財(cái)政機(jī)關(guān)風(fēng)險(xiǎn)管理英文

RiskManagementinFinancialInstitutionsDr.ZhongyangChenAssociateProfessorSchoolofFinanceRenminUniversityofChinaWhatToday?AboutmeAbouttheCourseWhy?What?How?ChapterOneAboutmeAbouttheCourse:What?RiskManagementcourse:anemergingcourseJustliketheriskconceptitself,riskmanagementcourseisnotyetunanimouslydefined,ordesigned.Aboutderivativesandfinancialderivatives?Aboutriskmeasuringmodels?Aboutauditingandinternalcontrol?Aboutfinancialinstitutionsmanagement?Alloftheabove?AbouttheCourse:What?OurPlannedCoverageChapter1Introduction:What,WhyandHow?Chapter2MarketriskmanagementChapter3CreditriskmanagementChapter4OperationalriskmanagementChapter5LiquidityriskmanagementChapter6Risk-basedregulationandtheNewBaselCapitalAccordSpecialtopic:RiskofChina’sfinancialsystemAbouttheCourse:How?Lecturing,CasestudyandPresentationMiddle-termtestFinalwrittenexaminationAboutgrading20%CaseStudyandPresentation30%Problemsassignments40%Finalwrittenexamination10%ClassAttendanceandParticipationFirstofall,let’stalkaboutrisk!

----Howmuchdoyouknowaboutrisk?

Listrisk-relatedwordsDefineriskinyourownwords.Makesentencesusingrisk.Yourpreference/attitudetoriskHowdoyoumanageoravoidriskinyoureverydaylife?Yourviewsonriskandfinance/investment.Yourpreference/attitudetorisk

高、中、低三種狀態(tài)Makesentencesusingrisk.

風(fēng)險(xiǎn)是可控的風(fēng)險(xiǎn)是由不可確定性造成的風(fēng)險(xiǎn)是高投資，高收益的投資人群是可以依據(jù)風(fēng)險(xiǎn)偏好分類的風(fēng)險(xiǎn)是可以預(yù)料的，但不可避免Listrisk-relatedwords保險(xiǎn)投資損失戰(zhàn)爭(zhēng)婚姻學(xué)習(xí)就業(yè)對(duì)沖基金籬笆旅行期權(quán)期貨Defineriskinyourownwords.

災(zāi)害可能的損失危機(jī)不可預(yù)料的危險(xiǎn)對(duì)某個(gè)客體在某種情況下造成危險(xiǎn)的事件出乎自己的意料而造成的損失

不利的因素可能承擔(dān)的代價(jià)Chapter1IntroductiontoRiskManagement:

What,WhyandHow?

1Whatisrisk,especiallyinperspectiveofFIs?2WhyFIsshouldmanagerisk?3Howtomanagefinancialrisk?(Basicconceptsandmethodologiesofmanagingrisk)4Evolution,revolutionandtrendsofriskmanagement1.Whatisrisk?Commonword,hardtodefineclearly,preciselyIntuitively,somethingwhichpossible(notdefinitely)makeyoulosesomethingelsevaluabletoyou,therefore(definitely)makesyouworryorsufferAcademically,andinperspectiveofFIs,(Somedefinitionformpopulartextbooks)

RiskisuncertaintyoffutureoutcomeRiskispotentiallossRiskisdeviationfromexpectationRiskisanychangeresultinginlossRiskisvolatilityRiskisdanger,orhazardComparingsomeinvolved

orrelatedconceptsUncertaintyVolatilityLoss(severity)HazardProbabilityRiskexposureUncertaintyTheoreticalcontroversyaboutwhetherriskisequivalenttouncertaintyMostofthefinancebooksorinvestmentbookstreatordefineriskasuncertaintyInsomebooks,especiallyondecisionmaking,riskisdifferentiatedfromuncertaintyinthewayhowfuturesituationisperceived.Risk:Decisionmakerhastheknowledgeofthepossibleoutcomesandtherespectivepossibilitiesoftheseoutcomes.Thus,riskismeasurable.Uncertainty:Decisionmakershavenosuchknowledge.Thus,uncertaintyisnotmeasurable.VolatilityVolatilityismeasuredbyvarianceσ2orstandarddeviationσ,double-sidemeasurementofrisk,includingupsidepotentialanddownsidepotentialFirstintroducedbyHarryMarkowitz,asabasicmeasureofriskofinvestmentonitsown.Variance(σ2):Theprobabilityweightedsumofthesquareddeviationsofalltheoutcomesfromtheirmean(expectedvalue).standarddeviation(σ):thesquarerootofvarianceLoss(severity)LossitselfisnotriskRealizedloss(Probabilitynotinvolved)Potentialloss(Probabilityinvolved)Expectedloss(Probabilityinvolved)Unexpectedloss(atsomespecifiedconfidenceinterval,Probabilityinvolved)Lossgivendefault(LGD)orotherevent,(Probabilitynotinvolved)(LGD=1—recoveryrate)HazardIninsurancebusinessandlendingbusiness,riskcanbedifferentiatedobviouslyfromhazard.Riskispotentialloss,orlossgivenacertainpossibility,Hazardistheenvironmentoreventwhichcanincreasethescale(severity)or/andpossibilityofloss.PhysicalhazardandMoralhazard

MoralHazardTheoretically,moralhazardresultsfrominformationasymmetry.Moralhazardoccurswhentheinsuredfailstotakeproperprecautionstoavoidlossesbecauselossesarecoveredbyinsurance.HurricaneFran1996inNorthCarolinacoast,yachtownersdidnottakedowntheiroldcanvascovers.Moralhazardplaysimportantroleincreditmanagement.Borrowcouldintentionallyviolatetherestrictivecovenantsandinvestborrowingsinhighriskproject.Inmanagingcreditrisk,oneimportantaspectistoreducemoralhazard,andhencetoreduceinformationasymmetry.Financialstructuring,monitoringandenforcingcovenantscanhelpreducemoralriskindebtcontract.ProbabilityRiskyinvestmentisnotasurething,probabilitycalculationisinevitablyinvolvedandevenbecomeacorepartofmoderninvestmentandriskmanagementExpectedreturnandStandarddeviation(andhencecovarianceandcorrelationcoefficient)arethemostbasicelementsofanalyticframeworkofmoderninvestmentandriskmanagementProbabilityDistributionFunction(PDF)isthecoreandhardpartofriskmodeling.IncreasinglysophisticatedstatisticskillsandadvanceprobabilitytheoriesaregainingmoreandmoregroundinriskmanagementLargenumberlawisafundamentallawinriskmanagement.Ajarfilledwith3000whitepebblesand2000blackpebbles,howdoyouknow(estimate)thecolorstructurewithoutcountingallthepebbles?RequirementsofIndependenceofeventsandlargesampleRiskexposureRiskexposureisthetotalamountofinvestmentorpositionwhichisexposedtoaparticularriskresource.Managingriskisactuallymanagingtheriskexposure,adjustingtheriskexposurethroughhedging,insurance,orreducinginvestmentscale.Riskexposure×ProbabilityofDefaultorotherevent×Lossgivendefault(Severity)=expectedloss,whichisonemeasureofriskSupposethesizeofyourloanportfoliois$5m,itisexposedtocreditrisk,youcansay”Ihave$5mriskexposuretocreditrisk”.Ifyourresearchshowsoveraspecifiedperiod,sayoneyear,thelossprobabilitydistributionisasfollows:10,000(0.3),50,000(0.4),100,000(0.3)Theexpectedlossis$53,000.Howmuchwouldyouchargeyourcustomersforthelendingbusiness?CategoriesofRiskinperspectiveofFIsRisktypologyinfinancialindustryisfarfromunanimouslydefinedduetodiversebusinessandrisknatureofdifferentFIs.TheincreasinglypopularRisktypologyisthatadoptedbyBaselCommitteein“RiskManagementGuidelinesforDerivatives1994”:CreditRisk(includingsettlementrisk),MarketRisk,Liquidityrisk,Operationrisk,Legalrisk(,Regulatoryrisk,Compliancerisk).Itisalsochangingandevolving.NewBaselCapitalAccord2000:CreditRisk,MarketRisk,OperationalRiskCreditRiskBroadlydefined,creditriskistheriskthatacounterpartywillfailtoperformanobligationtotheFI.Or,achangeinthecreditqualityofacounterpartywillaffectthevalueofaFI’sposition.CounterpartyriskDefaultriskCrediteventSettlementrisk,(partlyduetocreditrisk)MarketRiskMarketriskistherisktoanFI’sfinancialconditionresultingfromadversemovementsinthelevelorvolatilityofmarketprices.MarketriskistheriskthatchangesinfinancialmarketspricesandrateswillreducesthevalueoftheFI’spositionsMarketpricesincludeinterestrate,foreignexchangerate,equityprice,commoditypriceOperationalRiskOperationrisk(BIS1994)istheriskthatdeficienciesininformationsystemsorinternalcontrolswillresultinunexpectedloss.Itisassociatedwithhumanerror,systemfailuresandinadequateproceduresandcontrols.Operationalrisk(BIS2000)isRiskofdirectorindirectlossresultingfrominadequateorfailedinternalprocesses,peopleandsystemorfromexternalevents.Operationalriskunderabovedefinitionistheriskotherthancreditriskandmarketrisk,includingsettlementrisk(excludingthoseduetocounterpartyreason),legalandcompliancerisk.

EventtypesInternalfraud,Externalfraud,Employmentpracticesandworkplacesafety,Clients,productsandbusinesspractices,Damagetophysicalassets,Businessdisruptionandsystemfailures,Execution,deliveryandprocessmanagementDerivativeandoperationalriskDerivativestradingismorepronetooperationalriskthancashtransactionsbecausederivativesare,bytheirnature,leveragedtransaction,whichmeans,atradercanmakeverylargecommitmentsonbehalfofbank,andgeneratehugeexposuresintothefuture(evenupto30yearsahead),usingonlyasmallamountofcash(atthetimethetransactionisexecuted)LiquidityriskLiquidityriskhastwoforms:Product(ortrading-related)liquidityrisk,istheriskthataFSmaynotbeabletoorcannoteasily,unwindoroffsetaparticularpositionatorneartheprevious(prevailing)marketpricebecauseofinadequatemarketdepthorbecauseofdisruptionsinthemarketplace.FundingliquidityriskistheriskthattheFIwillunabletoraisethenecessarycashtomeetitspaymentobligationsonsettlementdates,suchas,torolloveritsdebt,tomeetthecash,,margin,andcollateralrequirementsofcounterpartiesand(inthecaseoffunds)tosatisfycapitalwithdrawals.Thetwoformsarecloselyrelatedandarebothveryhardtoquantify.Legalrisk(Compliancerisk)Legalriskistheriskthatcontractsarenotlegallyenforceableordocumentedcorrectly.LegalriskariseswhenaFIentersintoacontractwhichisnotappropriatelyorlegally(lawfully)documented(worded),orwherethecounterpartymightlackthelegalorregulatoryauthoritytoengageinatransaction.Legalriskusuallyonlybecomeapparentwhenacounterparty,customeroraninvestorlosesmoneyonthetransactionanddecidestosuetheFItoavoidmeetingitsobligation.AcaseofLegalrisk

InApril1994,Procter&Gamble,GibsonGreetings,andMeadCorporationannouncedheftylossesfromleveragedswapagreementswithBankersTrust.AllthreecompaniesfiledsuitsagainstBankersTrust.Procter&Gamblelost$157millionontwointerestswaps,itthensuedBankersTrustformisrepresentationoftherisksinvolvedinthetransactions.FordetailsseeSteinherr(1998)

Anotheraspectoflegalriskisthepotentialimpactofachangeinlaws.Forexample,whentheBritishGovernmentchangedthetaxcodetoremoveaparticulartaxbenefitduringthesummerof1997,onemajorinvestmentbanksufferedhugelosses.Somebasicconclusions

andperceptionsaboutriskRiskissomethingpeople(investors)normallyareafraidofordislikeSomerelatedconcepts:riskaversion,risktakingandriskcompensation,riskpremiumRisk(management)issomethingconnectingfutureandpresent,i.e.yourcurrentperceptionoffuturesituation(?),futuresituationaffectingyourcurrentdecisionIsManagingRiska“gameagainstGods”(byPeterL.Bernstein,1998)?,oranattemptatbeatingyourfate?Shouldriskmanagerbeafortuneordisasterteller?)Fromamodernperspective,riskhasadouble-sidenature:potentialforlossandpotentialforprofitRiskisaboutprobability,OnePriceLawisthefundamentallawofriskmanagement

Twodimensionofdescribing(measuring)risk:losssize(Severity)andtheprobabilityoftheloss.Losssizeisrelatedtoriskexposureandrecoveryrate(likeLossGivenDefaultinthecaseofcreditriskmanagement)Riskiswhereprofitcomesfrom(norisk,noreturn),riskisakindofresources,managingriskisnotallaboutavoidingrisk,moreimportantly,isabouttakingrisk,whichformsyourcorebusinesscompetitivenessinmarketplace.Riskiscostly,andriskmanagementcancreatevalueforfirmsInperspectiveofassetvaluation,riskvalue(riskpremium)istheotherpartofthewholevalueofanassetapartfromitstimevalue.Assetvalue=TimeValue+RiskValue2.WhyManageRisk?FromviewpointofthespecialnatureofFIsandtheirbusinessFromviewpointoftheevolvementofriskyenvironmentoverpasthalfcenturyFromviewpointoftheregulatoryrequirementsFromviewpointoflosscases

FromviewpointofthespecialnatureofFIsandtheirbusinessBasicbusinesslinesofFIsFunctionsofFIsHighleveragenatureofFIsHighcostofbankfailureBasicbusinesslinesofFIsdeposit-takingandlending(commercialbanking),assetmanagement,trading,dealingandbrokering,IPO,M&A(Investmentbanking)collectingandclearing(paymentservices),insurance,leasing,risktransferring(L/C,guarantee,derivatives,etc.)BankingBookactivitiesvs.tradingBookactivities,On-balanceactivitiesvs.off-balanceactivitiesCommercialbanking,investmentbanking,insuranceFunctionsofFIsFundstransferring:Transferfundsfromfundssurplusunitstofundsdeficitunits,through:1.assettransformation(indirectfinance),2.brokeragefunction(directfinance),Riskallocation:Transferriskfromunitswhoarenotableorwillingtotakesomeriskstothosewhoareableandwillingtotakethem,through:1.Cashtransaction2.DerivativestransactionPaymentservicesandothereconomicfunctionsFIsinFinancialSystemFinancialIntermediariesFUNDSFinancialMarketsFUNDSLender-savers1.Households2.Businessfirms3.Government4.ForeignersFUNDSFUNDSFUNDSDIRECTFINANCEIndirectFinanceBorrowerSpenders1.Businessfirms2.Government3.Households4.ForeignersRisktransferringchannels

offinancialsystemCashtransactions(riskistransferredalongwithfundsmovements)

A.

debtfinance,includingbondandloantransactionsCreditriskoccursincreditorsideB.equityfinanceMarketriskoccursininvestorsideDerivativetransactions(Riskistransferreddirectlyandindependentlyfromfundsmovement)

A.future-typetransactionsB.option-typetransactionsHighleveragenatureofFIsLeverageratio:Capital(equity)/AssetLeverageisacommonphenomenoninallbusiness,butduetothespecialnatureoffinancialbusiness,leverageinfinancialindustryisgenerallymuchhigherthanotherindustry,likemanufacturing,BaselRequiredCapitalAdequacyRatiois8%=Capital(tier1+2+3)Risk-adjustedassetThus,financialbusinessismuchmoreriskythannon-FB,andneedmorerigidriskmanagement.ASimplifiedBalanceSheetAssetsLiabilitiesCashreservesLoansBondsOthersDepositsBorrowingsOthers$90millionCapital$100million$10million$100millionL+C:Highcostofbankfailure:Bankfailure:abankisunabletomeetitsobligationstopayitsdepositorsandothercreditorsandsomustgooutofbusiness.bankruns:Asuddenandunexpectedincreaseindepositwithdrawalsfromadepositinstitution.Bankpanic:Asystemicorcontagiousrunonthedepositsofthebankingindustryasawhole.contagioneffect(dominoeffect):Uncertaintyaboutthehealthofthebankingsystemingeneralcanleadtorunsonbanksbothgoodandbad,andthefailureofonebankcanhastenthefailureofothers.Financialcrises:majordisruptionsinfinancialmarketsthatcharacterizedbysharpdeclinesinassetpricesandthefailuresofmanyfinancialfirmsandnon-financialfirms.Depositinsurancearrangement:FIDC(1934)ofU.S.Needfor(external)financialregulationand

supervisionConclusions:

RiskisindispensableandinherentnatureorelementofallbusinesslinesofFIsDoingfinancialbusinessisalmostallaboutdealingwithriskDoublesidenatureofriskisreflectedinthesuccessorfailureofFIs’riskmanagementThebasicmissionofFIsistotakeriskandgetprofitfrommanagingrisk(theoreticallyformriskpremium)Fromviewpointoftheevolvementofriskyenvironmentoverpasthalfcentury

Interestratesrisk:Interestratesbecamevolatilefrom1951andthevolatilityintensifiedinthe70sand80sForeignexchangerisk:BrettonWoodsclaspedinlate60sandearly70sandFXregimeshiftedfromthefixedonetoflexibleoneRiskmanagementproduct,derivativeinnovationandexpansion:bothexchange-tradedandOTCtraded,impactonbothmarketriskandcreditrisk(counterpartyrisk)

Globalization

(Developmentoflargemultinationalcorporationsandmergersinbothbankandnon-bankcorporations):impactonmarket,creditandoperationalriskDeregulation(liberalization)andcompetition(SeeA556)1.USfinancialsystemhasbeentraditionallystructuredalongseparatistorsegmentedproductlines.1933BankingAct,orGlass-SteagallActseparatedC-bankingfromI-banking2.ThepassageoftheFinancialServicesModernizationActof1999leadstouniversalbanking,andmorecompetitionamongFIsSecuritization:

Thepackagingandsellingofloansandotherassetsbackedbysecuritiestoincreaseliquidity,hedgeinterestexposuregap,andgainanewsourceoffeeincome,andalsohelpreducetheeffectsofregulatorytaxessuchascapitalrequirements,reserverequirements,anddepo