Risk Management in Banking: Market Practices

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Risk Management in Banking Market Practices
Regulatory Framework
???????? ??????? ??????S????? HELLENIC OPEN
UNIVERSITY
7 F?????????? 2004
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Risk Management in Banking ?t???ta

• ?a????st??? p?a?s??
• ?efa?a?a?? ?p???e?a
• ? p??s????s? t?? es?te????? µ??t????
• ?as??e?a ??
• ??ß?????af?a
• ???t?se??

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Risk Management in Banking ?a????st??? ????s??

• ????? ? s??p?? t?? ?a????sµ?? p????pt????
  e??????
• ?e?t??s? t?? asf??e?a? t?? t?ape????? s?st?µat??
• ?? ?a????sµ?? st??e???? st? ?a ???s??? t??
  ???pe?e? ?a ????et?s??? ?µ???µ??fe? ?a?
  ap?te?esµat???? p???t???? d?a?e???s?? ???d????.
• ?? ?a????st??? p?a?s?? ??te? t??? pe?????sµ???
  ?a? t?? ?ate????se?? ??a t?? a??pt??? epa????
  s?st?µ?t?? d?a?e???s?? ???d???? ap? t?? ?d?e? t??
  ???pe?e?.
• ?????e? t?? ?????a t?? t?? s??des?? t?? ?d???
  ?efa?a??? µe t?? a?????? ???d???? ap? t??
  ???pe?e? risk-based capital.
• G?a t?? ???pe?e?, t? ??st?? a??????? ???d????
  µetat??peta? se ??st?? ?efa?a???.

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Risk Management in Banking ?a????sµ??

• G?at? ??e?????ta? s???e???µ???? ?a???e?
• ?? t??pe?e? ????? d??f??a ????t?a ??a t?? a??????
  ???d????.
• ? a?????? ???d???? ?µ?? µp??e? ?a d?µ??????se?
  s?st?µ??? ???d???, d??ad? ???d???
  ap?sta?e??p???s?? ????????? t?? t?ape?????
  s?st?µat??. ? ??e???p?a µ??? t??pe?a? de? ?a
  ep??e?se? µ??? t??? ?ata??te? ?a? µet????? t??
  a??? ?a? ???e? t??pe?e? p?? ????? d?s?????e? µa??
  t??.
• ??? ep?t???????? t? s??p? t??? ?? ?a???e?
  p????pt???? e??????
• ?? ßas??? e??a?e?? e?????? e??a? ? ?efa?a?a??
  ep???e?a. St???? t?? apa?t?s?? ??a ?efa?a?a??
  ep???e?a e??a? ?a ??se? ??a e????st? ep?ped?
  ?d??? ?efa?a??? se s??s? µe t??? ???d?????
  (d??e?a, p???e?? s??a????µat?? ??p) p??
  a?a?aµß????? ?? t??pe?e?.
• ?? ßas???? a???? a?t?? t?? ?a????? e??a? d?e??e??
  ?a? ? efa?µ??? t??? p?????e? ap? ???a se ???a ?a?
  pa?a??????e?ta? ap? t?? a?µ?d?a e?e??t??? a???,
  s?????? t?? ?e?t???? ???pe?a.

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Risk Management in Banking ?efa?a?a?? ep???e?a

• S??t?µ? ?st????? a?as??p?s?
• 1988 The Accord is issued by the Basle
  Committee on Banking Supervision, Bank of
  International Settlements (BIS)
• Credit risk only
• 1992 Implementation of the Accord
• 1995 Market Risk Proposal (incl. internal
  models)
• Credit Market risk
• 1996 Amendment to the Accord to incorporate
  market risks is issued
• 1998 Amendment to the Accord comes into force
• 2001 Publication of the New Accord (Basel II)
• Credit Market Operational risk
• 2006 Suggested date of implementation of Basel
  II

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Risk Management in Banking ?efa?a?a?? ep???e?a

• ? s?µp????µat??? S?µf???a t?? 1996
• ?a t?ape???? ?d??µata p??pe? p???? ?a µet????
  t??? ???d????? a????? "market risk ?a? ?a t?????
  ta apa?a?t?ta ?ef??a?a ??a?t? a?t??.
• ? p???p????t?ta t?? s?st?? ap?t?µ?s?? t??
  ???d???? a?????, e?d??? ??a pa?????a p?????ta,
  a?a??????eta? ap? t?? ep?pt???? a???? ?? ?p??e?
  ep?t??p??? a??et? e?e????a st?? ???s? t??
  ?at??????? µ??t???? µ?t??s?? t?? ???d???? a?t??.
• ?ts?, ?? p?? p??????µ??e? t??pe?e? p?? ?d?
  e??a? a?e???t?te? d?e????se?? ??a?e???s??
  ???d????, e??a? t?? ep????? µeta?? t?? d???? t???
  es?te????? µ??t???? µ?t??s?? ???d???? internal
  Value-at-Risk (VaR) model, ? internal models
  approach, ?a? t?? t?p?p???µ???? p??s????s?? p??
  p??te??e? ? BIS standardized approach.

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Risk Management in Banking ? p??s????s? t??
es?te????? µ??t????

• Value-at-Risk (VaR)
• ? VaR µet??e? t? ep?ped? t?? µ???st?? ??µ??? p??
  ?a µp????se ?a p?????e? ap? µ?a s???e???µ???
  s???es? ?a?t?f??a????, µe ded?µ??? p??a??t?ta ?a?
  ??a ???sµ??? ??????? pe???d?.
• ?a??de??µa 2 e?at?µµ???a se 10 ?µ??e? µe
  p??a??t?ta 95
• ??t? s?µa??e? ?t? ? p??a??t?ta ?? ??µ??? ap? ??a
  s???e???µ??? ?a?t?f?????? se µ?a pe???d? 10
  ?µe??? ?a ?epe??s??? ta 2 e?at?µµ???a e??a?
  µ??? 5 ??af??et??? µ?sa se e???s? d?af??et???
  de?a?µe?a t? p??? µ?a f??? ?? ??µ??? ?a
  ?epe??s??? ta 2 e?at.
• ? VaR de? ap?te?e? µ?a ap???t? ?e???te??
  pe??pt?s? ? t?? µ???st? d???t??? ??µ??.
• ? VaR a?af??eta? p??ta se s???e???µ???
  ?a?t?f??????, ??????? ??????ta ?a? ep?ped?
  p??a??t?ta?.
• ?s? µe?a??te?? ? ??????? pe???d??, t?s?
  µe?a??te?? ? VaR, ded?µ???? ?t? ?? t?µ?? a?????
  t?? pe????s?a??? st???e??? t?? ?a?t?f??a????
  µp??e? ?a µetaß?????? pe??ss?te??.
• ?s? µe?a??te?? t? ep?ped? p??a??t?ta?, t?s?
  µe?a??te?? ?a e??a? ? VaR.

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Risk Management in Banking ? p??s????s? t??
es?te????? µ??t????

• Value-at-Risk (VaR)
• ? ?????a t?? VaR st????eta? st?? se µ?a ?ata??µ?
  p??a??t?t?? t?? d?af???? t?µ?? t?? ?a?t?f??a????
  (probability distribution of portfolio values)
  ??a t?? s???e???µ??? ??????? pe???d?.

• ?a??de??µa
• ??a ?ata??µ? p??a??t?t?? e??? ?a?t?f??a???? ??a
  10 ?µ??e? µe t?????sa a??a f 10 e?at. ?a? VaR
  2 e?at. µe ep?ped? eµp?st?s???? 95.

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Risk Management in Banking ? p??s????s? t??
es?te????? µ??t????

• ?e??d?????e? VaR
• ?p?????? t?sse?e?? t??p?? µ?t??s?? t?? VaR
• Variance-Covariance or Delta VaR
• Delta-Gamma VaR
• Historical Simulation
• Monte Carlo Simulation

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Risk Management in Banking ? p??s????s?
t?? es?te????? µ??t????

• ????t??? ???t???a
• ??e???t?t? ??e????s? ??a?e???s?? ???d????
• S?st?µat???? ??e???? ?p???se?? µe p?a?µat???
  ded?µ??a (backtesting and stress testing)
• S?st?µa p????f?????? ??a t? ??a?e???s? ???d????
• ??s?t??? ???t???a
• VaR ?p?????sµ??? µe 99 ep?ped? eµp?st?s????
  ?a? ??a ??????? ??????ta 10 ?µe???.
• ? VaR t?? 10 ?µe??? µp??e? ?a p??se???ste? µe
  p??ap?as?asµ? t?? ?µe??s?a? VaR µe v10 (ie.
  3,16)
• ? µetaß??t?t?ta (Volatilities) ?a? ?? s?s?et?se??
  (correlations) p??pe? ?a e?t?µ??ta? µe ß?s?
  pa?e????ta ?st????? st???e?a 250 ?µe???
  t??????st??.
• ?? es?te???? µ??t??? p??pe? ?a ?a??pte? ??? µ???
  t??? ??aµµ????? ???d????? a??? ?a? t??? µ?
  ??aµµ?????. convexity (gamma) and volatility risk
  (vega).

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Risk Management in Banking ? p??s????s?
t?? es?te????? µ??t????

• ??s?t??? ???t???a
• ? ?p?????sµ?? t?? apa?t??µe??? ?efa?a??? ??a t??
  ?????? t?? ???d???? a????? a?t?st???e? st?
  µe?a??te?? µeta?? t?? VaR t?? p??????µe??? ?µ??a?
  ?a? t?? µ?s?? ???? t?? VaR t?? p??????µe??? 60
  ?µe???, p???ap?as?asµ??? µe µ?a sta?e?? k
• MARKET RISK CAPITAL CHARGE (t)
  ?p??
• ?? k e??a? ??a a??a??et? ???µe?? (3 ? 4) ??a ?a
  ?a???e? t???? ???? e?t?µ?s??.
• ? ep????? t?? s???e???µ???? µ??t???? µ?t??s?? t??
  VaR ???eta? ap? t? ?d?? t? ??ape???? ?d??µa.

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Risk Management in Banking ?as??e?a II

• ?e????t???? e?e???e?? Bas??e?a II
• ?? ??? ?a????st??? p?a?s?? p??te??e? µ?a
  p??s????s? p?? e??a? p?? ????????µ??? a??? ?a?
  p?? e?????t? st?? µ?t??s? ???d???? ap? t?
  S?µf???a t?? 1988, d?at????ta? p??ta t? s??des?
  t?? ???d???? µe t?? ?efa?a?a?? ep???e?a.
• ???sf??e? st?? ???pe?e? t? d??at?t?ta ?a
  ????et?s??? µ??t??a p??sa?µ?sµ??a st??
  ?d?a?te??t?te? t?? a????? p?? d?ast????p?????ta?
  ?a? st? e?d?? ???d???? p?? a?a?aµß?????, a??e? ?a
  te?µ????s??? ?t? ta µ??t??a a?t? e??a? e?a?s??ta
  st?? µetaß???? t?? ???d????.
• ??µ? t?? ??a? s?µf???a?
• First Pillar Minimum Capital Requirement
• Second Pillar Supervisory Review Process
• Third Pillar Market Discipline

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Risk Management in Banking ?as??e?a II

• A closer look on the First Pillar Minimum
  Capital Requirement

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Risk Management in Banking ?as??e?a II

• ?? ???? d?? p????e?
• ?e?te??? ?????a?
• ? d?ad??as?a ep?pt???? e?????? apa?te? ap? t??
  ep?pt???? a???? ?a ep?ßeßa?????? ?t? ???e ???pe?a
  d?a??te? epa??e?? es?te????? d?ad??as?e? e??????
  ??a t?? ap?t?µ?s? t?? ?efa?a?a??? t?? ep???e?a?,
  ßas?sµ??e? se µ?a se ß???? e?t?µ?s? t?? ???d????.
  ?? e?e??t???? a???? ?a e??a? ?pe????e? ?a
  e?t?µ??? ?at? p?s?? ?? t??pe?e? ap?t?µ??? s?st?
  t?? ?efa?a?a?? t??? ep???e?a se s??s? µe t???
  ???d????? p?? a?a?aµß?????. ?? es?te????? a?t??
  d?ad??as?e? ?a e??a? a?t??e?µe?? ep?pt????
  e?????? ?a? pa??µßas?? a? ?a? ?p?? apa?te?ta?.
• ???t?? ?????a?
• ? t??t?? p????a? t?? ???? ?a????st???? p?a?s???
  st??e?e? st? ?a e??s??se? t?? a?t?pe??a???a t??
  a????? µ?s? a???µ???? apa?t?se?? d?af??e?a? ?a?
  d?µ?s??p???s?? st???e??? ap? t?? ???pe?e?. ?
  ap?te?esµat??? d?af??e?a e??a? apa?a?t?t? ?ste
  ???? ?? s?µµet????te? st?? a???? ?a µp????? ?a
  ?ata????? ?a??te?a t? p??f?? ???d???? ???e
  ???pe?a? ?a? t?? ep???e?a t?? ?efa?a?a??? t??
  ??s??.

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Risk Management in Banking ?as??e?a II

• ?µfas? st?? p?st?t??? ???d???
• Credit Risk vs. Market Risk

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Risk Management in Banking ?as??e?a II

• ?µfas? st?? p?st?t??? ???d???
• ??µ? e??? es?te????? µ??t????

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Risk Management in Banking ?????

• World Wide Web
• www.bis.org
• www.defaultrisk.com
• www.gloriamundi.org
• www.riskmetrics.com
• ??ß?????af?a
• Value at Risk, Philippe Jorion
• Internal Credit Risk Models, Michael Ong
• RiskMetrics Technical Documents
• RISK magazine