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Risk Management MODULE A - Asset Liability Management AND MODULE B - Risk Management
Risk Management MODULE A - Asset Liability Management AND MODULE B - Risk Management
“Stocks”
• Risk of loss due to Daily price
change (%)
unexpected re-pricing of
assets owned by the bank,
caused by either
Unexpected
Market – Exchange rate price volatility
Time
fluctuation
– Interest rate Default
rate (%)
“Loans with credit rating 3”
fluctuations
– Market price of Unexpected
default
investment fluctuations Avg. default
reduction in operational
margins, caused by either Unexpected
low cost
internal or external factors utilization
Operational viz Process failure, systems
Time
failure, human error, frauds
but does not cover
reputational risk/strategic
risk.
The Current Capital Accord
• Focused on credit risk but formula based
Pillar 1 – Credit Risk stipulates three levels of increasing sophistication. The more
sophisticated approaches allow a bank to use its internal models to calculate its
regulatory capital. Banks who move up the ladder are rewarded by a reduced capital
charge
Advanced
Internal
Ratings Based
Approach
The new Accord maintains the current definition of total capital and the minimum 8%
requirement*
Total capital
= Bank’s capital ratio
Credit risk + Market risk + Operational risk (minimum 9%)
Credit Risk The risk of loss arising from default by a creditor or counterparty
Market Risk The risk of losses in trading positions when prices move adversely
Operational Risk The risk of loss resulting from inadequate or failed internal processes,
people and systems or from external events
* The revisions affect the denominator of the capital ratio - with more sophisticated measures for credit risk, and introducing an explicit capital charge for
operational risk
Internal Ratings Based Approach
Pillar 1 – Credit Risk stipulates three levels of increasing sophistication. The more
sophisticated approaches allow a bank to use its internal models to calculate its
regulatory capital. Banks who move up the ladder are rewarded by a reduced capital
charge
Advanced
Internal
Ratings Based
Approach
Corporate finance 18
Trading & sales 18
Retail Banking 12
Commercial Banking 15
Payment & Settlement 18
Agency Services 15
Asset Management 12
Retail Brokerage 12
• CREDIT RISK MITIGATION
• HAIR CUT TO EXPOSURE
• HAIR CUT TO FINANCIAL COLLATETAL.
• Q. Net Interest Margin NIM is defined as
• a. Net interest income divided by total earning assets.
• b. Interest income –interest expenses.
• c. total interest income divided by total assets.
• d. None of above.
•
• Q..Ratio of share holders funds to total assets is called as
• a. Debt equity ratio.
• b. TOL/TNW ratio.
• c. Economic equity ratio.
• d. No ne of above.
• Q The institution is in a position to benefit from rising interest rates
when assets are ……………than liabilities.
• Lower.
• Greater
• Equal
• Half.
• Q. The liquidity risk arising out of unanticipated withdrawal or non
renewal of deposits is called as
• a. Funding Risk.
• b. Time risk.
• c. Market Risk
• d. Operational risk.
•
• Q. The liquidity risk arising out of non receipt of expected in flow of
funds due to accounts turning as NPA is known as
• a. Time Risk.
• b. Call Risk.
• c. Operational Risk.
• d. Funding risk.
•
• Q. The liquidity risk arising out of crystallization of liabilities and
conversion of non fund based limits to fund based limits is known as :
• a. Call risk.
• b. Time risk.
• c. Operational risk.
• d. Market risk.
•
•
• Q. Stock approach of measuring and managing liquidity risk and funding
requirements is based on
• a. level of assets and liabilities and balance sheet exposure on a
particular date.
• b. based on stocks pledged to Bank in Cash Credit Account
• c. Stock of Investments of bank.
• d. None of above.
•
• Q. Flow approach to measuring and managing liquidity consist of
• a. Measuring and managing net funding requirements.
• b. Managing market access.
• c. Contingency planning.
• d. All the above.
•
• Q. Under gap method the net funding requirement is calculated
based on
• a. residual maturities of assets and liabilities.
• b. Actual maturities of assets and liabilities
• c. Both the above.
• d. None of above.
•
• Q. Cash inflows arise from mainly:
• a. Maturing assets.
• b. Maturing liabilities.
• c. Maturing off balance sheet exposure.
• d. Maturing time deposits.
•
• q. Cash outflows arise out of mainly.
• a. Maturing liabilities.
• b. Maturing assets.
• c. Maturing T Bills.
• d. Maturing CPs.
•
• Q. Different between the cash in flow and cash out flow will result
into……….. if the cash inflows are lower than the cash outflows:
• a. deficit.
• c. Surplus
• d. None of above.
• e. No impact.
•
• Q. If there is significant deficit observed say after 30 days period the
option available for bank is to
• a. acquire an asset maturing on that day.
• b. renew or roll over a 30 day liability.
• c. Acquire a liability maturing after 30 days.
• d. None of above.
•
• Q. In the year 2007 RBI has for the purpose of measurement of liquidity
risk split the first time bucket of 1-14 days in its structural liquidity in
• a. Four time buckets.
• b. Three time buckets
• c. Five time buckets.
• d. None of above.
• Q the net cumulative negative mismatch during the next
day, 2-7 days, 8-14 days and 15-28 days buckets should not
exceed
• a.5%,10%, 15% and 20% of cumulative cash inflows in
respective time bucket.
• b. 20%,15%,10% and 5% of cumulative cash inflows.
• c.10%,5%,25% and 30% of cumulative cash inflows.
• Q. Frequency of structural liquidity position is
• a. fortnightly
• b. Weekly.
• c. Monthly
• d. Quarterly.
•
• Capital , Reserves and Surplus are slotted in which time bucket in
Structural Liquidity Statement:
• Over 5 years.
• Over 3 Years.
• Over 1 Year.
• Over 6 months.
• Q. Saving and Current deposit may be treated as volatile portion
upto
• a. 10% and 15 % respectively.
• b.20% and 30% respectively.
• c. 30% and 40% respectively.
• d. None of above
• Q. Placement of volatile portion and core portion of Saving and current
deposit may be done as under:
• a. volatile portion in day 1 time bucket and core portion in 1-3 year
bucket.
• b. Volatile portion in 7 day time bucket and core portion in 5 year bucket.
• c. Volatile portion in 2-7 days time bucket and core portion in 1 year time
bucket.
• d. none of above.
•
• Q. Cash should be shown under which time bucket for inflow:
• a. 1 day.
• b. 2-7 days.
• c. 8-14 days.
• d. One year.
•
• Q. Investment in shares and mutual fund (open ended) should be
shown in
• a. Over 5 year bucket
• b. Over 1 year bucket.
• c. Over 2 year Bucket.
• D. None of above.
•
• Q. Investment in subsidiaries and joint ventures to be shown
• a. In over 5 year bucket.
• b. In over 3 year bucket.
• c. In over 1 year bucket.
• d. None of above.
•
• Q. Core portion of Cash credit advances may be shown under
a. 1-3 year time bucket.
• b. over 3 year time bucket.
• c. Over 5 years time bucket.
• d. None of above.
•
• Q. Term Loans to be shown under:
• a. Interest and principal of the loan under residual maturity
bucket.
• b. Principal under residual maturity bucket.
• c. all in 5 year and above bucket.
• d. None of above.
•
• Q. Sub Standard loans to be shown under
• a. Over one year bucket.
• b. Over 2 year bucket.
• c. Over 3 years bucket.
• d. Over 3-5 year bucket.
•
• Q. Fixed Assets:
• a. Over 5 year bucket.
• b. Over 2 year bucket.
• c. Over 1 year bucket.
• d. none of above.
• Q. The net cumulative negative mismatches
during the day 1, 2-7, 8-14 and 15-28 days
buckets if exceed the prudential limits may be
financed from market by
• a. Market borrowings ( call /term)
• b. Bills discounting
• c. Repo
• d. All above.
• Q. Market Value of an asset is conceptually equal to
• a. Present value of current and future cash flows from that asset and
liability.
• b. future value of current and future cash flows from that asset and
liability.
• c. None of above.
• d. all the above.
•
• Q. There fore rising interest rates increase the discount rates on those
cash flows and thus
• a. Decrease the market value of asset or liability.
• b. Increase the market value of asset or liability.
• c. No impact is caused.
• d. None of above.
•
• Q. Falling interest rate decrease the discount rates on these cash
flows and thus
• a. Increase the market value of an asset or liability.
• c. Decrease the market value of an asset or liability.
• d. No Impact.
• e. None of above.
•
• Q. What is basis risk:
• a. risk that interest rate of different assets and liabilities may
change in different magnitudes is called basis risk.
• b. Risk relating to basis on which loan is sanctioned.
• c. Risk related to yield curve.
• d. None of above.
• Q. Yield Curve Risk is known as:
• a. Risk owing to altering of yields across maturities and its impact
on NII
• b. Risk owing to wrong drawing of yield curve by Bank staff.
• c. risk of lower current yield .
• d. None of above.
•
• Q. Gap method is basically used for
• a. measuring banks interest rate risk exposure.
• b. measure maturity mismatch
• c. Measure potential losses from off balance sheet exposure.
• d. None of above.
• Q. In a given time band a negative or liability sensitive gap occurs when
• a. Rate sensitive liabilities exceed rate sensitive assets.
• b. Rate sensitive assets exceed rate sensitive liabilities.
• c. None of above.
• d. All the above.
•
• Q. with a negative gap , an increase in market interest rates could cause a
• a. decline in net interest income.
• b. Increase in net interest income.
• c. None of above.
• d. All above.
•
Market Value with interest at 8%
Discount
Rate = 8%
discount Present
year cashflow value Value
1 8 0.9259 7.4074
2 8 0.8573 6.8587
3 8 0.7938 6.3507
4 8 0.7350 5.8802
5 108 0.6806 73.5030
Total 100.0000
Yield Curve
11.0000%
10.0000%
9.0000%
YTM
8.0000%
7.0000%
6.0000%
5.0000%
0 1 2 3 4 5 6 7 8 9 10
10.2500%
9.7500%
9.2500%
8.7500%
YTM
8.2500%
7.7500%
7.2500%
6.7500%
6.2500%
5.7500%
1 2 3 4 5 6 7 8 9 10
Tenor in Years
11.0000%
10.0000%
9.0000%
YTM
8.0000%
7.0000%
6.0000%
1 2 3 4 5 6 7 8 9 10
Tenor in Years
and liabilities
To compare two portfolios - Both can be