Topic 22: The management of risk Flashcards
What is credit risk?
The risk that borrowers may not be able to repay their loans as agreed.
What is reputational risk?
The risk of adverse damage to a bank’s reputation, e.g. negative media coverage about the bank’s activities.
What is regulatory risk?
The introduction of new regulations and their consequent effect on a bank’s operations and profitability.
What is environmental risk?
The risk that certain activities may damage the environment and have a negative impact on a bank.
What is settlement risk?
The risk that a counterparty does not fulfil its obligations in a contract, e.g. foreign exchange.
Which 3 components does a typical risk management framework incorporate?
1) Risk identification
2) Risk assessment
3) Risk control
What are the 4 T’s of risk control?
1) Transferring risk
2) Tolerating risk
3) Treating risk
4) Terminating risk
What is the 3 lines of defence model?
1) The first line of defence includes organisational functions that own and manage risk
2) The second line of defence is established to monitor first line of defence controls (e.g. Compliance)
3) The third line of defence includes functions that provide independent assurance, such as internal audit
What are debt relief orders (DROs)?
DROs are suitable for people who do not own their own home and have little surplus income and assets.
A DRO lasts 12 months, and in that time creditors named on the order cannot take any action to recover their money without permission from the court. At the end of the period, if the individual’s circumstances have not changed, they will be freed from the debts that were included in the order. DROs do not involve the courts and aim to provide an informal, cost-effective way of dealing with relatively low levels of delinquent debt.
What are individual voluntary arrangements (IVAs)?
An IVA is a formal version of a DRO. The process begins with a formal proposal by an individual to creditors to pay part or all of their debts. The debtor will need to apply to the court and must be helped by an insolvency practitioner. Creditors have to meet and vote on whether to accept the proposals. If enough creditors (75% by value of the creditors present in person or by proxy and voting on the resolution) vote in favour, the proposals are accepted. They are then binding on all creditors who had notice of, and were entitled to vote at, the meeting.
The insolvency practitioner supervises the arrangement and pays the creditors in accordance with the accepted proposal.
What is bankruptcy?
Bankruptcy proceedings have the greatest consequences for debtors. Although it is a mechanism to free someone who is insolvent from overwhelming debts, bankrupt individuals are subject to future restrictions and all their assets, apart from a few exceptions, are shared out among their creditors.
It is the responsibility of the court to make a bankruptcy order only after a valid bankruptcy petition has been presented. This can be done by the debtor themselves or one or more creditors (in England or Wales) who are owed at least £5,000 on an unsecured basis.
Anyone made bankrupt will automatically be discharged from bankruptcy after a maximum of 12 months. This period may actually be shorter if the trustee concludes their enquiries and files a notice in court. On the other hand, if the bankrupt does not co-operate, the period can be longer.
What is the purpose of a recoveries team?
- The recoveries team takes over from the collections team once it is apparent that an ongoing solution cannot be achieved, and that the customer is not going to be profitable in the long term.
- The team aims to recover as much as possible and thereafter to sever the relationship.
- This is the stage of the process at which a default notice is served on the customer and the need for legal action arises.
- The recoveries process frequently involves having to trace absconded debtors and outsource to a debt recovery agency.
