財政機關(guān)風(fēng)險管理英文

Risk

Management

inFinancial

InstitutionsDr.

Zhongyang

ChenAssociate

ProfessorSchool

of

FinanceRenmin

University

of

ChinaWhatToday?AboutmeAbout

the

CourseWhy?What?How?ChapterOneAbout

meAbout

the

Course:

What?RiskManagementcourse:an

emergingcourseJustlike

the

risk

concept

itself,

riskmanagementcourse

isAbout

derivatives

and

financial

derivatives?About

risk

measuring

models?About

auditing

and

internal

control?About

financial

institutions

management?All

of

theabove?About

the

Course:

What?OurPlannedCoverageChapter1

Introduction:What,

Why

and

How?Chapter2

Marketrisk

managementChapter3

Creditrisk

managementChapter4

Operational

risk

managementChapter5

LiquidityriskmanagementChapter6

Risk-basedregulationandtheNewBaselCapital

AccordSpecialtopic:

Riskof

Chin’as’

financialsystemAbout

the

Course:

How?Lecturing,Casestudy

and

PresentationFinal

written

examinationAbout

grading20%

Case

Study

and

Presentation30

%

Problems

assignments40%

Final

written

examination10%

Class

Attendance

and

ParticipationFirst

ofall,le’st’talkabout

risk!----Howmuchdoyouknowabout

risk?Listrisk-relatedwordsDefine

riskin

yourownwords.Makesentences

usingrisk.Yourpreference/attitudeto

riskHowdo

you

manage

oravoid

riskinyoureverydaylife?Yourviews

on

risk

and

finance/investment.Yourpreference/attitudeto

risk高、中、低三種狀態(tài)Makesentences

usingrisk.風(fēng)險是可控的風(fēng)險是由不可確定性造成的風(fēng)險是高投資，高收益的投資人群是可以依據(jù)風(fēng)險偏好分類的風(fēng)險是可以預(yù)料的，但不可避免Listrisk-related

words保險投資損失戰(zhàn)爭婚姻學(xué)習(xí)

就業(yè)

對沖基金

籬笆

旅行期權(quán)期貨Define

riskin

yourownwords.災(zāi)害

可能的損失危機不可預(yù)料的危險對某個客體在某種情況下造成危險的事件出乎自己的意料而造成的損失不利的因素可能承擔(dān)的代價Chapter1

Introduction

to

Risk

Management:What,Why

and

How?1Whatisrisk,

especiallyinperspectiveof

FIs?Why

FIsshouldmanagerisk?How

tomanagefinancial

risk?(Basic

conceptsandmethodologies

ofmanaging

risk)4

Evolution,revolutionandtrends

of

riskmanagement1.Whatisrisk?Common

word,hard

todefineclearly,preciselyIntuitively,something

which

possible(notdefinitely)make

you

lose

somethingelsevaluable

to

you,

therefore

(definitely)

makes

youworry

or

sufferAcademically,

andin

perspective

ofFIs,

(Somedefinition

form

popular

text

books)Risk

is

potential

lossRisk

is

deviation

from

expectationRisk

is

any

change

resulting

inlossRisk

is

volatilityRisk

is

danger,

or

hazardComparing

some

involvedor

relatedconceptsUncertaintyVolatilityLoss

(severity)HazardProbabilityRisk

exposureUncertaintyTheoreticalcontroversyaboutwhether

riskisequivalent

touncertaintyMost

of

thefinance

books

or

investment

bookstreat

ordefine

riskas

uncertaintyIn

some

books,

especially

on

decision

making,risk

isdifferentiated

from

uncertainty

in

thewayhow

futuresituation

isperceived.Risk:Decision

maker

hasthe

knowledge

ofthepossibleoutcomes

and

therespective

possibilitiesofthese

outcomes.

Thus,

riskis

measurable.Uncertainty:Decision

makers

havenosuchknowledge.

Thus,

uncertainty

isnotmeasurable.VolatilityVolatilityismeasuredbyvarianceσ2orstandarddeviationσ,double-sidemeasurementofrisk,iFirst

introduced

by

Harry

Markowitz

,

as

a

basicmeasure

of

risk

of

investment

on

itsown.Variance(σ2

):

The

probability

weighted

sum

of

the

squareddeviations

of

all

the

outcomes

from

their

mean

(expectedvalue).standard

deviation(σ):

the

square

root

of

varianceLoss(severity)Loss

itselfisnotriskRealizedloss

(Probabilitynotinvolved)Potentialloss(Probabilityinvolved)Expectedloss

(Probabilityinvolved)Loss

given

default

(LGD)

or

other

event,(Probability

not

involved)(LGD=1—recoveryrate)HazardIn

insurancebusiness

and

lending

business,riskcan

be

differentiated

obviously

from

hazard.Risk

is

potentialloss,or

loss

given

acertainpossibility,Hazardis

the

environment

or

event

whichcanincreasethe

scale

(severity)

or/and

possibilityofloss.Physical

hazard

and

Moral

hazardMoralHazardTheoretically,

moral

hazard

resultsfrom

informationasymmetry.Moralhazardoccurs

whenthe

insuredfailsto

take

properprecautions

toavoidlosses

because

losses

are

covered

byinsurance.Hurricane

Fran

1996

in

North

Carolina

coast,

yacht

ownersdid

nottake

down

their

old

canvas

covers.Moralhazard

plays

important

role

in

creditmanagement.Borrow

could

intentionally

violatetherestrictive

covenants

andinvest

borrowings

in

highrisk

project.In

managing

credit

risk,one

important

aspectis

to

reducemoralhazard,

and

hence

toreduce

informationasymmetry.Financialstructuring,

monitoring

and

enforcing

covenantscan

help

reduce

moralriskin

debt

contract.ProbabilityRiskyinvestment

isnot

asurething,

probabilitycalculationisinevitablyinvolvedand

even

becomea

core

part

ofmoderninvestment

and

risk

managementExpected

returnandStandard

deviation

(andhencecovarianceandcorrelation

coefficient

)Probability

Distribution

Function(PDF)

is

the

core

and

hardpart

of

risk

modeling.Increasingly

sophisticated

statistic

skills

and

advanceprobability

theories

are

gaining

more

and

more

groundinrisk

managementLarge

number

law

is

a

fundamental

law

in

risk

management.A

jar

filled

with

3000

white

pebbles

and

2000

black

pebbles,how

do

you

know(estimate)

the

color

structure

withoutcounting

all

the

pebbles?Requirements

of

Independence

of events

and

large

sampleRiskexposureRiskexposure

is

thetotal

amount

of

invManaging

risk

is

actually

managing

the

risk

exposure,adjusting

the

risk

exposure

through

hedging,

insurance,

orreducing

investment

scale.Risk

exposure×Probability

of

Default

or

other

event

×Lossgiven

default

(Severity) =expected

loss,

which

isonemeasure

ofriskSuppose

the

size

of

your

loan

portfolio

is

$5m,

it

is

exposedto

credit

risk,

you

can

say”I

have

$5m

risk

exposure

tocredit

risk”.

If

your

research

shows

over

a

specified

period,say

one

year, the

loss

probability

distribution

is

as

follows:10,000(0.3),

50,000(0.4),

100,000(0.3)The

expected

loss

is

$53,000.How

much

would

you

charge

your

customers

for

the

lendingbusiness?Categoriesof

Risk

in

perspective

of

FIsRisktypology

in

financial

industryis

far

fromunanimouslydefined

due

todiverse

business

andrisknatureofdifferentFIs.The

increasingly

popularRisktypology

is

that

adoptedbyBasel

Committee

in

“Risk

Management

GuidelinesforDerivatives1994”:”Credit

Risk

(including

settlement

rMarket

Risk,Liquidity

risk,Operation

risk,Legal

risk(,

Regulatory

risk,

Compliance

risk).It

is

also

changing

and

evolving.New

Basel

Capital

Accord2000:Credit

Risk,

Market

Risk,

Operational

RiskCredit

RiskBroadly

defined,

credit

risk

is

theriskthatacounterpartywillfailto

perform

anobligationto

theFI.Or,

achange

inthecredit

qualityof

acounterpartywill

affectthe

valueof

aFI’sposition.Counterparty

riskDefault

riskCredit

eventSettlementrisk,(partly

due

tocredit

risk)MarketRiskMarket

risk

isthe

risk

toanFI’sfinancialconditionresultingfromadversemovements

inthelevelor

volatilityof

marketprices.Market

risk

isthe

risk

that

changesinfinancialmarkets

pricesand

rateswillreduces

thevalue

oftheFI’spositionsMarket

prices

include

interestrate,foreignexchange

rate,equity

price,

commoditypriceOperational

RiskOperationrisk(BIS

1994)is

theriskthatdeficiencies

ininformation

systems

orinternal

controls

will

resultinunexpected

loss.It

isassociated

with

human

error,systemfailuresandinadequateprocedures

andcontrols.Operational

risk(BIS2000)

isRiskof

director

indirect

lossresulting

from

inadequate

orfailed

internal

processes,peopleand

systemor

from

external

events.Operational

risk

under

abovedefinition

isthe risk

otherthancreditrisk

and

market

risk,

including

settlementrisk(excluding

those

dueto

counterparty

reason),

legalandcompliance

risk.Event

typesInternal

fraud,External

fraud,Employment

practicesand

workplacesafety,Clients,

products

andbusiness

practices,Damageto

physical

assets,Business

disruption

and

system

failures,Execution,

delivery

and

process

managementDerivative

andoperational

rDerivatives

trading

is

moreprone

to

operationalriskthan

cashtransactionsbecausederivatives

are,bytheir

nature,leveraged

transaction,whichmeans,a

trader

canmake

very

largecommitmentson

behalf

of

bank,

and

generatehuge

exposures

into

thefuture(even

up

to30years

ahead),using

only

a

small

amountofcash(at

the

time

thetransaction

is

executed)Liquidity

riskLiquidity

riskhas

two

forms:Product(or

trading-related)liquidity

risk,is

therisk

thata

FSmay

not

be

able

to

or

cannot

easily

,

unwind

oroffsetaparticular

positionat

ornear

the

previous

(prevailing)

marketprice

because

of

inadequate

market

depth

or

becauseofdisruptionsin

themarketplace.Fundingliquidity

riskis

therisk

that

theFI

willunabletoraise

thenecessary

cashto

meet

its

paymentobligationsonsettlement

dates,

such

as,to

rollover

its

debt,

to

meetthecash,,margin,and

collateral

requirementsof

counterparties

and

(inthe

case

of

funds)

tosatisfy

capitalwithdrawals.The

twoformsare

closely

related

and

areboth

very

hardtoquantify.Legal

risk(Compliancerisk)Legal

risk

isthe

risk

thatcontracts

arenot

legallyenforceable

or

documented

correctly.Legal

risk

arises

when

a

FIentersinto

acontractwhichis

notappropriatelyor

legally

(lawfully)documented

(worded),

or

wherethecounterpartymight

lack

thelegalorregulatoryauthority

to

engage

in

a

transaction.Legal

riskusuallyonly

become

apparentwhenacounterparty,customer oran

investor

losesmoney

on

the

transactionand

decides

to

suetheFI

to

avoidmeeting

its

obligation.A

caseof

Legal

riskIn

April

1994,Procter&Gamble,

GibsonGreetings,and

Mead

Corporationannounced

heftylosses

fromleveraged

swapagreements

withBankers

Trust.

Allthreecompanies

filedsuitsagainst

Bankers

Trust.

Procter&Gamble

lost$157millionon

twointerest

swaps,

it

thensuedBankers

Trustfor

misrepresentation

of

therisksinvolved

in

the

transactions.

FordetailsseeSteinherr(1998)Anotheraspectof

legal

riskis

thepotential

impactofa

change

in

laws.For

example,

when

theBritish

Governmentchangedthe

taxcode

to

remove

a

particulartaxbenefit

during

the

summer

of

1997,

onemajorinvestment

bank

suffered

huge

losses.Some

basic

conclusionsandperceptions

about

riskRisk

issomething

people

(investors)

normally

areafraidofordislikeSome

related

concepts:

riskaversion,

risktakingand

riskcompensation,

riskpremiumRisk(management)

is

something

connecting

future

andpresent,

i.e.

yourcurrent

perception

of

future

situation(?),future

situation

affectingyour

currentdecisionIs

Managing

Risk

a

“game

against

Gods”(byPeter

L.

Bernstein,1998)?,or

an

attemptat

beating

your

fate?Shouldrisk

manager

be

a

fortune

ordisaster

teller?)From

amodernperspective,

risk

hasa

double-sidenature:potential

for

lossand

potentialfor

profitRisk

isaboutprobability,

One

Price

Law

is

the

fundamentallawof

risk

managementTwo

dimension

of

describing

(measuring)

risk:

losssize(Severity)and

the

probLoss

size

is

related

to

risk

exposure

and

recoveryrate(like

Loss

Given

Default

in

the

case

of

creditriskmanagement)Risk

is

where

profit

comes

from

(no

risk,

no

return),riskis

a

kind

of

resources,

managing

risk

is

not

all

aboutavoiding

risk,

more

importantly, is

about

taking

risk

,which

forms

your

core

business

competitiveness

inmarketplace.Risk

is

costly,

and

risk

management

can

create

value

forfirmsIn

perspective

of

asset

valuation,

risk

value

(riskpremium)

is

the

other

part

of

the

whole

value

of

an

assetapart

from

its

time

value.Asset

value=

Time

Value+

Risk

Value2.WhyManageRisk?FromviewpointofthespecialnatureofFIsandtheirbusinessFromviewpointoftheevolvementofriskyenvironmentoverpasthalfcenturyFromviewpointoftheregulatoryrequirementsFromviewpointoflosscasesFromviewpointofthespecialnatureofFIsandtheirbusinessBasicbusinesslinesofFIsFunctionsofFIsHighleveragenatureofFIsHighcostofbankfailureBasicbusinesslinesofFIsdeposit-takingandlending(commercialbanking),assetmanagement,trading,dealingandbrokering,IPO,M&A(Investmentbanking)collectingandclearing(paymentservices),insurance,leasing,risktransferring(L/C,guarantee,derivatives,etc.)BankingBookactivitiesvs.tradingBookactivities,On-balance

activities

vs.

off-balance

activitiesCommercial

banking,investment

banking,insuranceFunctions

ofFIsFunds

transferring:Transferfunds

fromfundssurplus

unitsto

fundsdeficitunits,through:assettransformation(indirect

finance),brokeragefunction(directfinance),Riskallocation:Transfer riskfromunits

who

are

notableor

willing

to

take

somerisks

tothosewhoareableandwillingtotakethem,

through:CashtransactionDerivatives

transactionPaymentservicesandother

economicfunctionsFIsin

FinancialSystemFinancialIntermediariesFUNDSFinancialMarketsFUNDSLender-saversHouseholdsBusiness

firms3.Government4.ForeignersFUNDSFUNDSFUNDSDIRECT

FINANCEIndirectFinanceBorrowerSpendersBusiness

firmsGovernmentHouseholdsForeignersRisktransferring

channelsof

financialsystemCashtransactions

(riskis

transferred

alongwithfundsmovements)debtfinance,

includingbondandloan

transactionsCredit

riskoccurs

in

creditor

sideequity

financeMarket

riskoccurs

in

investor

sideDerivative

transactions(Risk

istransferreddirectlyand

independentlyfromfunds

movement)A.future-typetransactionsB.option-typetransactionsHigh

leverage

natureofFIsLeverageratio:Capital(equity)/AssetLeverage

is

acommonphenomenoninallbusiness,but

duetothespecial

natureof

financialbusiness,

leverageinfinancialindustry

is

generallymuch

higher

thanotherindustry,likemanufacturing,BaselRequiredCapital

AdequacyRatio

is8%=Capital

(tier

1+2+3)Risk-adjusted

assetThus,financialbusinessis

muchmore

risky

than

non-FB,andneedmorerigiA

Simplified

BalanceSheetAssets

LiabilitiesCashreservesLoansBondsOthersDepositsBorrowingsOthers$90million$100millionCapital$10millionL+C:$100millionHighBankfailure:a

bank

isunable

tomeetits

obligationsto

pay

itsdepositors

and

other

creditors

and

somustgo

out

ofbusiness.bankruns:A

sudden

and

unexpected

increase

indepositwithdrawalsfroma

depositinstitution.Bankpanic:A

systemicor

contagiousrun

on

thedepositsofthe

bankingindustry

as

a

whole.contagioneffect

(dominoeffect):Uncertainty

about

thehealthof

the

bankingsystem

ingeneral

can

lead

torunsonbanks

both

good

and

bad,

and

thefailure

ofonebankcanhasten

thefailure

of

others.Financialcrises:majordisruptions

infinancialmarkets

thatcharacterized

bysharp

declinesin

assetprices

andthefailuresof

many

financial

firms

and

non-financialfirms.Deposit

insurance

arrangement:FIDC(1934)

ofU.S.Needfor

(external)financialregulationandsupervisionConclusions:Riskis

indispensable

andinherentnatureorelement

ofallbusiness

linesof

FIsDoingfinancialbusinessis

almostall

aboutdealingwithriskDouble

side

nature

of

risk

isreflectedinthesuccessor

failureof

FIs’

risk

managementThe

basicmission

ofFIsis

totakeriskandgetprofitfrommanagingrisk(theoreticallyformriskpremium)Fromviewpointof

the

evolvement

ofriskyenvironment

over

past

half

centuryInterest

ratesrisk:

Interestrates

became

volatilefrom

1951

and

thevolatility

intensified

inthe70sand

80sForeign

exchange

risk:

BrettonWoodsclasped

inlate

60sandearly70sand

FX

regime

shifted

fromthefixed

oneto

flexible

oneRiskmanagementproduct,derivativeinnovationandexpansion:bothexchange-tradedandOTCtraded,

impact

on

both

market

risk

andcreditrisk(counterparty

risk)Globalization(Developmentoflargemultinationalcorporationsandmergersinbothbankandnon-bankcorporations):impactonmarket,cDeregulation

(liberalization)

and

competition(See

A556)US

financial

system

has

been

traditionally

structured

alongseparatist

or

segmented

product

lines.1933

Banking

Act,

or

Glass-Steagall

Act

separated

C-banking

from

I-bankingThe

passage

of

the

Financial

Services

Modernization

Act

of

1999leads

to

universal

banking,

and

more

competition

amongFIsSecuritization:

The

packaging

and

selling

of

loans

and

otherassets

backed

by

securities

to

increase

liquidity,

hedge

interestexposure

gap,

and

gain

a

new

source

of

fee

income,

and

alsohelpreduce

the

effects

of

regulatory

taxes

such

as

capitalrequirements,

reserve

requirements,

and

deposit

insurancepremi