Risk models only have value if they are used effectively in combination with a limit management and control process. While a control function requires and relies on reports, the key is not generation of quantitative numbers, formatted in ten different variations and cuts; it is the interpretation and application of that analysis that matters.
The objective of a risk function is to not just gather data, run reports, submit and analyze them; it is to ensure that unpleasant surprises and their impacts are limited. While you can’t control the timing and magnitude of such surprises, a well managed and well run risk function can help manage expectations as well as plan ahead for unexpected shocks. Limits play a major role in achieving that objective.
- Core principles of limit setting
- Risk limits and control process
- A brief overview of the various categories of limits
- Hierarchy of limits
- Reporting and exception review process, including early warning indicators, exception reports and management action triggers
- Categories of limit exceptions
- An illustration of capital loss and stop loss limits
- An illustration of VaR limits
- An illustration of VaR-based regulatory approach limits
- Illustrations of duration, convexity and PVBP limits
- Credit Risk Limits such as Pre-settlement risk and Financial institution and concentration limits
- Application of limits to various money market, forex market and capital market products
- Limits for Liquidity Risk
- Limits for Interest Rate Risk
- Exception handling and Sample action plan for trigger zones
The Calculating Value at Risk (VaR) course is a pre-requisite to some of the measures mentioned above. It is therefore included in the PDF note as an annexure.
This pre-package study note also includes a sample credit appraisal and counterparty limit proposal document for a local bank. The document covers the following topics:
- Financial Institution Credit Appraisal summary showing capital adequacy ratios and rating agency ratings and the recommended credit limit proposed
- Executive summary giving an overview of the bank analysis, peer group analysis and sovereign analysis conducted
- Bank’s Profile
- Bank’s Shareholding and Management structure
- Credit Ratings from Rating Agencies including their reasoning for assigning these rating
- Sovereign ratings including the reasoning for assigning this rating
- Financial analysis including an analysis of the financial statements (auditor’s report, balance sheet analysis by amount and % of Total Assets, trend in balance sheet items, earnings analysis by amount and % change over last period, trend in P&L statement items), and peer group and banking sector analysis
- Commentary to financial analysis for total assets, liabilities and equities, advances-to-deposits ratio, contingent liabilities, related party transactions, capital adequacy, net income for the year, returns on assets and equity
- Advances and Non-performing assets analysis including trends in NPL, industry wise share of NPL, NPL provision coverage, net NPL to advances ratios, and sector, geographical, foreign exchange exposures/ concentrations in total advances
- Business plans of and recent news regarding the bank
- Sovereign outlook including socio-political outlook and macroeconomic indicators
- Conclusions – Key risks identified for the bank after the analysis
- Annexure – Board of directors and key management personnel profiles, past and projected balance sheets and profit and loss statements, credit exposure details, country/ sovereign outlook details, peer group and banking sector analysis details
The pre-packaged deal also includes one EXCEL file that demonstrates the calculation/ setting of the Pre-settlement Risk (PSR) counterparty limit.