1. Risk Management: Conceptual Framework
1.1 History of Risk Management
1.2 Why Risks Need to be Managed?
1.3 Risk Management Defined
1.4 Risk Management Framework
1.5 Risk Management Organisation
1.6 Process of Risk Management
1.6.1 Risk Identification
1.6.2 Risk Measurement/Quantification
1.6.3 Risk Pricing
1.6.4 Risk Control
1.6.5 Risk Monitoring
1.7 Rules of Risk Management
1.8 Objectives of Risk Management
1.9 Risk Management Tools
1.9.1 Risk Management Information System (RMIS)
1.9.2 Value at Risk (VaR) Analysis
1.9.3 Risk Maps
1.9.4 Catastrophic Modelling
1.9.5 Websites and Intranet
1.10 Risk Management and Derivatives
1.10.1 Emergence of Complex Financial Products
1.10.2 Derivatives Defined
1.10.3 Why are Derivatives Popular
1.10.4 Types of Derivative Contracts
1.10.5 Participants in the Derivatives Market
1.11 Changing Scenario of Risk Management
2. Operational Risks
2.1 Background
2.2 Emergence of Operational Risks
2.3 Operational Risk Defined
2.4 Classification of Operational Risks
2.4.1 Cause-based Operational Risks
2.4.2 Effect-based Operational Risks
2.5 Forms of Operational Risks
2.5.1 Internal Fraud
2.5.2 External Fraud
2.5.3 Employment Practices and Workplace Safety
2.5.4 Clients, Products and Business Practices
2.5.5 Damage to Physical Assets
2.5.6 Business Disruption and System Failures
2.6 Relevance of Operational Risk Function
2.7 Key Elements in Operational Risk Management
2.8 Monitoring of Operational Risks
2.9 Control/Mitigation of Operational Risks
2.10 Core Elements of Operational Risk Framework
2.10.1 Governance
2.10.2 Clear Strategy
2.10.3 Appetite and Policy
2.10.4 Ensures Proper Communication
2.10.5 Periodic Evaluation
2.10.6 Structure
2.10.7 Execution
2.11 Operational Risk Management in Indian Banks
2.11.1 Increased Costs of Compliance
2.11.2 Improper Measurement of Operational Risk
2.11.3 Access to Appropriate Information and Reporting
2.11.4 Development of Business Line Databases
2.11.5 Implementing ORM Systems
2.11.6 Tone at the Top
3. Risk Management in Banking Business
3.1 History of Indian Banking
3.2 Role of Banking Sector
3.2.1 Brokerage Function
3.2.2 Asset Transformation Function
3.2.3 Liquidity Intermediation
3.2.4 Risk Intermediation
3.2.5 Information Intermediation
3.3 Deregulation of the Banking Sector
3.4 What Kinds of Risks Are Being Absorbed?
3.4.1 Banking Book
3.4.2 Trading Book
3.5 Types of Risks Banks Face
3.5.1 Liquidity Risk
3.5.2 Funding Risk
3.5.3 Credit Risk
3.5.4 Market Risk
3.5.5 Interest Rate Risk
3.5.6 Operational Risk
3.5.7 Other Risks
3.6 Role of RBI in Risk Management by Banks
3.7 Risk Management by Bank: Basel Committee Approach
3.7.1 Pillar I: Minimum Capital Requirement
3.7.2 Pillar II: Supervisory Review Process
3.7.3 Pillar III: Market Discipline
3.8 Current Risk Status of Banks in India
3.9 Challenges in the Indian context
3.10 Risk Management Scenario in the Future
4. Interest Rate Risks
4.1 Interest Rate Defined
4.2 Variations in Interest Rate
4.3 Interest Rate Risks and Their Sources
4.4 Various Types of Interest Risks
4.4.1 Repricing or Maturity Mismatch Risk
4.4.2 Yield Curve Risk
4.4.3 Basis Risk
4.4.4 Price Risk
4.4.5 Reinvestment Risk
4.4.6 Net Interest Position Risk
4.5 Effects of Interest Rate Risk
4.6 Measurement of Interest Rate Risk
4.6.1 Re-pricing Schedules
4.6.2 Maturity Gap Analysis
4.6.3 Value at Risk (VaR)
4.7 BCBS Principles for Interest Rate Risk Management
4.7.1 Board and Senior Management Oversight of Interest Rate Risk
4.7.2 Adequate Risk Management Policies and Procedures
4.7.3 Risk Measurement, Monitoring and Control Functions
4.7.4 Internal Controls
4.7.5 Information for Supervisory Authorities
4.7.6 Capital Adequacy
4.7.7 Disclosure of Interest Rate Risk
4.7.8 Supervisory Treatment of Interest Rate Risk in the Banking Book
4.8 Sound Interest Rate Risk Management Practices
5. Credit Risks and Credit Derivatives
5.1 Credit Risk Defined
5.2 Sources of Credit Risk
5.3 Types of Credit Risk
5.3.1 Credit Default Risk
5.3.2 Concentration Risk
5.3.3 Country Risk
5.4 Components of Credit Risk
5.4.1 Pre-settlement Risk
5.4.2 Settlement Risk
5.5 Approaches of Credit Risk
5.5.1 Standardized Approach
5.5.2 Foundation Internal Rating Based Approach (Foundation IRB)
5.5.3 Advanced Internal Rating Based Approach (Advanced IRB)
5.6 Management of Credit Risk
5.7 Principles for the Assessment of Banks’ Management of Credit Risk
5.7.1 Appropriate Credit Risk Environment
5.7.2 Operating under a Sound Credit Granting Process:
5.7.3 Maintaining an Appropriate Credit Administration, Measurement and Monitoring Process
5.7.4 Ensuring Adequate Controls over Credit Risk
5.7.5 Role of Supervisors
5.8 Tools of Credit Risk Management
5.8.1 Credit Approving Authority
5.8.2 Prudential Limits
5.8.3 Risk Rating
5.8.4 Risk Pricing
5.8.5 Portfolio Management
5.8.6 Loan Review Mechanism (LRM)
5.9 Credit Derivatives
5.9.1 Forms of Credit Derivatives
5.9.2 Significance of Credit Derivatives
5.9.3 Benefits of Credit Derivatives
5.9.4 Risks Involved in Credit Derivatives
5.9.5 Credit Derivatives and Sub-prime Crisis of 2007
5.9.6 Credit Derivatives in India
6. Risk Regulations in Banks: Basel Norms
6.1 Systematic Risk
6.2 Basel I Norms
6.2.1 Two-Tiered Capital
6.2.2 Advantages of Basel I
6.2.3 Weaknesses of Basel I
6.3 Basel II Norms
6.3.1 Structure of Basel II
6.3.2 Capital: Tiers 1 and 2
6.3.3 Conceptual Framework of Basel II Norms
6.3.4 Implications of Basel II Norms
6.4 Basel III Accord
6.4.1 Objectives of Basel III
6.4.2 Basel III Requirements and Indian Banks
6.4.3 Three Pillars of Basel III Norms
6.4.4 Major Features of Basel III
6.5 How is Basel III an improvement over Basel II?
6.5.1 Higher Capital Requirement
6.5.2 Liquidity Standards
6.5.3 Provisioning Norms
6.5.4 Disclosure Requirement
7. Liquidity Risk Management
7.1 Liquidity Defined
7.2 Liquidity Management: Conceptual Framework
7.3 Need for Liquidity Management
7.4 Early Warning Indicators of Liquidity Risk
7.5 Governance of Liquidity Risk Management
7.6 Liquidity Principles
7.7 Basic Principles for the Management and Supervision of Liquidity Risk
7.7.1 General
7.7.2 Governance of Liquidity Risk Management
7.7.3 Measurement and Management of Liquidity Risk
7.7.4 Public Disclosure
7.7.5 Role of Supervisors
7.8 Requirements of a Sound Liquidity Risk Management System
7.9 Measuring and Managing Liquidity Risk
7.9.1 Stock Approach
7.9.2 Flow Approach
7.10 Liquidity Management Framework in India
7.10.1 Pillar I
7.10.2 Pillar II
8. Managing Market Risks
8.1 Market Risk: Conceptual Settings
8.2 Market Risk Management Framework
8.2.1 Board and Senior Management Oversight
8.2.2 Organizational Structure
8.2.3 Risk Management Committee
8.2.4 Asset-Liability Committee
8.2.5 Middle Office
8.3 Market Risk Measurement
8.3.1 Risk Monitoring
8.3.2 Risk Control
8.3.3 Risk Limits
8.3.4 Gap Limits
8.3.5 Factor Sensitivity Limits
8.4 Market Risk Management Information System
8.5 Modern Approaches to Market Risk Measurement
8.5.1 Value at Risk (VaR) Method
8.5.2 Stress Testing
9. Foreign Exchange Risks
9.1 Foreign Exchange Market
9.2 Nostro, Vostro and Loro Accounts
9.3 Types of Foreign Exchange Risk
9.3.1 Transaction Risk
9.3.2 Translation Risk
9.3.3 Country Risk
9.3.4 Currency Risk
9.3.5 Foreign Exchange Settlement Risk
9.4 Foreign Exchange Risk Management Framework
9.4.1 Forecasts
9.4.2 Risk Estimation
9.4.3 Benchmarking
9.4.4 Hedging
9.4.5 Stop Loss
9.4.6 Reporting and Review
9.5 Methods of Foreign Exchange Risk Management
9.5.1 Internal Techniques
9.5.2 External Techniques
9.6 Foreign Exchange Market in India
9.6.1 Market Segments
9.6.2 Market Players
9.6.3 Sources of Supply and Demand of Foreign Exchange
9.6.4 Derivative Market Instruments
10. Risks in Insurance Business
10.1 Meaning of Risk in Insurance Business
10.2 Risk and Uncertainty
10.3 Loss Defined
10.4 Perils and Hazards
10.5 Elements of an Insurable Risk
10.5.1 Loss Must be Definite and Measurable
10.5.2 Loss Must be Statistically Predictable
10.5.3 Large Number of Exposure Units
10.5.4 Loss Due to Chance
10.5.5 Loss Cannot be Catastrophic
10.5.6 Premium Should be Economically Feasible
10.6 Pure and Speculative Risk
10.6.1 Pure or Static Risks
10.6.2 Speculative and Dynamic Risks
10.7 Types of Pure Risks
10.7.1 Personal Risks
10.7.2 Property Risks
10.7.3 Liability Risks
10.8 Fundamental Risk and Particular Risk
10.9 Subjective and Objective Risks
10.10 Insurable and Uninsurable Risks
10.11 Diversifiable Risk and Non-diversifiable Risk
10.12 Burden of Risk
10.13 Role of Risk Manager
Bibliography
Index
