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CHAPTER 5 : INTERNATIONAL BANKING RISKS (5.0 INTRODUCTION TO INTERNATIONAL…
CHAPTER 5 : INTERNATIONAL BANKING RISKS
5.0 INTRODUCTION TO INTERNATIONAL RISKS
🍓Banking and financial institutions are exposed to the SAME RISK, failure will give impact to others
🍓Risk is uncertainty
🍓Risk - chance that investment's actual return will be different than expected (SEPT 15)
🍓May come from different ways
🍓Banking and financial institutions need to STRENGTHEN global position 👉UNDERSTAND risk 👉 MANAGE risk 👉 Can LIMIT probability of BANK FAILURE
5.1 TYPES OF INTERNATIONAL BANKING RISKS
âš Operational Risk
âś’Oldest risk bank ever faced
âś’Risk of direct or indirect loss resulting from inadequate or failed intrrnal processes, people and systems or external events
âś’Two key element in definition
• INTERNAL ASPECT
• Bank can control, shape and influence
• Eg : losses or breakdown caused by insufficient management, physical causes, personnel failure, misleading information
• EXTERNAL ASPECT
• Eg : market environment, credit situation
âś’Risk of losses in on and off balance sheet position arising from movement in market prices or rates, interest rates, exchange rates, securities prices and commodity prices
âś’Two types of market risk
• SYSTEMATIC MARKET RISK
• Uncontrollable Risk
• Caused by movement in prices of all market due to macro factor
• Eg : Change in economic policy (taxation, money supply)
• Occur when financial system suffer from a failure that caused by other form of risk
• UNSYSTEMATIC MARKET RISK
• Controllable Risk
• Price of one instrument moves out in line with other similar instrument
• Eg : law suit against the issuer, misconduct
âś’Most bank manage this risk with a short-term focus
âś’Best practice for estimate market risk is to adopt measures as VAR and ES
âś’Value at Risk (VaR)
• Methodology that allow bank - measures probable LOSSES that trading portfolios could incur over period of time
âś’Expected Shortfall (ES)
• Provides advantages relatove to the VaR approach interm of lower portfolio downside risk