AMITY GLOBAL BUSINESS SCHOOL, MUMBAI

SUMMER INTERNSHIP REPORT ON

MARKET RISK MANAGEMENT IN BANK OF BAHRAIN AND KUWAIT

SUBMITTED BY:
VIVEK KHEPAR A30301912006 MBA (2012-14)

UNDER THE GUIDANCE OF Prof: C.D. SHREEDHARAN

DECLARATION
I hereby declare that the work reported in this thesis titled Market Risk Management in Bank of Bahrain and Kuwait is done by me as summer internship project at Bank of Bahrain and Kuwait during the period of 17th May 2013 to 31th July 2013 is original work and not copied from anywhere. I also declare that this project was done under the guidance of Prof. C.D Shreedharan

Signature of the Guide Name: Date:

CERTIFICATE

TO WHOMSOEVER IT MAY CONCERN This is certify that Mr. Vivek Khepar, student of Amity Global Business School Mumbai (20122014), has undergone a summer project training in Finance department at Bank of Bahrain and Kuwait from 17thMay 2013 to 31st July 2013 and has done his research project on Market Risk Management in Bank of Bahrain and Kuwait. During the training period he was sincere, hardworking and showed keenness towards learning & skill enhancement. His project work is excellent & I wish him success in his future endeavors.

Sign of Company Guide Name: KVN Sambasivarao

ACKNOWLEDGEMENTS

The satiation and euphoric that accompany the successful completion of task would be incomplete without the mention of the people who made it possible. So with immense gratitude I acknowledge all those whose guidance and encouragement crowned my efforts with success. Summer internship is one of the important aspects of the MBA curriculum. Through this internship, I got to learn many skills that are required for the corporate world. Through this acknowledgement, I would like to thank Mr. KVN Sambasivarao (VP- Risk & DCO) for his valuable support and advice. I would also like to thank Prof C.D Shreedharan for his timely advice and motivation. I would like to thank Dr. SeemaTatwawadi the director of our college for her everlasting support and motivation. I would like to thank all the faculty of AMITY GLOBAL BUSINESS SCHOOL

EXECUTIVE SUMMARY
Risk Management is the application of proactive strategy to plan, lead, organize, and control the wide variety of risks that are rushed into the fabric of an organizations daily and long-term functioning. Like it or not, risk has a say in the achievement of our goals and in the overall success of an organization. To identify the risks faced by the banking industry and the process of risk management. It also examined the different techniques adopted by banking industry for risk management.

Economic reforms and liberalization gave a new dimension to the playing field in financial markets especially banks; in fact in many ways the rules of the game, too. By definition, they tend to reduce the arbitrage opportunities as market imperfections are eliminated. Increased competition from both domestic and foreign players puts pressure on the margins and reduces the cushion for absorbing the losses even as the potential for business losses increases due to higher market volatility. Just a few years ago market set up for banks were not as complex as it is today. Interest rates were regulated, financial assets moved within a narrow band, foreign exchange rate was pegged, by and large roles of all financial intermediaries were well defined and banks had a stable and well known set of customers and counterparties to deal with.

Risk is inherent in any walk of life in general and in financial sectors in particular. Till recently, due to regulated environment, banks could not afford to take risks. But of late, banks are exposed to same competition and hence are compelled to encounter various types of financial and nonfinancial risks. Risks and uncertainties form an integral part of banking which by nature entails taking risks. There are three main categories of risks; Credit Risk, Market Risk & Operational Risk.

Main features of these risks as well as some other categories of risks such as Regulatory Risk and Environmental Risk. Various tools and techniques to manage Market Risk also mentioned relevant points of Basels New Capital Accord and Risk Based Supervision (RBS), in managing risks in banking sector.

CONTENTS Sr. No Particulars Literature Review Chapter 1-Introduction

1.1 1.2 1.3 1.4 1.5 Company Profile Presence in India Business Mix Vision Subsidiaries
2 2 3 3 3

Pg. No
1

Chapter 2-Overview of the Banking Industry of India

2.1 2.2 Introduction Industry scenario of Indian Banking Industry
4 6

Chapter 3- Risk Management

3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 Meaning of Risk Meaning of Risk Management Risk Management Components Risk Management Structure Steps for implementing Risk Management in Banks Benefits of Risk Management in Banks Types of Risks RBI Guidelines on Risk Management
8 9 10 11 13 15 17 20

Chapter 4- Market Risk Management

4.1 4.2 4.3 4.4 4.5 4.6 Meaning of Market Risk Market Risk Management Liquidity Risk Managing the Liquidity Risk in the Bank Meaning Interest Rate Risk Types of Interest Rate Risk
21 22 23 23 25 25

4.6.1 Repricing risk 4.6.2 Yield curve risk 4.6.3 Basic risk 4.6.4 Option risk 4.7 Methods for interest rate risk measurement 4.7.1 Discrepancy analysis 4.7.2 Duration analysis 4.7.3 Value at risk 4.7.4 Simulation

25 26 26 27 27 28 29 29 31

Chapter 5 -Basel II Compliance & Risk Based Supervision

5.1 5.1.1 5.1.2 5.1.3 5.2 5.3 5.3.1 5.3.2 5.3.3 Basel II Compliance Minimum Capital Requirement Supervisory Review Process Market Discipline Reservations about Basel II Risk Based Supervision Requirements Background Risk Based Supervision (RBS) A New Approach Features of RBS Approach
33 33 34 36 37 38 38 39 39

Chapter 6 - Basel III

6.1 6.2 6.3 6.4 6.5 6.6 6.6.1 6.6.2 6.6.3 6.7 6.7.1 6.7.2 Introduction Implications of Basel III Risk Impacts Timeframe Countering the Treasury Implications of Basel III Basel III and liquidity management in banks New liquidity risk measures under Basel III Liquidity coverage ratio Net funding stability ratio Basel III Impact on the Indian Banking System Pros of BaselIII accord on Indian Banks Cons of BaselIII accord on Indian Banks
41 41 42 43 44 45 45 46 46 46 46 47

RECOMMENDATIONS CONCLUSION BIBLIOGRAPHY

48 49 50