Managing Risks in Commercial and Retail Banking
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Content
Preface xv
Part One Risk Management Approaches and Systems
Chapter 1 Business Risk in Banking 3
1.1 Concept of Risk 3
1.2 Broad Categories of Risks 3
1.3 Credit Risk 5
1.4 Market Risk 7
1.5 Operational Risk 8
1.6 Operating Environment Risk 10
1.7 Reputation Risk 11
1.8 Legal Risk 12
1.9 Money Laundering Risk 12
1.10 Offshore Banking Risk 14
1.11 Impact of Risk 15
1.12 Summary 16
Notes 18
Chapter 2 Control Risk in Banking 19
2.1 How Control Risk Arises 19
2.2 External Control and Internal Control Risks 19
2.3 Internal Control Objectives 21
2.4 Internal Control Framework 21
2.5 Tasks in Establishing a Control Framework 28
2.6 Business Risk and Control Risk Relationship 34
2.7 Summary 35
Chapter 3 Technology Risk in Banking 37
3.1 What Is Technology Risk? 37
3.2 Risks in Electronic Banking 37
3.3 Sources of Technology Risk 38
3.4 Management of Technology Risk 42
3.5 Summary 43
Chapter 4 Fundamentals of Risk Management 45
4.1 Risk Management Concept 45
4.2 Risk Management Approach 45
4.3 Risk Identification Approach 47
4.4 Risk Management Architecture 47
4.5 Risk Management Organizational Structure 48
4.6 Summary 53
Chapter 5 Risk Management Systems and Processes 55
5.1 Risk Management Policy 55
5.2 Risk Appetite 56
5.3 Risk Limits 57
5.4 Risk Management Systems 59
5.5 Management Information System 67
5.6 Verification of Risk Assessment 72
5.7 Human Resource Development 72
5.8 Top Management Commitment 73
5.9 Capital Adequacy Assessment and Disclosure Requirement 74
5.10 Risk Prioritization 75
5.11 Summary 76
Notes 77
Part Two Credit Risk Management
Chapter 6 Credit Problems and Credit Risk 81
6.1 Genesis of Credit Problems 81
6.2 Causes of Credit Risk 92
6.3 Summary 93
Notes 94
Chapter 7 Identification of Credit Risk 95
7.1 Market Risk and Credit Risk Relationship 95
7.2 Credit Risk Identification Approach 96
7.3 Credit Risk Identification Process 100
7.4 Summary 109
Notes 110
Chapter 8 Credit Risk Rating Concept and Uses 111
8.1 Credit Risk Rating Concept 111
8.2 Credit Risk Rating Uses 113
8.3 Credit Risk Rating Principles 122
8.4 Summary 127
Notes 128
Chapter 9 Credit Risk Rating Issues 129
9.1 Rating Practices in Banks 129
9.2 Design of the Rating Framework 130
9.3 Conceptual Issues 131
9.4 Developmental Issues 136
9.5 Implementation Issues 140
9.6 Rating Framework Overview 147
9.7 Summary 147
Notes 151
Chapter 10 Credit Risk Rating Models 153
10.1 Internal Rating Systems in Banks 153
10.2 Need for Different Rating Models 154
10.3 Need for New and Old Borrower Rating Models 155
10.4 Types of Rating Models 157
10.5 New Capital Accord Options 158
10.6 Asset Categorization 159
10.7 Identification of Model Inputs 160
10.8 Assessment of Component Risk 161
10.9 Summary 172
Notes 172
Chapter 11 Credit Risk Rating Methodology 173
11.1 Rating Methodology Development Process 173
11.2 Derivation of Component Rating 189
11.3 Derivation of Counterparty Rating 195
11.4 Summary 197
Chapter 12 Credit Risk Measurement Model 199
12.1 Risk Rating and Risk Measurement Models 199
12.2 Credit Loss Estimation-Conceptual Issues 200
12.3 Quantification of Risk Components 204
12.4 Credit Risk Measurement Models 215
12.5 Back-Testing of Credit Risk Models 219
12.6 Stress Testing of Credit Portfolios 220
12.7 Summary 222
Notes 223
Chapter 13 Credit Risk Management 225
13.1 General Aspects 225
13.2 Credit Management and Credit Risk Management 225
13.3 Credit Risk Management Approach 226
13.4 Credit Risk Management Principles 227
13.5 Organizational Structure for Credit Risk Management 232
13.6 Credit Risk Appetite 234
13.7 Credit Risk Policies and Strategies 234
13.8 Early Warning Signal Indicators 242
13.9 Credit Audit Mechanism 244
13.10 Credit Risk Mitigation Techniques 248
13.11 Summary 253
Note 254
Chapter 14 Credit Portfolio Review Methodology 255
14.1 Portfolio Classification 255
14.2 Portfolio Management Objectives 256
14.3 Portfolio Management Issues 256
14.4 Portfolio Analysis Technique 261
14.5 Portfolio Risk Mitigation Techniques 266
14.6 Summary 269
Chapter 15 Risk-Based Loan Pricing 271
15.1 Loan Pricing Concept 271
15.2 Loan Pricing Principles 271
15.3 Loan Pricing Issues 272
15.4 Loan Price Computation 275
15.5 Summary 280
Part Three Market Risk Management
Chapter 16 Market Risk Framework 283
16.1 Market Risk Concept 283
16.2 Market Risk Types 283
16.3 Market Risk Management Framework 285
16.4 Organizational Setup 286
16.5 Market Risk Policy 288
16.6 Market Risk Vision 289
16.7 Summary 290
Chapter 17 Liquidity Risk Management 293
17.1 Liquidity Risk Causes 293
17.2 Liquidity Risk Management Activities 294
17.3 Liquidity Risk Management Policies and Strategies 296
17.4 Liquidity Risk Identification 297
17.5 Liquidity Risk Measurement 299
17.6 Liquidity Management Structure and Approaches 306
17.7 Liquidity Management under Alternate Scenarios 310
17.8 Liquidity Contingency Planning 313
17.9 Stress Testing of Liquidity Funding Risk 314
17.10 Liquidity Risk Monitoring and Control 321
17.11 Summary 325
Notes 326
Chapter 18 Interest Rate Risk Management 327
18.1 Interest Rate Risk in Trading and Banking Books 327
18.2 Interest Rate Risk Causes 328
18.3 Interest Rate Risk Measurement 332
18.4 Maturity Gap Analysis 334
18.5 Duration Gap Analysis 336
18.6 Simulation Analysis 341
18.7 Value-at-Risk 342
18.8 Earnings at Risk 347
18.9 Interest Rate Risk Management 351
18.10 Interest Income Stress Testing 353
18.11 Interest Rate Risk Control 354
18.12 Summary 355
Notes 356
Chapter 19 Foreign Exchange Risk Management 357
19.1 Exchange Risk Implication 357
19.2 Exchange Risk Types 358
19.3 Foreign Currency Exposure Measurement 361
19.4 Exchange Risk Quantification 364
19.5 Exchange Risk Management 366
19.6 Exchange Risk Hedging 370
19.7 Summary 371
Notes 372
Chapter 20 Equity Exposure Risk Management 373
20.1 Equity Exposure Identification 373
20.2 Equity Exposure Management Framework 374
20.3 Equity Exposure Risk Measurement 375
20.4 Summary 376
Chapter 21 Asset Liability Management Review Process 379
21.1 Asset-Liability Review 379
21.2 Liquidity Risk Review 380
21.3 Interest Rate Risk Review 383
21.4 Foreign Exchange Risk Review 384
21.5 Equity Price Risk Review 385
21.6 Value-at-Risk Review 385
21.7 Summary 386
Part Four Operational Risk Management
Chapter 22 Operational Risk Management Framework 389
22.1 Operational Risk Concept 389
22.2 Operational Risk Sources 390
22.3 Operational Risk Causes 393
22.4 Operational Risk Policy Objectives 397
22.5 Operational Risk Policy Contents 398
22.6 Operational Risk Management Framework 399
22.7 Summary 401
Note 408
Chapter 23 Operational Risk Identification, Measurement, and Control 409
23.1 Operational Risk Identification Approach 409
23.2 Operational Risk Identification Process 410
23.3 Business Line Identification 411
23.4 Operational Risk Assessment Methods 414
23.5 Operational Risk Measurement Methodology 421
23.6 Operational Risk Measurement Process 425
23.7 Operational Risk Monitoring 429
23.8 Operational Risk Control and Mitigation 430
23.9 High-Intensity Operational Risk Events-Business Continuity Planning 431
23.10 Business Continuity Plan Support Requirements 433
23.11 Business Continuity Planning Methodology 434
23.12 Operational Risk Management Organizational Structure 436
23.13 Summary 437
Notes 438
Part Five Risk-Based Internal Audit
Chapter 24 Risk-Based Internal Audit-Scope, Rationale, and Function 443
24.1 Internal Audit Scope and Rationale 443
24.2 Risk-Based Internal Audit Policy 449
24.3 Internal Audit Department Structure 450
24.4 Summary 452
Chapter 25 Risk-Based Internal Audit Methodology and Procedure 453
25.1 Risk-Based Internal Audit Methodology 453
25.2 Risk-Based Audit Planning and Scope 468
25.3 Risk-Based Audit Process 471
25.4 Summary 484
Part Six Corporate Governance
Chapter 26 Corporate Governance 489
26.1 Corporate Governance Concept 489
26.2 Corporate Governance Objectives 490
26.3 Corporate Governance Foundation 492
26.4 Corporate Governance Elements 493
26.5 Corporate Governance in Banks 500
26.6 Toward Better Corporate Governance in Banks 505
26.7 Summary 509
Note 510
Part Seven Lessons from the Asian and the United States' Financial Crises
Chapter 27 The Causes and Impact of the Asian and the United States' Financial Crises 513
27.1 The Asian Financial Crisis Causes and Impact 514
27.2 Risks Emerging from the Asian Financial Crisis 515
27.3 The Impact of the U.S. Financial Crisis 519
27.4 The U.S. Financial Crisis Causes and the Concomitant Risks 520
27.5 Basel Committee on Banking Supervision Response (Basel III) 534
27.6 Summary 535
Notes 537
About the Author 539
Index 541
