Advanced Studies and Training Centre

Course Structure
The course includes a review of the latest models used by organizations to manage risk and the traditional techniques that enable managers to quickly assess and control it. The three main sources of risk: market, credit and operational will be addressed. Delegates will analyze the general behavior and risks of various markets and financial instruments, how these risks occur, how they may be measured, what mitigation approaches may be adopted and ultimately how the risks may be managed. Particular emphasis will be paid to the various approaches proposed in the new Basel Accord. The course will also discuss firm wide risk management and the internal uses of economic capital to improve the allocation of scarce resources.
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Who Should Attend?
Risk managers in financial institutions Rating agency analysts Financial controllers in large institutions Credit risk analysts Portfolio analysts / managers Treasurers
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Course Outline
Day 1 THE SCOPE OF RISK MANAGEMENT Risk Management The evolution of banking risk: Introduction of the old Basel Accord G30 report Outline of the proposed new Accord Case study: Bankers Trust … and the evolution of bank risk management From a cost centre to a strategic competitive weapon Risk Management and the Basel Accord II Objectives of the new Accord Structure of the new Accord Pillar I: proposals for the three classes of bank risk What constitutes bank capital? Regulatory models for the estimation of credit risk Regulatory models for the estimation of market risk Regulatory models for the estimation of operational risk with examples of the capital calculations Results from the Quantitative Impact Studies Pillar II: the supervisory review Pillar II: interest rate risk Pillar III: market disclosure Timetable of the new Accord Problems that the new Accord may bring Exercise: delegates will discuss the current and planned progress of their institution towards the new Accord Sound Risk Management Practices Whilst each class of risk has developed its own methodologies, there are some overarching sound practices required to support the overall risk management function: Developing an appropriate risk management environment Defining the risk appetite of the institution Creation of risk management policies Development of risk measurement methodologies Creation of an appropriate infrastructure Exercise: delegates will discuss the progress of their institution towards sound practices, and highlight areas of priority MARKET RISK Introduction Adopting a portfolio approach, the main types of market risks will be discussed: What are the main sources of market risk Interest rate, foreign exchange, equity and commodity risks Different types of market risk Different generations of market risk Simulations of different instruments and portfolios, illustrating their characteristics Market risk management and measurement How do banks measure market risk? How do banks manage and control market risk? Traditional risk measures Concepts of delta measures: duration and sensitivity Simple comparison for an exposure Why is interest rate (IR) risk management difficult? Selecting the IR representation: market rates, forward rates, zero-coupon rates Brief aside: showing the relationship Impact of the IR term structure: gridpoint, multi-factor and imperfect Construction and comparison of classic gridpoint delta reports for a portfolio Construction and comparison of equivalence reports for the portfolio Exercise: to produce a sensitivity and equivalence report for a deal
Day 2 MARKET RISK Traditional Risk Measures (continued) Evidence from multi-factor analysis of IR movements Construction of classic multi-factor delta and delta-gamma reports Including risk measurement against mixtures of parallel and rotational shifts Demonstration and discussion about robust risk measurement Traditional risk management Limit and control schemes Case Study: Long Term Capital Management Modern risk measures: Value-at-Risk (VaR) What is VaR? Introduction through a simple 1-factor example: Using historic simulation Using a delta approximation Typical distributional assumptions Extension to a 2-factor example The Practical Implementation of VaR Difficulties of collecting appropriate and comparable information What are the regulatory requirements of the Basel Accord: Qualitative approval process Back testing: what is it and how to apply it? Stress testing, especially correlation matrix Liquidity risk Generation of extreme scenarios Typical VaR risk reports: what are the main management issues? VaR limit and control schemes Case Study: NatWest Markets Measurement of Interest Rate Risk The new Accord makes a distinction between market risk and IRR arising from the banking book. Banks apply different approaches: IRR exposure: earnings and economic value approaches Traditional technique: banding and gap analysis Applying simulation Case Study: MG Exercise: delegates will discuss the organisation of the market risk function within their institution and the main management reports
Day 3 CREDIT RISK Overview Banks as traditional credit taking institutions: Traditional loan exposures Provision of guarantees such as letters of credit or trade finance Complex derivative transactions Case-by-case credit assessment Overview of the main types of credit events Settlement and pre-settlement risks Traditional credit risk mitigation Typical industry practices Credit rating systems: What are the main components of a rating methodology Alternative approaches to a methodology: philosophies and structures The rating process: how different banks do it Rating agencies: main agencies, what they are trying to achieve? How do they differ? Case Studies: Bankgesellschaft Berlin and Continental Illinois Credit Risk Modelling Credit risk modelling: why is it the new challenge? Why is it so hard? Overview of the major approaches: Accounting approaches such as Z-scores Migration approaches such as CreditMetricsTM Equity-market approaches such as KMVTM Debt-market approaches such as KamakuraTM Example of a migration approach Modelling for a single obligor Merton’s mode: an outline of the basic theory Extending to a portfolio: example simulation Implementing the model in practice Criticisms of the migration models What additional insight do the equity-market approaches use? Criticisms of the equity-based approaches Hybrid models What additional insight do the debt-market approaches use? Criticisms of the debt-market approaches Credit Derivatives Credit derivatives constitute a rapidly growing section of the derivative market, aimed specifically at the transfer of credit risk. Their applications are increasing daily, and in particular are being used by banks to mitigate their credit exposures. Main types of credit derivatives: Credit default swaps Funded and unfunded CDOs Credit-linked notes Overview of the market Risk management of credit derivatives Case Study: Mahonia and the success of cross-sector risk transfer Brief discussion on the pricing of credit derivatives Sound Credit Risk Management Practices Establishing a credit risk environment Creating a credit granting process Maintaining an administration, measurement and monitoring process Credit risk controls Case Study: Credit Lyonnais Exercise: delegates will discuss the organisation of the credit risk function within their institution and the main management reports
Day 4 OPERATIONAL RISK What is operational risk: alternative definitions Why does the new Accord think it is so important? Methodology for managing operational risk: Developing suitable objectives and policies Process analysis – which are the key processes? Risk identification – creating a risk framework Creation of an operational risk database Process mapping – what are the major risks in any given process? Case Studies: Barings and Allied Irish Bank Key risk indicators – what can be used as a risk metric? Operational risk measurement models: Statistical modelling Score-card approaches Network modelling Backtesting the model Risk reporting Exposure management – internal mitigation and insurance Exceptional and unexceptional events What is current best practice? What is an appropriate organisational structure Case Studies: BCCI, Daiwa and First National Bank of Keystone Exercise: delegates will discuss the current state of operational risk management within their institution
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