Understanding Risks in Banking

Financial Intermediation Chapter 7 - Analysing
Bank’s Performance
Chapter 2
Banking Regulations
-Bank runs and how to
over come it
Chapter 1 - Theories of
Financial Intermediation
-What do banks do? Chapter 3 - Risks in
Banking
Chapter 4 - Credit Risks
-Introduction to other
risks
Credit Chapter 6 - Risk

Transfer Securitization
Country
& Credit Derivatives
Market
Interest Chapter 8 - Risk

Management with
Liquidity derivatives
Chapter 5
ALM –Liquidity, Interest Operations
rate Risk
Solvency
Prepared by Adam Wong
Chapter 3 – Risks in Banking

(2 Lessons)
1. Types of risks
a. Credit risk
b. Country risk
c. Market risk
• Measurement - VaR
d. Liquidity risk
e. Interest risk
f. Operational risk
g. Solvency risk
2. Risk management
a. Stages / process
b. Risk measurement – categories
3. Economic Capital
a. Definition
b. Measurement method
2
3
Aims
• Define the various categories of risk faced by banks and illustrate

their main characteristics.
• Demonstrate the need for appropriate risk management and risk

measurement processes.
• Introduce the key issues arising in risk management and risk

measurement, and identify commonly used techniques.
4
5
Learning Outcomes
Be able to:
• Describe and evaluate the variety and complexity of risks facing
banks.
• Illustrate and discuss the need for effective risk management tools
and systems
• Explain the principles of risk measurement
• Explain how to evaluate the risk of a given position using the Value
at Risk methodology.
6
Overview of Chapter 3 and Links to Other Chapters
Lender of Last Resort

Deposit Insurance
How measured Liquidity Ratios
Regulations Regulatory Capital

Types of Risks faced Chapter 2
• Capital Requirements
by banks • Gearing / Risk Asset ratio
How managed
1. Credit risk
Bank internal management
2. Country risk
3. Market risk • This chapter
• Principles of risk credit management
4. Liquidity risk • Risk management process
• Economic capital
5. Interest risk
6. Operational risk • Ch 4 – credit risk mgt
7. Solvency risk • Ch 6 – risk transfer with
securitisation & derivatives
Regulatory Capital • Ch 8 – Risk mgt with derivatives
• Ch 5 – ALM
• Ch 8 – Risk mgt with derivatives
7 • Basel – IRRBB Standards

Recap of Regulatory Capital Requirement
Regulatory Capital
= at least 8%
RWA
Credit risk, Mkt risk, Ops risk
8
9
Introduction
Banks needs to take some level of risks to make money.
10
Balance Required
• Bank that takes excessive risks is likely to run into difficulty.
• Financial institutions that are run on the principle of avoiding all risks
will be stagnant and will not adequately service the legitimate credit
needs of the community.
Risk Profitability
Asset transformation
• Maturity mismatch
• Liquidity mismatch
• Interest rate mismatch

• Many banking risks arise from mismatching.
• Mismatching is an essential feature of banking, and a source of
profit opportunities.
• If banks achieved perfect matching, the only (major) risk would be
credit risk.
11
Seven Types of Risks
1. Credit risk
2. Country risk Related
3. Market risk
Risk of loss occurring
4. Liquidity risk*
5. Interest rate risk*
6. Operational risk
7. Solvency risk
*mismatching risks
S I M LOCC
12
Other Types of Risks Not Mentioned in Study Guide
• Settlement risks - Settlement risk is the risk that one party will fail to
deliver the terms of a contract with another party at the time of
settlement.
• Environmental and Social Risk

Local
• BSI Bank Limited Singapore –
Merchant bank licence withdrawn.
• Compliance Risk
• UBS, DBS – Fined $2.3 mio.
• Falcon Private Bank – Closed
• Reputational Risk - risk of loss resulting from damages to a firm's

reputation.
13

Deposit Insurance

How managed
1. Credit risk
2. Country risk
5. Interest risk
• Ch 5 – ALM
14 Basel – IRRBB Standards

15
Credit Risk – Definition Linked to Chapter 4
1. Risk of loss if a counterparty to a financial transaction (‘e.g the

borrower’) will fail to comply with its obligations to service debt,
or
2. Counterparty will deteriorate in its credit standing.
3. One of the most material risk for commercial banks and it uses the
highest amount of capital.
16
Credit Risk - Impact
Credit Risks Arising From
1. Loans 2. Investments
– Cause – Cause
• Loan not repaid, • deteriorate in credit quality or
• Payments being delayed default leading to deterioration
in a company’s credit standing
– Impact →loan losses

– Impact
• downgrading of the
assessment of its debt quality.
• higher interest rates on
issuer’s debt
• asset value losses suffered by
the holder of asset
17
Impact of Credit Default
• Loan amount $100m

• Loan margin = 2 %
• If no default $100m gets repaid, net interest earned by the bank =

$2m
• If default, bank may loose up to $100m + accrued interest
• Need earnings of more than 50 loans to recoup the amount lost
Next slide – How to manage the risk of credit default
18

Deposit Insurance

How managed
1. Credit risk
2. Country risk
5. Interest risk
• Ch 5 – ALM

Principles of Credit Risk Management
1- Selection
Details in following slides

Principles of
Credit risk
Management
2-Limitation 3-Diversification
( Chapters Linkage - Further discussion on Measurement of Credit Risk in Chapter 4 )
20
1 - Credit Risk Management - Selection
• Banks have to choose carefully those to whom they

will lend money.
• The processing of credit applications is conducted

by credit officers or credit committees.
• The bank’s approval delegation rules specify

responsibility for credit decisions. Example in next slide
To ensure that the bank only lends to good borrowers with good credit quality
21
Example of Approving Authority Matrix

The higher the risk (in terms of Amount, Tenor, Credit
Rating) higher the approval level is required (In USD millions)
Credit Grade C, D, E Credit Grade A, B
Loan Amt S/T L/T S/T L/T
150 CC + Chairman CC + Chairman CC + Chairman CC + Chairman
140 CC + Chairman CC + Chairman CC + Chairman CC + Chairman
130 CC + Chairman CC + Chairman CC + Chairman CC + Chairman General principle
120 CC + Chairman CC + Chairman CC CC + Chairman Lower risk requires
110 CC + Chairman CC + Chairman CC CC + Chairman lower level of
approval required
100 CC CC + Chairman CC CC
70 CC CC CC CC
60 CC CC CC CC
50 CC CC CC CC
40 CC CC CCO CC
30 CC CC CCO CCO
20 CCO CC CCO CCO
10 CCO CCO CCO CCO
CC – Credit Committee comprising of CEO, COO, and CCO
CEO – Chief Executive Officer
COO – Chief Operating Officer
CCO – Chief Credit Officer
2 - Credit Risk Management - Limitation
Limitation refers to the way that banks set credit limits

at various levels. 1 Risk Assets
Negligible credit risks Total Assets < x%
2
Safe assets
Asset Ratio
Total Assets > x% • maximum risk assets to total assets (see Chapter 2),
• minimum proportion of assets with negligible credit
risk, (such as cash and government securities)
Large Loans
Total Loans < y%
Loan Limit – maximum amount of total large loans
as a percentage to total loans.
Customer / Group Limit - maximum amounts that can be lent to specific

individuals or groups
4
Loans to Single Group
Capital < z%
23
Example Notice 639 – Exposures To Single

Counterparty Groups - 2/3
Large Exposures Limit
• Exposures to a single counterparty group NOT to exceed 25%
– Locally incorporated bank - its eligible total capital Capital
– Foreign incorporated bank - its capital funds
Substantial Exposures Limit

• Substantial Exposures NOT to exceed 50% of its total exposures
Exposure
• Substantial Exposures definition

– Exposures exceeding 10% of its eligible total capital or capital funds, as
the case may be, to any single counterparty group

3 - Credit Risk Management - Diversification
• Spread the business over :
– different types of borrower,
– different economic sectors,

Mitigate Concentration Risk
– geographical regions.
in order to avoid excessive concentration of credit risk problems.
• Large banks therefore have an advantage in this respect.
25
How Credit Risk is Addressed by Regulators
Total Capital (Tier 1 + Tier 2)

> 8%
Credit risk exposure + Operational risk exposure + Market risk exposure
Risk Weighted Asset
Standardised Asset Value X Weight X 8% = Capital Required

Approach
Pre-determined based on asset category and quality
Who Decides The Values of Each Factor
PD (1-R) EAD M
Internal Risk
Foundation Bank MAS MAS MAS
Based
Approach Advanced Bank Bank Bank Bank
26
Example – DBS’ Credit Risk
• “Credit risk remains our most material risk as it incurs the highest
usage of capital.
• Changes in our credit risk profile are largely determined by the

global economic environment, the economic situation of the
countries we operate in, and the concentration risks of our
portfolio.
• We continually monitor the environment to assess whether our

positions remain in line with our risk appetite.”
Source: DBS Annual Report
27
Example – DBS’ Credit Risk Diversification
28
Recap 1
1. List the types of risks banks are exposed to.

2. What is Credit risk?
3. How is credit risks mitigated?
4. What are the principles of credit risk management?
29
30
Country Risk – Definition
1. Risks of incurring financial losses resulting from the inability and/or

unwillingness of borrowers within a country to meet their
obligations
2. Country risk is related to Credit risk
31
European Countries That Were in Trouble
• Portugal
• Ireland PIIGS
• Italy
• Greece
• Spain
32
Country Risk
Country Risk
Credit risk of the Ability and willingness of borrowers within a
government country to meet their obligations
1 2
Sovereign Risk Transfer Risk
• Risk of default by a sovereign • Risk that the sovereign will be
government on its foreign currency or unable to secure foreign exchange
debt obligations to service its foreign currency debt.
• Direct or indirect actions by the • Likelihood that the sovereign may

sovereign that may affect the ability of constrain or prohibit non-sovereign
other entities in that country to use issuers’ access to foreign
their available funds to meet foreign exchange, thereby preventing the
currency debt obligations issuer from meeting foreign
obligations in timely manner
1a 1b
Economic Political
Risk Risk
government’s willingness to
ability to repay repay debt
its obligations on
time 33
Country Risk Ratings
Country Political Risk Financial Economic Risk Composite

(1) Risk (2) (2) (3)
2001 2011 2001 2011 2001 2011 2001 2011

Japan 87.0 79.0 46.0 44.0 35.5 39.5 84.3 81.3 
Malaysia 71.5 73.5 42.0 43.5 38.5 42.0 76.0 79.5 
Singapore 90.0 84.5 44.5 45.0 44.0 47.0 89.3 88.3 
UK 89.0 81.0 35.0 39.0 41.0 34.0 83.5 77.0 
USA 80.5 81.0 37.0 37.0 38.5 36.0 79.0 77.0 
Score Interpretation
(1) rated out of 100,
0 ~24.5 – Very high risk
(2) rated out of 50. The composite country risk rating 25~29.9 –High risk
(3) Sum of the three constituent risks divided by 200 30~34.9 – Moderate risk
35~39.9 – Low risk
The higher the score, the lower is the perceived risk > 40 – Very low risk
http://www.prsgroup.com
34
Country Risk Ratings
Country Political Risk Financial Economic Risk Composite

(1) Risk (2) (2) (3)
2001 2011 2001 2011 2001 2011 2001 2011

Indonesia 42.5 59.5 30.0 40.0 35.0 38.0 58.8 68.8 
Nigeria 48.0 45.5 39.0 49.0 36.5 36.5 61.8 65.5 
Somalia 34.0 34.0 36.0 31.3 28.5 19.0 49.3 37.3 
Thailand 70.0 56.0 38.0 44.9 39.0 41.0 73.5 70.5 
Zimbawe 43.0 42.5 23.0 24.0 15.0 24.0 40.5 45.3 
35
Example – DBS’ Country Risk – Focusing on

Transfer Risk
• “Operations are concentrated in a few countries. Instability in these

markets, arising from political and economic developments, may
give rise to country risk events.
• This risk is mitigated by setting limits for the maximum transfer and
convertibility risk (“transfer risk”) exposure to each country.
• Transfer risk is the risk that capital and foreign exchange controls
may be imposed by authorities that would prevent or materially
impede the conversion of local currency into foreign currency
and/or transfer of funds to non-residents.
• A transfer risk could therefore lead to a default of an otherwise

solvent borrower. “
36
Recap 2
5. What is Country risk?

6. What are the sub categories of risks under country risk?
37
38
Market Risk - Definition
What is Market Risks?

• Risk of loss associated with adverse deviations in the value of the
trading portfolio, which arises through fluctuations in, inter-alia
– interest rates,
– equity prices, Depending on what is the

underlying instrument being
– foreign exchange rates or traded
As a comparison
– commodity prices. DBS total Assets was $457 Bio
• Many large banks have dramatically increased the size and activity
of their trading portfolios, resulting in greater exposure to market
risk. Example of trading assets
$2.1 trillion
39
Market Risk Another Definition - Bessis
1. Risk of loss during the time required to effect a transaction

(liquidation period).
Loss can be expressed as:
• as % of portfolio
• This risk has two components, relating to • as absolute amount in $
a. Volatility (changes in price)
• even though the liquidation period is relatively short, deviations can be large
in a volatile market.
b. Liquidity (easy to sell off)

• for instruments traded in markets with a low volume of transactions, it may
be difficult to sell without suffering large discounts.
2. Risk of deficiency in monitoring the market portfolio - operational

risk.
40
Credit Risk vs Market Risk
Bank purchase
Asset e.g. a bond
Hold for Investment Hold for Trading
Events
causing bond Losses due to decline in bond price /
price to interest rate
decline
Nest slide –
Credit Risk Market Risk managing
market risk
41

Deposit Insurance

How managed
1. Credit risk
2. Country risk
5. Interest risk
• Ch 5 – ALM

Measurement of Market Risks
• Value at Risk of a portfolio is defined as the maximum loss on a

portfolio occurring within a given length of time with a given small
probability.
• Value-at-Risk (VaR) model (pioneered by JP Morgan’s

RiskmetricsTM) is used to calculate a VaR-based capital charge.
• VaR calculates the likely loss a bank might experience on its whole
trading book.
• Validity of estimated VaR is assessed by back testing,

– actual daily trading gains or losses are compared to the estimated VaR
over a particular period.
– Concerns would arise if actual results were frequently worse than the
estimated VaR.
43
Distribution of six monthly portfolio returns
95% of the time,

the portfolio loss
will be less than
Frequency
$2m
-6m -4m -2m 0 +2m +4m +6m

portfolio loss / gain
The above shows the maximum fall in the value of the portfolio ($2m) that
occurs no more than five per cent of the time.
 VaR of the portfolio is defined as the loss (2%) which has precisely 5% of
the probability mass to its left – e.g. loss of $2m based on portfolio of
$100m. 44
Factors Affecting VaR
VaR @ 95% confidence
Original 5% area
-6 -4 -3 -2 0 2 3 4 6
Prepared by Adam Wong 45
A desired calculation based on losses occurring < 1% of the time will

increase the VaR
VaR @ 95%
confidence
VaR @ 99%
confidence
Losses is
less than
$1m 99% of
1% area
the time
-6 -4 -3 -2 0 2 4 6
$ losses based on a portfolio of $100m

Increasing the horizon from 6 (black line) months to 1

year (purple line) will increase VaR due to the probability
of larger swings occurring.
Original 5%
New 5%
-6 -4 -3 -2 0 2 4 6
Internal Models of Market Risks
Methods to compute VaR (worst expected loss)
1. Monte Carlo simulation

2. Historic or back simulation (nonparametric)
3. RiskMetrics (or the variance / covariance approach)
Computing VAR
A VAR statistic has three components:
• time period
• confidence level and
• loss amount (or loss percentage)
48
1. Historical Method
• Re-organizes actual historical returns, putting them in order from
worst to best.
• Assumes that history will repeat itself, from a risk perspective.
Evaluating the Risk of NASDAQ index
Total data points = 1400 days
There were more than 250 days

when the daily return was
between 0% and 1%.
1400 )
At the far right, a tiny bar at 13%;

it represents the one single day
(in Jan x1) within the observation
period when the daily return for
the NASDAQ index was 12.4%.
Daily returns
∑ of these represents the lowest 5% of observations (70 out of 1400 days) of daily
returns. The red bars run from daily losses of 4% to 8%.
Because these are the worst 5% (70 out of 1400 days) of all daily returns, we can say
with 95% confidence that the worst daily loss will not exceed 4%.
49
2. Monte Carlo Simulation
• A Monte Carlo simulation refers

to any method that randomly
Total 5
generates trials, but by itself outcomes
does not tell us anything about out of
the underlying methodology. 100 trials
• 100 trials were conducted.
Results of 100 trials

• 3 outcomes were between -20% and 25%.
• 2 outcomes were between -15% and -20%;
• That means the worst five outcomes (that is, the worst 5% i.e. 5 out of
100 trials) were more than -15%.
• The Monte Carlo simulation therefore leads to the following VAR-type

conclusion: with 95% confidence, we do not expect to lose more than 15%
during any given month.
50
3. Variance-Covariance Method
Similar to the ideas behind the historical method - except that we use
the familiar bell curve instead of actual data
actual daily standard deviation of the

QQQ is 2.64% (computed based on data
points)
Daily returns
we automatically know where the worst 5% and

1% lie on the curve. They are a function of our
desired confidence and the standard deviation
Based on one tailed z score
Computing Z Score
51
http://www.danielsoper.com/statcalc/calc20.aspx
Weaknesses of VAR
Historical Simulation
1 - Bars represent #
of occurrence of a
particular value
2 - VAR is concerned with the #

3 - There can be very large of occurrences that does not
losses with very small # of exceed a particular confidence
occurrence level
52
Weaknesses of VAR - Recap
1. VAR does not measure worst case loss

– 99% percent VAR means that in 1% of cases (that would be about 2 to
3* trading days in a year with daily VAR) the loss is expected to be
greater than the VAR amount.
– Value At Risk does not say anything about the size of losses or
maximum possible loss this within 1%.
– It is the single most important and most frequently ignored limitation of

Value At Risk.
2. Different Value at Risk methods lead to different results
*
52 weeks X 5 days per week = 260 days.
1% = 2.6 days
53
How Market Risk is Addressed by Regulators
• Standardised framework (Regulatory Model)

– Use simple rules for determining capital charges
– Avoid the technicalities of modeling
– A minimum market risk capital requirement is set for any open positions
in debt, equity and derivatives held in the bank’s trading books
• Internal framework (Internal Model)

– Use VaR approach to determine market risk
Total Capital (Tier 1 + Tier 2) > 8%

54
Example – DBS’s Market Risk – 1/2
Our exposure to market risk is categorised into:

• Trading portfolios: Arising from positions taken for:
a. market-making,
b. client-facilitation and
c. benefiting from market opportunities.
• Non-trading portfolios: Arising from

a. positions taken to manage the interest rate risk of our Institutional and
Consumer Banking assets and liabilities,
b. equity investments comprising of investments held for yield and/or long-
term capital gains,
c. strategic stakes in entities and
d. structural foreign exchange risk arising mainly from our strategic
investments which are denominated in currencies other than the SGD.
55
Example – DBS’s Market Risk – 2/2
Risk methodologies
• Value-at-Risk (VaR) is a method that computes the potential losses
on risk positions as a result of movements in market rates and
prices, over a specified time horizon and to a given level of
confidence.
• Our VaR model is based on historical simulation with a one-day

holding period. We use Expected Shortfall (ES), previously known
as Tail VaR, to monitor and limit market risk exposures.
• With effect from 2 November 2015, ES is the average of potential

losses beyond the given 97.5% level of confidence. Previously we
used the 95% level of confidence. In the third quarter of 2015, we
enhanced our credit.
• We conduct back testing to verify the predictiveness of the VaR

model.
56
Recap 3
7. Define Market risks

8. How do market risks arise?
9. How are market risks measured?
10. What are the main approaches to calculate VAR?
11. What are some limitations of VAR?
57
A16 Q3
Discuss the main sources of risk in commercial banking,

and critically discuss the Value-at-Risk (VaR) approach
to risk measurement.
Answer - 2 parts
Area of • SIMLOCC To be covered in later part of slides
focus • VaR
A07 Q3
Describe the nature of the country and operational risks

faced by banks, explain how Value at Risk (VaR) may be
used to assess market risk.
58
• Lender of Last Resort

• Deposit Insurance
How measured • Liquidity Ratios

How managed
1. Credit risk
2. Country risk
5. Interest risk
• Ch 5 – ALM
59 • Basel – IRRBB Standards

60
Liquidity Risk - Definition Linked to Chapter 5 & 8
1. Risks that are associated with a bank finding itself unable to meet
its commitments on time,
or
2. only being able to do so by recourse to emergency borrowing

(Going to Lender of last resort e.g. Northern Rock)
• Liquidity Risk ≠ Insolvency

– Insolvency = Bank do not have enough assets to meet all its obligations
• But Liquidity risk can lead to insolvency
61
Why is Liquidity Required
Liquidity is required:
– as a cushion to replace net outflows of funds
• e.g. Customer withdrawals or loan disbursement > funds raised
– to compensate for the non-receipt of expected inflows of funds

• e.g. Delinquent loans not collected
– as a source of funds when contingent liabilities fall due

• e.g. payment of a guarantee
– as a source of funds to undertake new transactions when

desirable
• e.g. make more attractive loans
62
Sources of Liquidity
Current
Assets
Current
Liabilities
Non Current
Assets
LT Liab
Equity
If cash is required it can be

obtained by several ways:
1. converting liquid
assets
ST
2. ↑ liabilities
3. ↑ capital LT
Under Exceptional Conditions

4. emergency
borrowings
63
New Asset required

New Asset Liquidity is required to
fund the acquisition of
the asset
Current
Assets
Current
Liabilities
Various Alternatives To
Fund The Acquisition of
Non Current
Assets New Assets
LT Liab
Equity
Alternative 1
Converting liquid assets Alternative 2 Alternative 3
to generate cash Increase Liabilities Increase Equity
New Asset New Asset New Liab New Asset
Cash Current
Assets Current Current Current
Assets Assets Liabilities
Current Current
Liabilities Liabilities
Non Current Non Current Non Current LT Liab

Assets Assets Assets
LT Liab LT Liab New Equity
Equity Equity Equity

64
Choice of Funding Source
The choice among the variety of sources of liquidity should depend on
several factors, including the following 5 factors:
Related to (2)
1. purpose of liquidity needed
– long or short term (types of liquidity to be discussed in next slide)
2. management strategy
– related to purpose and business directions
deposit vs.
3. access to liquidity markets (interbank borrowings) interbank vs.
– depends on banks credit standing bonds vs.
equity
4. costs and characteristics of the various liquidity sources

– comparative cost of different sources for the same tenor
5. interest rate forecasts

– this leads to interest rate risks (to be discussed later)
65
Types of Liquidity Requirements
Summary
1. Seasonal Liquidity Requirement
Affects the choice of
2. Cyclical Liquidity Requirement
funding source
3. Longer term Liquidity Requirement
Details in following slides
66
1 - Seasonal Liquidity Requirements
Characteristics Funding Considerations
Repetitive in extent, duration and

Can make use of bought-in*
timing. forms of liquidity because
E.g. cash requirement in • Funding requirements are
ATM for holiday season generally predictable
• Resulting in moderate risk of
Forecasts of seasonal needs are unexpected funds movement
usually based on past experience under normal circumstances.
(not in crisis period as seen in
NR’s case)
* interbank borrowings
67
2 - Cyclical* Liquidity Requirements

Requirements more Bought-in funds can be used to
unpredictable – cannot predict provide liquidity needs during
economic cycle booming economic cycles. But
this tends to be costly – high
credit cost. (limitation to amount of
bought in liquidity in next slide)
Bank’s credit standing impacts it

ability obtain funds from the
market.
• Large banks (good credit
standing) with broad access to
money market sources have
few problems during such
periods.
• Smaller banks tend to rely on
liquid asset holdings.
68
Limitation on Amount of Bought In Liquidity
Banks limit its use of bought-in liquidity (external borrowings):

• To maintain sufficient ‘borrowing capacity’ in case of future
unpredictable liquidity needs
• Therefore, banks set a limit on how much of its liabilities should

comprise interbank loans.
Interbank loans can be withdrawn by lenders easily
69
3 - Long Term Liquidity Requirements

Longer-term liquidity Major problem in funding loan
requirements are more complex growth is:
to manage due to uncertainty in
business growth. • the supply of saleable assets1
and
e.g. if loan growth exceeds • the permissible borrowing
deposit growth (e.g. NR’s case). levels2 are limited in size.
Banks need to have standby

credit lines from other banks
Needs a stable source of funds
Basel III
footnotes
1 sales of assets to raise liquidity
2 borrowings to raise liquidity
70
How Liquidity Risk is Addressed by Regulators
Basel III
Stock of high-quality liquid asset . Liquidity

>100%
Total net cash outflow over the next 30 calendar days ratio
Net stable
Available amount of stable funding _
>100% funding
Long term assets requiring stable funding
ratio
71
Example - DBS’ Liquidity Risk
DBS’ liquidity risk arises from our obligations to honour withdrawals of

deposits, repayments of borrowed funds at maturity, and commitments
to its customers to extend loans.
We seek to manage our liquidity in a manner that ensures that our

liquidity obligations would continue to be honoured under normal as
well as adverse circumstances.
DBS strives to develop a diversified funding base with access to

funding sources across retail and wholesale channels. Our funding
strategy is anchored on strengthening our core deposit franchise as the
foundation of the Group’s long-term funding advantage.
Customer deposits grew by SGD 3 billion in 2015. Deposit quality

improved as we rebalanced the mix towards longer tenor and more
sticky deposits that are favourable for the liquidity coverage ratio
(LCR). As at 31 December 2015, customer deposits continued to be
thepredominant source of funding at 89% of total funding sources.
72
Recap 4
12. What is Liquidity risk?

13. Why do banks require liquidity?
14. What are the factors that affect the choice among the sources of
liquidity?
15. What are the types of liquidity requirements faced by banks?
16. Explain seasonal liquidity requirements of a bank.
17. Explain cyclical liquidity requirements of a bank.
18. Explain long term liquidity requirements of a bank.
73

Deposit Insurance

How managed
1. Credit risk
2. Country risk
5. Interest risk
• Ch 5 – ALM

75
Interest Rate Risk – Definition Linked to Chapter 5 , 8
Definition: Interest rate risk relates to the exposure of banks’ profits to

interest rate changes How bank’s profit gets affected due to changes in interest rate
environment
Price impact – price of assets held by bank

decline due to changes in interest rate
(leading to market risk)
Change in
Interest Details in following slides
Rate
Income impact – Interest Revenue

decline or Interest Cost increase due to
changes in interest rate.
prolong loss leads
to solvency risk
76
Interest Rate Risk – Price Impact Price drops from $100 to $90
A B C
Starting Value -100 -90 -110
10 10 10
10 10 10 Interest payment
10 10 10 remains unchanged
10 10 10
110 110 110 Final value (princ + Int)
10.0% 12.8% 7.5% Internal Rate of Return
(effective Yield)
A – Start of investment - Investor pay $100, bonds pay a coupon on 10% = $10
per period
B – Market perceive bond to be more risky, requires 12.8%, but bond still pay $10
coupon per period (lower than expected return)
→ Investor is only willing to pay $90 (IRR = 12.8%)
C – Market perceive bond to be less risky, requires only 7.5%, but bond still pay
$10 coupon per period (more than expected return)
→ Investor is now willing to pay $110 (IRR = 7.5%)
77
Interest Rate Risk – Income Impact
E.g. Income impact

• reduced interest margins on outstanding loans or
– Lending and funding on different basis
– 1 year loan on floating rate (Sibor + 1%)
– Funded by deposit on fixed rate of 2%
Sibor drops from 4% to 2%

Inception Current
of loan Situation
SIBOR 4 2 Variable rate loan pricing –

Margin 1 1 Sibor+ 1%
Revenue 5 3
less Interest Cost 2 2 Assume fixed rate cost of funds
Net Int Margin 3 1
NIM ↓ by 2%
78
Causes of Interest Risk
• Banks are exposed to interest rate risk because they operate with
unmatched balance sheets.
Uses of Fund Sources of Fund

Also known as
variable rate
Interest Rate Basis Interest Rate Basis

• Fixed rate • Fixed rate
• Floating rate • Floating rate
mismatched
Maturity Maturity
• Short Term • Short Term
• Long Term • Long Term
Examples of fixed rate vs floating rate
79
SIBOR – How Variable Rate Works
http://www.moneysmart.sg/home-loan/sibor-trend
Sibor - the rate at which an ABS Sibor contributor bank can borrow funds were it to do so
by asking for and accepting inter-bank offers, in a reasonable market size just prior to 1100
hours.
At 11 am, 17 contributor banks submit the rates at which they can borrow funds to
Thomson Reuters.
The rates are ranked in order, and those in the top and bottom quartiles are removed.
The average of the remaining rates will be the day’s Sibor.
The remaining rates must come from at least eight banks. If not, ABS will make up for the
shortfall by polling money brokers.
80
Fixed vs Floating Rate
Interest based on 1 month Sibor

Interest rate changes every month
Loan period = 6 months

Fixed for
the entire
period of Interest based on 2 month Sibor
loan Interest rate changes every 2 month
Interest based on 6 month Sibor

No change in interest for the
entire loan duration

81
Interest Rate Components
Loans Funding
Interest rate Basis
Fixed Fixed
Floating Floating
(Variable) (Variable)
Short Term Long Term Short Term Long Term

(Volatile) (non-volatile) (Volatile) (non-volatile)
Maturity Maturity
• If bankers believe strongly that interest rates are going to move in a

certain direction in the future, they have a strong incentive to
position the bank accordingly (detains in following slides)
82
Why Banks wants to have a Mismatch of Interest
Rate -1/2
Bank expects interest rates to move up
• Bank borrow fixed rate now to lock in COF and lend floating as loans
interest rate will increase in future
Loan Income Funding Cost
Fixed Fixed
Floating Floating
Loan rates expected to %

move up at each
repricing
time
Why Banks wants to have a Mismatch of Interest

Rate -2/2
Bank expects interest rate to move down
• Bank borrow floating as it will be cheaper in future to fund
loans locked in at rates fixed now.
Loan Income Funding Cost
Fixed Fixed
Floating Floating
Funding cost
rates expected to
% move down at
each repricing
84
time
Other Reasons for Mis-matching of Interest Rate
Risk
There can never be perfect matching, because of three factors:
1. Some risk is unavoidable

– some interest rates are fixed or quasi-fixed,
– such as rates on cheque accounts and savings accounts, and these
may be considered to be structurally mismatched with respect to
variable interest rates on assets
2. Some interest rate risks have to be accepted (by the bank) to

accommodate clients.
3. No certainty that the banks’ borrowing costs in all cases will move
in step with market rates.
85
How is Interest Rate Risk Addressed by Regulators
Interest rate risk in the banking book (IRRBB) is part of the Basel
capital framework’s Pillar 2 (Supervisory Review Process)
Basel Standards
12 Principles
86
Recap 5
19. What is Interest Rate risks?

20. How does interest rate risk arise?
87

Deposit Insurance

How managed
1. Credit risk
2. Country risk
5. Interest risk
• Ch 5 – ALM

89
Operational Risk
• Basle Committee - standard industry definition

– the risk of direct or indirect loss resulting from inadequate or failed
internal processes, people and systems or from external events.
Eg. SARS
Operational Risk arises from shortcomings or deficiencies at

• a technical level
– (i.e. in a bank’s information systems or risk measures) or
or
• an organisational level
– (i.e. in a bank’s internal reporting, monitoring and control systems).
UBS lost $2b

90
Managing Operational Risk
• Separation of the risk takers from the risk controllers.
– Risk takers have an incentive to take on additional risk in order to

generate business and profitability,
– thus risk should be controlled by a separate unit of the bank.
• Formulate business rules which create incentives for employees to

disclose risks rather than conceal them.
• Examples of Operational Risk

– 1995 Barings Bank lost $1.2bn – Nick Leeson
– 2008 Societe General Bank lost $7 bn – Jerome Kerviel Details in
– 2009 Merill Lynch lost $120m – Alexis Stenfors following
slides
– 2011 UBS lost $2bn – Kweku Adoboli
91
Examples of Operational Risk - Nick Leeson

• Barings was brought down in 1995 due to unauthorized trading by
its head derivatives trader in Singapore, Nick Leeson.
• At the time of the massive trading loss, Leeson was supposed to be

arbitraging, seeking to profit from differences in the prices of Nikkei
225 futures contracts listed on the Osaka Securities Exchange in
Japan and the Singapore International Monetary Exchange.
• Such arbitrage involves buying futures contracts on one market and

simultaneously selling them on another at higher price.
Consequently, almost all risks are hedged and the strategy is not
very risky.
• However, instead of hedging his positions, Leeson gambled on the

future direction of the Japanese markets.
• Due to a series of internal and external events, his unhedged losses

escalated rapidly. 92
Examples of Operational Risk - Nick Leeson (Barings)
• Leeson doubled as both
– the floor manager for Barings' trading on the Singapore International
Monetary Exchange and
– head of settlement operations.
• In the latter role, he was charged with ensuring accurate accounting

for the unit.
• The positions would normally have been held by two different
employees.
• As trading floor manager, Leeson reported to the head of settlement

operations, an office inside Barings Bank which he himself held,
which short-circuited normal accounting and internal control/audit
safeguards
• After the collapse, several observers, including Leeson himself,

placed much of the blame on the bank's own deficient internal
auditing and risk management practices.
93
Examples of Operational Risk - Jérôme Kerviel (Société Générale)
• Société Générale lost approximately €4.9 billion closing out

positions over three days of trading beginning January 21, 2008, a
period in which the market was experiencing a large drop in equity
indices. The bank states these positions were fraudulent
transactions created by Jérôme Kerviel, a trader with the company.
• The police stated they lack evidence to charge him with fraud and
charged him with abuse of confidence and illegal access to
computers.
• Kerviel states his actions were known to his superiors and that the
losses were caused by panic-selling by the bank. Such practices are
widespread and that getting a profit makes the hierarchy turn a blind
eye.
94
Examples of Operational Risk - Alexis Stenfors (BOA)
• Bank of America may have recently uncovered at least $120 million

of losses attributable to one London trader, and “hundreds of
millions” of other losses on derivative trades, the New York Times
reported. According to the report, the losses occurred before Bank
of America’s rushed acquisition of Merrill Lynch and were missed by
bank accountants reviewing Merrill’s books. The Times report
identified the trader reportedly responsible for the currency losses as
Alexis Stenfors.
• London-based currency trader Alexis Stenfors

apparently scored a bonus after he recorded a
profit of $120 million in 2008. After BOA’s risk
officers noted irregularities in his trading account,
a further investigation revealed that Stenfors
seems to have lost quite a bit of money on his
currency trades, rather than the handsome profit
he recorded.
95
Examples of Operational Risk – Kweku Adoboli (UBS)
• Internal controls were not in place at the time that rogue trader
Kweku Adoboli allegedly ran up a $2 billion (£1.3 billion) loss on the
bank’s derivatives desk
• One control, which required the bank to confirm trades with

counterparties, was not operating,
• A monitoring tool designed to check the validity of cancelled or

changed trades had ceased to operate effectively’
• Other controls designed to make sure that internal transactions in

UBS’s equities and fixed income, currencies and commodities
businesses were valid and accurately recorded also did not operate
effectively.
96
How is Operational Risk Addressed by Regulators

> 8%
12 per cent of their total regulatory

Basic Indicator Approach capital for operational risk
sum of the operational risk capital

Standardised Approach requirements for each of the eight
business lines
Advanced Measurement
Approach
own internal data to calculate the
operational risk capital requirement
97
Example – DBS’ Operational Risk
• Operational risk includes processing errors, fraudulent acts,

inappropriate behaviour of staff, vendors’ mis-performance, system
failure and natural disasters. Operational risk is inherent in most of
our businesses and activities.
• To manage and control operational risk, we use various tools

– Risk and control self-assessment is used by each business or support
unit to identify key operational risk and assess the degree of
effectiveness of the internal controls.
• For control issues identified, the units are responsible for developing action
plans and tracking the timely resolution.
– Key risk indicators with pre-defined escalation triggers are employed to

facilitate risk monitoring in a forward-looking manner.
Source – DBS Annual Report
98

Deposit Insurance

How managed
1. Credit risk
2. Country risk
5. Interest risk
• Ch 5 – ALM

100
Solvency Risk
• Risk of Bank having insufficient capital to cover losses generated by

all types of risks → effectively the risk of default of the bank.
– All risks should be quantified in terms of potential losses.
– Amount of aggregate potential losses should be derived from the
potential losses of all component risks.
• Regulators view the issue of adequate capital is critically important

for the stability of the banking system.

> 8%
101
Protection Against Solvency Risk
• How much capital is required?

– Risks generate potential losses.
– The ultimate protection for such losses is capital.
– Capital should be adjusted to the level required to ensure capability to

absorb the potential losses generated by all risks.
Credit Risk Potential

Losses
Capital
Mkt Risk Potential Losses
Ops Risk Potential Losses
– All risks should be quantified in terms of potential losses.
(Further discussion on measurement of capital required - discussed in later part

of chapter) 102
Changes in general
Inter-related Risks market rate
Deteriorate in
credit 2 3 Price
standing impact
Credit Interest
Risk Rate risk
Income
Counter impact
party failed
in obligation
Interest rate
mismatches
Transfer Risk
Country 1
risk 4 Potential
Volatility Losses
Sovereign Risk
Market
risk 7
Liquidity
Economic Political Insufficient
Risk Risk External Events
Capital
Fraud
5 Operational Risk
System , process failure
Solvency
unable to meet its commitments on time, Risk
6 Liquidity Risk arising from asset transformation function
103
Some Other Risks – not mentioned in Study Guide
• Competition Risk: Innovative competition for corporate, institutional

and retail clients and customers comes both from incumbent players
and from new market entrants. The competition could adversely
impact profitability if the bank fails to retain and attract clients and
customers.
• Regulatory compliance Risk: arises from a failure or inability to

comply fully with the laws, regulations or codes for the financial
services industry.
– Non-Compliance could lead to fines, public reprimands, damage to
reputation, enforced suspension of operations or in the extreme —
withdrawal of banking license.
• Reputation Risk
104
Recap 6
21. Define Operational risk.

22. What are the key ways to manage operational risks?
23. What is Solvency risk?
24. How do regulators mitigate solvency risks of banks?
105

Deposit Insurance

Types of Risks faced Chapter 2 • Capital Requirements
How managed
1. Credit risk
2. Country risk
4. Liquidity risk • Principles of credit risk management
• Risk management process
5. Interest risk • Economic capital
6. Operational risk
7. Solvency risk • Ch 4 – credit risk mgt
• Ch 6 – risk transfer with
• Ch 5 – ALM
107
Credit Risk Management Process
At the beginning of the chapter we discussed the Principles of Risk

Management
1. Selection
To achieve this principles, we need to
2. Limitation measure the amount of risks
3. Diversification
This section we are going to discuss the Risk Management Process

• Set of tools and techniques, and a process
– to optimise risk–return trade-offs.
• The aim of the process is to measure risks in order to monitor and

control them.
108
Four Stages In Risk Management. Delegated Monitoring –
argument for intermediation
• Credit risk over direct financing
• Liquidity risk
• Interest rate risk
• Market risk Establish appropriate
• Country risk monitoring & control
• Solvency risk procedures
• Operational risk
Identify Establish
Measure the Balance risk
areas of monitoring /&
risk and return
risks control
1 2 3 4
e.g. • Determine prudent levels of total

• evaluating an individual customer risk exposure by individual, firm,
risk country or business activity,
• reviewing the risks of a particular within the agreed level of overall
sector or industry risk.
• risk of portfolio • Adopt risk based pricing.
(Further discussion later ) Risk based
pricing in
109
Prepared by Adam Wong chapter 7
Outcome of Risk Management Process
1. Development of
competitive
advantages
2. Implementation of
strategy
3. Ensuring capital
Identify Measure Monitoring adequacy and
Balance solvency
Risks Risks & control
4. Reporting and
control of risks
5. Management of
portfolios of
transactions.
110
Risk Management Process – Two Approaches to
determine the amount of risks that a Bank should take
Approach 1 Approach 2
Top-down Approach Bottom-up Approach

Management sets:
• Capital allocation Global risk return targets

• Business targets
• Risks limits Group level
Country level
Business units targets

Business units executes
Management strategy
Transactions
(expected level)
111
Recap
Sensitivity
Volatility
Downside Risk
Approaches to Risk Management Process
Determining the amount of

risk the bank should take
112
B11 Q 3
Explain the risk management process in banks, and critically
analyse the Value-at-Risk approach to risk measurement.
P15 Q5
Explain the different risks inherent in banking and describe
the risk management process.
113

Deposit Insurance

How managed
1. Credit risk
2. Country risk
6. Operational risk
• Ch 5 – ALM

114
Basel – IRRBB Standards
115
Risk measurement - Summary Details in following slides
• Quantitative measures of risk are vital for controlling risks and

setting limits.
Categories of risk What it does Remarks
measures
1 Sensitivity of target How will NIM be affected Simplest measure
variables(eg NIM) to by changes in market
changes in market interest rate?
parameters(eg interest
rate)
2 Volatility of target Captures deviations Includes the probability of it
variables around the mean (both happening
upside and downside)
3 Downside risk Focuses on adverse • Most elaborate

deviations only. This type • Integrates the previous
of measure is expressed two categories
as a worst-case value of • Measures used
a target variable and the  VaR – Value @ Risk
probability of it occurring  EaR – Earnings @ Risk
116
1. Quantitative Risk Measures - Sensitivity
Sensitivity
How Target Variable changes due to changes in Market Parameters
Examples of Target Variables Examples of Market Parameters

• Earnings • Interest rate environment
• Interest margins • Market demand
• Fee income
e.g. What is the change in interest earnings if interbank rate moves by 1%
• Liabilities impact – deposit earnings

See next slide
• Assets impact – loans earnings
• Affected by method of funding and how loans are charged (interest
rate risk as discussed earlier)
117
2. Quantitative Risk Measures - Volatility

Volatility of target variables, which captures deviations around their
mean (both upside and downside)
Portfolio A is more Volatile than Portfolio B
Portfolio B
Portfolio A and B
have the same
number of data
points Portfolio A
1.96 SD
1.96 SD
-4% -2% 0 2% 4%
-1.6% +1.6%
-2.2% +2.2%
1.96SD = 95% of the area

3. Quantitative Risk Measures – Down Side Risk
• Downside risk - focuses on adverse deviations.

• Expressed as a worst-case value of a target variable and the
probability of it occurring.
Mean return
Frequency .4
.3
.2
.1
-3% -2% -1% 0 +1% +2% +3%

Portfolio Return in % terms
Measures used
 VaR
Loss of >2.5% is unlikely to happen 95% of the time
 EaR
5% probability that the loss will be 2.5% or more
119

Deposit Insurance

How managed
1. Credit risk
2. Country risk
6. Operational risk
• Ch 5 – ALM

If you are a debt holder, which organisation do you
prefer to be in?
Organisation A Organisation B
Liabilities
Liabilities ($60m)
Assets ($90m) Assets
($100m) ($100m)
Capital
Capital ($40m)
($10m)
If asset value decline by >10% debt If asset value decline by >40% debt
holders will suffer loss holders will suffer loss
121
Now that we have discussed the various risks bank face,
Banks needs to use capital to protect it depositors and other lenders

against the effect of these risks which result in losses,
122
Types of Losses
• Investment / Trading Portfolio value losses (market risk)
• Loan losses (credit risk)
• Earnings losses
123
Economic Capital or ‘Risk-based Capital’

• Economic capital is a quantitative assessment of potential losses for
the entire portfolio of a bank, and generally differs from
– regulatory capital (discussed in Chapter 2 of subject guide) or
– available capital,
in that it measures actual risks.
• It is also capital necessary to absorb potential unexpected losses* at

a preset confidence level. (eg. 99.95% probability that loss will not
exceed the stated amount)
• This confidence level reflects the bank’s appetite for risk
• See diagram in next slide
124
Another Definition
Economic capital can be defined as the methods or practices that allow

banks to consistently assess risk and attribute capital to cover the
economic effects of risk-taking activities.
Economic capital was originally developed by banks as a tool for capital
allocation and performance assessment.
Source: Range of practices and issues in economic capital frameworks
March 2009
Bank for International Settlements*
http://www.bis.org/publ/bcbs152.htm
* BIS is an international financial organisation owned by 60 member central

banks, representing countries from around the world that together make up about 95%
of world GDP.
The mission of the BIS is to serve central banks in their pursuit of monetary and
financial stability, to foster international cooperation in those areas and to act as a bank
for central banks.
125
Credit Losses – Distribution curve

Normal cost of Economic Capital Exceptional
doing business Loss
covered by
provisioning
and pricing Potential
policies unexpected
Frequency of loss
loss against
Unexpected Loss which it is
judged to be
Potential unexpected loss which
too expensive
should be covered by Economic
to hold capital
Capital
against.
Unexpected
loss of this
Expected Loss extent lead to
insolvency
NPL 0% 1.5% 3% 10%

NPL%=
Confidence value of bad
Level 99.90% 99.95% loans / total
loans
126
Method 1 - Value at Risk (VaR)
• Value at Risk – VaR – Maximum loss @ a preset confidence level.
• VaR defines the capital required to absorb potential unexpected

losses @ a preset confidence level.
• Above capital = Economic Capital or Risk-based Capital.
• If losses > preset confidence level  bank becomes insolvent.
Bank set aside capital to absorb losses up

to the preset confidence level
127
128
Earnings at Risk (EaR)
• Measures potential adverse deviation of earnings @ a preset

confidence level.
• Many different risks can cause adverse deviation of earnings .

– Credit risk
– Economic risk
– Market risks …etc
• VaR measures the loss due to a specific type of risk.

– E.g. loss due to customer default
129
Earnings At Risk
• Starting Point – Earnings
– E.g. accounting earnings, interest margins and cash flows.
• Observe the volatility of historical distribution of earnings
• Obtain earnings distribution Bank’s Earnings
• The wider the distribution of a bank’s earnings, the higher the risk of
the bank.
-6 -4 -2 0 2 4 6
130
Prepared by Adam Wong % Gain / loss
Earnings At Risk
• EaR uses the observed volatility (standard deviation) of earnings
values as the basis for calculating potential losses, and thus for
estimating the amount of capital capable of absorbing such potential
losses.
• Capital required is based on the (unexpected) loss at specified

confidence level.
131
Drawbacks of EaR
• It does not relate the adverse deviations of earnings to the
underlying risks.
• Aggregates the effects of all risks – resulting from looking just at the
accounting income.
Unlike
• VaR which captures risks at their source, and requires the linking of
losses to each risk.
Market Risk
Interest Rate Risk

Total
Credit Risks
VaR
Other Risks
132
Recap 7
25. What are the common measures of risks?

26. What is Economic capital?
27. What is the main difference between using VAR and EAR as a tool to
determine Economic Capital?
133
B09 Q3
‘Excess risks can be regulated by linking a bank’s capital to the

risk held in its assets.’ Identify the main sources of risks in
commercial banking and explain the principles of capital
adequacy regulation.
134
End
135

Understanding Risks in Banking

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Financial Intermediation Chapter 7 - Analysing

Credit Chapter 6 - Risk

Interest Chapter 8 - Risk

Prepared by Adam Wong

Chapter 3 – Risks in Banking

• Define the various categories of risk faced by banks and illustrate

• Demonstrate the need for appropriate risk management and risk

• Introduce the key issues arising in risk management and risk

• Explain the principles of risk measurement

Lender of Last Resort

Regulations Regulatory Capital

Regulatory Capital • Ch 8 – Risk mgt with derivatives

7 • Basel – IRRBB Standards

Recap of Regulatory Capital Requirement

Credit risk, Mkt risk, Ops risk

Banks needs to take some level of risks to make money.

• Bank that takes excessive risks is likely to run into difficulty.

• Interest rate mismatch

Seven Types of Risks

• Environmental and Social Risk

• Reputational Risk - risk of loss resulting from damages to a firm's

Overview of Chapter 3 and Links to Other Chapters

Lender of Last Resort

Regulations Regulatory Capital

Regulatory Capital • Ch 8 – Risk mgt with derivatives

14 Basel – IRRBB Standards

Credit Risk – Definition Linked to Chapter 4

1. Risk of loss if a counterparty to a financial transaction (‘e.g the

2. Counterparty will deteriorate in its credit standing.

Credit Risks Arising From

– Impact →loan losses

Impact of Credit Default

• Loan amount $100m

• If no default $100m gets repaid, net interest earned by the bank =

• If default, bank may loose up to $100m + accrued interest

• Need earnings of more than 50 loans to recoup the amount lost

Next slide – How to manage the risk of credit default

Lender of Last Resort

Regulations Regulatory Capital

Regulatory Capital • Ch 8 – Risk mgt with derivatives

19 Basel – IRRBB Standards

Principles of Credit Risk Management

Details in following slides

( Chapters Linkage - Further discussion on Measurement of Credit Risk in Chapter 4 )

• Banks have to choose carefully those to whom they

• The processing of credit applications is conducted

• The bank’s approval delegation rules specify

Example of Approving Authority Matrix

Limitation refers to the way that banks set credit limits

Customer / Group Limit - maximum amounts that can be lent to specific

Example Notice 639 – Exposures To Single

Substantial Exposures Limit

• Substantial Exposures definition

Prepared by Adam Wong

• Spread the business over :

– different types of borrower,

– different economic sectors,

in order to avoid excessive concentration of credit risk problems.

• Large banks therefore have an advantage in this respect.

How Credit Risk is Addressed by Regulators

Total Capital (Tier 1 + Tier 2)

Risk Weighted Asset