Question

Assuming you are a member of the Risk Department of a leading Commercial Bank and the Board of Directors in their quest to better manage the overall risk profile of the bank has requested the following from the Risk Department:

Create a Risk Register that covers the main risk profile of the bank; credit risk, liquidity risk, operational risk and interest rate.

In developing your Risk Register, using weighted average, explain how the bank is exposed to liquidity risk.

Within your Risk Register, articulate no less than two plans to mitigate/ effectively liquidity risk.

The Risk Register should identify timelines and responsible department to manage the implementation.

Develop a Risk Register based on the above guidelines for your Board of Directors.

Please assist with all of the above requirements

Answer 1

As a memeber in the risk department of a leading commercial bank , the following process has to be followed :

1. The risks has to be first identified and each risk has to be assigned a weight based on the severity. These risks have to be sorted based on severity in descending order and the top 4 risk items should be taken note of.

2. Assume the four risk items are :

A) Market Risk due to currency fluctuations

B) Market Risk due to Interest Rate Fluctuations

C) Credit Risk due to a few high exposure NPA accounts

D) Operational Risk due to failure of internal controls

3. Prepare plans to mitigate each of the 4 different risks mentioned above.

4. For example , the first two risks can be mitigated by hedging using derivatives including futures and options. The operational risk can be reduced by having proper internal controls and processes within the organisation and Increase the overall span of control in the organisation . I.e., the number of managers / employee.

5. Once , mitigation plans are decided , these plans have to be implemented across the organisation . The timelines have to be identified and each of the risk should be assigned to the corresponding department.

6. For example , Hedging can be assigned to Trading/Finance department. Operational controls can be assigned to HR department . Operational controls should be given a longer timeframe as this will take more time to be implemented across the organisation. Other plans can be implemented in a relatively shorter time frame.