Project Report: Risk Management in Banking Sector
Project Title
An exploratory study on “Risk Management in Banking Sector”
Submitted By
Mr. XXXXX XXXXXXX
MBA in Banking (Finance) XXXXX ni!ersity
Page "
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Project Report: Risk Management in Banking Sector
!APT"R # #$TR%&' T#%$
Page 2
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Project Report: Risk Management in Banking Sector
()( T!"M" %F T!" ST'&*
Risk management underscores t#e $act t#at t#e sur!i!al o$ an organi%ation depends #ea!ily on its capa&ilities to anticipate and prepare $or t#e c#ange rat#er t#an just waiting $or t#e c#ange and react to it. '#e o&jecti!e o$ risk management is not to pro#i&it or pre!ent risk taking acti!ity( &ut to ensure t#at t#e risks are consciously taken wit# $ull knowledge( purpose and clear understanding so t#at it can &e measured and mitigated. )t also pre!ents an institution $rom su$$ering unaccepta&le loss causing an institution to su$$er or materially damage its competiti!e position. *unctions o$ risk management s#ould actually &e &ank speci$ic dictated &y t#e si%e and +uality o$ &alance s#eet( complexity o$ $unctions( tec#nical, pro$essional manpower and t#e status o$ M)S in place in t#at &ank.
()+ #$TR%&' T#%$
Risk, t#e meaning o$ -Risk. as per /e&ster.s compre#ensi!e dictionary is 0a c#ance o$ encountering #arm or loss( #a%ard( danger1 or 0to expose to a c#ance o$ injury or loss1. '#us( somet#ing t#at #as potential to cause #arm or loss to one or more planned o&jecti!es is called Risk. '#e word risk is deri!ed $rom an )talian word 0Risicare1 w#ic# means 0'o 2are1. )t is an expression o$ danger o$ an ad!erse de!iation in t#e actual result $rom any expected result. Banks $or )nternational Settlement 3B)S4 #as de$ined it as5 0Risk is t#e t#reat t#at an e!ent or action will ad!ersely a$$ect an organi%ation.s a&ility to ac#ie!e its o&jecti!es and success$ully execute its strategies.1 Risk Management, Risk Management is a planned met#od o$ dealing wit# t#e potential loss or damage. )t is an ongoing process o$ risk appraisal t#roug# !arious met#ods and tools w#ic# continuously • • • Assess w#at could go wrong 2etermine w#ic# risks are important to deal wit# )mplement strategies to deal wit# t#ose risks
Page 6
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Project Report: Risk Management in Banking Sector
()- ST'&* PR%B."M
Basel )) norms came as an attempt to reduce t#e gap in point o$ !iews &etween con$lict practices. '#ere$ore( t#e implementation o$ t#ose resolutions emerged &y t#e &anks. Regarding t#is issue t#e sur!ey #as &een made. Study pro&lem can &e stated as $ollows: To /0at e1tent banks 0a2e im3lemented Basel ## norms related to en0ancing internal control in t0e banks4
()5 %B6" T#7"S
? 7o!ering di$$erent aspects o$ risk assessment ? )denti$ying keys $or e$$ecti!e risk management ? 'o understand t#e c#allenges and impact o$ )mplementing Basel )) ? 'o analy%e t#e current progress o$ Basel )) in 8u&li.
()8 M"T!%&%.%9*
? 9iterature Re!iew ? 2ata collection ? Primary in$ormation: Personal inter!iew, :uestionnaire ? Secondary in$ormation: '#roug# internet( Manuals( ;ournals( Audit,Annual reports ? '#e Bene$its and limitation o$ Basel )) ? '#e 7#allenges o$ )mplementing Basel )) ? )mpact o$ Basel )) ? Researc# met#od ? *indings and suggestions ? 7onclusion
Page < www.readymadeproject.com www.programmer2programmer.net
Project Report: Risk Management in Banking Sector
!APT"R ## .#TR"T'R" R"7#":
Page =
www.readymadeproject.com www.programmer2programmer.net
Project Report: Risk Management in Banking Sector
+)( #$TR%&' T#%$
Basel # Accord, '#e Basel 7ommittee on Banking Super!ision( w#ic# came into existence in ">?@@. Ad!ances in risk management and t#e increasing complexity o$ $inancial acti!ities , instruments 3like options( #y&rid securities etc.4 prompted international super!isors to re!iew t#e appropriateness o$ regulatory capital standards under Basel ). 'o meet t#is re+uirement( t#e Basel ) accord was amended and re$ined( w#ic# came out as t#e Basel )) accord. '#e new proposal is &ased on t#ree mutually rein$orcing pillars t#at allow &anks and super!isors to e!aluate properly t#e !arious risks t#at &anks #a!e to $ace and realign regulatory capital more closely wit# underlying risks. Aac# o$ t#ese t#ree pillars #as risk mitigation as its central &oard. '#e new risk sensiti!e approac# seeks to strengt#en t#e sa$ety and soundness o$ t#e industry &y $ocusing on: B Risk &ased capital 3Pillar "4 B Risk &ased super!ision 3Pillar 24 B Risk disclosure to en$orce market discipline 3Pillar 64
Page C
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Project Report: Risk Management in Banking Sector
+)+ BAS". ## FRAM":%R;
T0e ne/ 3ro3osal is based on t0ree mutually rein
www.readymadeproject.com www.programmer2programmer.net
Project Report: Risk Management in Banking Sector
+)F)- %P"RAT#%$A. R#S; APPR%A !"S
%3erational Risk
Basic #ndicator A33roac0
StandardiGed A33roac0
Ad2anced Measurement A33roac0
Basic )ndicator Approac#:
nder t#e &asic indicator approac#( Banks are re+uired to #old
capital $or operational risk e+ual to t#e a!erage o!er t#e pre!ious t#ree years o$ a $ixed percentage 3"=D 5 denoted as alp#a4 o$ annual gross income. Gross income is de$ined as net interest income plus net non5interest income( excluding reali%ed pro$it,losses $rom t#e sale o$ securities in t#e &anking &ook and extraordinary and irregular items. Standardi%ed Approac#: nder t#e standardi%ed approac#( &anks acti!ities are di!ided into
eig#t &usiness lines. /it#in eac# &usiness line( gross income is considered as a &road indicator $or t#e likely scale o$ operational risk. 7apital c#arge $or eac# &usiness line is calculated &y multiplying gross income &y a $actor 3denoted &eta4 assigned to t#at &usiness line. 'otal capital c#arge is calculated as t#e t#ree5year a!erage o$ t#e simple summations o$ t#e regulatory capital across eac# o$ t#e &usiness line in eac# year. Ad!anced Measurement Approac#: nder ad!anced measurement approac#( t#e regulatory
capital will &e e+ual to t#e risk measures generated &y t#e &ank.s internal risk measurement system using t#e prescri&ed +uantitati!e and +ualitati!e criteria.
Page 2J
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Project Report: Risk Management in Banking Sector
+)(H B"$"F#TS %F BAS". ##
() Better allocation o< ca3ital and reduced im3act o< moral 0aGard t0roug0 reduction in t0e sco3e
Project Title
An exploratory study on “Risk Management in Banking Sector”
Submitted By
Mr. XXXXX XXXXXXX
MBA in Banking (Finance) XXXXX ni!ersity
Page "
www.readymadeproject.com www.programmer2programmer.net
Project Report: Risk Management in Banking Sector
!APT"R # #$TR%&' T#%$
Page 2
www.readymadeproject.com www.programmer2programmer.net
Project Report: Risk Management in Banking Sector
()( T!"M" %F T!" ST'&*
Risk management underscores t#e $act t#at t#e sur!i!al o$ an organi%ation depends #ea!ily on its capa&ilities to anticipate and prepare $or t#e c#ange rat#er t#an just waiting $or t#e c#ange and react to it. '#e o&jecti!e o$ risk management is not to pro#i&it or pre!ent risk taking acti!ity( &ut to ensure t#at t#e risks are consciously taken wit# $ull knowledge( purpose and clear understanding so t#at it can &e measured and mitigated. )t also pre!ents an institution $rom su$$ering unaccepta&le loss causing an institution to su$$er or materially damage its competiti!e position. *unctions o$ risk management s#ould actually &e &ank speci$ic dictated &y t#e si%e and +uality o$ &alance s#eet( complexity o$ $unctions( tec#nical, pro$essional manpower and t#e status o$ M)S in place in t#at &ank.
()+ #$TR%&' T#%$
Risk, t#e meaning o$ -Risk. as per /e&ster.s compre#ensi!e dictionary is 0a c#ance o$ encountering #arm or loss( #a%ard( danger1 or 0to expose to a c#ance o$ injury or loss1. '#us( somet#ing t#at #as potential to cause #arm or loss to one or more planned o&jecti!es is called Risk. '#e word risk is deri!ed $rom an )talian word 0Risicare1 w#ic# means 0'o 2are1. )t is an expression o$ danger o$ an ad!erse de!iation in t#e actual result $rom any expected result. Banks $or )nternational Settlement 3B)S4 #as de$ined it as5 0Risk is t#e t#reat t#at an e!ent or action will ad!ersely a$$ect an organi%ation.s a&ility to ac#ie!e its o&jecti!es and success$ully execute its strategies.1 Risk Management, Risk Management is a planned met#od o$ dealing wit# t#e potential loss or damage. )t is an ongoing process o$ risk appraisal t#roug# !arious met#ods and tools w#ic# continuously • • • Assess w#at could go wrong 2etermine w#ic# risks are important to deal wit# )mplement strategies to deal wit# t#ose risks
Page 6
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Project Report: Risk Management in Banking Sector
()- ST'&* PR%B."M
Basel )) norms came as an attempt to reduce t#e gap in point o$ !iews &etween con$lict practices. '#ere$ore( t#e implementation o$ t#ose resolutions emerged &y t#e &anks. Regarding t#is issue t#e sur!ey #as &een made. Study pro&lem can &e stated as $ollows: To /0at e1tent banks 0a2e im3lemented Basel ## norms related to en0ancing internal control in t0e banks4
()5 %B6" T#7"S
? 7o!ering di$$erent aspects o$ risk assessment ? )denti$ying keys $or e$$ecti!e risk management ? 'o understand t#e c#allenges and impact o$ )mplementing Basel )) ? 'o analy%e t#e current progress o$ Basel )) in 8u&li.
()8 M"T!%&%.%9*
? 9iterature Re!iew ? 2ata collection ? Primary in$ormation: Personal inter!iew, :uestionnaire ? Secondary in$ormation: '#roug# internet( Manuals( ;ournals( Audit,Annual reports ? '#e Bene$its and limitation o$ Basel )) ? '#e 7#allenges o$ )mplementing Basel )) ? )mpact o$ Basel )) ? Researc# met#od ? *indings and suggestions ? 7onclusion
Page < www.readymadeproject.com www.programmer2programmer.net
Project Report: Risk Management in Banking Sector
!APT"R ## .#TR"T'R" R"7#":
Page =
www.readymadeproject.com www.programmer2programmer.net
Project Report: Risk Management in Banking Sector
+)( #$TR%&' T#%$
Basel # Accord, '#e Basel 7ommittee on Banking Super!ision( w#ic# came into existence in ">?@@. Ad!ances in risk management and t#e increasing complexity o$ $inancial acti!ities , instruments 3like options( #y&rid securities etc.4 prompted international super!isors to re!iew t#e appropriateness o$ regulatory capital standards under Basel ). 'o meet t#is re+uirement( t#e Basel ) accord was amended and re$ined( w#ic# came out as t#e Basel )) accord. '#e new proposal is &ased on t#ree mutually rein$orcing pillars t#at allow &anks and super!isors to e!aluate properly t#e !arious risks t#at &anks #a!e to $ace and realign regulatory capital more closely wit# underlying risks. Aac# o$ t#ese t#ree pillars #as risk mitigation as its central &oard. '#e new risk sensiti!e approac# seeks to strengt#en t#e sa$ety and soundness o$ t#e industry &y $ocusing on: B Risk &ased capital 3Pillar "4 B Risk &ased super!ision 3Pillar 24 B Risk disclosure to en$orce market discipline 3Pillar 64
Page C
www.readymadeproject.com www.programmer2programmer.net
Project Report: Risk Management in Banking Sector
+)+ BAS". ## FRAM":%R;
T0e ne/ 3ro3osal is based on t0ree mutually rein
www.readymadeproject.com www.programmer2programmer.net
Project Report: Risk Management in Banking Sector
+)F)- %P"RAT#%$A. R#S; APPR%A !"S
%3erational Risk
Basic #ndicator A33roac0
StandardiGed A33roac0
Ad2anced Measurement A33roac0
Basic )ndicator Approac#:
nder t#e &asic indicator approac#( Banks are re+uired to #old
capital $or operational risk e+ual to t#e a!erage o!er t#e pre!ious t#ree years o$ a $ixed percentage 3"=D 5 denoted as alp#a4 o$ annual gross income. Gross income is de$ined as net interest income plus net non5interest income( excluding reali%ed pro$it,losses $rom t#e sale o$ securities in t#e &anking &ook and extraordinary and irregular items. Standardi%ed Approac#: nder t#e standardi%ed approac#( &anks acti!ities are di!ided into
eig#t &usiness lines. /it#in eac# &usiness line( gross income is considered as a &road indicator $or t#e likely scale o$ operational risk. 7apital c#arge $or eac# &usiness line is calculated &y multiplying gross income &y a $actor 3denoted &eta4 assigned to t#at &usiness line. 'otal capital c#arge is calculated as t#e t#ree5year a!erage o$ t#e simple summations o$ t#e regulatory capital across eac# o$ t#e &usiness line in eac# year. Ad!anced Measurement Approac#: nder ad!anced measurement approac#( t#e regulatory
capital will &e e+ual to t#e risk measures generated &y t#e &ank.s internal risk measurement system using t#e prescri&ed +uantitati!e and +ualitati!e criteria.
Page 2J
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Project Report: Risk Management in Banking Sector
+)(H B"$"F#TS %F BAS". ##
() Better allocation o< ca3ital and reduced im3act o< moral 0aGard t0roug0 reduction in t0e sco3e