Lecture 4 slides.ppt

AC959 – Bank Strategy and Risk

Lecture 4:Introduction to risk management

in banking

AC959 - Lecture 4 2

Aims of lecture

• Understand the structure of bank’s balance sheets and income structure

• Identify the key banking risks• Introduce management of key banking

risks

AC959 - Lecture 4 3

Commercial bank balance sheet

AC959 - Lecture 4 4

Investment bank balance sheet

AC959 - Lecture 4 5

Capital structure: Manufacturing v Bank

AC959 - Lecture 4 6

Bank income statement

AC959 - Lecture 4 7

Barclays Profit and loss account 2000-2004

AC959 - Lecture 4 8

Managing bank risks – generic areas

• Asset management• Liability management• Liquidity management• Capital management• Off-balance sheet (OBS) management

AC959 - Lecture 4 9

Key banking risks

AC959 - Lecture 4 10

Credit risk

“The risk that a counterparty defaults on some or all of its contractual obligations. In lending operations it is the likelihood that a borrower will not be able to repay the principal or pay the interest.”

[Casu, Giradone and Molyneux, 2006]

AC959 - Lecture 4 11

Counterparty risk

“The risk that a party in a financial transaction will default.”

[Casu, Giradone and Molyneux, 2006]

AC959 - Lecture 4 12

Liquidity risk

“The risk that an institution is unable to meet its obligations as they become due.”

[Casu, Giradone and Molyneux, 2006]

AC959 - Lecture 4 13

Interest rate risk

• “The risk of a decline in earnings due to the movements of interest rates.” [Bessis, 2002]

• “Risk arising from the mismatching of the maturity and the volume of banks’ assets and liabilities as part of their asset transformation function.” [Casu, Giradone and Molyneux, 2006]

AC959 - Lecture 4 14

Market risk

“The risk of losses arising from movements in market prices. This type of risk pertains in particular to trading in assets, liabilities and derivative products. This risk relates to changes in interest rates, exchange rates and other asset prices.”

[Casu, Giradone and Molyneux, 2006]

AC959 - Lecture 4 15

Other risks

• Foreign exchange risk• Operational risk• Country risk/Sovereign risk