Course Description
This course is for bankers that wish to learn how to challenge the risk management implementation initiatives of their institutions. Such efforts would include auditing the work of internal risk specialists (such as model developers) as well as auditing the similar work of external consultants. In particular, we focus on the audit or database, model development and usage considerations spawned or encouraged by Basel II and CAD II compliance. Owing to the great number of quantitatively skilled individuals that have migrated into bank internal risk departments in recent years, the source of “bad practices” in risk management undertakings more often stems from widely-held misconceptions concerning best-practice as opposed to incompetence. Even the quantitatively skilled are challenged by the vast number of departures from the textbook assumptions that represent the reality of risk management implementation. For this reason we discuss primarily how to evaluate “common-practices” so as to determine whether they are consistent with or depart from best practice in key areas of risk management implementation.
In this course participants will learn:
- How to challenge the quantitative and qualitative risk management initiatives of their banks
- How to determine their bank’s compliance with regulatory standards (i.e. CAD, Basel II, New Basel rules, etc.) and industry best-practice
- The various modelling techniques commonly used in credit, market and operational risk, particularly with respect to Basel compliance and the Basel enhancements
- How to assess model and exposure compatibility
- How to assess the compatibility of models with the bank’s risk appetite, initiative and Internal Capital
Adequacy Assessment Process (ICAAP)
- Data considerations necessary to assess and evaluate models and model choices
- Validation considerations for all three risk areas
- Application of use tests and considerations of internal effectiveness
- Capital allocation and capital adequacy determination
Who should attend:This course is geared towards senior personnel from financial institutions and large, nonfinancial institutions. This would include: CEOs, CFOs, Chief Risk Officers as well as Risk managers, risk analysts, auditors and accountants as well as IT personnel. While many examples used during the course will be geared towards financial institutions (which lead the market in ERM efforts) a number of case studies will be discussed and included in course materials in order to draw parallel comparison with nonfinancial institution exposures.
Requisite knowledge:The course assumes that individuals are aware or are in a position to judge the risk position of their business unit if not their institution at-large. Knowledge of basic accounting and statistics is useful but not required. Spreadsheet examples containing mathematical formulas will be provided for the ease of exposition.
Day 1
Introduction and overview – Auditing the risk measurement apparatus
· Risk management compliance initiatives and best practice: Basel II, the new Basel rules and global best-practice
· Credit risk measurement
– Evaluating model choices
– Probability of Default (PD) models
– Horizon choices: Point-in-Time versus Through-the-Cycle
– Obligor-PD models
– Smoothing and cohorts
– Duration based models
– Models with macro variables
– Relationship with scoring and ratings
– Back testing and validation
· Loss Given Default (LGD) models
– Workout LGD models
– IFRS considerations
– Actuarial LGD models
– Market LGD models
– Other, less common methods
· Exposure at Default (EAD) models
– Analytical methods
– Empirical methods
Day 2
· Credit risk measurement (Continued)
– Provisioning models: Expected Loss (EL)
– Economic and regulatory capital: Unexpected Loss (UL)
– Portfolio credit models (some discussion)
– Dependence
– Stress testing
– Copulae
· Market risk measurement
– Establishing and using Market VaRs
– Calculating VaR: Brief expositions and examples
o Parametric methods
o Historical methods
o Monte Carlo methods
o Pros and Cons of VaR as a measurement tool
o Market relevance: illiquidity issues, regime switches
o What VaR requires in terms of data
– Expected Tail Loss (ETL)
o Interpretation
o Pros and Cons of ETL as a measurement tool
o What ETL requires in terms of data
– Allocating capital in a market risk framework
o Individual exposures
o Portfolio-level exposures
Day 3
· Operational risk measurement
– Establishing an Operational VaR (OpVaR)
o Calculating the OpVaR
o Parametric approaches
o Loss Distribution approaches
– Use of extreme value theory (EVT)
o Theory and applications
– Use of copulae and EVT
– Establishing EL and UL estimates
– Allocating provisions, insurance and capital
– Problems and issues surrounding operational risk measurement
Auditing the risk management process
· Data considerations (for all three risk areas)
– Statistics refresher and primer
– Distributions and empirical distributions (as time permits)
· Sampling
· Conditions/limitations sampling places on the aforementioned models
· Sample size determination
· Sample quality issues
– Missing data
– Sampling bias
· Statistical testing for sample parameters
· Sampling for Market, Credit and Operational risk, respectively
Day 4
· Operational risk and auditing the risk management apparatus (continued)
· Challenging the risk management initiatives
· Assessing effectiveness
· Assessing compliance
· Reporting and problem handling
– Credit risk
– Market risk
– Operational risk
· “Use” tests
– Credit risk
– Market risk
– Operational risk
· Related issues and extensions
· Concluding remarks
Course summary and close
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Maurice Ewing
Dr Maurice Ewing, FRM
Globally-Experienced Risk Management Specialist
Dr. Maurice Ewing, FRM has trained and advised individuals from institutions worldwide in risk management - at both the executive and operational levels. Formerly on the full-time faculty of the Kellogg - HKUST business school, a Princeton PhD and a chartered FRM holder, Dr. Ewing opened the first dedicated, emerging markets risk management consultancy in 2003, basing it in Hong Kong. Since that time he has expanded his practice to Africa, Europe, Latin America and the Middle East. A specialist in resolving difficulties associated with quantitative implementation, Dr Ewing is renowned for his abilities to convey often complex concepts to non-specialists in simple terms and is a widely sought after speaker and adviser to boards of directors as well as regulatory supervisory panels. His banking experience stems both from his work at the Federal Reserve Board of Governors and the New York Federal Reserve Bank as well as his firsthand experience in advising numerous (successful) Basel II compliance efforts over 4 continents. Moreover, Dr. Ewing enjoys incorporating his wide range of experiences in his classrooms, always focusing solely on proven methods of practical implementation while balancing he pedagogical needs of his participants.
Apart from his membership in the Global Association of Risk Professionals (GARP), the Professional Risk Managers International Association (PRMIA), the Risk Management Association (RMA), Dr Ewing is an affiliate of the Institute of Risk Managers (IRM) and numerous other professional organizations. He currently lives in the Mediterranean with his wife and two small children, avidly reads Byzantine history, drives like he is from the region and occasionally practices Wing Chun kung fu. He is a terrible golfer.
Interested in holding this course in-house? Please fill out your details and a member of our team will be in touch with more information.
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