Presented by: Nesar Ahmad “Yosufzai”
Source: Reserve Bank of India, Staff College
1
What is Risk
• Risk is the probability of loss
• Risk is an uncertainty that could result in losses or
adverse fluctuations in profitability.
• Impact that may arise on the value of an asset due to
some present process or a future event.
• Unexpected Variability or volatility of returns
• The quantifiable likelihood of loss or less-than-expected
returns.
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Growing Importance
Technology/
Deregulation Globalisation
automation
Sophisticated Mergers,
financial de-mergers, Outsourcing
products acquisitions
Increased Risk
3
Types of Risk
• Credit Risk
• Market Risk
• Operational Risk
• Liquidity Risk
• Management Risk (Corporate Governance Risk)
• Legal Risk
• Strategic and Reputation Risk
4
Credit Risk
• The risk that a counterparty may fail to fully perform on
its financial obligations.
• The risk of changes in value associated with
unexpected changes in credit quality.
• The possibility that a borrower will be unable to meet
interest and/or principal repayment obligations on a
loan agreement.
5
Credit Risk
• Credit risk is the single largest factor affecting the
soundness of financial institutions and the financial
system as a whole.
• Lending is the principal business activity for most banks.
• The loan portfolio is typically the bank's largest asset
class and its main source of revenue.
• For this reason, as a financial risk manager and/or a
financial sector supervisor, you will devote a large
portion of your time and attention to evaluating a bank's
asset quality and lending function.
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Operational Risk
• Operational Risk is defined as the risk of loss resulting
from in adequate or failed internal process, people and
system……
• Sources of operational risk;
• Internal Frauds
• External Frauds
• Employment Practices and Workplace Safety
• Clients, Damage to Physical Assets
• Delivery and Process Management
• Business Disruption
7
Legal Risk
• The risk of unenforceable contracts (in whole or in part),
lawsuits, adverse judgments or other legal proceedings
disrupting or adversely affecting the operations or
condition of a bank.
• It can arise due to a variety of issues, from broad legal or
jurisdictional issues to something as simple as a missing
provision in an otherwise valid agreement.
8
Reputational Risk
• The possibility that negative public opinion regarding an
institution's practices, whether true or not, will result in a
decline in its customer base, expensive litigation and/or
a fall in revenue.
9
Strategic Risk
• Risk arising from an inadequate business strategy or
from an adverse shift in the assumptions, parameters,
goals and other features that underpin a strategy.
10
Market Risk
• Market risk is the risk that movements in market prices
will adversely affect the value of on- or off-balance sheet
positions.
• These movements can occur in:
– Interest rates
– Foreign exchange (FX) rates
– Equity prices
– Commodity prices
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Market Risk
• Market Risk mainly depend on;
– Equity price volatility
– Commodity price
– Interest rate risk
• - floating interest rate
• - fixed interest rate
– Foreign Exchange Transaction Risk
12
Liquidity Risk
• Definition of Liquidity
– ability to meet obligations at a reasonable cost when they come due
– ability to fund increases in assets and meet obligations as and when
they arise
• Liquidity Risk
– risk arising from lack of marketability of an asset that
cannot be bought or sold quickly enough to prevent or
minimizese loss
– current and prospective risk of loss from inability to
meet obligations when they arise without incurring
unacceptable losses
– includes inability to manage unplanned decreases or
changes in funding sources
13
Corporate Governance Risk (Management Risk)
• Given the important financial intermediation role of banks
in an economy, their high degree of sensitivity to
potential difficulties arising from ineffective corporate
governance and the need to safeguard depositors’
funds, corporate governance for banks is of great
importance to the financial system.
• Poor corporate governance may contribute to bank
failures and has broader macroeconomic implications.
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Management of Risk
• Risk management is a structured approach to
managing uncertainty through, risk assessment,
developing strategies to manage it, and mitigation of risk
using managerial resources.
• The strategies include transferring the risk to another
party, avoiding the risk, reducing the negative effect of
the risk, and accepting some or all of the consequences
of a particular risk.
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Management of Risk
Better Risk Management
Analysis
Define Measure Mitigation Control
& Report
Policy
Culture
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Management of Risk
Frequency
5
4 D
Red Zone
3 C
2 Yellow Zone
A B A
1 Green Zone B
C B A C
0
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Management of Risk
Out of
Fuel!
FUEL
E F
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Management of Risk
Warning
Caution
Value
Loss Value Time
19
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