RISK MANAGEMENT & FINANCIAL INSTITUTIONS
Balance sheet & Risk
Liabilities
Capital
Asset
Deposits at other banks
Loans, credit cards, Financing
Check able deposits
Borrowings
Stocks
Retained earnings
Credit Risk
Principles
Screening
Credit risk & asymmetric of information
Adverse selection
Moral hazard
Collateral
Credit Rationing
Screening
Compensating balance
Monitoring
Long-term customer relationship
Loan commitment
Principle of proportionate stake
Principle of Pari Passu
Principle of protection
Principle of control
Principle of well-spread lending portfolio
Principle of good first way out
Principle of appropriate tenor in financing
Principle of reflective national policy
Monitoring and enforcement
Collateral
Compensating balance
Credit rationing
Long-term customer relationship
Loan commitments
Components
Credit evaluation(The 5C's Approach)
Credit scoring
Credit Analysis
Real estate lending
Mid size commercial and industrial lending
Restrictive covenant
Legal action
Bankruptcy notice
Property promised as compensation(lender)
Keep minimum amount of fund(borrower)
No loan is extended
Rationing the amount financing to the limit
Existing savings/current account
Other loan commitment
Salary instruction
Provide firm a negotiable interest rates/market rate
Liquidity risk
Liquidity risk & depository institutions
Measuring bank;s liquidity exposure
Asset side liquidity risk
Liquidity can be obtain through
Liability side liquidity risk
Selling liquid asset immediately
Borrow/purchased funds market up to max amount
Using any excess cash reserves over and above the amount
Net liquidity statement
Peer group Ratio comparison
Liquidity index
Financing gap & financing requirement
Liquidity planning
Interest rate
Steps
Measured through
Analyze the effect of IR
Liabilities>assets(Sensitive), rise in IR reduce the NIM & income.
Decide which asset & liabilities are rate sensitive
Repricing model of funding Gap Model
Duration Gap Model
Insolvency risk
Deposit insurance
Discount window