Chapter 10 Risk Management, controls, compliance, documentation Flashcards
Credit risk
The risk that a client will not be able to pay you back
Market risk
The risk that the market value of trading positions will adversely influenced by changes in prices and/or interest rates
Liquidity risk
The risk that the bank is not able to fulfill its short term obligations
Head of risk management should report to..
the board of directors
Types of market risk
- Interest rate risk
- Equity risk
- FX risk
- Commodity risk
(5. Liquidity risk)
Market risk - important activities
- Setting limits (for FO-staff)
- Position keeping (Back office)
- Valuation
- Reporting
FX Risk
- MidOffice is responsible for position keeping and report to regulator
- Net open position report includes: A&L in FX, Fx forwards and swaps, other future cash flows in FX
- Spot dealers are responsibles for managing the position
Types of liquidity risk
- Availability risk: not able to borrow funds at reasonable rates
- Market liquidity risk: not able to sell assets fast enough
Ladder maturity reports
- A&L in time buckets
2. Estimation of withdrawal of non-maturing liabilities (such as current accounts)
High Quality Liquid Assets
Portfolio of securitues that can easily be sold immediately
Credit risk - Lending risk
Risk that a borrower cannot pay interest or repay the principal sum
Credit risk - Settlement risk
Any amount that is due to be under a contract reveived untill the receipt is confirmed
Credit risk - Pre-settlement risk (replacement counterparty credit risk)
The contract needs to be replaced in the market at unfavourable conditions
Credit limit
Limit on the size of the obligations of a particular counterparty towards the bank
Settlement limit
Sets a maximum to the delivery risk that a bank runs with a specific counterparty
FX limit (counterparty credit risk limit)
Sets a maximum to the exposure as a result of FX forwards or derivatives
Payment netting
A means to reduce settlement risk by offsetting payments
Contractual netting (portfolio compression)
Combining transactions into 1 contract to reduce counterparty credit risk, balannce sheet volume, required capital and settlement risk
Multilateral netting
- CCP becomes counterpart Excluding credit risk by using a margin system
Initial margin
Minimum cash reserve
Variation margin (daily margining)
Daily settlement of profit and loss
Maintanance margin
Paying a margin if the balance of the account is lower that a pre-agreed percentage of the initial margin
Collateral
A pledge that acts as a security in the event of default of counterparty
Types of collateral
- Cash/ non-cash collateral
- Own currency/ foreign currency
- Investment grade / non-investment grade
