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    7 - 1-Market Risk PDF

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    Vivek Khepar
    The document discusses market risk for banks. It defines market risk as potential losses due to changes in market factors like interest rates, currency exchange rates, and commodity and equity prices. It outlines the organizational structure for managing market risk, including oversight by the Board of Directors, Risk Management Committee, and Asset Liability Management Committee. It also discusses approaches for measuring market risk like Value-at-Risk and setting capital requirements to mitigate this risk.

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    7 - 1-Market Risk PDF

    Uploaded by

    Vivek Khepar
    102 views15 pages
    The document discusses market risk for banks. It defines market risk as potential losses due to changes in market factors like interest rates, currency exchange rates, and commodity and equity prices. It outlines the organizational structure for managing market risk, including oversight by the Board of Directors, Risk Management Committee, and Asset Liability Management Committee. It also discusses approaches for measuring market risk like Value-at-Risk and setting capital requirements to mitigate this risk.

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    MARKET RISK

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    7_1-Market%20Risk.pdf

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    The document discusses market risk for banks. It defines market risk as potential losses due to changes in market factors like interest rates, currency exchange rates, and commodity and equity prices. It outlines the organizational structure for managing market risk, including oversight by the Board of Directors, Risk Management Committee, and Asset Liability Management Committee. It also discusses approaches for measuring market risk like Value-at-Risk and setting capital requirements to mitigate this risk.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    102 views15 pages

    7 - 1-Market Risk PDF

    Uploaded by

    Vivek Khepar
    The document discusses market risk for banks. It defines market risk as potential losses due to changes in market factors like interest rates, currency exchange rates, and commodity and equity prices. It outlines the organizational structure for managing market risk, including oversight by the Board of Directors, Risk Management Committee, and Asset Liability Management Committee. It also discusses approaches for measuring market risk like Value-at-Risk and setting capital requirements to mitigate this risk.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 15

    Market Risk

    Definition Possibility of loss due to changes in the market factors Market risk affects the banks earnings Market risk reduces the capital position of banks Volatility of market values Affects banks ability to meet its obligations

    Bank for International Settlements (BIS) Adverse change in value of balance sheet positions on balance sheet positions Off balance sheet positions Movements in Equity market Interest rate market Currency exchange rate Commodity prices

    Focus of Market Risk Liquidity risk Market risk Interest rate risk Foreign exchange risk Commodity price risk Equity price risk

    Organizational Structure of Market Risk Board of Directors Risk Management Committee Asset Liability Management Committee Market Risk Group

    Structure of the Market Risk Group in Banks

    Board of Directors

    Risk Management Committee

    Asset Liability Management Committee

    Market Risk Group

    Board of Directors Overall responsibility for market risk Risk Management Policy of the bank Setting of limits for Liquidity Interest rate Foreign exchange rate Commodity trade Equity trade

    Risk Management Committee Board level sub committee Chief executive officer Head of credit Head of market Head of operations Strategy for integrating bank risk Responsible for Guidelines for market risk measurement Compliance with market price risk policy Review of market risk limits, triggers, stop-loss positions Effectiveness of market risk system Quality of staff

    Asset Liability Management Committee Responsible for adherence of limits, targets, stop-loss orders Product prices for deposits and advances Decision on maturity profile of assets and liabilities of the bank Forecast interest rate views of the bank Decision on business strategies Review funding policy Decide the transfer pricing policy Review economic and political impact on balance sheet

    Market Risk Group Responsible for analyzing risk Responsible for monitoring risk Responsible for reporting risk profiles to ALM Committee Preparation of forecasts Simulation models

    Value-at-Risk Concept of Market Risk Potential gain or loss In a position In a portfolio Associated with a price movement Measured as a probability In relation to a time horizon

    Value-at-Risk Requirement Instantaneous price shock for a specified holding period One tailed confidence interval of 99% Historical observation of at least one year Adjustments in terms of correlation Within risk factors Across risk factors

    Capital Requirement for Market Risk Tier 1 capital Shareholders equity Retained earnings Tier 2 capital Supplementary capital Tier 3 capital Short term subordinated debt (Tertiary capital held by banks to meet part of market risk undisclosed reserves and general loss reserves)

    Requirements for Consideration of Tier 3 Capital Initial maturity of at least two years Limited to 250% of banks Tier 1 capital that is allocated to support market risk Tier 2 capital could be substituted for Tier 3 up to 250% Tier 3 capital subject to lock-in provisions

    Difficulties in Implementing Market Risk Capital Adequacy Requirements Market price movements are not normally distributed Wide dispersion Fat tails Extreme events Event risk is difficult to account for Exceptional market scenarios Difficult to account for intra-day trading risks

    Historical representations may not repeat and market risk may be due to factors not encountered earlier

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