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.

    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.