Essay Zone.com - Free essays!
REGISTER NOW!
Login to an existing account
     
GCSE essays
A Level essays
University essays
Forum
Why join?
Essay quality
FAQ

Search forums
About us
Contact us

 

 
risk management in banking Free essay! Download now

Home > University > Business studies > risk management in banking

risk management in banking

You can download this essay for free. All you need to do is register and submit at least one of your essays to us.

Or you can purchase this essay for just $2 instantly without registering

Downloads to date: N/A | Words: 519 | Submitted: 07-Feb-2012
Spelling accuracy: 97.1% | Number of pages: 11 | Filetype: Word .doc


This is what the first 3 pages of the essay look like

risk management in banking essay previewrisk management in banking essay previewrisk management in banking essay preview

Description

this paper talk about risk manangement in banks

Preview

Risk Management in Banking

Particularly important given the QAT function of banks which gives rise to credit risk, liquidity risk and interest rate risk. Main focus (day to day) is on credit risk but also exists:

Regulatory Risk

? risk that regulation may change and impact on individual bank

? risk that lender of last resort asks for “something back”




Credit Risk Management

Important because loans generate bank income but excessive loans ?loan quality? Þ credit risk­ Þ loan losses ­

Four parts to credit risk management:

(i) Underwriting/ loan origination:

All activities required before a loan decision is made: credit analysis plus loan contract design (covenants, collateral, terms, prices)

Loan decisions guided by “Policy Statement” approved by board of directors:

Aggregate loan limits
Credit analysis standards
Collateral requirements
Lines of authority ? relationship between loan size and decision maker’s hierarchy

(ii) Funding and Servicing: Role of Documentation

Documentation required to protect bank’s:

Legal right to borrower repayments
Legal right to collateral
Ability to enforce covenants

Documentation lapses during rapid expansion: Continental Illinois (1984) (Penn Square Bank’s loan files empty!)


(iii) Risk Processing:

After loan consummation. Consists of monitoring and diversification:

Monitoring:

Keeping in touch with borrower, checking firm performance, ensuring compliance with covenants

Good monitoring is costly (resource intensive)

Credit culture important: balancing opposing attitudes of calling officers (frontline, maintain customer relationships) and credit professionals (aggressive)

Dislocations of these functions can erode credit culture: credit risk analysis outsourcing


Diversification:

See correlation of returns (lecture 1)

Concentrated lending can cause insolvency

Diversification often pursued passively ? reduce concentrations after identification instead of aggressively ? specify source and quality of loan (loans that lower portfolio risk should be priced lower ? “portfolio approach” to credit risk management)

Note however: specialisation allows efficiency in credit analysis (cross-sectional and inter-temporal informational reusability, lecture 1).

Dynamic programming versus linear programming problem: banks obtain illiquid assets on a sequential basis and face uncertainty about the future whereas investors can repeatedly reconfigure portfolios and trade liquid assets. Some blurring due to securitisation.


(iv) Credit Culture:

Relates to bank’s general approach towards risk management which synthesises underwriting, funding and servicing and risk processing.

Credit committee often formed with powers granted by Board of Directors

Ensuring consistent application of credit standards (avoiding “herding” and “myopia”)



Liquidity Risk Management


Main insurance of liquidity occurs via liability management.

Liability management ensures the bank has access to funds (most commonly the interbank market).

Good liability management ensures diversification (akin to asset side). Sub-Prime crisis shows the risks of undiversified funding sources in conjunction with liquidity risk on the asset side.

Liquidity/ liability management considers two types of funding requirements:

Routine (predictable, day to day cash needs)
Cash requirements during crisis events (unpredictable)


Crisis liquidity ensured via:

Cash reserves (costly)
Pre-arranged funding agreements (also costly)

Hence trade-off between costly liability management which incurs actual costs against the uncertain benefits that liquidity may provide.


Interest Rate Risk Management

High term premiums mean long-duration assets offer better yields ...

Download this essay in full now!

Just upload at one of your essays to our database and instantly download your selection! Registration takes seconds

Or you can download this essay for $2 immediately without registering


Comments and reviews

Reviews are written by members who have downloaded the essay

No comments yet. If you download the essay you can review it afterwards.