Bank Risk Management School

Course Background Financial institutions have been managing risk from inception. But the perception of risk management is fundamentally changing within these institutions. No longer is it seen only as a control mechanism. Now it is a critical input into the basic business question: Am I earning enough revenue from this transaction to compensate me for the risks I am taking? At all the leading financial institutions, every transaction needs to be assessed in terms of the increase in risk to the institution, with the assurance that the transaction’s pricing will generate a suitable return. Budgets should be allocated, and performances measured, on the basis of revenue earned per unit of risk generated. This is reinforced by the Basel Accord. It requires banks to allocate regulatory capital against the major components of risk, using either regulatory or internal models. Course Overview The Euromoney Bank Risk Management School provides delegates firstly with an high-level overview of modern risk management, including a breakdown of the Basel Accord. This is followed by an in-depth examination of the techniques and management structures used to assess and to control risk, including the implementation of Value-at-Risk across all the major risk classes: market, credit and operational. New proposals, announced in May 2012, may replace VaR with Expected Shortfall, at least for Market Risk. During the course, we will discuss why and how Expected Shortfall may be calculated. Finally we examine best practice in stress testing and how risk management can add value to your institution. This 5-day comprehensive course will examine the following topics and more: The Basel Accord - What it is, why we have it, and did it work in the current economic crisis? Basel II.5 and III - what are the impacts of the proposed changes? 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 Just announced - the new proposals for market risk Credit portfolio management - why is this the new paradigm? How operational risk is being assessed and managed Stress testing - what went wrong, and how this must be changed How can risk management add value to your organisation? Methodology A wide range of real-life case-studies demonstrate the lessons we should learn from past failures - could the same events happen at your institution? Computer simulations of the latest techniques to model market, credit and operational risk Discussions about commercially-available software Who should attend this training course? Heads of Risk Management Risk Analysts Heads of Project Finance Financial Analysts Portfolio Managers Treasury Managers Credit Managers Rating Agency Analysts
DAY 1: Risk management A brief historical background The evolution of banking risk Why the Basel Accord was deemed necessary G30 report Case study: Bankers Trust Why Basel II was deemed necessary Expected and unexpected losses and the role of capital The evolution of bank risk management From a cost centre to a strategic competitive weapon The Basel Accord – a brief overview Objectives of the Accord Application - to whom does it apply? Legal standing of the Accord and national discretions Structure of the Accord Pillar 1: minimum capital requirement What constitutes bank capital? The definition of regulatory capital Changes to the regulatory mix of capital Likely implications Pillar 2: Supervisory review process Objectives Construction of an ICAAP What risks should be covered? How should they be assessed? The structure of the ICAAP Examples Principle-based supervision Pillar 3: market disclosure Changes as the result of Basel III Interaction with other regulatory requirements such as IFRS Will Pillar 3 remain? Procyclicality Introduction of a conservation capital buffer Introduction of a counter-cyclical capital buffer 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 framework. What is a risk framework? The COSO framework - how applicable is it to banks? Developing an appropriate risk management environment Organisational structure Roles and responsibilities Defining the risk appetite of the institution Factors that may influence a risk appetite Quantitative and qualitative approaches Creation of risk management policies and procedures Risk identification framework Risk measurement methodologies Management and control of risks Reporting and monitoring of risks Governance Comments from the supervisors Introduction of bank-wide risk management What are the likely implications? Group discussion: With reference to a leading international bank, delegates will discuss the progress of their institution towards sound practices and highlight areas of priority. DAY 2: Market risk Market risk has changed fundamentally over the past 20 years, with the introduction of Value-at-Risk (VaR). We first discuss the main approaches used to control traders at the “desk-top”, and then review the main approach banks use to calculate their regulatory VaR. The regulatory approaches have recently changed substantially. These will be reviewed with example calculations, and the implications of the changes discussed. Introduction What are the main sources of market risk? Interest rate, foreign exchange, equity and commodity risks Definition of “Trading” Introducing model risk Case study: NatWest Bank Traditional “desk-top” risk measurement Adopting a portfolio approach, interest rate risk will be discussed: Construction of classic gridpoint sensitivity reports for a significant portfolio Extension to incorporate curvature Value-at-Risk (VaR) Introduction through a simple 1-factor example Using historic simulation Extension to a 2-factor example Demonstration of realistic examples What do banks do in practice? Practical difficulties of implementation: Volatility and correlation, holding period Regulatory requirements of the Basel Accord The standardised approach How to estimate the IR capital requirement using Maturity bands Duration bands How to estimate the FX, equity and commodity capital requirements How to incorporate options Specific risk: inclusion of credit risk from the trading book Internal models - using VaR Qualitative approval process Normal and stressed VaR Calculation of the regulatory capital Back testing: what is it and how to apply it? Other changes to the market risk framework Valuation of illiquid positions Introduction of the incremental risk charge - what are its implications? Likely further developments Measurement of interest rate and liquidity risk The Basel Accord makes a distinction between traded and non-traded market risk. The latter includes funding liquidity risk, the risk that the bank cannot renew its funding. This section explaines different approaches banks use to assess nontraded and liquidity risk. IRR exposure: earnings and economic value approaches Traditional technique: banding and gap analysis Funding liquidity risk Development of an Internal Liquidity Adequacy Standards document Introduction of liquidity constraints Liquidity coverage ratio Net stable funding ratio Likely implications Simulating the balance sheet What does Basel require? Example of a standardised framework for estimating capital Proposals under the Fundamental Review of 2012 Division between trading and banking revisted Models to be calibrated in times of stress Assumption of differing market liquidity assumptions Changes to internal model approval Replacement of VaR by Expected Shortfall Movement of non-traded market risk into Pillar 1 Potential changes to credit risk within the trading environment DAY 3: Credit risk Banks are credit risk-taking institutions. Why have global banks fundamentally changed the way they view credit risk over the past 10 years? Does the Basel Accord support or hinder this new paradigm? The traditional view of Credit Risk Management (CRM) Banks as traditional credit taking institutions The typical credit control process Traditional credit risk mitigation The effectiveness of the process: does it work? Level I CRM Case studies: Bankgesellschaft Berlin, Continental Illinois and Credit Lyonnais. Modern credit risk management Portfolio credit risk management why is it the new paradigm? What are the fundamental concepts? Basic data requirements Exposure at default (EAD) Probabilities of defaults (PDs) Loss given defaults (LGDs) Correlations How to estimate EADs and EPEs Traditional loan exposures Provision of guarantees such as standby Letters of Credit or trade finance Settlement, pre-settlement and derivative risks Credit conversion factors (CCFs) Expected positive exposure (EPE) How to estimate PDs Using historic internal data Supplementing with external data Incorporating the economic cycle Factor-based statistical modelling such as scoring Examples of factor models Why are factor models better than historic models How to assess PDs from statistical models Traditional credit analysis What are the main components of a traditional rating methodology? Credit analysis vs. Statistical modelling? Market-based approaches The credit market The debt market The equity market and Merton's model Hybrid models Each approach will be briefly and critically explained How to estimate LGDs: Is estimating LGDs difficult? Discussion of estimation projects Seven levels of credit risk management Where is your institution? Active credit portfolio management Estimation of regulatory capital for credit risk The standardised approach The role of external rating agencies International or domestic? Impact of the Dodd-Frank Act Credit conversion factors Permitted risk mitigation Overview of the internal rating-based approaches Foundation and advanced approaches What you 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 Example calculations The regulatory credit model The underlying theoretical assumptions Minimum organisational and technical requirements to implement these approaches Permitted risk mitigation Revisions made in 2005: Redefinition between banking and trading Double defaults Minimum maturity Hedging banking exposures with trading derivatives CCFs for derivatives Revisions made in 2010 Leverage constraint Changes to traded counterparty credit risk Credit valuation adjustment Portfolio credit modelling Analytically modelling portfolio default assuming independence Simulating portfolio default Introducing correlations Estimating correlations Modelling a realistic portfolio Construction of a loss distribution Calculating credit VaR Implementing such a model in practice Extension of the default model to a migration model - as required by IRC This session will be supported by computer demonstrations. If there is time, the events and strategies underlying the credit crisis will be discussed - with case studies on the US Investment Banks and Sachsen LB. 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? 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 operational risk been included in the Basel? Case study: Royal Bank of Canada Developing an operational risk methodology Developing suitable objectives and policies Role and responsibility of senior management Typical operational risk organisational structures Relationship with other functions, especially internal audit Top down or bottom up? Creating a risk framework Risk identification Causal and event frameworks Recording of loss events and other data What should be stored? Real example Definition of loss - direct or indirect? Build or buy an operational risk database Risk assessment Process analysis will be briefly discussed: Which are the key processes? vertical or horizontal? Process mapping Indicator approaches Key risk indicators The KRI project Regulatory indicator approaches Business efficiency and internal control factors Bottom-up risk measurement models Loss distribution analysis: statistical modelling using historic data Using external data Fitting severity and frequency distributions Modelling LD, and estimating the 99.9% VaR Improving your model Computer-based demonstration using real data Control self assessment: Score-card or self-assessment approaches Examples of assessment questionnaires Training of staff to conduct self-assessment Examples of professional software used to support this methodology Results from a CSA Estimation of VaR using simulation and other approaches Computer-based demonstration Exceptional and unexceptional events Will the normal modelling capture exceptional events? If not, what can be done? Case studies: Barings, Société Générale and Allied Irish Bank Current best practice What are the leading institutions doing? Results of QIS3 (2004) and QIS5 (June 2006) Will they work? DAY 5: Stress testing Stress testing has always been seen as a necessary compliment to “normal” risk management. Yet, it has often been perceived by senior management as an irrelevance. This session explains what represents good stress testing, and how senior management attitudes have begun to change. Definition of stress testing How were stress tests conducted prior to 2007 – what lessons can be learnt? Case study: LTCM How stress tests should be conducted Role of the Board Current best practice Development of an ICAAP What is an ICAAP? What should it contain? Background information Identification of all relevant and material risks Guidance provided by supervisors Additional re-focussing of the ICAAP under Basel III How does risk management add value? The objective of this session is to explore how modern risk management may contribute to the overall strategic development of your institution. What is the acceptable trade-off between the return on a transaction, and the risk it incurs for the bank? RAROC: risk-adjusted return on riskadjusted capital What is RAROC? How is it defined? Variants such as EVA Determining the cost of capital using the capital asset pricing model The use of RAROC: Ex ante: allocating economic capital to business units Ex post: performance measurement Implementing RAROC: what are the practical problems? Final words How can risk management add value to the organisation? Risk management of the future