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CHAPTER 5: International banking risks (TYPES OF IB RISKS (Market risks…
CHAPTER 5: International banking risks
TYPES OF IB RISKS
Operational risks
risk of direct and indirect loss resulting from inadequate or failed internal processes
internal factor- breakdown caused by inefficient management , by physical causes and by personnel failure
external factors - market environment, credit solution, and other risk conditions
Market risks
risk on loses in on and off balance sheet position arising from movements in market price or rates.
systematic risk - a movement in the prices of all market instruments due to macro factors.
VAR - Methodology or tools allows banks to measures probable loses their trading portfolio could incur over a period
unsystematic risks - price of one instruments moves out in line with other similar instruments because of events related instrument
ES - focus allocation asset
Credit risks
probability that loan will not repaid or there will be a default in payment
associated with the traditional lending activity of banks as is simply described as the risk of a loan not being repaid in part or full
basel 1 - required to maintain their capital level equal to 8% risk adjusted assets
basel 2 - revealed numerous loopholes in accurately managing credit risk during the financial crisis
basel 3 - provide more effective regulations about addressing credit risks
Interest rate risk
creates interest rate- interest rate will increase, bank will pay more and thus can reducing profit
the exposure of a banking and financial condition to adverse movements in interest rates
bank make profit. buy the lower interest rate on liabilties.
basel 1 and 2 did not circulate mandatory capital requirement for interest rate risk in the banking books
basel 3 sets out the requirements that an authorized financial institution to use internal model
FOREX risks
currency risk or exchange rate risk
exists when a financial transaction is denominated in other currency
the risk of invest value changing due to changes in currency exchange rates
Sovereign Risk
refers to political risks
major constraint on foreign investments in emerging markets
unstable political environment underlines higher banking and financial risk in relation
unstable political include changes in government policy, taxation and law and other problems
Liquidity
bank has to meet its obligations as they come due, without incurring losess
two types of liquidity
funding liquidity - unable to obtain sufficient funds to meet cash flow obligations
market liquidity risks - the inability to conclude a large transaction near the current market price
Transport risks
sea and transport are exposed to many types of additional risks
Cultural risks
language, value of time, custom and lifestyle differ from country to country
INTERNATIONAL RISK ASSESSMENT OF INTERNATIONAL BANKING
Credit scoring system
can be found in virtually all types of credit analysis
to pre-identify certain key factors that determine of combine them into a quantitative score
Credit derivatives
Credit default option (CDO)
an option to buy protection or sell protection as a credit default swap on a specific reference credit with a specific maturity
net credit spread involves a purchase of one option and a sale another option in the same class & expiration
Credit default swap (CDS)
financial swap agreement that the seller of CDS will compensate the buyer in the event of a loan default or other credit event
seller of the CDS insures the buyer against some reference loan
Credit forward agreement
hedges against an increase in default risk on a loan or decline in credit quality of a borrower after loan rate is determined and the loan has been issued
specifies a credit spread eg. risk premium above the risk-free rate to compensate for default risk
Credit securitizations
to complex process of transforming individual loans into assets that may be purchased by investors
has been an explosive growth in the use of credit derivatives in recent years
Value at risk
To measure the minimum loss of value on a given asset over a given time period at given confidence level either 95%, 97.5% or 99%
SUPERVISION REGULATION ON INTERNATIONAL
Single bank supervisor or multiple bank supervisors
a key polices decision in designing the framework or structure
Bank supervisory role of the central bank
it indentify and respond to the emergence of a systemic problem in a timely manner.
Scope of supervisory authority
Financial conglomerates that operate in the banking, securities and insurance sector are among the most powerful MNCs in many country
Supervisory approach of countries
Authorities therefore seek appropriately interpert and enforce the regulations governing bank, the regulations themselves become meaningless
AMLA regulations
a process of transforming profit earned from a criminal or illegal activity into legal profit
stage of AMLA - placement,layering and integration
The basel committee on banking supervisory (BCBS)
provide the forum for regular cooperation on banking supervision matters
a committee of banking supervisory authorities
OFCs
OFCs exits in large part because they offer financial market participants tax, regulatory and supervisory advantages not available in their home markets
Banking and the World Trade Organization (WTO)
specify the general principles that govern cross border trade in financial services
WTO general agreement on Trade In Service (GATS) and its Annex on Financial Services (ANNEX) took effect in 1999
Islamic banking supervision & regulations
have two system of operation
Two-tier mudarabah - assets & liabilities sides of bank balance sheet are fully integrated
Two windows - bank liabilities divided 2 window which demand deposit and investment deposit
Demand deposit - assumed to be placed as amanat
investment deposits - used to finance risk bearing investment projects with depositors full awareness
PREVENTION MEASURES OF AMLA
develop a customers acceptance policy and procedures
conduct customer due diligence ( reasonable manner)
keep all documents & records of transaction at least 6 years
shall conduct ongoing customers due diligence
promptly submit a suspicious transaction report to the financial intelligence unit in central bank