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An Introduction to Risk
Risk Management is the process of measuring or assessing the actual or potential dangers of a particular situation.
Risk Has Two Components
Types of Risk
Operational. Credit. Reputational.
people and systems. Page 5 . or from external events.Operational Risk The risk of loss resulting from inadequate or failed internal processes.
External Fraud. Damage to Physical Assets. Clients.Operational Risks Include Internal Fraud. Execution. Page 6 . Delivery and Process Management. Employment Practices and Workplace Safety. Business Disruption and System Failures. Products and Business Practices.
Willful blindness. Page 7 . Mismarking of position. Insider trading. Forgery. Transactions not reported. Account take-over/impersonation. Transaction type unauthorized.Internal Fraud Unauthorized Activity. Fraud/credit fraud/worthless deposits. Money laundering. takeBribes/kickbacks. Theft and Fraud. Theft/extortion/embezzlement/robbery. Misappropriation of assets.
Elder financial abuse. Systems Security.External Fraud Theft and Fraud. Hacking damage. Identity theft. Page 8 . Theft of information (with monetary loss). Forgery. Theft/robbery. Check kiting.
Employment Practices and Workplace Safety Employee Relations. termination issues. Diversity and Discrimination. benefit. Compensation. General liability (slips and falls). Harassment. Workers compensation. Equal Employment Opportunity (EEO). Safe Environment. Page 9 . All discrimination types. Organized labor issues. Employee health and safety rules.
Misuse of confidential information. Fiduciary breaches/guideline violations. Account churning. Suitability/disclosure issues. Products and Business Practices Suitability. Aggressive sales. Disclosure and Fiduciary. Page 10 . Breach of privacy. Inadequate product offerings. Lender liability. Retail consumer disclosure violations.Clients.
Insider trading (on firm s account). Market manipulation. Money laundering. Page 11 . Antitrust. Products and Business Practices (CONTINUED) Improper Business or Market Practices .Clients. Improper trade/market practice. Unlicensed activity.
Disputes over performance or advisory activities. Products and Business Practices (CONTINUED) Selection. Sponsorship and Exposure. Advisory Activities. Page 12 .Clients. Exceeding client exposure limits. Failure to investigate client per guidelines.
vandalism). Human losses from external sources (terrorism. Natural disaster losses.Damage to Physical Assets Disasters and Other Events. Page 13 .
Hardware. Page 14 . Software. Utility outage/disruptions.Business Disruption and System Failures Systems. Telecommunications.
Delivery failure. Miscommunication. Delivery and Process Management Transaction Capture. Record retention. Missed deadline or responsibility. Other task misperformance.Execution. Reference data maintenance. Collateral management failure. Model/system misoperation. Data entry. Execution and Maintenance. Page 15 . Accounting error/entity attribution error. Documentation maintenance. maintenance or loading errors.
Incorrect client records (loss incurred). Customer Intake and Documentation. Inaccurate external loss (loss incurred). Page 16 .Execution. Negligent loss or damage of client assets. Failed mandatory reporting obligations. Unapproved access given to accounts. Delivery and Process Management (CONTINUED) Monitoring and Reporting.
Vendor disputes. Trade Counterparties. Delivery and Process Management (CONTINUED) Customer/Client Account Management. Outsourcing. Negligent loss or damage of client assets. Unapproved access given to accounts. Vendors and Suppliers. NonNon-client counterparty misperformance. Incorrect client records (loss incurred).Execution. Page 17 .
Exiting certain businesses. Capitalization of risks. Close management oversight. Segregation of duties.Operational Risk Checklist Employee training. Employee background checks. Page 18 . Procedures and process. Purchase of insurance.
Credit Risk Risk due to an uncertainty in a counterparty s ability to meet its obligations in accordance with agreed upon terms. Page 19 .
Futures. Letters of credit. Options. Equities. FX transactions. Interbank transactions. Acceptances. Page 20 . Swaps.Credit Risks Include: Loans. Trade financing.
Page 21 . creditMaintain an appropriate credit administration. Operate under a sound credit-granting process. Ensure adequate controls over credit risk.Sound Practices for Managing Credit Risk Establish an appropriate credit risk environment. measurement and monitoring process.
Senior management should implement credit risk strategy approved by the Board.Establish an Appropriate Credit Risk Environment Board of Directors should review credit risk strategy periodically. Page 22 .
Page 23 . Establish overall credit limits at the level of individual borrowers/connected counterparties.Operate Under a Sound Credit Granting Process Criteria should include thorough understanding of the borrower. purpose/structure of credit and its source of repayment. Extension of credit must be made on an arm s length basis. Have a clearly established process for approving new credits/extension of existing credits.
Maintain a Credit Administration. Page 24 . riskDevelop an internal risk rating system for managing credit risk. Measurement and Monitoring Process Have in place a system for ongoing administration of various risk-bearing portfolios. Have an information system and analytical techniques that enable management to measure credit risk of on/off balance sheet activities.
Page 25 .Maintain a Credit Administration. Measurement and Monitoring Process (CONTINUED) System for monitoring overall composition and quality of the credit portfolio. Consider future changes in economic conditions when assessing individual credits.
Page 26 .Ensure Adequate Controls Over Credit Risk System of independent. System for managing problem credits. Credit granting function is properly handled and credit exposures are within limits. ongoing credit review.
Credit Risk Checklist Stringent credit standards for borrowers and counterparties. Constant focus on changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank s counterparties. Strict portfolio risk management. management. Page 27 .
whether true or not. Page 28 .Reputational Risk Reputational risk is the potential that negative publicity. will result in loss of customers. severing of corporate affiliations. decrease in revenues and increase in costs.
Page 29 . Minimizing threats of litigation.Benefits of Effective Reputation Management Improving relations with shareholders. Securing premium prices for products. Creating a more favorable environment for investment. Recruiting/retaining the best employees. Reducing barriers to development in new markets.
coupled with straightforward communication about the problem the bank is facing.The key to managing reputational risk is management. sound risk management. Page 30 .
Page 31 .ReRe-establishing a firm s reputation takes a long time.
Bhopal. India. Enron shredding. Page 32 . Union Carbide Arthur Andersen Firestone Tires.Reputational Risk Cases Perrier Exxon Toluene traces. Valdez spill.
External perceptions of the bank are regularly measured. Employees are trained to identify and manage reputational risks.Reputational Risk Checklist Processes for crisis management are planned and documented. Standards on environmental. Page 33 . human rights and labor practices are set publically. Relationships and trust with pressure groups and other potential critics are established. Reputational threats are systematically tracked.
The risks involving a bank s reputation have increased significantly over the past five years. My bank is proactive in enhancing and protecting its reputation. Reputational risk is harder to manage than other forms of risk. Page 34 .True or False? Corporate reputation is one of the primary assets of my bank.
Page 35 .True or False? It is impossible to quantify the impact of reputational risks. My bank usually thinks about its reputation only when things go wrong. A well run bank doesn t need to invest extra resources into guarding against reputational risk.
Risk Management Risk management is the process of monitoring and addressing the potential for loss. Page 36 .
Evolution of Risk Management Emerged as a discipline during the early 1990s. Used long before (1960s). Page 37 . Typically used to describe techniques for addressing insurable risks.
including self-insurance selfand captive insurance.Old Risk Management Risk reduction through safety. Use of derivatives to hedge or customize market risk exposures. Page 38 . quality control and hazard education. The purchase of traditional insurance products. Alternative risk financing.
oversight and segregation of duties within the organization.New Risk Management Treats derivatives as a problem as much as a solution. Focuses on reporting. Page 39 .
Concerns about derivatives. Published losses. Release of RiskMetrics. Page 40 .By the Mid-1990s Mid Regulatory initiatives.
Page 41 . Mark-toMark-to-market valuations were subject to adjustments by management. Few career risk managers. Fluid workforce.Enron s Experience with Risk Management Maintained a risk management function. Employees constantly looking for next transfer. Lines of reporting were reasonably independent.
Graam-LeachGraam-Leach-Bliley Act. Various record retention and reporting requirements. Act/AntiInsider Trading Rules. Page 42 . Bank Secrecy Act/Anti-Money Laundering.Regulatory Responses from the Financial Services Community Basel II. Fair and Accurate Credit Transactions Act (FACTA) Fair Lending Federal Conflicts of Interest Statutes. SarbanesSarbanes-Oxley Act of 2002. Bank Bribery Act.
Success Depends Upon A positive corporate culture. Page 43 . Effective use of technology. Actively observed policies and procedures. Independence of risk management professionals.
When risk management is done correctly you CAN sleep at night! Page 44 .
Our Service The excellent service we provide demonstrates that we are your partner. Our Products The breadth and depth of our products assures you that we will provide you with a solution that meets your business needs.com Page 45 . We are the #1 financial services training company in the world for three reasons: Our Expertise We have been proudly serving the global financial community for over 20 years. Linda Eagle Founder & President The Edcomm Group Banker's Academy +1 212 631 9400 +1 917 318 6650 linda. Dr.eagle@edcomm. We are so committed to our clients that we offer a complete money-back moneyquality guarantee.Our Pledge Thank you for your interest in The Edcomm Group Banker s Academy.
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