RISK MANAGEMENT

By:

Nasim Jamal Muradiyan

Bachelors of Business AdministrationRisk Management Department of AZIZI BANK

WHAT IS RISK?The possibility of receiving outcomes of an event, where an actual return on investment will be lower than the expected return.

RISK MANAGEMENT CYCLE

BASEL ACCORDHerstatt Bank, Germany engaged in

major international payment & Settlement Transactions was declared insolvent in 1974 which caused settleBCBS under the aegis of BIS, in Basel,Switzerland.

Basel I: Issued on 1988 and focused mainly on Credit Risk, Asset Classification & CAR.

Asset Classification: Standard Zero to 30 Days Watch List 31 to 60Days Substandard 61 to 90 Days Doubtful 91 to 180Days Loss 181 to above Days

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Basel II, initially published in June 2004, with three pillars us under: Risk Under First Pillar:

Credit Risk [SA, FIRB & AIRB Approaches] Standardized Approach Foundation Internal Risk Based Advanced Internal Rating Based

Operations Risk [BIA, SA, AMA] Basic Indicator Approach Standardized Approach Advanced Measurement Approach

Market Risk [SMM, IMA] Standardized Measurement Method Internal Modules Approach

Second Pillar: Supervisory Review and Other Risks i.e. Strategic, Legal, Systematic, Liquidity,

Reputational etc. Third Pillar:

Market Discipline

BASEL ACCORD

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CREDIT RISKCredit Risk” is the potential that a bank’s borrower or counterparty will fail to meet its obligations in accordance with the agreed terms on account of inability or unwillingness. 6

CREDIT MANAGEMENT VS

CREDIT RISK MANAGEMENT

Credit Management

Credit Risk Management

It involves selection of borrowers

It involves analysis of risk in credit transactions

Three Ps, viz; People, Purpose & Protection

Three Ms, viz; Measuring, Managing & Monitoring/Controlling

Based on Accounting information and judgment is subjective

Data driven, scientific and is more objective

Backward Looking Forward Looking

CREDIT RISK MANAGEMENT –FRAMEWORKCREDIT RISK MANAGEMENT STRUCTURE

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OPERATIONAL RISKOperational Risk is “the risk of

loss resulting from inadequate or failed internal processes, people and systems or from external events.” It includes Legal Risk but excludes Strategic and Reputational Risk.

Legal Risk includes, but not limited to, exposure to fines, penalties, punitive damages resulting from supervisory actions as well as private settlements.

IDENTIFICATION OF OPERATIONAL RISK

MARKET RISK Market Risk arising from

adverse changes in market, such as interest rate, Forex (foreign Exchange rate) equity price etc.

Market Risk can be defined as the risk of losses in on and off balance sheet positions arising from adverse movement of market rates.

CONCLUSIONWhat is Risk?What is Basel?What is Credit Risk?What is Market Risk?

Thanking You For Active

Participation