBO… Banks & Fin firms Assets Financing (Aircrafts) Commodities, Securitisation Invest -ment Banking Derivatives, Equity Fixed Income Trading Private Banking Assets Management Others Custody ‘Structured Finance’ Traded Instruments From Joel Bessis Present Scenario and Risk Assessment : Present Scenario and Risk Assessment Integration of markets both domestic and international and integration of services Increasing trend in retail segment of business Expansion of business and build up of assets and liabilities in international markets Opening up of branches/subsidiaries by global banks – New Licensing Policy of RBI Consolidation of banking, complexity of innovative products* Supervision of cross-border banking groups – Supervisory and financial conglomerates * “Fools ignore complexity. Pragmatists suffer it. Some can avoid it. Geniuses remove it.” –US computer scientist Key features of the new environment : Key features of the new environment 1) Atomization of risk – Eg – Credit transfer products 2) Emergence of new financial players – This results in increased complexity change in market liquidity – New territory 3) Growing symbiosis between markets and financial institutions – Markets rely on both old and new financial firms – Financial firms rely on markets for profits and risk management activities 4) Surge in volume of transactions 5) Current economic expansion Keynote address of Malcolm De Knight, G.M. BIS: “ Now you see it, Now you don’t: Risk in the small and in the large” Risk in Indian Scenario - Issues : Risk in Indian Scenario - Issues Knowledge/skill Gap to understand and handle the complex products at all levels Do not enjoy full autonomy in practice Moral Hazard – Government backing in the case of public sector banks Human Resources – Skill development – Age profile – on the wrong side in the case of old private sector/public sector banks Reforms era : Reforms era Introduction of BIS Norms Capital Adequacy Standards Prudential norms Credit Rating & Risk-based pricing Valuation of investments Disclosure requirements Competition by allowing new banks The Basel – II Capital Accord : Minimum Capital Requirement Three Basic Pillars Supervisory Review Process Market Discipline Requirements The Basel – II Capital Accord Second phase of the reforms : Second phase of the reforms Capital Adequacy Standards i. Enhancement in CRAR ii. Capital for Market Risk iii. Rationalisation of risk weights Second phase (contd.) : Second phase (contd.) Strengthening of prudential norms Provision for Standard assets Time frame for Doubtful debts Govt. guaranteed advances Second phase (contd.) : Second phase (contd.) Disclosure requirements Maturity pattern of Loans and advances Investments Deposits Borrowings Foreign currency assets & liabilities Lending to sensitive sectors Valuation of investments Response to Financial Risk : Response to Financial Risk Market response-introduce new products Equity futures Foreign currency futures Currency swaps Options Regulatory response Prudential norms Stringent Provisioning norms Corporate governance norms Risk in Indian Scenario - Issues : Risk in Indian Scenario - Issues Fast changing Technology Compatibility of Technology – With customer requirements – High profile customers – illiterate customers Information asymmetry Lack of professionalism in the delivery of total service Coverage of service to unorganized sector Persistence of lack of legal support Risk in Indian Scenario - Issues : Risk in Indian Scenario - Issues Inadequate secondary market for some of the products Ever increasing cost No level playing field Retaining identity and reputation in the market Maintaining profitability Sustaining high supervisory rating Slide 28: “All said, there is lot of thrill in the game and we must know how to play the game skillfully and remain in business with all checks and balances” Approach : Approach Risk by choice and not by chance Integrated, not fragmented approach (asset, liability, off-balance sheet items) Integrated approach to market and credit risks -- Motives and roles of financial institutions and corporate treasury -- Implications Risk management : Risk management Beyond regulatory compliance Internal control to value creation A new mindset/a new paradigm Slide 31: Strategic Framework Information Reporting Framework Organisational Framework Operational Framework Analytical Framework Control Framework Regulatory Compliance Performance Measurement Framework Technology Framework A Comprehensive Framework Risk Management Slide 32: Risk Management becomes too important to be left for a department or its Head. RISK CULTURE GOVERNANCE / TRANSPARENCY / CONTROLS Require attention at different levels and a seamless integration in the organization. Board of Directors : Board of Directors Understand risks Management of risks Role of Senior Management : Role of Senior Management Develop written policies and procedures, subject to Board approval Maintain clear lines of authority Establish appropriate limits on risk taking, subject to Board approval Develop adequate risk measurement systems Provide standards for valuing positions and measuring performance Ensure an effective system of internal controls Initiate a comprehensive risk reporting and measurement review process Provide Directors with comprehensive information on the entire portfolio. Simple lessons of the crisis : Simple lessons of the crisis Those with traditional banking little affected Exotic products turn chaotic Data integrity is critical Mathematical models lead us only to a point beyond which intuitive approach pays Models can’t capture irrational human behavior Gold plated credit ratings are no substitute for bank’s own due diligence The Ten Triggers for the challenge : The Ten Triggers for the challenge Likely deceleration in the pace of expansion of Banks’ Balance Sheets Combined assets of all banks would be 65% of GDP by Mar 2010 Increasing NPAs fuelled by new businesses Stricter regulatory compliance mandates CAGR may slow down to 12-13% in the coming decade from 16.7% (94-04) Efforts of inclusiveness Outsourced businesses & BCs Scaling up technological architecture Strategic and incremental innovation Internet technologies; mobiles; Business intelligence and aanalytics softwares Recruitment, development and retention of manpower Future Challenges : Future Challenges Next decade more transformational Unprecedented volumes of business with rapid and inclusive growth Human resources biggest challenge the right kind of numbers Expertise to deliver sophisticated financial products RBI introduced provisioning coverage ratio of 70% for NPAs as a forward looking requirement Higher growth sectors like real estate, infrastructure, NBFCs pose challenges Emergence of long term investment funds like insurance and pension funds Banks moving to Advance Approaches : Banks moving to Advance Approaches Pricing of risk – below cost can be suicidal Concentration risk, strategic risk, reputation risk, risks arising out of securitisation, off-balance sheet vehicles, valuation practices need better recognition Every new product should be subject to stress tests Banks that are part of financial conglomerates must focus on intra-group exposures and transactions as also group wise exposures to sectors and borrowers Systemic risk deserve more attention Be vigilant to international regulatory initiatives’ impact Banks moving to Advance Approaches : Quality and coverage of capital – Tier I capital and common equity component (9.4% and 7% respectively in Mar 09) Introduction of leverage ratio as regulatory tool (17% for Indian Banks in March 2009 – reasonable) Banks should keep vigil on long term net stable funding ratio Banks moving to Advance Approaches New Basel Accord III : New Basel Accord III Changes in capital allocation for securitization exposures New definitions of capital Market Risk Capital requirements Leverage ratio Liquidity Risk Management Principles The role of Countercyclical capital New Basel Accord or Basel III : New Basel Accord or Basel III Impose upon Banks a core Tier I capital ratio – roughly equivalent to tangible common equity ratio- Common equity to Risk Weighted Assets::4-6% Short Term Liquidity Metric and the Structural Funding Metric undergo change Allocation of ‘going-concern’ capital to some non-banking businesses like insurance is an area of anxiety Leverage ratio could complement risk-adjusted metrics – strengthens the ‘supervisory review’ under Pillar II The calibration of capital charges for counter party risk may help the banks withstand the ugly crises of the type we witnessed in the last two years. Regulations are designed to make financial crises less likely Management of Risk : Management of Risk Understanding and identifying the risk may be possible to a great extent but measuring the risk is a difficult task. Doing banking business is akin to climbing a pole immersed in oil. Slippery and slippages have to be overcome Risk is in the midst of the sea. The approach is to minimize the risk and survive in the midst of the turbulent sea. The objective is neither to cross the sea nor come back to the shore of the sea from where you started Banking & Risk : Banking & Risk Same side of the coin Inherent as banks essentially trade in risk in the process of maturity transformation Banks can’t afford to be risk averse Prudence: critical to safety of deposits Creating Risk Appetite is as important as mitigating risks as we have to stay in business in a highly competitive environment and grow and grow. Reputation Risk : Reputation Risk – How to assess? Is it on the strength of Balance Sheet? Is it based on performance of its shares in the market? Is it based on other parameters like customer service, aggressiveness in the market or penetration Is it based on Regulatory rating? Is it based on market share of business? Is it a combination of all? Managing Reputation Risk : Managing Reputation Risk Keeping events as quiet as possible Managing the external interface Create enough reputation capital Maintenance of AB Brand Promoting projects of societal benefit Establishing a broad culture of integrity Managing large customers with care and concern Managing retail customers thru better service & prompt customer complaint redressal Careful avoidance of conflict between retail and investment banking Internal customer interaction frequency to increase Customer feed back surveys frequency to increase Board level interaction to assess the possible ways of improvement Stress testing Slide 46: Intelligent management of risk will be the foundation of a successful financial institution In the future . . . Thank youyerramr@gmail.com; hyderabad@prmia.orgwww.prmia.org : Thank youyerramr@gmail.com; hyderabad@prmia.orgwww.prmia.org You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.
Challenges in Risk Management in Banks Yerramraju Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINT lite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: Embed: Flash iPad Dynamic Copy Does not support media & animations Automatically changes to Flash or non-Flash embed WordPress Embed Customize Embed URL: Copy Thumbnail: Copy The presentation is successfully added In Your Favorites. Views: 2148 Category: Education License: All Rights Reserved Like it (4) Dislike it (0) Added: September 22, 2010 This Presentation is Public Favorites: 1 Presentation Description No description available. Comments Posting comment... By: raj1977 (26 month(s) ago) Sir, your presentation is very usful, can you please send it to me. My email is rajyadavjnu@gmail.com. Thanks Saving..... Post Reply Close Saving..... Edit Comment Close By: Meedor (28 month(s) ago) I really love your presentation. Congrats for a great work. Could you please send it to me? I have a lot to learn using your presentation. Thanks! Saving..... Post Reply Close Saving..... Edit Comment Close By: nadeem2121 (29 month(s) ago) very good Saving..... Post Reply Close Saving..... Edit Comment Close By: ZAUR (30 month(s) ago) very useful presentation please could you make it avaible for me Saving..... Post Reply Close Saving..... Edit Comment Close By: bsbehl (30 month(s) ago) please send behl_in@yahoo.com Saving..... Post Reply Close Saving..... Edit Comment Close loading.... See all Premium member Presentation Transcript RISK MANAGEMENT- THE EMERGING CONTEXT & CHALLENGES AHEAD:ANDHRA BANK FORUM TALK-180910 : B. YERRAM RAJU REGIONAL DIRECTOR PRMIA,HYDERABAD CHAPTER yerramr@gmail.com; Hyderabad@prmia.org The Professional Risk Managers’ International Association RISK MANAGEMENT- THE EMERGING CONTEXT & CHALLENGES AHEAD:ANDHRA BANK FORUM TALK-180910 To-day’s Agenda : To-day’s Agenda Financial Risk Management –The ‘what and why’ of it Analytics of Risk Management The Roles of the Board and Senior Managers Emerging Context The Lessons of Crisis and Challenges Hell Broke! : Hell Broke! Tsunami 2005 Bird Flu Swine Flu Floods and torrential rains Dark Clouds on Iceland Flights from across Pacific canceled for a month Three ATR Domestic flights meet with sudden accidents Two Air Bus crash land Recession in US Sovereign Debt trap in EU Lost my sleep! : Lost my sleep! Three branches report frauds of huge magnitude – Press and Media flash the news Gold ornaments in six branches reported spurious across two regions Twenty percent of branches migrate to lower ratings in inspection and audit Six large firms lent by the Bank declare wash out Credit card and Housing subsidiaries down in their business. Sensex crashes by 30% - a market correction after a continuous up beat for six months? “The essence of risk management lies in maximising the areas we have some control over the outcome while minimising the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us” : “The essence of risk management lies in maximising the areas we have some control over the outcome while minimising the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us” Peter L.Bernsten - Against the Gods : What Is Risk? Risk, in traditional terms, is viewed as negative. Oxford defines risk “as the possibility of meeting danger or suffering harm or loss”. The Chinese give a pictorial description for risk: The first is a symbol for ‘danger’ while the second is the symbol for ‘opportunity’ making risk a mix of danger and opportunity. : Risk in business is directly linked to Political stability – National – International Economic Development – National – International Social Status – Domestic and International – physical – financial and social infrastructure Technological Advancement Risk Perception Depends on : Risk Perception Depends on Aggressive / Conservative Approach Competitiveness and Innovativeness Size of balance sheet/off-balance sheet Selection of constituents Selection of Products Supervisory/regulatory compliance requirements Slide 9: This again depends on Strength of Human resources, their attitude, skill and knowledge in understanding the whole gamut of business - various markets – their linkages – under currents – instruments – safeguards, etc., etc., as the currency is fungible and the risks get transferred fast Slide 10: EVOLUTION OF BANKING SINCE 1950 Present Scenario in Banks : Present Scenario in Banks Change in business Model of banks From Buy and hold model to originate to distribute model due to innovative financial instruments and new players in the market Risk Management and Financial Stability – Basel II and Beyond Dynamic World !!!! : Dynamic World !!!! Pressure to increase offerings Explosion of electronic commerce Customer’s control over banking Rapid spread of information The “NEW” Retail Banks: : The “NEW” Retail Banks: State of Dynamism: Customer Acquisition & Management MultiChannel Management Online Banking Bancassurance Fast changing position Hierarchy of Financial Risks : Hierarchy of Financial Risks Portfolio Concentration Risk Transaction Risk Counterparty Risk Issuer Risk Trading Risk Gap Risk Financial Risks Operational Risk Market Risk Credit Risk “SpecificRisk” GeneralMarket Risk Issue Risk * From Chapter-1, “Risk Management” by Crouhy, Galai and Mark Breaking Down the Bank {Portfolio along organizational Dimensions : Breaking Down the Bank {Portfolio along organizational Dimensions Business Poles Business Lines Lending and Collecting Deposits Individuals and SBFs Combankg Retail Fin Services Mid-Corportes Large Corporates Advisory Services Mergers & Acquisitions LBO… Banks & Fin firms Assets Financing (Aircrafts) Commodities, Securitisation Invest -ment Banking Derivatives, Equity Fixed Income Trading Private Banking Assets Management Others Custody ‘Structured Finance’ Traded Instruments From Joel Bessis Present Scenario and Risk Assessment : Present Scenario and Risk Assessment Integration of markets both domestic and international and integration of services Increasing trend in retail segment of business Expansion of business and build up of assets and liabilities in international markets Opening up of branches/subsidiaries by global banks – New Licensing Policy of RBI Consolidation of banking, complexity of innovative products* Supervision of cross-border banking groups – Supervisory and financial conglomerates * “Fools ignore complexity. Pragmatists suffer it. Some can avoid it. Geniuses remove it.” –US computer scientist Key features of the new environment : Key features of the new environment 1) Atomization of risk – Eg – Credit transfer products 2) Emergence of new financial players – This results in increased complexity change in market liquidity – New territory 3) Growing symbiosis between markets and financial institutions – Markets rely on both old and new financial firms – Financial firms rely on markets for profits and risk management activities 4) Surge in volume of transactions 5) Current economic expansion Keynote address of Malcolm De Knight, G.M. BIS: “ Now you see it, Now you don’t: Risk in the small and in the large” Risk in Indian Scenario - Issues : Risk in Indian Scenario - Issues Knowledge/skill Gap to understand and handle the complex products at all levels Do not enjoy full autonomy in practice Moral Hazard – Government backing in the case of public sector banks Human Resources – Skill development – Age profile – on the wrong side in the case of old private sector/public sector banks Reforms era : Reforms era Introduction of BIS Norms Capital Adequacy Standards Prudential norms Credit Rating & Risk-based pricing Valuation of investments Disclosure requirements Competition by allowing new banks The Basel – II Capital Accord : Minimum Capital Requirement Three Basic Pillars Supervisory Review Process Market Discipline Requirements The Basel – II Capital Accord Second phase of the reforms : Second phase of the reforms Capital Adequacy Standards i. Enhancement in CRAR ii. Capital for Market Risk iii. Rationalisation of risk weights Second phase (contd.) : Second phase (contd.) Strengthening of prudential norms Provision for Standard assets Time frame for Doubtful debts Govt. guaranteed advances Second phase (contd.) : Second phase (contd.) Disclosure requirements Maturity pattern of Loans and advances Investments Deposits Borrowings Foreign currency assets & liabilities Lending to sensitive sectors Valuation of investments Response to Financial Risk : Response to Financial Risk Market response-introduce new products Equity futures Foreign currency futures Currency swaps Options Regulatory response Prudential norms Stringent Provisioning norms Corporate governance norms Risk in Indian Scenario - Issues : Risk in Indian Scenario - Issues Fast changing Technology Compatibility of Technology – With customer requirements – High profile customers – illiterate customers Information asymmetry Lack of professionalism in the delivery of total service Coverage of service to unorganized sector Persistence of lack of legal support Risk in Indian Scenario - Issues : Risk in Indian Scenario - Issues Inadequate secondary market for some of the products Ever increasing cost No level playing field Retaining identity and reputation in the market Maintaining profitability Sustaining high supervisory rating Slide 28: “All said, there is lot of thrill in the game and we must know how to play the game skillfully and remain in business with all checks and balances” Approach : Approach Risk by choice and not by chance Integrated, not fragmented approach (asset, liability, off-balance sheet items) Integrated approach to market and credit risks -- Motives and roles of financial institutions and corporate treasury -- Implications Risk management : Risk management Beyond regulatory compliance Internal control to value creation A new mindset/a new paradigm Slide 31: Strategic Framework Information Reporting Framework Organisational Framework Operational Framework Analytical Framework Control Framework Regulatory Compliance Performance Measurement Framework Technology Framework A Comprehensive Framework Risk Management Slide 32: Risk Management becomes too important to be left for a department or its Head. RISK CULTURE GOVERNANCE / TRANSPARENCY / CONTROLS Require attention at different levels and a seamless integration in the organization. Board of Directors : Board of Directors Understand risks Management of risks Role of Senior Management : Role of Senior Management Develop written policies and procedures, subject to Board approval Maintain clear lines of authority Establish appropriate limits on risk taking, subject to Board approval Develop adequate risk measurement systems Provide standards for valuing positions and measuring performance Ensure an effective system of internal controls Initiate a comprehensive risk reporting and measurement review process Provide Directors with comprehensive information on the entire portfolio. Simple lessons of the crisis : Simple lessons of the crisis Those with traditional banking little affected Exotic products turn chaotic Data integrity is critical Mathematical models lead us only to a point beyond which intuitive approach pays Models can’t capture irrational human behavior Gold plated credit ratings are no substitute for bank’s own due diligence The Ten Triggers for the challenge : The Ten Triggers for the challenge Likely deceleration in the pace of expansion of Banks’ Balance Sheets Combined assets of all banks would be 65% of GDP by Mar 2010 Increasing NPAs fuelled by new businesses Stricter regulatory compliance mandates CAGR may slow down to 12-13% in the coming decade from 16.7% (94-04) Efforts of inclusiveness Outsourced businesses & BCs Scaling up technological architecture Strategic and incremental innovation Internet technologies; mobiles; Business intelligence and aanalytics softwares Recruitment, development and retention of manpower Future Challenges : Future Challenges Next decade more transformational Unprecedented volumes of business with rapid and inclusive growth Human resources biggest challenge the right kind of numbers Expertise to deliver sophisticated financial products RBI introduced provisioning coverage ratio of 70% for NPAs as a forward looking requirement Higher growth sectors like real estate, infrastructure, NBFCs pose challenges Emergence of long term investment funds like insurance and pension funds Banks moving to Advance Approaches : Banks moving to Advance Approaches Pricing of risk – below cost can be suicidal Concentration risk, strategic risk, reputation risk, risks arising out of securitisation, off-balance sheet vehicles, valuation practices need better recognition Every new product should be subject to stress tests Banks that are part of financial conglomerates must focus on intra-group exposures and transactions as also group wise exposures to sectors and borrowers Systemic risk deserve more attention Be vigilant to international regulatory initiatives’ impact Banks moving to Advance Approaches : Quality and coverage of capital – Tier I capital and common equity component (9.4% and 7% respectively in Mar 09) Introduction of leverage ratio as regulatory tool (17% for Indian Banks in March 2009 – reasonable) Banks should keep vigil on long term net stable funding ratio Banks moving to Advance Approaches New Basel Accord III : New Basel Accord III Changes in capital allocation for securitization exposures New definitions of capital Market Risk Capital requirements Leverage ratio Liquidity Risk Management Principles The role of Countercyclical capital New Basel Accord or Basel III : New Basel Accord or Basel III Impose upon Banks a core Tier I capital ratio – roughly equivalent to tangible common equity ratio- Common equity to Risk Weighted Assets::4-6% Short Term Liquidity Metric and the Structural Funding Metric undergo change Allocation of ‘going-concern’ capital to some non-banking businesses like insurance is an area of anxiety Leverage ratio could complement risk-adjusted metrics – strengthens the ‘supervisory review’ under Pillar II The calibration of capital charges for counter party risk may help the banks withstand the ugly crises of the type we witnessed in the last two years. Regulations are designed to make financial crises less likely Management of Risk : Management of Risk Understanding and identifying the risk may be possible to a great extent but measuring the risk is a difficult task. Doing banking business is akin to climbing a pole immersed in oil. Slippery and slippages have to be overcome Risk is in the midst of the sea. The approach is to minimize the risk and survive in the midst of the turbulent sea. The objective is neither to cross the sea nor come back to the shore of the sea from where you started Banking & Risk : Banking & Risk Same side of the coin Inherent as banks essentially trade in risk in the process of maturity transformation Banks can’t afford to be risk averse Prudence: critical to safety of deposits Creating Risk Appetite is as important as mitigating risks as we have to stay in business in a highly competitive environment and grow and grow. Reputation Risk : Reputation Risk – How to assess? Is it on the strength of Balance Sheet? Is it based on performance of its shares in the market? Is it based on other parameters like customer service, aggressiveness in the market or penetration Is it based on Regulatory rating? Is it based on market share of business? Is it a combination of all? Managing Reputation Risk : Managing Reputation Risk Keeping events as quiet as possible Managing the external interface Create enough reputation capital Maintenance of AB Brand Promoting projects of societal benefit Establishing a broad culture of integrity Managing large customers with care and concern Managing retail customers thru better service & prompt customer complaint redressal Careful avoidance of conflict between retail and investment banking Internal customer interaction frequency to increase Customer feed back surveys frequency to increase Board level interaction to assess the possible ways of improvement Stress testing Slide 46: Intelligent management of risk will be the foundation of a successful financial institution In the future . . . Thank youyerramr@gmail.com; hyderabad@prmia.orgwww.prmia.org : Thank youyerramr@gmail.com; hyderabad@prmia.orgwww.prmia.org