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Risk and Regulation in Financial Markets

  • Banking and Financial Markets, Banking Operations, Regulation, Retail Banking, Risk and Credit
  • Duration: Two days
  • Information

    This course explains how different risks arise, how banks seek to manage them and how it is regulated in terms of risk quantification and capital and liquidity requirements. It is targeted at bank employees seeking a broad and simultaneously deeper understanding of how a large investment bank manages risk and is regulated.


    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
    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
    The compliance challenge
    Risk management – culture and hierarchy

    Register interest

    As every course we run is tailored to meet the specific needs of each client, we can only provide an estimate after fully understanding your specific requirements. Please complete the form below of call +44 (0) 208 894 4977 to discuss how Taylor Associates can help you.

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