-Risk management in banks became, and remained, a hot topic after the financial crisis. It has become a core management field in banking, whit a large concentration of resourses dedicated to better identify, assess and control risks. -Risk has been defined in various ways across time. Risk in finance is defined as the randomness of the return of investments, including both positive and negative outcomes. In the financial industry the risk is defined by the uncertainty that has adverse consequences on earnings and wealth. This is the view of risk managers, those who have the role of idenitifying, assessing and controlling the likelihood and the consequences of adverse events for the institution. -conclusion:Risk management is the process by which managers identify key risks, obtaining consistent, understandable, operational risk measures, and estabilishing procedures to monitor the resulting risk position. The classes of financial risks are credit risk, market risk, liquidity risk, interest rate risk 1.Credit risk is the risk of negative effects on the financial result and capital of the bank caused by borrowers default on its obligations to the bank. 2.Market risk is the risk of losses due to adverse market movements depressing the values of the positions held by market players. Market risk includes interest rate and foreign exchange risk. -Market risk measurement alternatives: scenario analysis and value-at-risk analysis. a.In scenario analysis the analyst postulates changes in the underlying determinants of portfolio value (e.g. interest rates, exchange rates, equity prices) and revalues the portfolio given those changes. The resulting change in value is the loss estimate. b.Value-at-Risc analyses use asset return distributions and predicted return parameters to estimate potential portfolio losses, 3.Liquidity risk is defined as the risk of not being able to raise cash when needed. Banking firms raise cash by borrowing or selling financial assets in the market. Liquidity risk is the risk of negative effects on the financial result and capital of the bank caused by the banks inability to meet all its due obligations. 4.The interest rate risk is the risk of declines of net interest income, or interest revenues minus interest cost, due to the movements of interest rates. Any party who lands or borrows is subject to interest rate risk. Read:"If a bank is serious about risk management, then it will be serious from the top down.
The risk department and the Three lines of defense model:
-an illustration used for structuring roles, responsabilities, risk controlling, it shows how controls, processes, and methods are aligned throughout large organizations -The tree lines of defense are: The lines of business, the central risk function, the corporate audit and compliance function. -1.the business lines make up the first line of defense, and are responsible identifying, measuring and managing all risks, they have the primary responsability for day-to-day risk management -2.these reports roll up to the central risk department, which enforces the risk discipline. Thee department is responsible for the guidance and implementation of risk policies, -3.the third line of defense is that of internal and external auditors who report independently to the senior comittee, representing the enterprisess stakeholder The Asset and Liability Management Department -the ALM department is in charge of managing the funding and the balance sheet of the bank, and of controlling liquidity and interest rate risks. -for controlling liquidity risks, the ALM sets up limits to future funding requirements, and manages the debt of the bank. Conclusion: It is important for the bank institutions to develop a view of risk exposure and focus on the most important, to understand the risks, to clearly define roles and responsabilities, to quantify the cost and benefits of managing risks,
Foundational Theories and Techniques for Risk Management, A Guide for Professional Risk Managers in Financial Services - Part II - Financial Instruments