CHAPTER 5 INTERNATIONAL BANKING RISK (5.2 INTERNATIONAL RISK ASSESSMENT…
INTERNATIONAL BANKING RISK
uncertainty. all type of banking and financial institution have their own type of risk which they have to mange the risk to avoid bank failure
5.3 SUPERVISION & REGULATION ON IB
C.Scope of Supervisory Authority
Financial Conglomerates that operate in the banking, securities and insurance sectors are among the most powerful MNCs in many countries This could increase the likelihood of regulatory capture and retard financial innovation
D. Supervisory Approach of Countries
The supervisory authorities supervise banks is quite important unless these authorities apporiately interpret and enforce the regulation governing banks the regulations themselves become meaningless
B. Bank Supervisory Role of the Central Bank
Country must also decide whether to assign responsibility for bank supervision to the central bank and the conceptual literature is spit on the relative advantages and disadvantage of the central bank being a bank supervisory.
E. Anti Money Laundering (AMLA) Regulations
Money laundering is defined as the act or a process of transforming profits earned from a criminal or illegal activity into legal profits. 3 stages of money laundering;-
- The first stage is the movement of funds from one institution
The second stage is the movement of funds from one institution to another in order to disguise the original source and ownership of the funds
-The third and last stage is the time when the funds having been laundering are reinvested into legitimate business
A. Single Bank Supervision or Multiple Bank Supervision
A key policy decision in designing the framework or structure of the bank supervisory system is whether there should be single bank supervisory authority or multiple bank supervisory
F,Offshore Financial Center (OFCs)
it emerged in the 1960's and 1970's as a response to distortionary regulations in developed economies. Such measure included interest ceilings, restriction on the range of products supervised financial institutions could offer, capital controls and high effective tax rates.
G.Banking and the World Trade Organization(WTO)
The WTO General Agreement on Trade in Services (GATS) and its Annex on The Financial Service (ANNEX) took effect in 1999 specify the general principle that govern cross boarder trade in financial services.
i. Two tier mudharabah
: The assets and liabilities sides of a bank’s balance sheet are fully integrated. The two tier Mudhrabah scheme does not mandate specific reserve requirement on both types of deposits.
ii. Two Windows:
Under this agreement, bank abilities are divided into two windows e.g.:- one for the demand deposits and the other for investment deposits. The choice of window is all on depositors. Demand deposits are assumed to be placed as Amanat (safekeeping) thus they are considered to belong to depositor and the bank cannot used it.
5.1 INTERNATIONAL BANKING RISK
probability that a loan will repaid or there will be a default in payment and it is the potential that a borrower or counterparty will fail to meet its obligation in accordance with agreed term
INTEREST RATE RISK
the exposure of a banking and financial condition to adverse movement in interest rate. It makes profits by paying a lower interest rate on its liabilities than it earns on its assets.
The risk of losses in on and off balance sheet positions arising from movement in market prices or rates including interest rates, exchanges, securities price and commodity prices.
FOREIGN EXCHANGE (FOREX) RISK
Currency risk or exchange rate risk. It is a financial risk that existe=s when financial transaction is denominated in a currency other than the currency of the origin country.
Political risk.Most of the foreign loan are paid in US dollars and repaid with dollar.
A new established bank can be confronted with operational risk before it even decides on its first credit commitment or market situation. It is a risk of direct or indirect loss resulting from inadequate or failed internal processes
It’s arises when bank has to meet its obligations as they come due without incurring losses. Two types of liquidity, funding liquidity risk and market liquidity risk
5.2 INTERNATIONAL RISK ASSESSMENT OF IB
Value at Risk:
Models seek to measure the min. loss( of value) on given asset or portfolio over a given time period at a given confidence level either 95% , 97.5% or 99%. While the traditional credit scoring focuses on measuring the credit risk of individual assets, VAR is particularly powerful in assessing the risk exposure of a portfolio of assets because it takes into account the correlation among different assets
refers to the complex process of transforming individual loans into assets that may be purchased by investor. Bank coordinated these transactions is to reduce their exposure to individual financial risk
It can be found in virtually all types of credit analysis, from consumer credit to commercial loans. The idea is essentially to pre-identify certain key factors that determined and probability of default and combine or weigh them into quantitative score
they are designed to transfer the credit risk on portfolios of bank loans or debt securities from banks to non-banks, particularly insurance companies. They are 4 instrument
a) Credit Default Option (CDO)
b) Credit Default Swap (CDS)
c) Credit Forward Agreement
d) Credit Securitization