Risk Management in Banking Sector Project Report Mba Finance

RISK MANAGEMENT IN BANKING SECTOR
CHAPTER I:
INTRODUCTION
BABASAB PATIL Page 1
1.1 THEME OF THE STUDY
Risk management underscores the fact that the survival of an organization depends heavily on its
capabilities to anticipate and prepare for the change rather than just waiting for the change and
react to it. The objective of risk management is not to prohibit or prevent risk taking activity, but
to ensure that the risks are consciously taken with full knowledge, purpose and clear
understanding so that it can be measured and mitigated. It also prevents an institution from
suffering unacceptable loss causing an institution to suffer or materially damage its competitive
position. Functions of risk management should actually be bank specific dictated by the size and
uality of balance sheet, comple!ity of functions, technical" professional manpower and the
status of #I$ in place in that bank.
1.2 INTRODUCTION
Risk: the meaning of %Risk& as per 'ebster&s comprehensive dictionary is (a chance of
encountering harm or loss, hazard, danger) or (to e!pose to a chance of injury or loss). Thus,
something that has potential to cause harm or loss to one or more planned objectives is called
Risk.
The word risk is derived from an Italian word (Risicare) which means (To *are). It is an
e!pression of danger of an adverse deviation in the actual result from any e!pected result.
+anks for International $ettlement ,+I$- has defined it as. (Risk is the threat that an event or
action will adversely affect an organization&s ability to achieve its objectives and successfully
e!ecute its strategies.)
Risk Manageen!: Risk #anagement is a planned method of dealing with the potential loss or
damage. It is an ongoing process of risk appraisal through various methods and tools which
continuously
/ssess what could go wrong
*etermine which risks are important to deal with
Implement strategies to deal with those risks
1." STUDY PROB#EM
+asel II norms came as an attempt to reduce the gap in point of views between conflict practices.
Therefore, the implementation of those resolutions emerged by the banks. Regarding this issue
the survey has been made.
$tudy problem can be stated as follows0
T$ %&a! e'!en! (anks &a)e i*+een!e, Base+ II n$-s -e+a!e, !$ en&an.ing in!e-na+
.$n!-$+ in !&e (anks/
1.0 OB1ECTI2ES
1overing different aspects of risk assessment
Identifying keys for effective risk management
To understand the challenges and impact of Implementing +asel II
To analyze the current progress of +asel II in 2ubli.
1.3 METHODO#OGY
3iterature Review
*ata collection
4rimary information0 4ersonal interview" 5uestionnaire
$econdary information0 Through internet, #anuals, 6ournals, /udit"/nnual
reports
The +enefits and limitation of +asel II
The 1hallenges of Implementing +asel II
Impact of +asel II
Research method
Findings and suggestions
1onclusion
CHAPTER II:
#ITRETURE RE2IE4
2.1 INTRODUCTION
Base+ I A..$-,: The +asel 1ommittee on +anking $upervision, which came into e!istence in
789:, volunteered to develop a framework for sound banking practices internationally. In 78;;
the full set of recommendations was documented and given to the 1entral banks of the countries
for implementation to suit their national systems. This is called the +asel 1apital /ccord or
+asel I /ccord. It provided level playing field by stipulating the amount of capital that needs to
be maintained by internationally active banks.
Base+ II A..$-,: +anking has changed dramatically since the +asel I document of 78;;.
/dvances in risk management and the increasing comple!ity of financial activities " instruments
,like options, hybrid securities etc.- prompted international supervisors to review the
appropriateness of regulatory capital standards under +asel I. To meet this reuirement, the
+asel I accord was amended and refined, which came out as the +asel II accord.
The new proposal is based on three mutually reinforcing pillars that allow banks and supervisors
to evaluate properly the various risks that banks have to face and realign regulatory capital more
closely with underlying risks. <ach of these three pillars has risk mitigation as its central board.
The new risk sensitive approach seeks to strengthen the safety and soundness of the industry by
focusing on0
= Risk based capital ,4illar 7-
= Risk based supervision ,4illar >-
= Risk disclosure to enforce market discipline ,4illar ?-
2.2 BASE# II FRAME4ORK
T&e ne% *-$*$sa+ is (ase, $n !&-ee 5!5a++6 -ein7$-.ing *i++a-s !&a! a++$% (anks an,
s5*e-)is$-s !$ e)a+5a!e *-$*e-+6 !&e )a-i$5s -isks !&a! (anks 7a.e an, -ea+ign -eg5+a!$-6
.a*i!a+ $-e .+$se+6 %i!& 5n,e-+6ing -isks.
Base+ II
F-ae%$-k
Pi++a- I Pi++a- II Pi++a- III
Mini5 Ca*i!a+ S5*e-)is$-6 Ma-ke!
Re85i-een!s Re)ie% P-$.ess Dis.i*+ine
2.2.1 THE FIRST PI##AR 9 MINIMUM CAPITA# RE:UIREMENTS
The first pillar sets out minimum capital reuirement for the bank. The new framework
maintains minimum capital reuirement of ;@ of risk assets.
+asel II focuses on improvement in measurement of risks. The revised credit risk measurement
methods are more elaborate than the current accord. It proposes for the first time, a measure for
operational risk, while the market risk measure remains unchanged.
2.2.2 THE SECOND PI##AR ; SUPER2ISORY RE2IE4 PROCESS
$upervisory review process has been introduced to ensure not only that bank have adeuate
capital to support all the risks, but also to encourage them to develop and use better risk
management techniues in monitoring and managing their risks. The process has four key
principles.
a- +anks should have a process for assessing their overall capital adeuacy in relation to their
risk profile and a strategy for monitoring their capital levels.
b- $upervisors should review and evaluate bank&s internal capital adeuacy assessment and
strategies, as well as their ability to monitor and ensure their compliance with regulatory capital
ratios.
c- $upervisors should e!pect banks to operate above the minimum regulatory capital ratios and
should have the ability to reuire banks to hold capital in e!cess of the minimum.
d- $upervisors should seek to intervene at an early stage to prevent capital from decreasing
below minimum level and should reuire rapid remedial action if capital is not mentioned or
restored.
2.2." THE THIRD PI##AR 9 MARKET DISCIP#INE
#arket discipline imposes strong incentives to banks to conduct their business in a safe, sound
and effective manner. It is proposed to be effected through a series of disclosure reuirements on
capital, risk e!posure etc. so that market participants can assess a bank&s capital adeuacy. These
disclosures should be made at least semi.annually and more freuently if appropriate. 5ualitative
disclosures such as risk management objectives and policies, definitions etc. may be published
annually.
2." TYPES OF RISKS
'hen we use the term (Risk), we all mean financial risk or une!pected financial loss. If we
consider risk in terms of probability or occur freuently, we measure risk on a scale, with
certainty of occurrence at one end and certainty of non.occurrence at the other end. Risk is the
greatest phenomena where the probability of occurrence or non.occurrence is eual. /s per the
Reserve +ank of India guidelines issued in Act. 7888, there are three major types of risks
encountered by the banks and these are 1redit Risk, #arket Risk B Aperational Risk. Further
after eliciting views of banks on the draft guidelines on 1redit Risk #anagement and market risk
management, the R+I has issued the final guidelines and advised some of the large 4$C banks to
implement so as to gauge the impact. Risk is the potentiality that both the e!pected and
une!pected events may have an adverse impact on the bank&s capital or its earnings. The
e!pected loss is to be borne by the borrower and hence is taken care of by adeuately pricing the
products through risk premium and reserves created out of the earnings. It is the amount
e!pected to be lost due to changes in credit uality resulting in default. 'here as, the une!pected
loss on account of the individual e!posure and the whole portfolio is entirely borne by the bank
itself and hence care should be taken. Thus, the e!pected losses are covered by
reserves"provisions and the une!pected losses reuire capital allocation.
2.".1 CREDIT RISK
In the conte!t of +asel II, the risk that the obligor ,borrower or counterparty- in respect of a
particular asset will default in full or in part on the obligation to the bank in relation to the asset
is termed as 1redit Risk.
1redit Risk is defined as.(The risk of loss arising from outright default due to inability or
unwillingness of the customer or counter party to meet commitments in relation to lending,
trading, hedging, settlement and other financial transaction of the customer or counter party to
meet commitments).
1redit Risk is also defined, (as the potential that a borrower or counter party will fail to meets its
obligations in accordance in agreed terms).
2.".2 MARKET RISK
It is defined as (the possibility of loss caused by changes in the market variables such as interest
rate, foreign e!change rate, euity price and commodity price). It is the risk of losses in, various
balance sheet positions arising from movements in market prices.
R+I has defined market risk as the possibility of loss to a bank caused by changes in the market
rates" prices. R+I Duidance Eote focus on the management of liuidity Risk and #arket Risk,
further categorized into interest rate risk, foreign e!change risk, commodity price risk and euity
price risk.
#arket risk includes the risk of the degree of volatility of market prices of bonds, securities,
euities, commodities, foreign e!change rate etc., which will change daily profit and loss over
timeF it&s the risk of une!pected changes in prices or rates. It also addresses the issues of +anks
ability to meets its obligation as and when due, in other words, liuidity risk.
2."." OPERATIONA# RISK
Aperational risk is the risk associated with the operations of an organization. It is defined as (risk
of loss resulting from inadeuate or failed internal process, people and systems or from e!ternal
events.)
It includes legal risk. It e!cludes strategic and reputational risks, as the same are not uantifiable.
Aperational risk includes the risk of loss arising from fraud, system failures, trading error and
many other internal organizational risks as well as risk due to e!ternal events such as fire, flood
etc. the losses due to operation risk can be direct as well as indirect. *irect loss means the
financial losses resulting directly from an incident or an event. <.g. forgery, fraud etc. indirect
loss means the loss incurred due to the impact of an incident.
2.".0 REGU#ATORY RISK
The owned funds alone are managed by an entity, it is natural that very few regulators operate
and supervise them. 2owever, as banks accept deposit from public obviously better governance
is e!pected from them. This entails multiplicity of regulatory controls. #any +anks, having
already gone for public issue, have a greater responsibility and accountability in this regard. /s
banks deal with public funds and money, they are subject to various regulations. The various
regulators include Reserve +ank of India ,R+I-, $ecurities <!change +oard of India ,$<+I-,
*epartment of 1ompany /ffairs ,*1/-, etc. #ore over, banks should ensure compliance of the
applicable provisions of The +anking Regulation /ct, The 1ompanies /ct, etc. Thus all the
banks run the risk of multiple regulatory.risks which inhibits free growth of business as focus on
compliance of too many regulations leave little energy scope and time for developing new
business. +anks should learn the art of playing their business activities within the regulatory
controls.
2.".3 EN2IRONMENTA# RISK
/s the years roll the technological advancement takes place, e!pectation of the customers change
and enlarges. 'ith the economic liberalization and globalization, more national and international
players are operating the financial markets, particularly in the banking field. This provides the
platform for environmental change and e!posure of the bank to the environmental risk. Thus,
unless the banks improve their delivery channels, reach customers, innovate their products that
are service orientedF they are e!posed to the environmental risk.
2.0 BASE#<S NE4 CAPITA# ACCORD
+ankers& for International $ettlement ,+I$- meet at +asel situated at $witzerland to address the
common issues concerning bankers all over the world. The +asel 1ommittee on +anking
$upervision ,+1+$- is a committee of banking supervisory authorities of D.7G countries and has
been developing standards and establishment of a framework for bank supervision towards
strengthening financial stability through out the world. In consultation with the supervisory
authorities of a few non.D.7G countries including India, core principles for effective banking
supervision in the form of minimum reuirements to strengthen current supervisory regime, were
mooted. The 78;; 1apital /ccord essentially provided only one option for measuring the
appropriate capital in relation to the risk weighted assets of the financial institution. It focused on
the total amount of bank capital so as to reduce the risk of bank solvency at the potential cost of
bank&s failure for the depositors. /s an improvement on the above, the Eew 1apital /ccord was
published in >GG7 by +asel 1ommittee of +anking $upervision. It provides spectrum of
approaches for the measurement of credit, market and operational risks to determine the capital
reuired. The spread and nature of the ownership structure is important as it impinges on the
propensity to induct additional capital. 'hile getting support from a large body of shareholders
is a difficult proposition when the bank&s performance is adverse, a smaller shareholder base
constrains the ability of the bank to garner funds. Tier I capital is not owed to anyone and is
available to cover possible une!pected losses. It has no maturity or repayment reuirement, and
is e!pected to remain a permanent component of the core capital of the counter party. 'hile
+asel standards currently reuire banks to have a capital adeuacy ratio of ;@ with Tier I not
less than :@, R+I has mandated the banks to maintain 1/R of 8@. The maintenance of capital
adeuacy ratio is like aiming at a moving target as the composition of risk.weighted assets gets
changed every now and then on account of fluctuations in the risk profile of a bank. Tier I capital
is known as the core capital providing permanent and readily available support to the bank to
meet the une!pected losses. In the recent past, owners of 4$C banks, the government provided
adeuate capital to weaker banks to ease the burden. In doing so, the government was not acting
as a prudent investor as return on such capital was never a consideration. Further, capital
infusion did not result in any cash flow to the receiver, as all the capital was reuired to be
reinvested in government securities yielding low returns. Receipt of capital was just a book entry
with the only advantage of income from the securities.
2.3 CAPITA# ADE:UACY
$ubseuent to nationalization of banks, capitalization in banks was not given due importance as
it was felt necessary for the reason that the ownership of the banks rested with the government,
creating the reuired confidence in the mind of the public. 1ombined forces of globalization and
liberalization compelled the public sector banks, hitherto shielded from the vagaries of market
forces, come by the condition of terms market realities, where certain minimum capital adeuacy
has to be maintained in the face of stiff norms in respect of income recognition, asset
classification and provisioning. It is clear that multi pronged approach would be reuired to meet
the challenges of maintaining capital at adeuate levels in the face of mounting risks in the
banking sector. In banks, asset creation is an event happening subseuent to the capital formation
and deposit mobilization.
2.= RISK AGGREGATION > CAPITA# A##OCATION
1apital /deuacy in relation to economic risk is a necessary condition for the long.term
soundness of banks. /ggregate risk e!posure is estimated through Risk /djusted Return on
1apital ,R/RA1- and <arnings at Risk ,<aR- method. Former is used by bank with international
presence and the R/RA1 process estimates the cost of <conomic 1apital B e!pected losses that
may prevail in the worst.case scenario and then euates the capital cushion to be provided for the
potential loss. R/RA1 is the first step towards e!amining the institution&s entire balance sheet
on a mark to market basis, if only to understand the risk return trade off that have been made. /s
banks carry on the business on a wide area network basis, it is critical that they are able to
continuously monitor the e!posures across the entire organization and aggregate the risks so that
an integrated view can be taken. The <conomic 1apital is the amount of the capital ,besides the
Regulatory 1apital- that the firm has to put at risk so as to cover the potential loss under the
e!treme market conditions. In other words, it is the difference in mark.to.market value of assets
over liabilities that the bank should aim at or target. /s against this, the regulatory capital is the
actual 1apital Funds held by the bank against the Risk 'eighted /ssets. /fter measuring the
economic capital for the bank as a whole, bank&s actual capital has to be allocated to individual
business units on the basis of various types of risks. This process can be continued till capital is
allocated at transaction"customer level.
2.? RISK BASED SUPER2ISION @RBSA
The Reserve +ank of India presently has its supervisory mechanism by way of on.site inspection
and off.site monitoring on the basis of the audited balance sheet of a bank. In order to enhance
the supervisory mechanism, the R+I has decided to put in place, a system of Risk +ased
$upervision. Cnder risk based supervision, supervisors are e!pected to concentrate their efforts
on ensuring that financial institutions use the process necessarily to identify measure and control
risk e!posure. The R+$ is e!pected to focus supervisory attention in accordance with the risk
profile of the bank. The R+I has already structured the risk profile templates to enable the bank
to make a self.assessment of their risk profile. It is designed to ensure continuous monitoring and
evaluation of risk profile of the institution through risk matri!. This may optimize the utilization
of the supervisory resources of the R+I so as to minimize the impact of a crises situation in the
financial system. The transaction based audit and supervision is getting shifted to risk focused
audit. Risk based supervision approach is an attempt to overcome the deficiencies in the
traditional point.in.time, transaction. validation and value based supervisory system. It is
forward looking enabling the supervisors to differentiate between banks to focus attention on
those having high.risk profile. The implementation of risk based auditing would imply that
greater emphasis is placed on the internal auditor&s role for mitigating risks. +y focusing on
effective risk management, the internal auditor would not only offer remedial measures for
current trouble.prone areas, but also anticipate problems to play an active role in protecting the
bank from risk hazards.
2.B RISK MANAGEMENT:
KEYS FOR EFFECTI2E RISK MANAGEMENT:
To direct risk behaviour B influence the shape of a firm&s risk profile, management
should use all available options. Csing financial incentives and penalties to influence risk
taking behaviour is effective management tool.
$haring of information by keeping confidentiality intact is also helpful to find out
different ways for controlling the risk as valuable inputs may be received through this
sharing. <ven information on creditworthiness of counterparties that are known to take
substantial risk can also help.
*iversification is e!tremely important. /s it lowers the variance in investor portfolios,
improves corporate ability to raise debt, reduces employment risks, B heightens
operating efficiency.
Dovernance should never be ignored. 1areful structuring of the alliance in advance of the
deal and continual adjustment thereafter help to build a constructive relationship.
Ane should not trust while in business. 4ersonal chemistry is good but is no substitute for
monitoring mechanism, co.operation incentives, B organizational alignment.
'ithout support system within the organization itself, e!ternal alliances are doomed to
fail.
2.B.1 MARKET RISK MANAGEMENT:
'e may believe that there are limited tools available to mitigate this risk, but this is not so.
Future, option, derivatives trading and its many sub types are some of the tools which help to
investors to protect the investment or minimize there e!posure toward market risk. In case of
derivatives as in broader sense derivatives are considered to be used to hedge against market risk,
but they can be used to mitigate various other types of risks, like credit risk, operational risk.
The importance of managing market risk has now been well understood by financial institutions
and corporate across the world. #arket risk has made the global financial conditions uncertain
and unsettled and still recovery of problem is not visible in the near time.
2.B.2 CREDIT RISK MANAGEMENT
Tools of 1redit Risk #anagement0 The instruments and tools, through which credit risk is
managed are0 <!posure 1eilings, Review"Renewal, Risk Rating #odel, Risk based scientific
pricing, 4ortfolio #anagement, 3oan Review #echanism
2.B." OPERATIONA# RISK MANAGEMENT:
This risk can be reduced to great e!tent by effectively controlling organization as a whole by
taking certain steps, like assuring that designed processes is carried out carefully B with the help
of e!perts, and are followed in desired way.
2.C COMPUTATION OF CAPITA# RE:UIREMENT
2.C.1 CREDIT RISK APPROACHES
C-e,i! Risk
S!an,a-,iDe, a**-$a.& A,)an.e, A**-$a.&

F$5n,a!i$n IRB A,)an.e, IRB
S!an,a-,iDe, a**-$a.&0 the +asel committee as well as R+I provides a simple methodology
for risk assessment and calculating capital reuirements for credit risk called $tandardized
approach. This approach is divided into the following broad topics for simpler and easier
understanding
7. /ssignment of Risk 'eights0 all the e!posures are first classified into various customer types
defined by +asel committee or R+I. Thereafter, assignment of standard risk weights is done,
either on the basis of customer type or on basis of the asset uality as determined by rating of the
asset, for calculating risk weighted assets.
>. <!ternal 1redit /ssessments0 the regulator or R+I recognizes certain risk rating agencies and
e!ternal credit assessment institutions ,<1/Is- and rating assigned by these <1/Is, to the
borrowers may be taken as a basis for assigning risk weights to the borrowers. +etter rating
means better uality of assets and lesser risk weights and hence lesser reuirement of capital
allocation.
?. 1redit Risk #itigation0 +asel recognized 1ollaterals and +asel recognized Duarantees are two
securities that banks obtain for loans " advances to cover credit risk, which are termed as (1redit
Risk #itigants)
A,)an.e, A**-$a.&: +asel II framework also provides for advanced approaches to calculate
capital reuirement for credit risk. These approaches rely heavily on a banks internal assessment
of its borrowers and e!posures. These advanced approached are based on the internal ratings of
the bank and are popularly known as Internal Rating +ased ,IR+- approaches. Cnder /dvanced
/pproaches, the banks will have > options as under
a- Foundation Internal Rating +ased ,FIR+- /pproaches.
b- /dvanced Internal Rating +ased ,/IR+- /pproaches.
The differences between foundation IR+ and advanced IR+ have been captured in the following
table0 Table >.8.7.70 The differences between foundation IR+ and advanced IR+
Da!a In*5! F$5n,a!i$n IRB A,)an.e, IRB
4robability of *efault 4rovided by bank based on
own estimates
4rovided by bank based on own
estimates
3oss Diven *efault $upervisory values set by the
1ommittee
estimates
<!posure at *efault $upervisory values set by the
1ommittee
estimates
<ffective #aturity $upervisory values set by the
1ommittee
estimates Ar /t the national
discretion, provided by bank
based on own estimates
2.C.2 MARKET RISK APPROACHES
Ma-ke! Risk
S!an,a-,iDe, In!e-na+ M$,e+
A**-$a.& Base, a**-$a.&
Ma!5-i!6 D5-a!i$n
Base, Base,
R+I has issued detailed guidelines for computation of capital charge on #arket Risk in 6une
>GG:. The guidelines seek to address the issues involved in computing capital charge for interest
rate related instruments in the trading book, euities in the trading book and foreign e!change
risk ,including gold and precious metals- in both trading and banking book. Trading book will
include0
$ecurities included under the 2eld for trading category
$ecurities included under the /vailable for $ale category
Apen gold position limits
Apen foreign e!change position limits
Trading position in derivatives and derivatives entered into for hedging trading book
e!posures.
2.C." OPERATIONA# RISK APPROACHES
O*e-a!i$na+
Risk
Basi. In,i.a!$- S!an,a-,iDe, A,)an.e,
A**-$a.& A**-$a.& Meas5-een!
A**-$a.&
+asic Indicator /pproach0 Cnder the basic indicator approach, +anks are reuired to hold capital
for operational risk eual to the average over the previous three years of a fi!ed percentage ,7H@
. denoted as alpha- of annual gross income. Dross income is defined as net interest income plus
net non.interest income, e!cluding realized profit"losses from the sale of securities in the banking
book and e!traordinary and irregular items.
$tandardized /pproach0 Cnder the standardized approach, banks activities are divided into eight
business lines. 'ithin each business line, gross income is considered as a broad indicator for the
likely scale of operational risk. 1apital charge for each business line is calculated by multiplying
gross income by a factor ,denoted beta- assigned to that business line. Total capital charge is
calculated as the three.year average of the simple summations of the regulatory capital across
each of the business line in each year.
/dvanced #easurement /pproach0 Cnder advanced measurement approach, the regulatory
capital will be eual to the risk measures generated by the bank&s internal risk measurement
system using the prescribed uantitative and ualitative criteria.
2.1E BENEFITS OF BASE# II
1. Be!!e- a++$.a!i$n $7 .a*i!a+ an, -e,5.e, i*a.! $7 $-a+ &aDa-, !&-$5g& -e,5.!i$n in !&e
s.$*e 7$- -eg5+a!$-6 a-(i!-age: +y assessing the amount of capital reuired for each e!posure
or pool of e!posures, the advanced approach does away with the simplistic risk buckets of
current capital rules.
2. I*-$)e, signa+ 85a+i!6 $7 .a*i!a+ as an in,i.a!$- $7 s$+)en.6: the proposed rule is
designed to more accurately align regulatory capital with risk, which will improve the uality of
capital as an indicator of solvency.
". En.$5-ages (anking $-ganiDa!i$ns !$ i*-$)e .-e,i! -isk anageen!: Ane of the
principal objectives of the proposed rule is to more closely align capital charges and risk. For any
type of credit, risk increases as either the probability of default or the loss given default
increases.
0. M$-e e77i.ien! 5se $7 -e85i-e, (ank .a*i!a+: Increased risk sensitivity and improvements in
risk measurement will allow prudential objectives to be achieved more efficiently.
3. In.$-*$-a!es an, en.$5-ages a,)an.es in -isk eas5-een! an, -isk anageen!0 The
proposed rule seeks to improve upon e!isting capital regulations by incorporating advances in
risk measurement and risk management made over the past 7H years.
=. Re.$gniDes ne% ,e)e+$*en!s an, a..$$,a!es .$n!in5ing inn$)a!i$n in 7inan.ia+
*-$,5.!s (6 7$.5sing $n -isk: The proposed rule also has the benefit of facilitating recognition
of new developments in financial products by focusing on the fundamentals behind risk rather
than on static product categories.
?. Be!!e- a+ignen! $7 .a*i!a+ an, $*e-a!i$na+ -isk an, en.$5-ages (anking $-ganiDa!i$ns
!$ i!iga!e $*e-a!i$na+ -isk: Introducing an e!plicit capital calculation for operational risk
eliminates the implicit and imprecise (buffer) that covers operational risk under current capital
rules.
B. En&an.e, s5*e-)is$-6 7ee,(a.k: all three pillars of the proposed rule aim to enhance
supervisory feedback from federal banking agencies to managers of banks and thrifts. <nhanced
feedback could further strengthen the safety and soundness of the banking system.
C. En&an.e, ,is.+$s5-e *-$$!es a-ke! ,is.i*+ine: The proposed rule seeks to aid market
discipline through the regulatory framework by reuiring specific disclosures relating to risk
measurement and risk management.
1E. P-ese-)es !&e (ene7i!s $7 in!e-na!i$na+ .$nsis!en.6 an, .$$-,ina!i$n a.&ie)e, %i!& !&e
1CBB Base+ A..$-,: /n important objective of the 78;; /ccord was competitive consistency of
capital reuirements for banking organizations competing in global markets. +asel II continues
to pursue this objective.
2.11 #IMITATIONS OF BASE# II:
1. #a.k $7 s577i.ien! *5(+i. kn$%+e,ge0 knowledge about banks& portfolios and their future
risk.weight, since this will also depend on whether banks will use the standardized or IR+
approaches.
2. #a.k $7 *-e.ise kn$%+e,ge: as to how operational risk costs will be charged. The banks are
e!pected to benefit from sharpening up some aspects of their risk management practices
preparation and for the introduction of the operational risk charge.
". #a.k $7 .$nsis!en.6: at least at this stage, as to how insurance activities will be accounted for.
Ane treatment outlined in the 1apital /ccord is that banks deduct euity and other regulatory
capital investments in insurance subsidiaries and significant minority investments in insurance
entities. /n alternative to this treatment is to apply a risk weight age to insurance investments.
2.12 CHA##ENGES FOR INDIAN BANKING SYSTEM UNDER BASE# II
C$s!+6 Da!a(ase C-ea!i$n an, Main!enan.e P-$.ess: The most obvious impact of
+/$<3 II is the need for improved risk management and measurement. It aims to give
impetus to the use of internal rating system by the international banks.
A,,i!i$na+ Ca*i!a+ Re85i-een!: 2ere is a worrying aspect that some of the banks will not
be able to put up the additional capital to comply with the new regulation and they may be
isolated from the global banking system.
#a-ge P-$*$-!i$n $7 NPAFs: / large number of Indian banks have significant proportion of
E4/Is in their assets. /long with that a large proportion of loans of banks are of poor uality.
There is a danger that a large number of banks will not be able to restructure and survive in
the new environment. This may lead to forced mergers of many defunct banks with the
e!isting ones and a loss of capital to the banking system as a whole.
In.-ease, P-$;C6.+i.a+i!6: The increased importance to credit ratings under +asel II could
actually imply that the minimum reuirements could become pro.cyclical as banks are
reuired to raise capital levels for loans in times of economic crises.
#$% Deg-ee $7 C$-*$-a!e Ra!ing Pene!-a!i$n: India has as few as three established rating
agencies and the level of rating penetration is not very significant as, so far, ratings are
restricted to issues and not issuers. 'hile +asel II gives some scope to e!tend the rating of
issues to issuers, this would only be an appro!imation and it would be necessary for the
system to move to ratings of issuers. <ncouraging ratings of issuers would be a challenge.
C-$ss B$-,e- Iss5es 7$- F$-eign Banks: In India, foreign banks are statutorily reuired to
maintain local capital and the following issues are reuired to be resolvedF
7. Jalidation of the internal models approved by their head offices and home country
supervisor adopted by the Indian branches of foreign banks.
>. *ate history maintained and used by the bank should be distinct for the Indian branches
compared to the global data used by the head office
?. capital for operational risk should be maintained separately for the Indian branches in India
2.10 IMPACT OF BASE# II IMP#EMENTATION ON THE INDIAN
BANKING INDUSTRY
1. C&anges in Ca*i!a+ Risk 4eig&!e, Asse!s Ra!i$ @CRARA: #ost of the banks are already
adhering to the +asel II guidelines. 2owever, the Dovernment has indicated that a cushion
should be maintained by the public sector banks and therefore their 1R/R should be above 7>@.
+asel I focused largely on credit risk, whereas +asel II has ? risks to be considered, viz., credit
risk, operational risk and market risks. /s +asel II considers all these ? risks, there are chances
of a decline in the 1apital /deuacy Ratio.
2. Hig& .$s!s 7$- 5*;g-a,a!i$n $7 !e.&n$+$g6: Full implementation of the +asel II framework
would reuire up.gradation of the bank.wide information systems through better branch.
connectivity, which would entail huge costs and may raise IT.security issues. The
implementation of +asel II can also raise issues relating to development of 2R skills and
database management. $mall and medium sized banks may have to incur enormous costs to
acuire reuired technology, as well as to train staff in terms of the risk management activities.
There will be a need for technological up gradation and access to information like historical data
etc.
". Ra!ing -isks: 4roblems embedded in +asel II norms include rating of risks by rating agencies.
'hether the country has adeuate number of rating agencies to discharge the functions in a
+asel II compliant banking system, is a uestion for consideration. Further, to what e!tent the
rating agencies can be relied upon is also a matter of debate.
<ntry norms for recognition of rating agencies should be stricter. Anly firms with international
e!perience or background in ratings business should be allowed to enter. This is necessarily
given that the Indian rating industry is in its growth phase, especially with the implementation of
new +asel II capital norms that encourage companies to get rated.
0. I*-$)e, Risk Manageen! > Ca*i!a+ A,e85a.6: Ane aspect that hold back the critics of
+asel II is the fact that it will tighten the risk management process, improve capital adeuacy and
strengthen the banking system.
3. C5-!ai+en! $7 C-e,i! !$ In7-as!-5.!5-e P-$Ge.!s: The norms reuire a higher weight age
for project finance, curtailing credit to this is very crucial sector. The long.term impacts for this
could be disastrous.
=. P-e7e-en.e 7$- M$-!gage C-e,i! !$ C$ns5e- C-e,i! #$%e- Risk 4eig&!s !$ M$-!gage
.-e,i!: 4reference for #ortgage 1redit to 1onsumer 1redit 3ower Risk 'eights to #ortgage
credit would accentuate bankers& preference towards it vis.K.vis consumer credit.
?. Base+ II: A,)an!age Big Banks: It would be far easier for the larger banks to implement the
norms, raising their uality of risk management and capital adeuacy. This combined with the
higher cost of capital for smaller players would ueer the pitch in favour of the former. The
larger banks would also have a distinct advantage in raising capital in euity markets. <merging
#arket +anks can turn this challenge into an advantage by active implementation and e!panding
their horizons outside the country.
B. IT s*en,ing: A,)an!age !$ In,ian IT .$*anies: An the flipside, Indian IT companies,
which have considerable e!pertise in the +F$I segment, stand to gain. #ajor Indian IT
companies such as I.fle! and Infosys already have the products, which could help them develop
an edge over their rivals from the developed countries.
CHAPTER III:
PRO1ECT TASK
".1 INTRODUCTION
The reason for conducting this survey was to establish how these new regulations were perceived
in terms of priority, urgency and interest within the banks. In addition, aim is to provide a view
on strategic issues and to report on key trends related to many aspects of compliance within the
+asel II regulatory framework. Finally, to make recommendations on the opportunities offered
by the new regulations for the risk management process.
".2 STUDY PROB#EM
+asel II norms came as an attempt to reduce the gap in point of views between conflict practices.
Therefore, the difference of bank implementation of those resolutions emerges. $tudy problem
can be stated as follows0
T$ %&a! e'!en! (anks &a)e i*+een!e, Base+ II n$-s -e+a!e, !$ en&an.ing in!e-na+
.$n!-$+ in !&e (anks/
"." OB1ECTI2ES
1overing different aspects of risk assessment
Identifying keys for effective risk management
To understand the challenges and impact of Implementing +asel II
To analyze the current progress of +asel II in 2ubli.
".".1 DATA CO##ECTION
4rimary information0 4ersonal interview" 5uestionnaire
$econdary information0 Through internet, #anuals, 6ournals, /udit"/nnual reports
".0 STUDY CO2ERAGE AND SAMP#E
$tudy coverage consists of all bank employees within internal control, risk management,
operations department, and credit department. 7G uestionnaires were distributed over 7G
banks in 2ubli, selected on random sampling techniue.
The survey assesses the readiness of the banking industry for implementing the +asel II
regulatory framework and provides a view of the strategic issues and key trends related to the
many aspects of compliance within this framework.
".3 SCOPE OF THE SUR2EY
The +anking Industry has been assessed the readiness in seven areas0
/wareness of regulations
Arganizational structure
Reporting ability
1ompliance with +asel II
1apital allocation
+asel II action plan
Technology
CHAPTER I2:
ANA#YSIS > INTERPRETATION
0.1 A4ARENESS OF REGU#ATIONS
S$5-.e: A++ !&e (e+$% ana+6sis an, in!e-*-e!a!i$n is ,$ne 7-$ !&e s5-)e6 .$n,5.!e, in
Banks.
7. 'hat is your assessment of your readiness for the new +asel proposals with respect to capital
reuirementsL
Table :.7.70 Readiness for the new +asel proposal
1R<*T RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
FC33N 4R<4/R<* ; 8 8
4/RTI/33N 4R<4/R<* > 7 7
EAT N<T 4R<4/R<*
Figure :.7.7 Readiness for the new +asel proposal
>. 2ave you done a gap analysis between current risk management practice and new capital
reuirementsL
Table :.7.>0 Dap analysis
N<$ 8 H 8
EA 7 H 7
Figure :.7.> Dap analysis
?. 'hat degree of priority do you address to the new +asel regulatory frameworkL
Table :.7.?0 4riority to new +asel regulatory framework
J<RN I#4ART/ET 8 8 7G
I#4ART/ET 7 7
EAT I#4ART/ET
Figure :.7.? 4riority to new +asel regulatory framework
:. 2ow do you view +asel II regulation0 as an opportunity to enhance the risk management
process, or as a regulatory constraintL
Table :.7.:0 Jiew of +asel II regulation
1R<*T
RI$M
#/RM<T RI$M A4<R/TIAE/3 RI$M
A44ARTCEITN 7G ; 7G
1AE$TR/IET >
Figure :.7.:0 Jiew of +asel II regulation
OBSER2ATIONS
The majority of banks consider themselves to be fully prepared.
/ majority of banks have performed a gap analysis between their current risk management
practice and the new capital reuirements.
Anly one bank does not view +asel II implementation as a high priority project.
The banks largely believe that +asel II will provide them an opportunity to enhance risk
management.
INTERPRETATION
/lthough the +asel II regulations are considered important to very important by a strong
majority of banks, some are only partly prepared for implementation.
The banks aim to look beyond the regulatory aspects and aim to benefit from the new
regulations as a means to enhanced risk management.
0.2 ORGANISTIONA# STRUCTURE
7. *o you have an assigned 1redit risk, #arket risk and Aperational risk manager in your bankL
Table :.>.70 /ssignment of risk manager
N<$ 7G 8 8
EA 7 7
Figure :.>.70 /ssignment of risk manager
>. To whom does the Risk manager reportL
Table :.>.>0 'hom does risk manager report
1R<*T
RI$M
#/RM<T
RI$M
A4<R/TIAE/3
RI$M
12I<F <O<1CTIJ< AFFI1<R : P P
12I<F FIE/E1I/3 AFFI1<R
/$$<T$ /E* 3I/+3ITN
#/E/D<R
> 7 7
1R<*IT RI$M AFFI1<R : > >
AT2<R $4<1IFN
Figure :.>.>0 'hom does risk manager reportL
?. 'hat is the assigned manager&s time dedicated to this activityL
Table :.>.?0 Time dedication
G.>G@ > : >
>G.HG@ > 7 >
QHG@ P H P
Figure :.>.?0 Time dedication
:. 2ow many people work in these departmentsL
Table :.>.:0 Eumber of people work
7 . ? > : 7
? . H P : H
H. 7G 7 7 7
Q 7G 7 7 ?
Figure :.>.:0 Eumber of people work
H. *o you have a Risk 1ommitteeL
Table :.>.H0 Risk 1ommittee
N<$ P H P
EA : H :
Figure :.>.H0 Risk 1ommittee
OBSER2ATIONS
/lmost all of the participating banks have a risk management departemnt.
#ost of the industry&s risk managers& report to the 1hief <!ecutive Afficer, /sset and
liability manager and 1hief Risk Afficer accounting for the balance in eual proportions.
$lightly more attention is paid to credit and operational risk than to #arket risk, as :G @
of the banks operating do not have risk committee.
INTERPRETATION
*espite the relatively small size of banks, they are generally well aware of the risk
management function, and for this purpose, risk managers spend over half their time
performing these functions.
0." REPORTING ABI#ITY
7. /re you producing reporting for
Table :.?.70 Reports produced for
1R<*T
RI$M
R<DC3/TARN 4CR4A$< ? : :
#AEITARIED 9 ; ;
*<1I$IAE #/MIED
4CR4A$<
9 : :
Figure :.?.70 Reports produced for
>. *oes e!ternal reporting drive your internal reportingL
Table :.?.>0 <!ternal reporting drive internal reporting
1R<*T RI$M #/RM<T RI$M A4<R/TIAE/3
RI$M
J<RN $IDEIFI1/ET3N : H :
$IDEIFI1/ET3N H : H
EAT /T /33 $IDEIFI1/ET3N 7 7 7
Figure :.?.>0 <!ternal reporting drive internal reporting
?. *oes e!ternal reporting affect your decision making processL
Table :.?.?0 <!ternal reporting affect decision making process
J<RN $IDEIFI1/ET3N ? ? ?
$IDEIFI1/ET3N P H P
EAT /T /33
$IDEIFI1/ET3N
7 > 7
Figure :.?.?0 <!ternal reporting affect decision making process
:. 2ow freuent is your internal reportingL
Table :.?.:0 Freuency of internal reporting
*aily 7 7
'eekly 7 7
#onthly ; ; 9
/nnually 7 7 7
Figure :.?.:0 Freuency of internal reporting
H. 'ill you produce specific internal reporting for 1redit, #arket and Aperational RiskL
Table :.?.H0 4roduction of specific internal reporting
N<$ 7G 7G 7G
EA
Figure :.?.H0 4roduction of specific internal reporting
OBSER2ATIONS
/ll risk reporting is compiled largely for monitoring and *ecision making purposes than
Regulatory purpose.
/ll the +anks produce internal report.
#ost of the +anks produce Internal Report monthly.
#ost of the banks said <!ternal reporting affect their decision making process.
INTERPRETATION
Reporting for all risk still needs to be developed.
0.0 COMP#IACE 4ITH BASE# II
7. 'hich approach will best suit your organizationL
Table :.:.70 /pproach that best suit organization
1R<*T
RI$M
$T/E*/R* ; 8 9
FACE*/TIAE
/*J/E1<* > 7 ?
*AE&T MEA'
Figure :.:.70 /pproach that best suit organization
>. 2ave you performed a 1ost"+enefit analysis for each approach proposed by +asel IIL
Table :.:.>0 1ost"+enefit analysis
N<$ 7G ; 8
EA > 7
Figure :.:.>0 1ost"+enefit analysis
?. In your situation, could regulatory capital consumption be motivation for0
Table :.:.?0 Regulatory capital consumption be motivation
$TA44IED /1TIJITI<$ > 7 >
*<J<A43IED
/1TIJITI<$
H 9 P
/15CIRIED
/1TIJITI<$
7
EAE< 7 7 7
Figure :.:.?0 Regulatory capital consumption be motivation
OBSER2ATIONS
#ost of the banks believe that the standard approach is most appropriate for their
purposes.
An the whole, a cost"benefit analysis has been done for each approach. It appears that the
banks have completed their cost"benefit analysis only for their elected approach.
Regulatory capital consumption is motivated for developing activities.
INTERPRETATION
#ost of the banks would prefer to adopt the standard approach, but only few of those who
would like to implement the advanced approach and they will implement.
The banks that would prefer to adopt the standard approach should try to adopt advanced
approach.
0.3 CAPITA# A##OCATION
7. 2ave you estimated the regulatory capital consumption for each of your individual
businessesL
Table :.H.70 <stimation of the regulatory capital consumption
N<$ 7G 8 7G
EA 7
Figure :.H.70 <stimation of the regulatory capital consumption
>. 'ill you outsource activities with high capital consumptionL
Table :.H.>0 Autsource activities for high capital consumption
N<$ : ? H
EA P 9 9
Figure :.H.>0 Autsource activities for high capital consumption
?. 'ill you insure selected RiskL
Table :.H.?0 Insure Risk
N<$ 9 H P
EA ? H :
Figure :.H.?0 Insure Risk
:. *o you intend allocating economic capital by +usiness linesL
Table :.H.:0 /llocation of economic capital
RI$M
N<$ ; 9 ;
EA 7 > 7
Figure :.H.:0 /llocation of economic capital
H. 'ill you make use of +asel II reuirements to implement an economic capital allocation
throughout your business linesL
Table :.H.H0 Cse of +asel II reuirements
N<$ 8 ; ;
EA 7 7
Figure :.H.H0 Cse of +asel II reuirements
OBSER2ATIONS
#ost of the banks do not outsource activities with high capital consumption.
2alf of the banks insure selected Risk.
+anks with less sophisticated approaches are likely to use regulatory capital as the basis
for internal capital allocation.
INTERPRETATION
Jery few banks plan to outsource activities with high capital consumption, but the
majority will insure their credit risks, while nearly half will plan to insure their market and
operational risks.
/ strong majority of local banks will allocate economic capital according to business
lines, while a stronger majority will use the +asel II reuirements to implement that
capital allocation process.
0.= BASE# II ACTION P#AN
7. 2ave you established an action plan to achieve the +asel II reuirementsL
Table :.P.70 <stablishment of action plan
N<$ 7G 7G 7G
EA
Figure :.P.70 <stablishment of action plan
>. 2ow will you e!ecute this action planL
Table :.P.>0 <!ecution of action plan
IET<RE/3
R<$ACR1<$
9 H ;
<OT<RE/3
R<$ACR1<$
7 : 7
+AT2 : ? ?
Figure :.P.>0 <!ecution of action plan
?. 'hat will the largest spending area beL
Table :.P.?0 3argest spending area
1R<*T
RI$M
#/RM<T
RI$M
A4<R/TIAE/3 RI$M
T<12EA3ADN ; 9 ;
1A##CEI1/TIAE 7 : 7
AT2<R ,$4<1IFN-
*AE&T MEA'
Figure :.P.?0 3argest spending area
:. 2ow far are you in the implementation of your action planL
Table :.P.:0 1urrent progress
EAT R</33I$<*
4/RTI/33N
R</33I$<*
H 9 H
FC33N R</33I$<* H ? H
Figure :.P.:0 1urrent progress
OBSER2ATIONS
/ll the banks established by an action plan to achieve the +asel II reuirements.
#ost of the banks e!ecute the action plan with internal resources than e!ternal resources.
3argest spending area is technology.
2alf of the bank&s implementation of action plan is partially realized and half fully
realized.
INTERPRETATION
The banks have generally determined an action plan to help them to meet +asel II
reuirements. They have partially completed the actions reuired, and will continue with
these action plans.
Those banks that have not yet begun implementation tend to be the smaller banks, with
simpler business models, which reuire less time and resources to meet the +asel II
reuirements.
0.? TECHNO#OGY
7. *oes your current IT infrastructure allow you to meet the +asel II reuirementsL
Table :.9.70 IT infrastructure
N<$ 7G ; 8
EA > 7
Figure :.9.70 IT infrastructure
>. 'ill you develop an IT solution for Risk managementL
Table :.9.>0 IT solution for Risk management
N<$ 9 9 9
EA ? ? ?
Figure :.9.>0 IT solution for Risk management
?. 2ave you completed a review of potential IT solutions availableL
Table :.9.?0 Review of potential IT solutions available
T<12EA3ADN H ? :
1AE$C3TIED : P H
Figure :.9.?0 Review of potential IT solutions available
:. 'hat difficulties do you foreseeL
Table :.9.:0 *ifficulties that you foresee
1R<*T
RI$M
IET<DR/TIAE
1/4/+I3ITI<$
? 7 7
*/T/+/$< *<$IDE 7 7
#A*<3$ 7 7
+C*D<T 7
*/T/ D/T2<RIED : P :
2C#/E R<$ACR1< ? ? ?
AT2<R ,$4<1IFN-
Figure :.9.:0 *ifficulties that you foresee
OBSER2ATIONS
#ore than half of the +anking industry will use their IT infrastructure in its current
format.
*ifficulties that banks foresee are more on *ata Dathering and 2uman Resource.
INTERPRETATION
The banks should train their employees, in order to overcome the difficulties in
implementing the +asel II norms.
The banks should develop sufficient infrastructure to gather the reuired data.
CHAPTER 2:
FINDINGS AND SUGGESTIONS
3.1 FINDINGS
1redit risk is generally well contained, but there are still problems associated with loan
classification, loan loss provisioning, and the absence of consolidated accounts.
#arket risk and Aperational risk are clear challenge, as they are relatively new to the
areas that were not well developed under the original +asel 1apital /ccord.
The new regulations will allow banks to introduce substantial improvements in their
overall risk management capabilities, improving risk based performance measurement,
capital allocation as portfolio management techniues.
Future comple!ity is e!pected because banks diversify their operations. It is e!pected that
banks will diversify their operations to generate additional income sources, particularly
fee.based income i.e. non interest income, to improve returns.
+asel II leads to increase in *ata collection and maintenance of privacy and security in
various issues.
The banks that would prefer to adopt the $tandard /pproach should try to adopt /dvanced
/pproach.
3.2 SUGGESTIONS
The +anks should review +asel II components and develop a vision, strategy and action
plan for what is e!pected to be a suitable framework based on how the banking system
evolves over time.
The +anks need regular engagement for sustained support. / ualified long.term advisor
would be preferable.
/ workshop should be planned to produce a road map to +asel II 1ompliance.
Training and additional assistance to make it easier for the banking system to comply
with new guidelines on market and operational risk.
*ata 4rivacy and security needs more attention
CHAPTER 2I:
CONC#USION
=.1 CONC#USION
Implementation of +asel II has been described as a long journey rather than a destination by
itself. Cndoubtedly, it would reuire commitment of substantial capital and human resources on
the part of both banks and the supervisors. R+I has decided to follow a consultative process
while implementing +asel II norms and move in a gradual, seuential and co.ordinate manner.
For this purpose, dialogue has already been initiated with the stakeholders. /s envisaged by the
+asel 1ommittee, the accounting profession too, will make a positive contribution in this respect
to make Indian banking system still stronger.
CHAPTER 2II:
APPENDIH
?.1 :UESTIONNAIRE
I am +/+/$/+ 4/TI3 studying :
th
semester #+/ in +<1 *A#$ . I am working on a
project titled (RISK MANAGEMENT IN BANKING SECTORI. In this regard I reuest you
to spend your valuable time in filling this uestionnaire @Ti.k !&e a**-$*-ia!e ($'A. This
information will be used only for academic purpose and will be kept confidential.
INSTITUTIONA# INFORMATION
7. Eame of your bank0
>. 4lease indicate the name of the contact
person for this uestionnaire and
his"her position in the +ank.
Eame0
4osition0
?. To which of the following types of
banks does your bank belongL
o 4ublic sector
o 4rivate sector
o Foreign +ank
:. 'here is your parent"head office
locatedL
Ti.k !&e a**-$*-ia!e ($'
A4ARENESS OF REGU#ATIONS
7. 'hat is your assessment of your readiness for the new +asel proposals with respect to capital
reuirementsL
FC33N
4R<4/R<*
4/RTI/33N
4R<4/R<*
EAT N<T
4R<4/R<*
>. 2ave you done a gap analysis between current risk management practice and new capital
reuirementsL
N<$
EA
?. 'hat degree of priority do you address to the new +asel regulatory frameworkL
J<RN
I#4ART/ET
I#4ART/ET
EAT I#4ART/ET
:. 2ow do you view +asel II regulation0 as an opportunity to enhance the risk management
process, or as a regulatory constraintL
A44ARTCEITN
1AE$TR/IET
ORGANISTIONA# STRUCTURE
7. *o you have an assigned 1redit risk, #arket risk and Aperational risk manager in your bankL
N<$
EA
>. To whom does the Risk manager reportL
12I<F
<O<1CTIJ<
AFFI1<R
12I<F FIE/E1I/3
AFFI1<R
/$$<T$ /E*
3I/+3ITN
#/E/D<R
1R<*IT RI$M
AFFI1<R
AT2<R $4<1IFN
?. 'hat is the assigned manager&s time dedicated to this activityL
G.>G@
>G.HG@
QHG@
:. 2ow many people work in these departmentsL
7 R ?
? R H
H. 7G
Q 7G
H. *o you have a Risk 1ommitteeL
N<$
EA
REPORTING ABI#ITY
7. /re you producing reporting for
R<DC3/TARN
4CR4A$<
#AEITARIED
*<1I$IAE
#/MIED
4CR4A$<
>. *oes e!ternal reporting drive your internal reportingL
J<RN
$IDEIFI1/ET3N
$IDEIFI1/ET3N
EAT /T /33
$IDEIFI1/ET3N

?. *oes e!ternal reporting affect your decision making processL
J<RN
$IDEIFI1/ET3N
$IDEIFI1/ET3N
EAT /T /33
$IDEIFI1/ET3N
:. 2ow freuent is your internal reportingL
*aily
'eekly
#onthly
/nnually
H. 'ill you produce specific internal reporting for 1redit, #arket and Aperational RiskL
N<$
EA
COMP#IACE 4ITH BASE# II
7. 'hich approach will best suit your organizationL
$T/E*/R*
FACE*/TIAE
/*J/E1<*
*AE&T MEA'
>. 2ave you performed a 1ost"+enefit analysis for each approach proposed by +asel IIL
N<$
EA
?. In your situation, could regulatory capital consumption be motivation for0
$TA44IED
/1TIJITI<$
*<J<A43IED
/1TIJITI<$
/15CIRIED
/1TIJITI<$
EAE<
CAPITA# A##OCATION
7. 2ave you estimated the regulatory capital consumption for each of your individual businessesL
N<$
EA
>. 'ill you outsource activities with high capital consumptionL
N<$
EA
?. 'ill you insure selected RiskL
N<$
EA
:. *o you intend allocating economic capital by +usiness linesL
N<$
EA
H. 'ill you make use of +asel II reuirements to implement an economic capital allocation
throughout your business linesL
N<$
EA
BASE# II ACTION P#AN
7. 2ave you established an action plan to achieve the +asel II reuirementsL
N<$
EA
>. 2ow will you e!ecute this action planL
IET<RE/3
R<$ACR1<$
<OT<RE/3
R<$ACR1<$
+AT2
?. 'hat will the largest spending area beL
T<12EA3ADN
1A##CEI1/TIAE
AT2<R ,$4<1IFN-
*AE&T MEA'
Ather ,specify- SSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS
:. 2ow far are you in the implementation of your action planL
EAT R</33I$<*
4/RTI/33N
R</33I$<*
FC33N R</33I$<*
TECHNO#OGY
7. *oes your current IT infrastructure allow you to meet the +asel II reuirementsL
N<$
EA
>. 'ill you develop an IT solution for Risk managementL
N<$
EA
?. 2ave you completed a review of potential IT solutions availableL
T<12EA3ADN
1AE$C3TIED
:. 'hat difficulties do you foreseeL
RI$M
IET<DR/TIAE
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*/T/+/$< *<$IDE
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43/1<0 SSSSSSSSSSSSSSSSSS
*/T<0 $ignature.
REFFERENCE
4EB SITES
www.bis.org
www.rbi.org
www.kpmg.com
www.cognizant.com
www.google.com
www.yahoo.com
BOOKS
2and +ook on Risk management B +asel II norms
ARTICA#S
Risk #anagement in +anks. .. R $ Raghavan 1hartered /ccountant.
+asel Eorms challenges in India R$wapan +akshi
'hite 4aper The Ripple <ffect0 2ow +asel II will impact institutions of all sizes
Risk #anagement Duidelines for 1ommercial +anks B *FIs.
+/$<3 II R /re Indian +anks Doing to DainL .. $antosh E. Dambhire 6amanalal, +ajaj
Institute of #anagement $tudies #umbai
+asel II and IndiaIs banking structure 1. 4. 1handrasekhar and 6ayati Dhosh
REPORTS
Report on Implementing +asel II0 Impact on <merging <conomies .. 6aydeep M. Thaker
E#I#$
4aper on Risk /ssessment and Risk #anagement .. $antosh *eoram 'atpade B $iddhi
$hrikant Jyas #<T&s Institute of #anagement Eashik.

Risk Management in Banking Sector Project Report Mba Finance

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Risk Management in Banking Sector Project Report Mba Finance

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RISK MANAGEMENT IN BANKING SECTOR

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