Session 4 Flashcards
What do risk managers do?
Risk managers assess, monitor, and report on risks, they may have an approval function or veto authority.
Who is responsible for risk management?
Risk management remains everyone’s responsibility. It is the portfolio managers or traders, who own the risk of their deals
Why is it important to have risk management as part of your corporate culture?
risk manager must ensure that all relevant risks are identified, but the final judgment on the business decision lies with the decision makers.
Everyone makes calls on risk management
Where does risk management occur?
Front office
Mid-office
Back office
What is Front office’s function?
In the trading function within a financial institution
What is the middle office’s function?
The part of the financial institution concerned with the level of risks being taken, capital adequacy, and regulatory compliance
What is the back office’s function?
The record keeping function
What are the three lines of defence?
1st LoD: Daily operations checking their things are ok.(permanent)
2nd LoD: Risk management & compliance (permanent)
3rd LoD: Internal audit. (periodic)
What are the three major risks of a bank?
Credit risk
Market risk
Operational risk
How are risks classified?
By the source of uncertainty.
What are the four main divisions of Credit risk?
Default risk
Bankruptcy risk
Settlement risk
Downgrade risk
What is Credit risk?
Its the risk that the bank’s counterparties in loan transactions and derivatives transactions will default.
How do banks counteract credit risk?
They hold the most
amount of capital needed to cover the unexpected and expected losses.
What is the time horizon to determine the losses incurred through credit risk?
One year.
What is Default risk? (Credit risk)
Its the debtor’s incapacity (or refusal) to meet his debt obligations by more than a reasonable relief period from the due date
What is Bankruptcy risk? (Credit risk)
Its risk of taking over the collateralized assets of a
defaulted borrower or counterparty
What is Settlement risk? (Credit risk)
Its the exchange of cash flows when a transaction is settled.
What is Downgrade risk? (Credit risk)
Its the downgrade of credit rating of a borrower and the increase of risk premium
What is Market risk?
The probability that securities in a bank’s trading book will decrease in value
What is the time horizon to determine the losses incurred through Market risk?
usually much less than a year
What are the four main types of market risk?
- Interest rate risk
- Equity price risk
- Foreign exchange risk
- Commodity price risk
What is the time horizon to determine the losses incurred through operational risk?
One Year
What is Operational risk?
Its the losses that a bank will face due to failure of internal systems or due to external events.
What are the components of Liquidity risk?
Funding liquidity risk
Trading liquidity risk
What is Funding liquidity risk?
a firm’s ability to raise the necessary cash to roll over its debt and to meet the cash requirements
What is Systemic risk
2008
Its the potential for the failure of one institution to create a chain reaction on other institutions and consequently threaten the stability of financial markets.
What is Trading liquidity risk?
Basically not having anyone to buy your shit, aka it aint liquid baby.
(often simply called liquidity risk), is the risk that an institution will not be able to execute a transaction at the prevailing market price because there is no appetite for the deal on the other side of the
market.
What is legal and regulatory risk?
It is closely related to operational risk as well as to reputation risk.
(hitting an employee with a big machine?)
What is Business risk?
Business classics like:
uncertainty about demand for products, price that can be charged for those products, or the cost of producing and delivering products.
What is strategic risk?
significant investments for which there is a high uncertainty about success and profitability.
Taking a strategic risk to overcome your competitor and maybe fucking up. now investors hate you u doodoohead.
What is reputation risk?
The risk the firms or an important individual is tarnished and fucked.
What are the two main components of reputation risk?
The belief that an enterprise can and will fulfil its promises to
counterparties.
The belief that the company is fair and follows ethical practices.
