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INTERNATIONAL BANKING RISK (Types of risk (Credit Risk (Basel (Basel I,…
INTERNATIONAL BANKING RISK
Risk assessment
Value of risk
Modern approach
Measures the minimum loss on a given asset or portfolio over a given time period at a given portfolio
Credit derivatives
Credit Default Swap (CDS)
Financial swap agreement
Seller of CDS will compensate the buyer in the event of loan default or other credit
Credit default Option (DFO)
Option to buy protection or sell protection.
Credit Forward Agreement (CFA)
Hedges against an increase in default risk on a loan or decline in credit quality of a borrower after the loan rate is determined and the loan has been issued
Credit Securitization
Process of transforming individual loans into assets that may be purchased by investors
Banks coordinate these transactions to reduce their exposure to individual financial risks
Credit scoring systems
To pre-identify certain key factors that determine and probability of default and combine them into quantitative score
Traditional approach
Types of risk
Foreign Exchange Risk
Known as currency risk
Happen when transaction denominated in a currency other than origin country
Sovereign Risk
Known political risk
Interest Rate Risk
The exposure of a banking and financial condition to adverse movements in interest rates.
Liquidity Risk
Arises when bank has to meet its obligations as they come due, without incurring losses
Two types of liquidity risk
Funding liquidity risk
Market liquidity risk
Credit Risk
The risk of unpaid loan or default in payment.
Associated with the traditional lending activity of banks as it is simply described as the risk of a loan not being repaid in full.
Basel
Basel I
Basel II
Basel III
Transport Risk
Due to long distance between countries
Transport are exposed to many types of additional risk
Market Risk
Risk of losses in balance sheet include market prices or rates.
Types of market risk
Systematic risk
( movement of prices or the market due to macro factors )
Unsystematic risk
( Price of one instrument moves out in line with other similar instruments because of events related to the issuer of instrument )
Operational Risk
The elements
External aspect (Management)
Internal aspect (market environment)
Risk of direct or indirect loss result from inadequate or failed internal processes.
Cultural Risk
Culture differs from one country to another, language the value of time, custom and lifestyle differs from country to country
As a result a business firm faces additional risk
Introduction
All banking an financial institutions, regardless of their type are exposed to the same form of risk and in most situations the failure of one bank normally will give impact to others
Thus, it seems quite logical why today global banking systems concern about risks
RIsk is an uncertainty of any outcome of an event
Supervision and regulations
Single/Multiple bank supervisor
Policy decision in design the framework or structure of the bank supervisory authority or multiple bank supervisors
Bank supervisory role of the central bank
Countries must also decide whether to assign responsibility for bank supervision to the central bank
As with the issue of single or multiple bank supervisors, the conceptual literature is split on the relative advantages and disadvantages of the central bank being a bank supervisor
Scope of supervisory authority
Financial conglomerates that operate in the banking
Refers to any company under common central who exercise providing significant services in at least 2 different financial sector
Supervisory approach of countries
Approach in which the supervisory authorities supervises banks is quite important
Supervisory authorities therefore seek to detect and assess activities and practices
Anti-Money laundering act (AMLA)
3 stages ( Placement,Layering and intergration)
Money laundering is not new to the financial system