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Overview/Description
Basel regulations, specifically Basel II, establish principles and guidelines for banks to calculate their minimum capital requirements for credit, market, and operational risk. Operational risk represents the risk of financial loss resulting from inadequate or failed internal processes, people, and systems or from external events. Depending on the level of sophistication of individual banks, Basel II permits three methods for calculating operational risk capital charges: basic indicator approach, standardized approach, and advanced measurement approach (AMA). The AMA is...
Overview/Description
The Basel Committee identifies operational risk as the key risk that banks face on account of inadequate or failed internal processes, people or systems, or external events. The Committee requires that banks hold adequate capital to cover these potential losses. Banks use a number of methods and tools to identify, assess, quantify, and respond to potential operational risk events. These may include building and using a loss event database, identifying key risk indicators (KRIs), and using tools such as risk and control self-assessment (RCSA), scenarios, and scorecards....
Overview/Description
Basel regulations include established principles and guidelines for managing operational risks and holding adequate capital to cover potential losses from operational risk events. The Basel Committee requires a bank or a financial institution to have an adequate operational risk management framework for this purpose. As a result, an operational risk management (ORM) framework and corresponding ORM processes should comprise important steps such as identification, assessment, reporting, monitoring and control, and mitigation of operational risk. The ORM efforts at a bank...
Overview/Description
During the credit crisis of 2007, many of the problems were not a result of shortage of capital, but of enormous liquidity risk taken by banks. When the Basel Committee on Banking Supervision introduced the third Basel Accord, or Basel III, in December 2010, it required banks to have stronger liquidity standards as well as better risk management and supervision. As a result, Basel III introduced several liquidity risk measurement, management, and supervision tools and guidelines for banks, including two liquidity ratios to provide supervisors with important information...
Overview/Description
Liquidity of a bank describes its ability to meet out its debt obligations as and when they arise without incurring unacceptably large losses. A sound liquidity risk management framework comprises an array of metrics, measurement, and monitoring tools to assist supervisors in identifying and analyzing liquidity risks. Basel III introduced several liquidity risk standards, including two liquidity ratios to assess the liquidity risk and to ensure that banks survive liquidity pressures. Basel III also introduced a set of monitoring tools aimed at capturing specific...
Overview/Description
A derivative contract, or derivative for short, is a bilateral contract that derives its value from an underlying security – a stock, bond, or a commodity – and is used for managing risks associated with these securities. Derivatives have seen a phenomenal growth over the past few decades. Traditionally, they are used for protecting banks, financial institutions, and traders from adverse movements in the price of financial instruments and commodities. In other words, derivatives are generally used for hedging purposes. However, more recently they have also been used by...
Overview/Description
The size of the global derivatives market has by some estimates reached a notional value of a quadrillion dollars. Among the primary users of derivatives are commodity-based corporations, banks, pension funds, insurance companies, mutual funds, hedge funds, and private investors. The credit worthiness of different parties to these contracts has been under focus since the credit crisis of 2008, which led to many institutions going bankrupt due to a lack of focus on credit risk. Credit risk has emerged as the major risk in dealing with derivative contracts. In order for...
Overview/Description
Over the past decade, credit risk has become a main focus for many financial institutions, most notably banks. Credit risk occurs when there is a possibility of a borrower or counterparty to a transaction being unable or unwilling to perform their financial obligations. Utilizing credit risk mitigation techniques, financial institutions are able to minimize what could otherwise be substantial losses when the credit markets or particular borrowers are under pressure. The losses may sometimes be large enough to render a company insolvent and put it out of business....
Overview/Description
When dealing with other parties, banks and other financial institutions face a variety of risks. The most relevant of these is credit risk. The global expansion of sophisticated products, such as derivatives and a host of other products, has further fueled the rise in transaction values. This poses a real threat to a company's well-being, regardless of its size. Emerging from the credit crisis of 2007, which saw a number of financial institutions, both large and small, fail due to unmanageable credit losses, it has become paramount for organizations to track and manage...
Overview/Description
The credit crisis of the early 21st century has been a stark reminder to financial organizations of the inherent risks involved in extending large amounts of credit. Banks have revisited their credit procedures and have a renewed emphasis on credit analysis and pricing loans correctly to reflect the associated credit risks. A robust credit risk analysis process will ensure that banks can better judge the amount of credit risk that they are willing to undertake and what kind of measures they should take to protect themselves from such risks. It is also important for banks...
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