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5.0 International Banking Risks (Types of international banking risks …
5.0 International Banking Risks
Introduction to international risks :smiley:
:smiley: All banking and financial institutions, regardless of their type are exposed to the same form of risks and in most situations the failure of one bank normally will give impact to the others.
:smiley: It seems quite logical why today's global banking system concerns about risks and seeks ways to deal with
:smiley: Risk is an uncertainty. It is defined as the chance that an investment's actual return will be different than expected.
Types of international banking risks :lock:
Foreign exchange risks :lock:
known as currency risk or exchange rate risk
Risk of investment value changing due to changes in currency exchange rates
Sovereign risks :lock:
Sometimes it also refers to political risk
many foreign loans are paid in US dollars and repaid with dollars
Interest rate risks :lock:
Exposure of banking and financial condition to adverse movement in interest rates
bank's source is converting bank's liabilities and turn to assets
Liquidity risks :lock:
Bank has to meet its obligations as the come due, without incurring losses
two types of liquidity which are funding and market liquidity risk
Credit risks :lock:
Probability that a loan will not be repaid or be default payment
potential that a bank borrower fail to meet obligations
Transport risks :lock:
Due to long distance between countries, goods are despatch by shipping or airways
sea and transport are exposed to many types of additional risks
Market risks :lock:
Risk of losses in on and off balance sheet positions arising from movements in market price
Two types of risk which are systematic and unsystematic risks
Cultural risks :lock:
culture differ from one country to another
As a result a business firm faces additional risks
Operational risks :lock:
One of the oldest risk that banks have ever faced
Have two elements which internal and external aspects
Internal risks assessment of international banking :check:
Value at risks :check:
seek to measure the minimum loss on a given asset or portfolio at a given confidence level
VAR is particularly powerful in assessing the risk exposure of portfolio of assets
Credit scoring system :check:
a credit scoring system can be found virtually all types of credit analysis, from consumer credit to commercial loans
the idea essentially to pre-identify certain key factors that determine and probability of default and combine or weigh them into quantitative score
score can be literally interpreted as a probability of default
Credit derivatives :check:
Credit forward agreement :check:
hedges against an increase in default risk on a loan or decline in credit quality
specifies a credit spread example risk premium above the risk free rate
Credit default option :check:
involves a purchase of one option and a sale of another option in same class and expiration but different strike prices
investor receive a net credit for entering the position and want the spread to end up with profit
CDO is option to buy protection or sell protection
Credit securitizations :check:
complex process of transforming individual loans into assets that may be purchased by investor
banks coordinate these transactions to reduce their exposure to individual financial risks
there has been an explosive growth in the use of credit derivatives in recent years
credit default swap :check:
is a financial swap agreement that the seller of CDS will compensate the buyer
seller of CDS insures the buyer against some reference loan building
buyer of CDS makes a series of payments
Supervision and regulation on international banking :recycle:
Supervisory approach of countries :recycle:
supervisory authority supervise bank is quite important
authorities appropriately interpret and enforce the regulations governing banks, the regulation become meaningless
seek to detect and assess activities and practices
Anti Money Laundering (AMLA) Regulations :recycle:
money laundering is not new to the financial system
it is dificult to find
defined as process of transforming profits earned from a criminal or illegal activity into legal profits
Scope of supervisory authority :recycle:
discussion about MNC doing consolidating financial services supervision takes as its starting points the observation that these kind of companies are growing increasingly
financial conglomerates that operate in the banking, securities and insurance are among powerful MNC in many countries
The Basel Committee on Banking Supervision (BCBS) :recycle:
is a committee of banking supervisory authorities that established by central bank governors of group of ten countries
provides a forum for regular corporation on banking supervisory matters
objective is to improve understanding of fundamental supervisory aspects and increase the quality of banking supervision worldwide
Bank supervisory role of the central bank :recycle:
decide whether to assign responsibility for bank supervision to central bank
most strongly emphasized argument in favour of assigning supervisory responsibility to central bank
can help it identify and respond to the emergence of a systematic problem in a timely manner
Offshore Financial Centre (OFCs) :recycle:
as a response to distortionary regulations in developed economies
exist in large part because they offer financial market participants tax, regulatory and supervisory advantages
proportion of cross-border financial activity taking place in OFC substantial, even if somewhat dificult to measure
Single bank supervisor or multiple bank supervisors :recycle:
key policy decision in designing the framework or structure of bank supervisory system whether single or multiple bank
system with two or more bank supervisors stress the benefits of a competition in ideas among multiple bank supervisors
Banking and the World Trade Organization (WTO) :recycle:
general agreement on trade in services (GATS) and Annex of Financial Services (ANNEX) specify the general principles that govern cross border trade in financial services
also specify the restrictions that may be imposed on trade in services for prudential purposes by the current 161 WTO member countries