Question

Choosing a European bank:

1.    Discuss different types of risks this bank manages. Gather evidence and discuss whether these risks have been sufficiently managed since 2005.

2.    Discuss the regulatory relationship and how this has influenced this bank’s risk management.

3.    With reference to both micro and macro prudential policy and regulation, critically analyse the impact of the Basel III Guidelines on this bank’s risk management.

Answer 1

1.Risk Measurement SCB and its Financial Group adopt the same method for measuring a particular type of risk using for both qualitative and quantitative approaches or methods based on the Internal Rating-Based Approach or an Internal Model in order to assess actual risks.

A. Credit Risk: SCB measures the risk of Probability oF Credit Risk and evaluate Loss Given Default (LGD), which will reflect through collateral discount, and Exposure at Default (EAD). In addition, the group also applies other key indicators for credit risk measurement such as the Probability of Non-Performing Loan or the Probability of a Write?Off. The details are described in the credit risk section.

B.Market Risk: Statistical and non-statistical tools are employed for assessing market risk, namely Value at Risk (VaR), Sensitivity Analysis, Stop-Loss, Position Size, and others.

C.Operational Risk: Operational risk is measured by risk management tools, such as Risk Control Self Assessment (RCSA), Key Risk Indicators (KRI), and Incident and Loss Management.

D.Liquidity Risk: SCB and its Financial Group measure this risk by using cash flow reports or liquidity gap reports including behavioral cash flow reports and liquidity ratio analysis.

E.Strategic Risk: Strategic risk is measured by a Risk Self Assessment and the strategic risk management processes.

2.Ultimate responsibility for setting the risk appetite and for the effective management of risk rests with the Board.

Acting within an authority delegated by the Board, the Board Risk Committee (BRC), whose membership is comprised exclusively of non-executive directors of the Group, has responsibility for oversight and review of prudential risks including, but not limited to, credit, market, capital, liquidity and operational. It reviews the Group’s overall risk appetite and makes recommendations thereon to the Board. Its responsibilities also include reviewing the appropriateness and effectiveness of the Group’s risk management systems and controls, considering the implications of material regulatory change proposals, ensuring effective due diligence on material acquisitions and disposals, and monitoring the activities of the Group Risk Committee (GRC) and Group Asset and Liability Committee (GALCO).

The BRC receives regular reports on risk management, including our portfolio trends, policies and standards, stress testing, liquidity and capital adequacy, and is authorised to investigate or seek any information relating to an activity within its terms of reference. The BRC also conducts ‘deep dive’ reviews on a rolling basis of different sections of the consolidated group risk information report.

The Brand and Values Committee (BVC) oversees the brand, culture, values and good reputation of the Group. It ensures that the management of reputational risk is consistent with the risk appetite approved by the Board and with the creation of long-term shareholder value.

3.Micro-prudential elements of Basel III The micro-prudential elements of Basel III are (i) definition of capital; (ii) enhancing risk coverage of capital; (iii) leverage ratio; and (iv) international liquidity framework.  Banks will be subject to a Credit Valuation Adjustment (CVA) capital charge to protect themselves against the potential mark to market losses associated with deterioration in the creditworthiness of the counterparty. The CVA is a measure of diminution in the fair value of a derivative position due to deterioration in the creditworthiness of the counterparty. Standards for collateral management and initial margining have been strengthened. Banks with large and illiquid derivative exposures to counterparties will have to apply longer margining periods as a basis for determining the regulatory capital requirement. Additional standards have been adopted to strengthen collateral risk management practices. Thus, the Basel III framework will have enhanced risk coverage.

Macro-prudential elements of Basel III. Basel III seek to address issues relating to systemic risk through various measures including (i) leverage ratio; (ii) capital conservation buffer; (iii) countercyclical capital buffer; (iv) addressing procyclicality of provisioning requirements; (v) addressing interconnectedness; (vi) addressing the too-big-to-fail problem; and (vii) addressing reliance on external credit rating agencies.