Risk Management in Banking

Risk Management in Banking- Joel Bessis

-Risk management in banks became, and remained, a hot topic after the financial crisis. It has
become a core management field in banking, whit a large concentration of resourses dedicated
to better identify, assess and control risks.
-Risk has been defined in various ways across time. Risk in finance is defined as the
randomness of the return of investments, including both positive and negative outcomes. In
the financial industry the risk is defined by the uncertainty that has adverse consequences on
earnings and wealth. This is the view of risk managers, those who have the role of
idenitifying, assessing and controlling the likelihood and the consequences of adverse events
for the institution.
-conclusion:Risk management is the process by which managers identify key risks, obtaining
consistent, understandable, operational risk measures, and estabilishing procedures to monitor
the resulting risk position.
The classes of financial risks are credit risk, market risk, liquidity risk, interest rate risk
1.Credit risk is the risk of negative effects on the financial result and capital of
the bank caused by borrowers default on its obligations to the bank.
2.Market risk is the risk of losses due to adverse market movements depressing the values of
the positions held by market players. Market risk includes interest rate and foreign
exchange risk.
-Market risk measurement alternatives: scenario analysis and value-at-risk
analysis.
a.In scenario analysis the analyst postulates changes in the underlying
determinants of portfolio value (e.g. interest rates, exchange rates, equity prices)
and revalues the portfolio given those changes. The resulting change in value is
the loss estimate.
b.Value-at-Risc analyses use asset return distributions and predicted return
parameters to estimate potential portfolio losses,
3.Liquidity risk is defined as the risk of not being able to raise cash when
needed. Banking firms raise cash by borrowing or selling financial assets in the
market. Liquidity risk is the risk of negative effects on the financial result and
capital of the bank caused by the banks inability to meet all its due obligations.
4.The interest rate risk is the risk of declines of net interest income, or interest
revenues minus interest cost, due to the movements of interest rates. Any party
who lands or borrows is subject to interest rate risk.
Read:"If a bank is serious about risk management, then it will be serious from the top down.

The risk department and the Three lines of defense model:

-an illustration used for structuring roles, responsabilities, risk controlling, it shows how
controls, processes, and methods are aligned throughout large organizations
-The tree lines of defense are: The lines of business, the central risk function, the corporate
audit and compliance function.
-1.the business lines make up the first line of defense, and are responsible identifying,
measuring and managing all risks, they have the primary responsability for day-to-day risk
management
-2.these reports roll up to the central risk department, which enforces the risk discipline. Thee
department is responsible for the guidance and implementation of risk policies,
-3.the third line of defense is that of internal and external auditors who report independently
to the senior comittee, representing the enterprisess stakeholder
The Asset and Liability Management Department
-the ALM department is in charge of managing the funding and the balance sheet of the bank,
and of controlling liquidity and interest rate risks.
-for controlling liquidity risks, the ALM sets up limits to future funding requirements, and
manages the debt of the bank.
Conclusion: It is important for the bank institutions to develop a view of risk exposure and
focus on the most important, to understand the risks, to clearly define roles and
responsabilities, to quantify the cost and benefits of managing risks,