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 hedgingProducts 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 system4.2.1. 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.