26 - Risk Identification and Classification Flashcards
Give the general, overall key factors to understand at the start of risk identification.
- The circumstances and structures of the organisation
- The specific business environment of the firm.
- The general business and regulatory environment
Describe the main techniques used in risk identification.
- Risk classification
- Risk checklists from the regulator
- Outside experience from staff joining from other organisations, consultants and experts.
- Project management risk identification techniques.
Give the project management risk identification techniques.
- High-level preliminary analysis
- Brainstorming for specific risks, correlations, rankings and preliminary mitigation options.
- Desktop analysis involving research
- Risk register or matrix
Give the major risk categories.
- Market risk
- Credit risk
- Liquidity risk
- Business risk
- Operational risk
- External risk
- Financial or non-financial
What are market risks?
Risks that affect the value of a firms assets and liabilities and the matching between them.
What is credit risk?
The risk of failure of any counterparty to a monetary transaction.
Give the factors that affect the security of a transaction with regards to credit risk.
- Nature of the transaction
- Covenant of the debtor
- Market and relative negotiating strength of involved parties.
- If there are any assets made available for security and the nature of those assets.
What is liquidity risk?
The risk that a firm cannot secure cash on any acceptable terms when they need it.
What is business risk?
These are risks associated with the nature of specific business operations and practices.
Give the main categories of business risk.
- Underwriting risk
- Insurance risk from poor claims experiences
- Financing risk, funding unsuccessful projects
- Exposure risk, this includes business volume and business mix risks where the exposure to a certain risk is higher than expected.
What is operational risk?
Losses resulting from inadequate or failed internal processes, people and systems or bad planning for the management of external risks.
Give the main causes of operational risks.
- Inadequate internal processes, people or systems
- Dominance of a single individual
- Reliance on third parties
- Failure of plans to recover from an external event.
How can a bank reduce credit risk?
- Require a debtor to have a liquidity fund of 6 to 12 months of payment
- Require a transfer of risk through insurance
- Require a loan guarantee from various stakeholders in a project
- Restrict the time horizon to a sensible period
- Restrict any further borrowing by the client
- Set a principle repayment schedule which is likely to be as fast as the cash flows of the debtor will allow.
- Take a fixed security over all the assets of the debtor
- Ensure that security assets are readily realisable in a cost-effective manner
- Check the creditworthiness of the debtor, such as through their credit rating.
Give some general concerns under Market Risk
- Salary inflation
- High interest rates increasing borrowing costs
- Exchange rate risk
- Stock exchange falls
- Economic downturn
- Lower investment return than expected
Give some general risks under credit risks
- Defaults on bonds
- Counterparty risk, including settlement risk
- General debtors
- Failure of a reinsurer to pay out on a claim
