Preface xv
PART ONE Risk Management Approaches and Systems
CHAPTER 1 Business Risk in Banking 3
1.1 Concept of Risk 3
1.2 Broad Categories of Risks 3
1.3 Credit Risk 5
1.4 Market Risk 7
1.5 Operational Risk 8
1.6 Operating Environment Risk 10
1.7 Reputation Risk 11
1.8 Legal Risk 12
1.9 Money Laundering Risk 12
1.10 Offshore Banking Risk 14
1.11 Impact of Risk 15
1.12 Summary 16
Notes 18
CHAPTER 2 Control Risk in Banking 19
2.1 How Control Risk Arises 19
2.2 External Control and Internal Control Risks 19
2.3 Internal Control Objectives 21
2.4 Internal Control Framework 21
2.5 Tasks in Establishing a Control Framework 28
2.6 Business Risk and Control Risk Relationship 34
2.7 Summary 35
CHAPTER 3 Technology Risk in Banking 37
3.1 What Is Technology Risk? 37
3.2 Risks in Electronic Banking 37
3.3 Sources of Technology Risk 38
3.4 Management of Technology Risk 42
3.5 Summary 43
CHAPTER 4 Fundamentals of Risk Management 45
4.1 Risk Management Concept 45
4.2 Risk Management Approach 45
4.3 Risk Identification Approach 47
4.4 Risk Management Architecture 47
4.5 Risk Management Organizational Structure 48
4.6 Summary 53
CHAPTER 5 Risk Management Systems and Processes 55
5.1 Risk Management Policy 55
5.2 Risk Appetite 56
5.3 Risk Limits 57
5.4 Risk Management Systems 59
5.5 Management Information System 67
5.6 Verification of Risk Assessment 72
5.7 Human Resource Development 72
5.8 Top Management Commitment 73
5.9 Capital Adequacy Assessment and Disclosure Requirement 74
5.10 Risk Prioritization 75
5.11 Summary 76
Notes 77
PART TWO Credit Risk Management
CHAPTER 6 Credit Problems and Credit Risk 81
6.1 Genesis of Credit Problems 81
6.2 Causes of Credit Risk 92
6.3 Summary 93
Notes 94
CHAPTER 7 Identification of Credit Risk 95
7.1 Market Risk and Credit Risk Relationship 95
7.2 Credit Risk Identification Approach 96
7.3 Credit Risk Identification Process 100
7.4 Summary 109
Notes 110
CHAPTER 8 Credit Risk Rating Concept and Uses 111
8.1 Credit Risk Rating Concept 111
8.2 Credit Risk Rating Uses 113
8.3 Credit Risk Rating Principles 122
8.4 Summary 127
Notes 128
CHAPTER 9 Credit Risk Rating Issues 129
9.1 Rating Practices in Banks 129
9.2 Design of the Rating Framework 130
9.3 Conceptual Issues 131
9.4 Developmental Issues 136
9.5 Implementation Issues 140
9.6 Rating Framework Overview 147
9.7 Summary 147
Notes 151
CHAPTER 10 Credit Risk Rating Models 153
10.1 Internal Rating Systems in Banks 153
10.2 Need for Different Rating Models 154
10.3 Need for New and Old Borrower Rating Models 155
10.4 Types of Rating Models 157
10.5 New Capital Accord Options 158
10.6 Asset Categorization 159
10.7 Identification of Model Inputs 160
10.8 Assessment of Component Risk 161
10.9 Summary 172
Notes 172
CHAPTER 11 Credit Risk Rating Methodology 173
11.1 Rating Methodology Development Process 173
11.2 Derivation of Component Rating 189
11.3 Derivation of Counterparty Rating 195
11.4 Summary 197
CHAPTER 12 Credit Risk Measurement Model 199
12.1 Risk Rating and Risk Measurement Models 199
12.2 Credit Loss Estimation—Conceptual Issues 200
12.3 Quantification of Risk Components 204
12.4 Credit Risk Measurement Models 215
12.5 Back-Testing of Credit Risk Models 219
12.6 Stress Testing of Credit Portfolios 220
12.7 Summary 222
Notes 223
CHAPTER 13 Credit Risk Management 225
13.1 General Aspects 225
13.2 Credit Management and Credit Risk Management 225
13.3 Credit Risk Management Approach 226
13.4 Credit Risk Management Principles 227
13.5 Organizational Structure for Credit Risk Management 232
13.6 Credit Risk Appetite 234
13.7 Credit Risk Policies and Strategies 234
13.8 Early Warning Signal Indicators 242
13.9 Credit Audit Mechanism 244
13.10 Credit Risk Mitigation Techniques 248
13.11 Summary 253
Note 254
CHAPTER 14 Credit Portfolio Review Methodology 255
14.1 Portfolio Classification 255
14.2 Portfolio Management Objectives 256
14.3 Portfolio Management Issues 256
14.4 Portfolio Analysis Technique 261
14.5 Portfolio Risk Mitigation Techniques 266
14.6 Summary 269
CHAPTER 15 Risk-Based Loan Pricing 271
15.1 Loan Pricing Concept 271
15.2 Loan Pricing Principles 271
15.3 Loan Pricing Issues 272
15.4 Loan Price Computation 275
15.5 Summary 280
PART THREE Market Risk Management
CHAPTER 16 Market Risk Framework 283
16.1 Market Risk Concept 283
16.2 Market Risk Types 283
16.3 Market Risk Management Framework 285
16.4 Organizational Setup 286
16.5 Market Risk Policy 288
16.6 Market Risk Vision 289
16.7 Summary 290
CHAPTER 17 Liquidity Risk Management 293
