A practical guide to the practices and procedures of effectively managing banking risks Managing Risks in Commercial and Retail Banking takes an in-depth, logical look at dealing with all aspects of risk management within the banking sector. It presents complex processes in a simplified way by providing real-life situations and examples. The book examines all dimensions of the risks that banks face--both the financial risks--credit, market, and operational--and the non-financial risks--money laundering, information technology, business strategy, legal, and reputational. Focusing on methods and models for identifying, measuring, monitoring, and controlling risks, it provides practical advice backed up by solid theories, without resorting to the use of complicated mathematical and statistical formulas. Author Amalendu Ghosh exposes topics that are usually absent in books on managing banking risk--such as design of control framework, risk management architecture, credit risk rating, risk-based loan pricing, portfolio analysis, business continuity planning, and corporate governance. * Author has extensive experience with a variety of major banks and institutions worldwide and brings a fresh perspective in the wake of the global finance crisis* Presents a novel approach using models of the credit risk rating of different types of borrowers, the methodology for assigning weights for deriving the rating, and the scoring process* Covers the essentials of corporate governance and options for credit risk assessment in line with the recommendations made in the New Basel Capital Accord* Explains the methodology of risk-based internal audit, including techniques to enable bank branches to switch over from the old transaction-based audit methods With its logical sequence of the aspects of risk management, the book's layout is ideal for presentations, making it a handy tool for risk management training
Preface xv PART ONE Risk Management Approaches and Systems CHAPTER 1 Business Risk in Banking 3 1.1 Concept of Risk 3 1.2 Broad Categories of Risks 3 1.3 Credit Risk 5 1.4 Market Risk 7 1.5 Operational Risk 8 1.6 Operating Environment Risk 10 1.7 Reputation Risk 11 1.8 Legal Risk 12 1.9 Money Laundering Risk 12 1.10 Offshore Banking Risk 14 1.11 Impact of Risk 15 1.12 Summary 16 Notes 18 CHAPTER 2 Control Risk in Banking 19 2.1 How Control Risk Arises 19 2.2 External Control and Internal Control Risks 19 2.3 Internal Control Objectives 21 2.4 Internal Control Framework 21 2.5 Tasks in Establishing a Control Framework 28 2.6 Business Risk and Control Risk Relationship 34 2.7 Summary 35 CHAPTER 3 Technology Risk in Banking 37 3.1 What Is Technology Risk? 37 3.2 Risks in Electronic Banking 37 3.3 Sources of Technology Risk 38 3.4 Management of Technology Risk 42 3.5 Summary 43 CHAPTER 4 Fundamentals of Risk Management 45 4.1 Risk Management Concept 45 4.2 Risk Management Approach 45 4.3 Risk Identification Approach 47 4.4 Risk Management Architecture 47 4.5 Risk Management Organizational Structure 48 4.6 Summary 53 CHAPTER 5 Risk Management Systems and Processes 55 5.1 Risk Management Policy 55 5.2 Risk Appetite 56 5.3 Risk Limits 57 5.4 Risk Management Systems 59 5.5 Management Information System 67 5.6 Verification of Risk Assessment 72 5.7 Human Resource Development 72 5.8 Top Management Commitment 73 5.9 Capital Adequacy Assessment and Disclosure Requirement 74 5.10 Risk Prioritization 75 5.11 Summary 76 Notes 77 PART TWO Credit Risk Management CHAPTER 6 Credit Problems and Credit Risk 81 6.1 Genesis of Credit Problems 81 6.2 Causes of Credit Risk 92 6.3 Summary 93 Notes 94 CHAPTER 7 Identification of Credit Risk 95 7.1 Market Risk and Credit Risk Relationship 95 7.2 Credit Risk Identification Approach 96 7.3 Credit Risk Identification Process 100 7.4 Summary 109 Notes 110 CHAPTER 8 Credit Risk Rating Concept and Uses 111 8.1 Credit Risk Rating Concept 111 8.2 Credit Risk Rating Uses 113 8.3 Credit Risk Rating Principles 122 8.4 Summary 127 Notes 128 CHAPTER 9 Credit Risk Rating Issues 129 9.1 Rating Practices in Banks 129 9.2 Design of the Rating Framework 130 9.3 Conceptual Issues 131 9.4 Developmental Issues 136 9.5 Implementation Issues 140 9.6 Rating Framework Overview 147 9.7 Summary 147 Notes 151 CHAPTER 10 Credit Risk Rating Models 153 10.1 Internal Rating Systems in Banks 153 10.2 Need for Different Rating Models 154 10.3 Need for New and Old Borrower Rating Models 155 10.4 Types of Rating Models 157 10.5 New Capital Accord Options 158 10.6 Asset Categorization 159 10.7 Identification of Model Inputs 160 10.8 Assessment of Component Risk 161 10.9 Summary 172 Notes 172 CHAPTER 11 Credit Risk Rating Methodology 173 11.1 Rating Methodology Development Process 173 11.2 Derivation of Component Rating 189 11.3 Derivation of Counterparty Rating 195 11.4 Summary 197 CHAPTER 12 Credit Risk Measurement Model 199 12.1 Risk Rating and Risk Measurement Models 199 12.2 Credit Loss Estimation-Conceptual Issues 200 12.3 Quantification of Risk Components 204 12.4 Credit Risk Measurement Models 215 12.5 Back-Testing of Credit Risk Models 219 12.6 Stress Testing of Credit Portfolios 220 12.7 Summary 222 Notes 223 CHAPTER 13 Credit Risk Management 225 13.1 General Aspects 225 13.2 Credit Management and Credit Risk Management 225 13.3 Credit Risk Management Approach 226 13.4 Credit Risk Management Principles 227 13.5 Organizational Structure for Credit Risk Management 232 13.6 Credit Risk Appetite 234 13.7 Credit Risk Policies and Strategies 234 13.8 Early Warning Signal Indicators 242 13.9 Credit Audit Mechanism 244 13.10 Credit Risk Mitigation Techniques 248 13.11 Summary 253 Note 254 CHAPTER 14 Credit Portfolio Review Methodology 255 14.1 Portfolio Classification 255 14.2 Portfolio Management Objectives 256 14.3 Portfolio Management Issues 256 14.4 Portfolio Analysis Technique 261 14.5 Portfolio Risk Mitigation Techniques 266 14.6 Sum
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