Risk Assessment & Stress Test
Since risk management has been formalized within Basel Accords, stress-testing has invariably been an after-thought. It has been a necessity to watch liquidity risk, therefore inducing financial institutions into forgetting that stress-testing is, at any time, a good managerial practice. This course will provide an in depth look at the key provisions of the Basel III regulatory framework, the ongoing risk assessment practice within banks, and the vital role of stress testing. Upon completion, participants will have a comprehensive understanding of internal risk assessment. There will be an in depth analysis of why stress testing is vitally important to financial institutions, how to conduct stress testing, and why financial regulators are so preoccupied with stress testing.
· Develop a deep understanding of the key elements within Basel III regulatory framework
· Understand the key metrics and procedures for assessing credit risk, market risk and operational risk
· Understand the vital importance of stress testing as the cornerstone of risk management
· Apply analytical skills for the identification of concentration of credit risk, concentration of funding risk and liquidity risk
· Develop and formulate procedures and policies with respect to the best practice implementation of stress modelling and associated risk management protocols
Understanding The Role Of Regulatory Bank Capital
· Overview of financial statements of banks – accounting principles
· Composition of the balance sheet – types of assets and liabilities
· Understanding the key elements of the P&L – statement of income
· Review of the distinction between the banking book and the trading book
· The equity capital of financial Institutions
· Illustration of the contrast between liquidity and solvency issues
· Explanation of bail-in able capital
· Accounting and regulatory definitions for own funds
· Prudential filters and revaluation reserves, AOCI
· Treatment of goodwill, intangibles, deferred tax assets
· Treatment of securitizations and off-balance sheet exposures
Requirements for Qualifying Capital under Basel III
· Definitions of Regulatory Capital – Core Tier 1, Tier 2
· Core Tier 1 – equity capital and disclosed reserves
· Supplementary Capital – Tier 2 – subject to discretion of supervisor/central bank
· Revaluation reserves – limitations
· Hybrid capital – equity-like e.g. perpetual preferred shares
· Subordinated debt instruments – criteria and restrictions
· Short-term subordinated debt covering market risk (Tier 3)
· Loss absorbency requirements
· Deductions from capital – goodwill and subsidiaries
· Supervisory discretion over cross holdings of other banks
Operational Risk under Basel
· Definition of Operational Risk introduced into the Basel II framework
· The life cycle of Operational Risk
· Basel measurement approaches
· Risk weightings under each approach
· Rogue trading – severity of losses
· Scenario generation – KRI’s, management involvement in adverse scenario modelling
· Quantifying the exposure and severity of “outliers” and tail risk
· Loss Distribution Approach (LDA) and Scenario Based Analysis (SBA)
· Application of VaR techniques to operational risk (Op VaR)
· Loss identification – measurement, management, monitoring, reporting
· Integrating operational risk management into the organizational risk management
Modelling and Stress Testing
· Explanation of the techniques for conducting stress tests
· Back testing using historical returns
· Scenario generation – stress testing using hypothetical returns
· Sizes of historical samples
· Danger of optimizing risk management parameters – over-fitting to the historical data
· Modelling methods – contingency scenarios
· Limitations of normal distribution as basis for probabilistic modelling
· Quantifying the exposure and severity of “outliers” and tail risk
Implementation and Reporting Systems for Basel Compliance
· Efficacy of the monitoring and reporting mechanisms within banks and how they interface with overall risk management
· Avoiding silos
· Accounting, surveillance, IT systems and data storage back-up systems
· Monitoring of controls – quality and integrity of the procedures
· Development of contingency scenarios
· Role of the Chief Risk Officer
Role of the Internal Auditor
This course is suitable for all those working in the finance industry, including wealth managers, auditors, and treasury and product control professionals.