An intensive 4-day training course for risk management professionals in banks, corporate treasury and financial institutions.
- A broad look across risk management
- The Basel Accord – what is it and why do we have it?
- Did the Accord work in the current economic crisis – changes under Basel II.5 and III
- Development of the ICAAP in preparation for your SReP
- Creation of a risk framework
- How risk management should be organised
- The assessment of market risk using both traditional and modern approaches
- Credit portfolio management – why is this the new paradigm?
- How operational risk is being assessed and managed
- The Accord has been implemented – what next?
Who should attend
- Risk managers in financial institutions
- Rating agency analysts
- Financial controllers in large institutions
- Credit risk analysts
- Portfolio analysts / managers
- Treasurers
Prerequisites
Detailed technical knowledge is not required, but delegates should have a good knowledge of the operations of a bank, and some knowledge of financial terminology and instruments.
Delegates are not required to have advanced mathematical or statistical training, although more knowledge would be beneficial for the second part of the course.
Delegates should be familiar with Excel spreadsheets, although advanced Excel modelling skills are not required.
Course background
Risk management is not new. All organisations take on risks during the course of their normal activities; these risks have to be managed. But for banks, as regulated entities, risk management is a more formal activity, as laid out in the new Basel Accord.
This requires the banks to introduce new processes, procedures and organisational structures to ensure the efficient management of risk, and to allocate regulatory capital against the major components of the risks.
The course will discuss:
- The definition and constraints around regulatory capital
- How traded and non-traded market risk is measured, including discussion of the Value-at-Risk methodologies
- The standardised approach to credit risk, plus an overview of how the portfolio-based modern methodologies are being applied within the large international banks
- An overview of operational risk, and how to create an appropriate risk framework to comply with the infrastructure requirements
- The requirements of Pillar II, including complying with the necessary ICAAP
- Requirements of Pillar III, including example publications
- Evolution of the regulatory framework in the light of the recent Western banking crisis
But is that sufficient? There is a growing realisation that banks, like all organisations, need to provide an adequate return to the providers of capital for the risks that they are taking. In the major international banks, risk management has evolved from a control mechanism ensuring Basel compliance, to a critical input into the basic business question: am I earning enough revenue out of this transaction to compensate me for the additional risks I am taking on? Addressing this question should be of fundamental interest to the senior management of banks, and indeed of all organisations.
This course will therefore not only address the immediate regulatory requirements, but will also discuss both current and future best practice internationally.
To reinforce the course, there are:
- A wide range of real-life case-studies discussing the lessons we should learn from these failed institutions
- Details and computer simulations of the latest techniques to model market, credit and operational risk, and discussions about commercially-available software.
Day 1
The Basel Accord II – a brief overview
It is assumed that all delegates will have at least heard of the new Basel Accord.
- Brief historical background
- Objectives of the new Accord
- Application of the Accord – to whom does it apply?
- Structure of the new Accord
- Pillar I: Minimum Capital Requirement
- What constitutes Bank Capital?
- Expected and Unexpected Losses and the role of Capital
- Other quantitative approaches to banking control
- Pillar II: Supervisory Review Process
- The objectives of this process
- Production of an ICAAP – what are the risks to be considered?
- Risk-based supervision
- Pillar III: Market Discipline
- What are the main requirements
- Objective and concerns around Pillar III
- Examples of Pillar III reports
- Interaction with other regulatory requirements such as IFRS
- Procyclicality
- Evolution of the Accord due to 2007-9 banking crisis
- Changes in the composition of capital
- New rules for Market and Securitisation Risks
- New rules for assessing counterparty credit risk
- Introduction of a Leverage Ratio
- Potential reduction of procyclicality
- Introduction of a Liquidity framework
Sound risk management practices
Whilst each class of risk has developed its own methodologies, there are some overarching sound practices required to support the overall risk management function.
- What is a risk framework?
- The COSO framework – how applicable to banks?
- Other international frameworks
- Developing an appropriate risk management environment
- Typical organisational structure
- Roles and responsibilities of each of the parties
- Defining the risk appetite of the institution
- Creation of risk management policies and procedures
The discussion will be with reference to a leading international bank
Day 2
Traded market risk
The day-to-day control of traded market risk using sensitivity measures has changed little over the past 25 years. However, the introduction of Value-at-Risk some 15 years ago for aggregated reporting provided senior management with greater insights.
This session will first go through the stages required to implement the Standardised approach:
- Valuation of traded products
- Calculation of sensitivities
- Estimation of regulatory capital for each of the risk classes
- Other sources of risk such as theta, funding, credit and market liquidity
Numerical examples will be used to demonstrate the calculation of capital.
Value-at-Risk
- Introduction through a simple 1-factor example using historic simulation
- Extension to a 2-factor example
- Demonstration of more realistic examples
- What do banks do in practice?
- Practical difficulties of implementation: holding period, data collection
- Regulatory calculations of capital: normal and stressed VaR
- Incremental Risk Charge
- Changes in the Counterparty Credit Risk charge
Case studies: NatWest Bank and
Long-Term Capital Management
Non-traded (interest rate) market risk
The new Accord makes a distinction between traded and non-traded market risk. The latter typically arises from longterm investments in the banking book, plus the long-term funding of the bank.
Traditionally, banks have applied different approaches to these risks.
This section will briefly discuss these approaches, and then consider the regulatory requirements.
- How does non-traded IRR arise?
- What does it effect: examples of
- NII and economic value approaches
- How is it traditionally assessed
- Banding, gap analysis and duration
- Some examples how this is implemented
- Simulation approaches – incorporating behavioural maturity
- Other advances in Asset-Liability Management
Funding liquidity risk
- What has happened to many banks in last two years
- Why was liquidity risk typically ignored
- How to address liquidity risk
- Internal Liquidity Adequacy Assessment (ILAA)
- Stress testing
- What does the Accord require?
- Background
- The standardised IR shock
- Creation of a standardised framework, including cross-currency considerations
- New Liquidity Framework in the Accord
- How the supervisor will monitor this risk
Day 3
Credit risk
Banks are traditional credit risk taking institutions. Hence, through experience, presumably they have developed well-founded mechanisms for managing credit risk? If that is the case, why have the leading international banks fundamentally changed the way in which they view credit risk over the past ten years? And does the Basel Accord support or hinder this new paradigm?
This session will first discuss how traditional credit risk management has usually been performed, culminating in a consideration of the Standardised method in the new Accord.
- Banks as traditional credit taking institutions:
- Traditional loan exposures
- Provision of guarantees such as stand-by Letters of Credit or Trade Finance
- Settlement, pre-settlement and derivative risks
- The concept of Exposure At Default
- The typical credit control process
- Traditional credit risk mitigation
- The effectiveness of the process: does it work?
- Level 1 CRM
Case Studies: Bankgesellschaft Berlin, Continental Illinois and Credit Lyonnais
- The Standardised approach
- The “who” and the “what” of the Accord
- The concept of Credit Conversion Factors
- The role of external rating agencies
- International or domestic – that’s the question?
- Permitted risk mitigation
- Secured lending
- Collateralisation
- Guarantees
Numerical examples will be used to demonstrate the actual calculation of capital in a range of different situations.
The session will culminate with a brief discussion of the new, more quantitative, approaches to credit risk, including another look at the Accord.
- Portfolio Credit Risk Management – why is it the new paradigm?
- What are the fundamental concepts?
- Basic data requirements: Probabilities of Defaults, Loss Given Defaults and correlations
- How to estimate PDs:
- Traditional qualitative credit rating systems
- Statistical models such as scorecarding
- Use of historic data from external parties
Each approach will be briefly and yet critically discussed
- How to estimate LGDs:
- An outline of portfolio credit modelling – an example of a migration approach
- A basic model
- Estimation of correlations, and the impact
- Calculating Credit VaR
- Implementing such a model in practice
- Assessing Credit Concentration Risk – as required by the ICAAP
- The credit treasury
- Overview of the Internal Rating Based approaches
- What the banks supply, what the Accord supplies, and what the National Supervisor supplies
- What is likely to change in the future?
- How to apply to different client sectors
- Impact on the regulatory capital?
Computer-based demonstrations will be used to reinforce this session.
Day 4
Operational risk
The Basel Accord has introduced a capital requirement for Operational Risk for the first time. But what is Operational Risk? Can it be realistically measured as the Accord requires? Or is the whole topic the triumph of optimism over reality?
These are some of the basic questions to be debated in the section, along with a detailed coverage of the approaches banks are employing.
Overview
- What is operational risk: alternative definitions?
- What is the regulatory charge supposed to cover?
- The Basel categories and definitions
- The results of the latest Loss Data Collection Exercise
- Why has OR been included in the new Accord?
- The early view of OR, and the current view
Case Study: Royal Bank of Canada Risk indicators
- What are risk indicators – some examples
- The regulatory indicator approaches
- Why indicator approaches are fundamentally flawed!
Developing an OR methodology
- Developing suitable objectives and policies
- Typical OR organisational structures
- Relationship with other functions, especially Internal Audit
- Creating a risk framework
- Risk identification
- Build or buy an OR database
- Process analysis – which are the key processes?
- Process mapping – what are the major risks in any given process?
- Bottom-up risk measurement models
- Loss Distribution Analysis: statistical modelling using historic data
Computer-based demonstration using real data
- Control self assessment: Score-card or self-assessment approaches
- Example of assessment questionnaire
- Example of professional software used to support this methodology
- Exceptional and unexceptional events
Case Studies: Barings and Allied Irish Bank
- Controls and mitigation of operational risks
- Role of insurance
- Risk monitoring and reporting
- Review of the OR function
- Where is current best practice, and what are the leading institutions doing?
- Results of QIS3 (2004) and QIS5 (June 2006)
Various Case Studies, including BCCI, Daiwa and First National Bank of Keystone
Stress testing
- Why stress test? What are the recent lessons?
- What are the Basel requirements?
- What happens in times of stress?
- What constitutes a good stress test?
- Interactions between credit and market risk
- What are the management messages from stress tests?
Revisiting the ICAAP
The objective of Pillar II is for the supervisor to assure itself that each bank is holding adequate capital against all the risks to which it is exposed.
- The Internal Capital Adequacy Assessment Process (ICAAP)
- What should the ICAAP report contain?
- Identification of all relevant and material risks
- Appropriate methodologies – including internal models
- Key sensitivities
- Future scenarios – the 1-in-25-year requirement
- Aggregation and diversification impacts
- Testing the ICAAP
- Role of the senior management
- Use of the ICAAP within the bank
- Relationship between the ICAAP and the future strategy
- Supervisory Review Process (SReP)
- How do supervisors plan to conduct the SReP?
- Incentives for the bank
Selected forms of risks to be covered under Pillar 2
- Model Risk and Validation – banks are big users of models
- Reputational risk
- What is the definition of reputational risk
- Has reputational risk been increasing or decreasing?
- What are the major areas of concern
- Should and can potential reputational risks be managed?
- What is the crisis plan to manage reputational damage
Final words and course summary
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The course director is a consultant in the financial services industry. Until recently, he was Director of Financial Engineering at Lombard Risk Systems, one of the leading providers of derivative trading systems around the world. In this role he led a team responsible for the mathematical development of Lombard’s derivative trading and risk management systems. At the same time, he also undertook extensive client/product training and consultancy projects.
Prior to his role at Lombard Risk, he was Head of Financial Engineering at ANZ Merchant Bank in London, and was Reader in Finance at The Management School, Imperial College, which is part of the University of London. He has worked with many banks and financial institutions around the world, advising them on their derivative and risk management activities. He has an international reputation for his expertise in swaps, other derivatives and risk management.
He has also published widely in both academic and professional literature, his most recent book on Swaps and other Derivatives was published in December 2009, and he is currently writing a book on bank risk management. His approach to training is structured and practical. He has extensive experience and success in teaching both recent entrants to the derivatives markets and risk management, as well as highly experienced technical experts and market participants.
Courses run by this instructor
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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