By the end of the course delegates will be able to:
• Understand the different risks that banks are exposed to and how they arise
• Understand the different ways banks seeks to quantify and manage these risks
• Understand the Regulator’s goals and how it seeks to reach them
• Understand how banking regulation, and in particular Basel, works and how it relates to a bank’s internal risk management

Day One

Session One — Introduction

What are the main classes of risk that a bank is exposed to? Credit, Operational, Market and Liquidity risks, their definitions and how they arise
Risk management overview:
The risk management process: identify, classify, quantify, manage, review, adjust
The goal of internal bank risk management: to avoid large losses, to charge appropriately for risks taken
Managing risk: setting limits, holding capital against Unexpected Loss, capital ratios, liquid assets
The regulator’s perspective: protecting depositors, the payment system and taxpayers

Basel, its evolution, the three pillars and national regulators

Regulatory v Economic capital

Session Two

Risk management
Credit risk management
How much, if any, exposure is a bank willing to take on a borrower?
Fundamental credit analysis, e.g. debt to EBITDA ratio
Individual Expected Loss: Probability of Default (PD) and Loss Given Default (LGD)/Recovery rates; historic rating agency statistics
Credit migration – e.g. credit transition matrices

Session Three

Pricing credit risk, the spread
Protecting the bank: covenants
Basel: Internal Ratings Based (IRB) models and Standardised Risk Weights
The Merton model and Moody’s KMV EDD
Correlation and generating the portfolio expected loss distribution
Expected loss and provisions

Session Four

Operational risk
Some examples
Regulatory capital: illustrated with Basel Standardised Approach

Day Two

Session One

Market risk and the Trading book
Equity risk
FX and Herstatt risk
Interest rate risk, duration and convexity
Option risks: delta, gamma and vega
Quantifying Market risk: Internal Value at Risk (VaR) models, regulatory 99% 10-day VaR x 3, back-testing and exceptions. VaR’s drawbacks
Basel 2.5 and Stressed VaR and the Incremental Risk Charge (IRC)
Stress tests
OTC derivatives and Counterparty Credit Risk: modelling e.g. swap Exposure At Default (EAD)
Credit Valuation Adjustment (CVA) – quantifying the risk of counterparty credit risk migration
The regulatory push to use Central CounterParties (CCPs), margining, sizing Initial Margin, a bank as Clearing Member and the default fund

Session Two

Risk aggregation
How various risks may overlap, diversification benefit and how banks approach quantifying it
Capital
Basel III: the different types of capital, what counts as capital, deductions
The different ratios
Contingent convertibles, high trigger
Leverage ratio
The weaknesses of Basel II and the variability of Risk Weights
The Leverage ratio and how it is calculated
Its impact

Session Three

Liquidity risk
Asset-liability management and the loans to deposits ratio
Gap risk
Basel Liquidity Coverage Ratio (LCR), net outflows v High Quality Liquid Assets (HQLA)
Monitoring tools: Contractual Maturity Mis-match, Unencumbered assets, etc.
Net Stable Funding Ratio (NSFR): Required Stable Funding (RSF) and Available Stable Funding (ASF)

Session Four

Recovery and Resolution
Recovery plans and ‘living wills’
Bail-in of senior unsecured bondholders
Compulsory debt issuance
FATCA
The compliance challenge
Risk management – culture and hierarchy