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risk management in banking > Overall Notes > Flashcards

Overall Notes Flashcards

1
Q

interest rate definition

A

the potential financial losses or reduced profitability due to movement in interest rates

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2
Q

challenges in managing interest rate risk (5)

A

market volatility
assets and liabilities mismatch
duration mismatch
hedging costs
regulatory requirements

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3
Q

managing interest rates (6)

A

leveraged duration gap
hedging
diversification
reduction sensitive assets
stress and scenario analysis
robust framework implementation

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4
Q

What is duration

A

the weighted average of time until bonds present value of cash flows are recovered

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5
Q

refinancing risk

A

liabilities maturity > asset maturity

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6
Q

reinvestment risk

A

asset maturities > liability maturity

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7
Q

if duration gap is positive

A

banks are exposed to a decline in interest rates

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8
Q

if duration gap is negative…

A

banks are exposed to interest rate declines

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9
Q

when is valuation affect negative

A

IR falls liabilities rise faster than assets
IR rises liabilities fall slower than liabilities

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10
Q

weaknesses in repricing model (3)

A

intrabuckets
non balance sheet items
linear model

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10
Q

weakness of duration (3)

A

assumes no default risk
difficult to apply
linear model

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11
Q

buy option…

A

cover you against interest rate rises

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12
Q

sell option…

A

cover you against interest rate decline

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13
Q

SVB exmple

A

lost money through heavy investment into treasury bills the interest rates rose heavily reducing the price of these bonds

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14
Q

liquidity risk definition

A

refers to banks not being able to meet short term obligations without incurring loss

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15
Q

market liquidity

A

how quickly you can buy and sell assets without incurring price defect

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16
Q

funding liquidity

A

how easily banks can raise funds to meet short term requirements

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17
Q

stroed liquidity

A

liquidity generated from selling highly liquid assets or cash

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18
Q

purchased liquidity

A

banks purchasing short term funding to meet obligations

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19
Q

dynamic approach steps (4)

A

measure liquidity gap
forecast loan and deposits
forecast changes in deposit and loans
future forecast with three models (component, seasonal and cyclical)

20
Q

name the three methods for forecasting loan and deposit movement

A

trend - historical data
seasonal - recent trends
cyclical - consider business cycles

21
Q

static approach

A

maintaining fixed strategies that are not adapted to changing conditions

22
Q

three different fund buckets when considering static approach

A

hot money funds
vulnerable funds
stables funds

23
Q

what does the liquidity cover ratio do

A

aims to ensure a bank can maintain adequate leaves
LCR of high liquidity assets within a 30 day period

24
Q

LCR formula

A

high quality stock
/
outflow of funds

25
Q

net stable funding

A

aims to ensure banks can maintain adequate liquidity and high grade liquid assets over a year period - tried to reduce reliance on short term funding (this was seen in the GFC)

26
Q

NSFR formula

A

stable funding amount
/
required amount of stable funding

27
Q

how to liquidity plan

A

establish management with roles, positions and limits across the organisation

28
Q

BASEL III accords (2)

A

require minimum capital requirements with T1 and T2 assets
require NSFR and LCR and stress and scenario analysis

29
Q

stress and scenario analysis required by BASEL III accords

A

internal liquidity adequacy assessment process (ILAAP)

30
Q

climate risk definition

A

risk incurred to FI when long term changes in weather patterns affect banks earning, profitability and risk profiles

31
Q

what does the OECD recon

A

it will cost $6.9T a year to meet the 2030 Paris accords concerning global warming

32
Q

physical risk (acute)

A

extreme weather conditions that can affect the banks profitability indirectly or indirectly

33
Q

transitional risk

A

risk posed by transitioning into a low carbon economy by different factors such as, regulatory, technological, consumer preference and market

34
Q

physical risk (chronic)

A

weather changes over a long period of time such as temperature or sea levels rinsing impacting the banks profitability

35
Q

how regulation affects transitional risk

A

regulators may implement regulatory frameworks that companies may have to abide by which can affect operations and profitability

36
Q

how technologies can affect transitional risk

A

technologies can reduce demand in some sectors and can be expensive implement

37
Q

how market can affect transnational risk

A

demand and supply can change in sectors due to changes in preference in some industries

38
Q

how reputation can affect transitional risk

A

companies can have reputation tarnished if the fail to adapt to sustainable business practice

39
Q

liability can affect transitional and physical risk

A

transnational: companies may not follow new requirement leading to fines and legal fees
physical: banks can be hold liable from damage through insurance schemes

40
Q

how can operations impact physical risk

A

operations can be halted by physical risk of weather events

41
Q

example of physical risk

A

2014 Dubai floods

42
Q

5 steps in assessing climate risk

A
  1. identify risk that the bank is exposed to and map out what risks are associated which which assets
  2. quantify these exposures by using prior data
  3. conduct stress and scenario analysis to see how the bank will respond both short and long term
  4. assess carbon footprints of sectors invested in to see if you are exposed to high carbon sectors
  5. incorporate findings into frameworks and change approaches if needed
43
Q

issues with data (3)

A

availability
quality
limited

44
Q

managing climate risk (6)

A
  1. integrate into risk management frameworks
  2. enhance risk identification to specific sectors
  3. reduce high risk exposure
  4. promote green sustainable products
  5. improve disclosure and transparency
  6. embed sustainability into the fabric of the company
45
Q

the body established in 2015 by the financial stability board to encourage disclosure in climate change operations

A

task force on climate related financial disclosure (TCFD)

46
Q

regulatory body established by 8CBs and regulatory bodies to help contribute to climat erisk management

A

network for greening the financial system (NGFS)

47
Q

liquidity risk studies

A

more stress tests and liquidity practices = reduced liquidity creation but increased stability

risk management in banking (4 decks)

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