1 / 19

Challenges in Implementing IRM

Integrated Risk architecture: Implementation Issues FICCI - IBA conference on “Global Banking – paradigm shift” on October 5 th 2005. What is Integrated Risk Management. 1. Components for implementing IRM. 2. Challenges in Implementing IRM. 3. Growth. Capital Adequacy. Profitability.

falala
Download Presentation

Challenges in Implementing IRM

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Integrated Risk architecture:Implementation IssuesFICCI - IBA conference on “Global Banking – paradigm shift” on October 5th 2005

  2. What is Integrated Risk Management 1 Components for implementing IRM 2 Challenges in Implementing IRM 3

  3. Growth Capital Adequacy Profitability Three key imperatives for Bank’s Management • Differing requirements from various stakeholders • Employees • Borrowers • Regulators • Credit Rating agencies • Counterparty banks • Depositors • Investors IRM can assist in managing the three objectives proactively

  4. Maintenance of Regulatory/ Economic Capital is crucial to business continuity • Economic Capital is the financial cushion that a bank uses to absorb unexpected losses. The purpose of economic capital is to provide confidence to claim holders such as depositors, creditors and other stakeholders. • The development of of sophisticated risk measurement tools offers banks the capability to calculate economic capital. • The proposed New Basel Capital Accord is a major move towards aligning regulatory capital to economic capital.

  5. Profitability Analysis – Bank ABC • Investments offer the highest contribution p.c.age on assets • Which segment leads to high interest earnings? • The credit function has the largest contribution towards fixed expenses • Which credit segment contributes the highest? • What is the position after allocating costs? • Am I properly pricing for expected Losses? • What is the capital required for different business lines? • What is the return provided by different business lines on capital invested? • What is the expected impact of NPAs/ revaluation? Where should we grow? • Are we generating enough internal capital to support growth?

  6. Liquidity Risk Credit Risk Market Risk Risk Exposures – Bank ABC The bank runs asset liability mismatches due differing maturity profiles and lending and borrowing rates for credit, investments, deposits and subordinated debentures. Borrowing/ Lending/ Investing in Foreign Currency gives rise to foreign exchange risk

  7. How does this affect us? • Credit Risk: Simple credit products (loans normally backed by collateral, few products) • Market Risk: Simple market risk products (dealing in g-sec/ limited corporate bond market/ limited FX market) • Operational Risk: Not a major concern Increasing Complexity & Size Current Environment Future Environment • Credit Risk: • Credit Derivatives • Project Finance • Market Risk: • Multiple currencies • Investments in securities across countries • Investments in corporate bonds • Swaps/ Options other derivatives • Operational Risk: • Increasingly important with complex systems and processes, operations across time zones and markets

  8. Income 6.10 % Risk-adjusted income 5.60 % Expected Loss 0.50 % Risk-adjusted Net income 2.20% Costs 3.40 % Risk-adjusted After tax income 1.75% Net Tax 0.45% Risk-adjusted Net income 1750 Average Lending assets 100,000 RAROC 22% Total capital 8000 Credit Risk Capital 4.40 % Total capital 8.0 % Market Risk Capital 1.60 % Operational Risk Capital 2.00 % RAROC - Base for Integrated Risk Management • RAROC allows a bank to take a comprehensive risk view and forms the base for IRM • RAROC could be carried out for the bank as a whole or a business segment.

  9. Integrated Risk Management in a Bank • What is Integrated Risk Management? • Measure, monitor and manageall the risksacross the bank. • Bank wideintegrated risk management infrastructurein terms of people, policies and systems • Common and consistent risk measurement and quantificationmethodologiesacross all risk categories • Aggregation of risks andestimation of economic capitalto assist in risk/ return decision making Organisation Structure Policies Systems & Processes Integrated Risk Management People Culture Methodologies Compliance

  10. Perceived advantages of IRM • Facilitates strategic value creation • Key to regulatory compliance • Mechanism for efficient allocation of economic capital • Enables bank to maximise returns • Lower capital costs • Better decision making due to scenario analysis • Risk adjusted pricing • Loss reduction due to understanding of correlations • Elimination of unwanted exposures

  11. What is Integrated Risk Management 1 Components for implementing IRM 2 Challenges in Implementing IRM 3

  12. Policy Risk Models Performance Measurment Aggregation Controls on Risk takers Centralised risk function (analytics and management) Risk-adjusted performance measurement Risk Policy Risk reporting Quantification New product assessment IRM Implementation – Important Facets MIS IT Infrastructure Risk Communication and Control

  13. What is Integrated Risk Management 1 Components for implementing IRM 2 Challenges in Implementing IRM 3

  14. Information Technology Systems • Risk Analytics Basel II • Organisation Structure Credit Risk Market Risk • Risk Management Policies Operational Risk • Management Information Systems • Top Management Oversight Beyond Basel II ALM Business Risk Reputation Risk • Processes and Systems IRM Challenges – identification of gaps in existing risk management practices Reviewing and improving existing

  15. IRM Challenges - measurement of risks • Credit Risk • Probability of Default • Loss Given Default • Exposure at Default • Market Risk • Trading Book (VaR) • Interest Rate Risk on Banking Book • Operational Risk (evolving) Requires collection of data over time, development of measurement models, back testing of models

  16. Foreign Exchange Risk Interest Rate Risk Commodity Risk Business Line 1 Business Line 2 Equity Risk Corporate II Retail Pool Corporate I RISK CATEGORY Correlations across Businesses Correlations across Asset classes Correlations Across Companies MARKET RISK CAPITAL OPERATIONAL RISK RISK SILO CREDIT RISK IRM Challenges – Risk Aggregation Correlations among risk silos OVERALL ECONOMIC CAPITAL

  17. IRM Challenges - modelling of correlations across risk categories & risk silos • Modelling correlations requires data and is not easy • Fat tails in credit risk create problems

  18. IRM Challenges - Improving IT systems • Internal risk scoring models for credit • Portfolio Management Models • Models for estimating VaR for Market risk • Operational Risk databases • Asset Liability Management System • Data warehouse having interfaces for • Analytical • Modelling • Reporting • Options for developing Risk Management Systems • In-house • Off-the-shelf Sizeable investments in IT infrastructure required for implementing Basel II

  19. Thank you • CRISIL Investment & Risk Management Services • CRISIL Limited • dravishankar@crisil.com • Ph.no: 91 22 56537371

More Related