Transcript Elements of Integrated Risk An interaction on Risk Management practices Dr. D V Srinivasa Rao, Faculty, Risk Management – Basel II and III Operational Risk & Market.

Elements of Integrated
Risk
An interaction on
Risk Management practices
Dr. D V Srinivasa Rao, Faculty,
Risk Management –
Basel II and III
Operational Risk & Market Risk
by
Dr. D V Srinivasa Rao
Faculty, IMAGE
Basel Capital Accords - History
Accord
Pr
wef
Focus
Basel - I
1986
1988
Credit Risk
Basel – I
Revision
Basel - II
1996
1997
1999
2007
Credit and Market
Risk
Credit, Market and
Operational Risk
Capital buffer &
Basel - III 2012 2013
Counter cyclical buffer
CRAR RWA IRAC
Basel Committee defined bank’s capital in
the form of two tiers
Tier I
Tier II
‘ Core ‘ capital - comprising
paid
up equity capital +
General Reserves
‘ Supplementary’ capital
comprising specific reserves &
preferred stocks and long term
subordinated debt. Maximum 50%
Basel II – Structure
Pillar I – Minimum Capital Requirements
Total capital
= Bank’s capital ratio
Credit risk + Market risk + Operational risk (minimum 9% in India)
Total Capital
Total capital = Tier 1 + Tier 2
Tier 1: Shareholders’ equity + disclosed reserves
Tier 2: Supplementary capital (e.g.revaluationreserves,provisions)
Credit Risk
The risk of loss arising from default by a
creditor or counterparty
Market Risk
The risk of losses in trading positions
when prices move adversely
Operational
Risk
The risk of loss resulting from inadequate or failed
internal processes, people and systems or from
external events
Pillar II - SREP
INTERNAL GOVERNANCE
SUPERVISORY REVIEW PROCESS
ICAAP
SREP
Assess all risks; identify material
ones; identify controls to mitigate the
risks
Identify, review and evaluate all risk
factors and control factors
DIALOGUE
*Identify amount and quality of
internal capital in relation to risk
profile, strategies and business plan
*Assess, review and evaluate the
ICAAP
CHALLENGE
Assess, review and evaluate
compliance with minimum
standards set in Directive
PRODUCE ICAAP NUMBER
AND ASSESSMENT
SREP CONCLUSIONS
*Narrow scope
supervisory review
ICAAP process/ results
fully satisfactory
CAPITAL
ICAAP process/
results not fully
satisfactory
ICAAP results
Pillar 1
minimum
regulatory
capital
Capital
allocated for
Pillar 2
Specific
own funds
requirement
Whole range of
available prudential
measures
including own funds
Supervisory
evaluation of
on-going
compliance
with
minimum
standards &
requirements
Pillar -III Market Discipline
31/10/2015
Indian Bank, Risk Management Dept
8
Basel III
Capital Buffers
• Capital conservation buffer 2.5% in addition to
increased core capital
• This will make minimum core capital 4.5%+2.5%
• Regulators can specify countercyclical buffer
capital up to2.5%, this is to protect banks during
excessive credit growth
• Both the Buffer capital can be used in stressed
environment
• Conservation buffer is phased out from Jan
2016 to Jan2019 (In India RBI revised the
schedule to March 2019)
Basel III, Introducing a global liquidity
standard
• Liquidity Coverage Ratio to promote short term resilience
LCR – Stock of high quality liquid assets /Total net cash
flows over next thirty days should be more than 100%
• Net Stable Funding Ratio
NSFR
- Available amount of stable funding/Required amount of
stable funding is more than 100%
• Monitoring Tools, Contractual maturity mismatch,
Concentration funding, available unencumbered assets,
liquidity coverage by significant currency, Market related
information
Components of Capital
Under RBI guidelines (Basel III), total
regulatory capital will consist of the sum of
the following categories:
(i)Tier 1 Capital
a) Common Equity Tier 1 (CET1)
b) Additional Tier 1 (AT1)
(ii)Tier 2 Capital (T2)
Rating / Scoring Model
• Software driven rating/scoring models (RAM) for
different segments are in place from 1st April, 2008
• 9 grades scale starting from ‘AAA’ to ‘C’ (besides "D" for
NPA accounts).
• For Project Rating 5 P1 to P5
• Frequency ANNUAL –a/c rated “CC / “C” quarterly
• Entry Barrier -entry level rating of not below ‘BBB’/
project rating-P2(Obligor grade)
10/31/2015
Dr D V S Rao
Segment
Rating
Big Corporate loan accounts of Rs. 5 Crores
and above
Rating from External
Rating agency
Manufacturing, Trading & Services Segment
accounts with exposure of Rs.50 lakh and
above
RAM rating
Rural Banking Segment:
Accounts with exposure of Rs.100 lakh and
above
RAM rating
Personal Banking Segment :
All SLPs under Personal Banking
Segment having exposure of
Rs.25000/- and above
10/31/2015
Internal scoring model viz
Home Loans, Mortgage Loans,
Automobile Loans,
Educational Loans, Consumer
Loans, Personal Loans & Others
Dr D V S Rao
EXTERNAL RATING AGENCIES
The ratings awarded by the following rating agencies
for the purpose of risk weighting to compute capital
adequacy
(a) Credit Analysis and Research Limited (CARE)
(b) CRISIL Limited (CRISIL)
(c) India Ratings & Research Pvt Ltd (India Ratings)
(d) ICRA Limited (ICRA)
(e) Brickwork Ratings India Pvt., Ltd (BRICKWORK)
(f) Small & Medium Enterprise Rating Agency (SMERA)
10/31/2015
Dr D V S Rao
Validity of the Ratings based on
Audited
Financial
Data
Provisional
Financial
Data
Projected
Financial
Data
10/31/2015
18 months from the date of Audited
balance sheet for the respective
financial year, irrespective of date of
confirmation of rating
6 months from the date of
confirmation of rating or 9 months
from the date of relevant financial
year whichever is earlier
6 Months only
Dr D V S Rao
Entry Barrier
Obligor rating - ‘BBB’ Project rating - ‘P2’
Review / Renewal:
10/31/2015
Dr D V S Rao
OBLIGAOR RATING
Rating obtained based on the following risk is called
Obligor Rating.
• a) Financial Risk
• b) Industry Risk
• c) Business Risk
• d) Management Risk
Pricing decision to be taken based on the
Combined
10/31/2015
Dr D V S Rao
rating
RATING BASED PRICING
Limit Upto 50 lakhs – RAM Rating is permitted. Interest
concession to be passed on based on obligor rating.
RAM rating is permitted for credit exposures of below
Rs.50 lakhs also under the respective models as
applicable for above Rs.50 lakhs.
a) For accounts with limits less than Rs.20 lakhs:
For assessment, self certified balance sheet may be
considered for rating the account.
b) For accounts with limit of Rs.20 lakhs and above:
For assessment, only audited balance sheet is to be
considered and the age of the balance sheet shall
not be older than 18 months
10/31/2015
Dr D V S Rao
FACILITY RATING
• Rating arrived based on the securities is called Facility
Rating.
• EVR is valid for 3 years.
• Home loan accounts with balance outstanding of
above Rs.50 lakhs and home loans under SMA / NPA
have to be revalued once in three years
• Realisable value to be taken as value of security
• Two engineer valuation to be obtained, if value of
security is Rs. 1 Cr and above for SLPs including
Home Loans, Rs.5 Crore and above for Other
Loans.(value difference max 15%)
• Average of 2 engineers valuation to be taken as value
10/31/2015
Dr D V S Rao
of
security
Scoring Models
Exempted Categories
1 Loan Against Deposits
2 All Jewel Loans
3 Staff Loans
4 All Loans < Rs.25000/other than those under
Rural Banking Segment
and Personal Banking
Segment
5 All Loans < Rs.200000/under Rural Banking
Segment
10/31/2015
Dr D V S Rao
Risk Mitigation measures
Stock Audit
Credit Audit
Legal Audit
Pre-release Audit
Threshold limits
Individual –
Rs. 1 Crore
Pvt Ltd Co. Rs. 2 Crore and above
Public Ltd Co – Rs. 5 Crore and above
Public Sector undertakings – Exempted
borrowal
NPA a/cs –Standard
WC of Rs.
1 Crorea/cs
andwith
above
Rating
– Rs.
1 Cr
For all
loans
ofBBB
Rs.and
100
Contractors
– Rs.
5 of
Crore
above
Below
BBB where
–Banking
Rs. 50 Lakhs
Lakhs
above,
Consortuium
/&Multiple
- Leader
mortgage of property offered
as security
Pre release
25 Lakhs
For Audit
limits >=
of Rs.
5 Crore and
Home Loans
– Rs. 50 Lakhs
above&– Plot
onceloans
in 3 years
and above
Wherever concurrent auditor certifies
compliance, pre release audit need not be
conducted
Accessing Consumer Credit Information
• If the loan amount is more than Rs.10 lakhs for retail
loans like Home loans, Ind Mortgage and Rent
Encash i.e. Two reports to be verified.
• For Vehicle Loans and Salary Loans irrespective of
the loan amount, branch has to verify both CIBIL and
Experian and pull out reports from both the service
providers. i.e Two reports to be taken.
• For all retail loans irrespective of the loan amount, if
at the time of enquiry with the first credit rating
agency, the system returns ‘No Report’, then the
sanctioning authority has to search the data base of
the second Company / Agency.
10/31/2015
Dr D V S Rao
LIQUIDITY
1. Ability to accommodate decrease
in liability and to fund increase in assets
ALM
2. Meet all expected and unexpected claims
on the Balance sheet
3. Profitability
INTEREST RATE RISK
Effects
Adverse Impact on Earnings NII
Impact on the Economic Value of Equity
SOURCES
Repricing, Basis Risk,
Yield Curve Risk, Embedded Option Risk
Dr. D V Srinivasa Rao
Sources of Market Risk
REPRICING RISK
Timing differences of the maturities of the
Fixed Rate Instruments
Repricing of Floating Rate Instruments
BASIS RISK
Moving of Interest Rates of different
A & L in different magnitudes
Basis of date and period
EMBEDDED OPTION RISK
Pre-payment of Loans
Premature withdrawal of Deposits
In both the cases Banks Actual NII will
be less than the anticipated NII
Dr. D V Srinivasa Rao
MEASUREMENT APPROACHES
FOR OPERATIONAL RISK
CAPITAL
Basic Indicator Approach
Standardised Approach
Banks to hold capital for Operational risk equal to the
average over the previous years a fixed percentage (15%)
Banks activities are divided into eight business
lines – Corporate finance, Trading and Sales,
Retail Banking, Commercial Banking, Payment
and Settlement, Agency Services, Asset
Management, Retail brokerage
Separate Beta factors (18, 15, 12) given for each
business line to be multiplied by the gross
income to arrive at the capital requirement
Internal Data
External data
Scenario analysis
Factors reflecting the business
environment
Dr. D V Srinivasa
Rao
Internal
Control
Systems
Which of the following is not
a Credit Bureau
1.CIBIL
2.Equifax
3.ICRA
4.Experian
Which of the following is not a
rating agency?
1.CARE
2.CRISIL
3.CIBIL
4.ICRA.
Which of the following can be
obtained from CIBIL report?
1.Credit Score
2.Credit history
3.Repayment history
4.All the above
What rating we have to obtain for an Home Loan
of Rs. 30 Lakhs?
1. Internal scoring
2. External Rating
3. RAM rating
4. No rating required for Home
Loan upto Rs.50 Lakhs
What is the new name of FITCH Ratings?
1. India Ratings & Research Ltd
2. BRICKWORK
3. FITCH India
4. FITCH Ratings
Which of the following Rating agency is a public
sector rating agency?
1. Indian Ratings
2. BRICKWORK
3. SMERA
4. CARE
Who is the promoter of rating
agency SMERA ?
1. Ministry of Finance
2. Ministry of Small Industries
3. SIDBI
4. IDBI
What is RAM?
1. Random Assessment Model
2. Risk Assessment Model
3. Risk Assessment Method
4. Risk Aversion Method
What is threshold limit for doing RAM rating?
1. Rs. 10 Lakhs
2. Rs. 20 Lakhs
3. Rs. 25 Lakhs
4. Rs. 50 Lakhs
What is threshold limit for getting rating from an
external rating agency?
1. Rs. 1 Crore
2. Rs. 2 Crore
3. Rs. 5 Crore
4. Rs. 10 Crore
Who has to do pre-release audit for a Structured
loan of Rs. 45 Lakhs?
1. Pre-release audit not required for
loans of upto Rs. 50 Lakhs
2. Loans Officer
3. Branch Manager
4. Any Officer other than the Officer
involved in loan processing
What is the frequency of Rating for loans rated
CC/C?
1.
2.
3.
4.
Annual
Halfyearly
Quarterly
No need for rating for CC/C a/cs
Where from we have to draw Credit Report for a
vehicle loan of Rs. 50000/-?
1.
2.
3.
4.
CIBIL
Experian
Both CIBIL and Experian
No need for credit report for
Vehicle loan, as it fully secured
For retail loans other than Home loans Credit
Report has to be drawn from?
1.
2.
3.
4.
CIBIL
Experian
First from Experian lest from CIBIL
No need for credit report for Retail
loans, as the amount is very small
What is the threshold limit for Legal Audit?
1.
2.
3.
4.
Rs. 25 Lakhs and above
Rs. 50 Lakhs and above
Rs. 1 Crore and above
No legal audit required
Pre-release Audit was introduced to mitigate?
1.
2.
3.
4.
Credit Risk
Operational Risk
Market Risk
It is not a Risk mitigation technique
What is the threshold limit for Credit Audit for
accounts with rating of below BBB?
1.
2.
3.
4.
Rs. 2 Crores and above
Rs. 50 Lakhs and above
Rs. 1 Crore and above
Rs. 5 Crore and above
Can we do rating under RAM for an Home Loan
of Rs. 20 Lakhs?
1. No RAM rating is for all loans of
Rs. 25 Lakhs and above
2. Yes we can do RAM rating for any
amount of loan
3. RAM rating can not be done for
loans of below Rs. 25 Lakhs
4. We have to do only Scoring model
Which risk is managed by a
bank by adopting the Assets
and Liability Management?
1. Interest risk
2. Liquidity risk
3. Operational risk
4. a+b
5. a+b+c
The possibility that an exporter not getting
payment due to restriction on transfer of
international payments due to its very poor
foreign exchange position of the country of
the importer is called
1. International risk
2. Foreign exchange risk
3. Operational risk
4. Country risk
5. Systemic risk
The risk of loss arising from
adverse public opinion is called
the ____risk.
1. Public opinion risk
2.Reputation risk
3.Legal risk
4.Vigilance risk.
The staff who makes complaints of corruption
against any official of the organization
much before the organization knows
about the same is called.
1.Preventive vigilance actor
2.Whistle blower
3.Trumpeter
4.Drummer
The staff who was very busy in the counter
was called by BM for an urgent work
in his cabin. The staff left the counter
without signing off. What type of risk
this action create to the Bank?
1.Transaction Risk
2.System Risk
3.Operational Risk
4.Inherent Risk
Under which Pillar of RBI’S New Capital Adequacy
framework (Basel-II guidelines), minimum 9%
capital adequacy for credit risk, market risk
and operational risk has been prescribed ?
1.Pillar-I
2.Pillar-II
3.Pillar-III
4.None.
The methods used for
computation of capital for
credit risk under Basel-II are
1. Standardized Approach
2. Internal Rating Based ApproachFoundation
3. Internal Rating Based ApproachAdvanced
4. All the above.
Our Bank implemented
Standardized approach for
computation of capital for credit
risk under Basel-II as on
1. 31.03.2009
2. 31.03.2010
3.Already implemented on
31.03.2008
The methods used for computation
of capital for operational risk
under Basel-II are
1. Basic Indicator Approach
2. Standardized Approach
3. Advanced Measurement
Approach
4. All the above
What do you mean by CORE ?
1. CRISIL Operational Risk Evaluator
2. Computation of Operation Risk
Evaluator
3. Computation of Operational Risk
Exercise
4. Centralized Operational Risk
Evaluation
As per Basel – 2 guidelines the
activities of Banks are
grouped into ___ Business
lines
1.
2.
3.
4.
8
10
12
5
As The Gross Income of 8
Business line activities are
mapped into ___Business
lines for computation of
Operational Risk calcultation
1.
2.
3.
4.
5
4
3
2
Our Bank implemented Basic Indicator
approach for computation of
capital for Operational risk under
Basel-II as on
1. 31.03.2009
2. 31.03.2010
3. Already implemented on
31.03.2008
4. Not known.
Which of the following methods has been
adopted by our Bank for computation
of capital for market risk under Basel-II
1. Standardized Maturity Method
2. Standardized Duration Method
3. Internal Risk Management Models
Method
4. Advanced Measurement Approach.
Operational risk is defined
as:
1.Risk of loss resulting from inadequate &
failed internal processes
2.Risk of loss resulting from mistakes or
frauds committed by the employees.
3.Risk of loss resulting from computer
hacking
4.All (a),(b) & (c).
To which type of ‘Business Line’
classification, the ‘Currency
Chest’ operations belong to?
1.Corporate Finance
2.Payment & Settlement
3.Agency Services
4.Execution, Delivery &
Process management.
Capital adequacy on Banking
requirement as per Basle -3
1. 9%
2. 8%
3. 10%
4. 12%
Revaluation reserves will be
considered for inclusion in
Tier II capital at a discount of
1. 55 %
2. 100 %
3. 60 %
4. 25 %
What is the numerator of Capital Adequacy
Ratio formula
1.
2.
3.
4.
Total Capital
Risk Weighted Asset
Total advances
Total Investments
What is the maximum ratio of Tier – II
capital permitted as per Basel - 3
1.
2.
3.
4.
2%
4%
5%
50 %
Perpetual Non-Cumulative
Preference Shares (PNCPS)
are included in ___ Capital
under Basel - 3
1.AT1
2.CET1
3.T2
4.T1
Which of the following will
not form part of Tier I
capital:
1. Paid up equity capital
2. Statutory Reserves
3. Revaluation Reserve
4. Disclosed Reserve or free reserve
Basle II indicated 3 pillars for risk
management in Banks. Which
is not one of these 3 pillars.
1. Minimum Capital Requirement,
CRAR
2. Supervisory Review & Monitoring
3. Credit Risk Rating
4. Market discipline & public
disclosure
As per the credit risk policy of the bank, for taking a credit
decision (fresh/renewal/review/enhancement) one
of the following rating grades will be reckoned
1.Obligor Rating Grade
2.Integrated Rating Grade
3.Facility Rating Grade
4.Higher of the Obligor Rating
Grade or Combined Rating
Grade
Pre- release audit exercise
should be completed within---
1. 24hours
2. One week
3. Fortnight
4. One month
The 3rd housing loan extended to the
same customer is to be treated as--
1.Mortgage loan
2.Home Loan
3.Commercial real Estate
Exposure
4.Non Priority Housing Loan
A preference share is one
which is
1.
2.
preferential as to dividend
preferential as to the
repayment of capital
3. ‘a’ and ’b’ above
4. Preferential as to the voting
right
Redeemable preference shares
of less than 12 years to run
is classified as
1.Current liability
2.Equity
3.Term liability
4.Reserves
The ideal DSCR should be
1. 2:1
2. 1:1
3. 1.5:1
4. non such norms
What do you mean by IAS
1. Indian Accounting Statements
2. International Accounting Standards
3. Indian Accounting Standards
4. International Accounting Statements
What do you mean by IFRS
1. Indian Financial Return Statements
2. International Financial Reporting Standards
3. Indian Financial Reporting Standards
4. International Financial Return Statements
What is the present Accounting
standards followed in India
1. IAS 39
2. IFRS
3. IFRS 9
4. IAS
What is the new nomenclature
of Accounting standards
under IFRS
1. IAS 39
2. IFRS
3. IFRS 9
4. IAS
Wish
u
All the best in
Exam
Career
Personal Life
Thank You…
INDIANBANK MANAGEMENT ACADEMY FOR GROWTH AND EXCELLENCE79