Applied Bank Risk Management - Practical Approaches for Market, Credit, and Operational Risk

For an increasing number of banks, risk management is not merely the measurement and reporting of risk in isolation. With the recognition that it is necessary to take some risks to ensure a return, the question that all banks must ask is: are we achieving sufficient return for all the risks that we are taking? There are two necessary corollaries to the answering of this question:§How does the bank ensure that all the risks have been identified?§How does the bank ensure that the potential impacts of the risks are quantified in a consistent and timely fashion?§This book is aimed at practitioners and covers all aspects of risk management.§Part 1 of the book provides a high-level overview of modern risk management that is being applied within banks and other financial institutions around the world.§Part 2 of the book is designed to cover the main approaches that banks use to measure and to control market risk. It starts with a broad discussion about market risk, and then describes both the traditional sensitivity/equivalence and modern VaR approaches using a mixture of realistic examples. The practical difficulties of implementing the approaches, as well as the approval process that must be satisfied if internal models are to be used for the determination of regulatory capital, are also discussed.§Part 3 covers both the traditional, albeit briefly, and the modern approaches to the measurement and management of credit risks. It starts with a broad discussion about credit risk, and how it can arise with different examples such as straight bullet loans contrasted with the potential exposure under a swap. It then goes on to discuss different approaches to credit risk management, using a mixture of realistic examples. The practical difficulties of implementing the approaches, as well as the approval process that must be satisfied if internal models are to be used for the determination of regulatory capital, are also discussed. The rapidly growing credit derivative market is also covered, as well as the causes and effects of the banking crisis of 2007-9.§Part 4 covers operational risk. The formal quantification of operational risk has been given considerable impetus by the new Accord, although the leading banks had started down this route long before. However, for many banks and other financial institutions, the process of assessing operational risks is quite new. This section of the book develops a broad methodology for the management of operational risk, covering identification, assessment, monitoring and control. The practical difficulties of implementing such methodologies are also discussed.§Part 5 draws it all together, enabling practitioners to produce a framework that can be implemented in their own organization.