06.2 Bank Risks and Risk Management

Question 1

How to manage Credit risk?

Answer 1

• Credit analysis
• Risk management using VaR and Expected Shortfall
• Holding capital to absorb losses
• Capital regulation (Basel Accords)

Question 2

How to manage Liquidity risk?

Answer 2

• Hold liquid assets
• Match liquid assets with runable debt
• Liquidity regulation
• Liquidity Coverage Ration (LCR)
• Net Stable Funding Ratio

Question 3

How to manage Currency risk?

Answer 3

• Hold foreign currency reserves
• Match Foreign currency assets with foreign currency liabilities
• Use derivatives (futures, forwards, swaps etc.) to hedge currency risk

Question 4

How to manage Interest rate risk?

Answer 4

• Match the maturity of assets and liabilities
• Duration analysis, immunization
• Use derivatives to hedge risk