basel ii

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Basel II Requirements & Risk Management of :

Basel II Requirements & Risk Management of

Understanding Risk:

Understanding Risk Any event or possibility of an event which can impair/damage expected earnings/income /cash flow over the short /medium /long term horizon is called risk. All kinds of organizations face risks of different kinds and have to learn to deal with and manage risks better to succeed.

Slide 3:

Activities of Financial institutions Funds mobilization Funds deployment Funds transfer Risk transfer Transaction services Credit enhancement services

Sources of Risk:

Sources of Risk Technology Prices Market share Competition Productivity

New Basel Capital Accord :

New Basel Capital Accord It is the regulatory approach to bank supervision & provides new incentives for banks to improve their risk management. Three features of new Accord : Credit Risk Sensitivity Wide Applicability of new accord Responsibility for measuring risk

Types of Risk:

Types of Risk Pillar I Pillar II

Pillar I:

Pillar I Credit Risk Market Risk Operational Risk

Credit Risk:

Credit Risk Involves inability or unwillingness of a customer to meet its commitments. It relates to lending, trading, hedging, settlement. It is generally made up of transaction risks, or default risk & portfolio risk.

Credit Risk:

Credit Risk Its owing to various economic & environmental factors. Some are related to banking & some are unforeseen & unexpected.

Market Risk:

Market Risk With the progress of deregulation, market risk arises due to changes in market variables. Even a small change in market variables causes substantial changes in income & economic values of banks.

Market Risk:

Market Risk Market risk take in the form of: Liquidity Risk Interest rate risk Forex Risk Commodity risk Equity Price Risk

Operational Risk:

Operational Risk It is the risk which is not categorized as market or credit risk. It’s the risk which arises from various types of human or technical error. It has some link between credit & market risk. It involves breakdowns in internal controls & corporate governance.

Pillar II:

Pillar II Liquidity Risk Interest Rate Risk Reputation Risk Earnings Risk Capital Risk

Liquidity Risk:

Liquidity Risk It is the ability to efficiently accommodate deposit & other liability decreases. A bank has adequate liquidity when sufficient funds can be raised either by increasing liabilities or converting assets.

Interest Rate Risk:

Interest Rate Risk It is the potential impact on NII or NIM or Market Value of Equity caused by unexpected changes in market interest rates. Deregulation of interest rates has exposed the adverse impacts of interest rate risks. NII = NIM =

Reputation Risk:

Reputation Risk In this competitive world, every bank should have some competitive advantage over others. Due to technology banks want to be a step further. If they don’t comply with the technology then they can loose their reputation in market. Any bank would not want to loose the reputation.

Earnings Risk:

Earnings Risk Every bank have the fear of earnings capacity of the bank. Every bank has to give quarterly results. And they have to perform better than their past quarter. As in the competitive world, they must grow with leaps & bounds.

Capital Risk:

Capital Risk Every bank wants capital for their operations to run. From time to time, they approach either RBI or public by issuing bonds for their working capital. So there is a risk whether they will get the capital or not.

Credit Rating:

Credit Rating RBI has recognized external ratings for application of preferential risk weight for corporate exposures. Ratings by following external credit agencies : CRISIL ICRA CARE FITCH ( INDIA )

Credit Rating:

Credit Rating Long term & Short Term bank loans ratings are used for banks long & short term exposures. Short term ratings are issue specific & are not used for mapping long term exposures. The tenor of the bond/debenture rated by external rating agencies is taken for mapping residual maturity.

Credit Risk Mitigation:

Credit Risk Mitigation Cash, incl deposits Gold Securities issued by Central & State Govt. Corporate debt Equities of listed Co’s Units of MF’s Land & Building Documents as title to goods

Risk Management:

Risk Management It’s the comprehensive process adopted by a bank to minimize adverse effects of risk & uncertainty. By this bank equips itself with tools & systems to control the risk exposure in scientific manner. Syndicate has a structured & standardised credit approval process & rating model which is Basel II compliant.

Risk Management:

Risk Management To mitigate credit risk, Credit Committees have been constituted at Corporate/Regional offices to evaluate credit proposals from all angles & then approve the sanction. Bank has also a system of monitoring its substantial & unsecured exposures & undertakes periodic reviews of sensitive sector advances ( Real Estate ).

Risk Management:

Risk Management With a view to monitor bank’s exposure to large borrowers accounts on regular basis & ensure the quality of the credit portfolio, a separate Credit Monitoring Cell has been formed.

Total Gross Credit Exposures:

Total Gross Credit Exposures Fund Based credit exposures 108350.05 cr Non Fund based credit exposures 10139.18 cr Capital Requirements for Credit Risk Portfolio subjected to standardized approach 6504.89 cr Securitisation Exposures NIL Capital Requirement for Market Risk Interest Rate Risk 170.31 cr Equity Position risk 62.17 cr Forex risk 240.58 cr Capital Requirement for Operational Risk Capital Requirement as per basic indicator approach 422.82 cr

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