Training center

Course: Risk Management and International Practice (16 hrs course)

1. Introduction to risk management organization in a bank (2 hrs)

1.1. Organizational principles:
• Risks estimation and their coverage by capital;
• Full model control.
• Intervention at start of capital loss and additional capital provision;

1.2. Business processes of risk management:
• Deal preparation.
• Operation condition control.
• Risk analysis.
• Capital distribution for efficiency.
• Budgeting and financial planning.
Risk management focus as an indicator of a bank’s maturity: risk determination, measurement, control, risk-gain analysis, capital distribution, risk-adjusted pricing. Importance of mature risk management under Basel.

1.3. Structuring and staffing for risk management:
• Orientation at particular risks.
• Orientation at business units.
• Orientation at functions.
• Capital distribution for efficiency.
• Budgeting and financial planning.
Comparison of structures and staff plans.

1.4. The banking business process, its organization and staff.
• Dedicating corporate centers to financial responsibility;
• Role and duty assignment for credit deals (customer support unit, credit unit, risk management).
• Collective management.
Problems with agents (conflicts of interests), the “divide et impera” approach to resolving them, its disadvantages. Organization-wide risks. KPI of a bank and its business units. The need for Internal Finance.

2. Computing available capital (2 hrs)

2.1. Make-up of available capital
• Main Tier 1 capital.
• Added Tier 1 capital.
• Tier 2 capital.

Criteria for including financial instruments in a particular category. Stand-alone issues:
• Minority stakeholders’ stake in subsidiaries.
• Intangible assets.
• Treasury stock.
• Investments in other financial organizations not consolidated in reporting.
  Other.

2.2. Capital adequacy requirements
• Main Tier 1 capital.
• Net Tier 1 capital.
• Net capital.

2.3. Cost of available capital
• Calculation of main capital cost and its connection with other KPI.
• How to determine additional capital cost.
• A “capital bonus”; liquidity cost vs. capital cost.
• Currency-based capital cost estimation.

3. Capital distribution (4 hrs)

3.1. Main risk types:
• Financial: market, currency and interest,
• loan,
• operational.
Definition problems, treatment of these risks inside the bank, ways to control and monitor. “Wrong” risks: strategy, competition etc.

3.2. Calculating required capital:
• Main parameters of risk models: confidence level, planning horizon, approach (instantaneous or through-the-cycle).
• Long-term estimates: VaR and EaR, management intervention factor.
• An illustration: risk estimates for capital distribution.
• Capital “cushion”: purposes, computing, accounting fields (risk estimation and risk-adjusted pricing).
• Stress-testing.

3.3. Risk-adjusted KPI:
• RAROC,
• EVA,
• CVA.

3.4. Risk-adjusted KPI calculations for business units:
• Transfer rates, an introduction.
• The problem of attracting units.
• “Cushion” for various products.

4. Managing loan risk of corporate borrowers (4 hrs)

4.1. Business processes of hedging
Products for corporate borrowers:
• Credit lines.
• loans,
• Off-balance sheet products: warranties, letters of credit, conversions and forwarding,
• market operations (bonds, shares).
Mutual cross-sales. Limits systems, risks (refinancing, basic, interest), hedging (various marginal payment conditions, prepayment, price changes tied to market events). Format of a loan application.

4.2. Creating an internal ratings system
4.2.1. Statistical analysis of borrower portfolios:
• Choice of important factors for rating.
• Calibrating from rating to annual probability of default (PD).
• Estimating average default frequency from internal data.
• Building a score (logit or probit-regression).
• Working with small data.
• Calibrating rating models and estimating PD.
4.2.2. Estimating correlations of borrowers’ financial situation.
4.2.3. Basic and in-depth loan risk evaluations. LGD and risk horizon assessment. Provision accounting.
4.2.4. Regulating agencies’ requirements to loan risk estimation models.

4.3. Loan risk estimation
• Basel-recommended formulas.
• Calculating a portfolio’s correlated loan risks via Monte Carlo methods,
• customer risk estimation for operations with derivatives;
• Direct investment risks, adjusted for loan and market risk correlation;
• Stress-testing.

4.4. Risk-adjusted pricing
• Funding cost estimation.
• Adjusting for risks,
• How to evaluate loan cost.
• Factoring in cross-sales.

4.5. Implementing original loan risk models
• Data preparation.
• Statistical analysis.
• Required IT.
• Implementation risks.

5. Managing loan risk in a retail bank (4 hrs)

5.1. Introduction:
• Minimal requirements.
• Main principles.
• Basic policies.
• How to put new products on the market, key factors and methods.
• Reporting and monitoring for a credit portfolio.
• Chief triggers and indicators.
• Roles and responsibilities.
• Stress-testing.
• Methodologies and validation.
• Important definitions.
• Credit portfolios classified.
• Grades and buckets.
• KPI: ROE, RACV, CV, LOSS, ROI etc.

5.2. Risk appetite:
• Credit portfolios classified.
• Classifying risks,
• Roles and responsibilities.
• Pricing policies and margins.
• Limit management strategies.
• Hedging.

5.3. Underwriting:
• Main principles.
• Underwriting specifics by type of loan.

5.4. Decision-making models (scoring):
• Basic principles: bad-rate-through-the-door, KS, ROC, approval rate.
• Scoring card calibration.
• Scoring card implementation.
• Scoring card monitoring.

5.5. Managing credit losses:
• How to find threatening segments and concentrate risks.
• Monitoring and control.
• Probable loss minimization.
• Force majeure planning.

5.6. Debt collection:
• Organization and structure.
• Policies and strategies.
• Managing collection.
• Collection strategies.
• Segmenting clients.
• Soft, hard, legal collection.
• Measuring efficiency and monitoring quality of collectors.
• Personnel work.
• Reporting.

5.7. Fraud:
• Structure and organization.
• Reporting by type of fraud.
• Strategies.

5.8. Reserves:
• Main principles and objectives.
• Roles and responsibilities.
• Reserve coverage and adequacy.
• Definitions.
• Absorbing states (reporting on overdue debt and charge-offs).
• Reserve-making models.
• Transition matrices.
• Early charge-offs (ECO).
• Portfolio segmentation.
• Restructuring criteria.
• Troubled debt restructuring (TDR).
• Requirements to reserves.
• Sample reserve models with estimates.

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