Project Report Mba

RISK MANAGEMENT IN BANKING SECTOR
CHAPTER I: INTRODUCTION
BABASAB PATIL
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1.1 THEME OF THE STUDY

Risk management underscores the fact that the survival of an organization depends heavily on its capabilities to anticipate and prepare for the change rather than just waiting for the change and react to it. The objective of risk management is not to prohibit or prevent risk taking activity, but to ensure that the risks are consciously taken with full knowledge, purpose and clear understanding so that it can be measured and mitigated. It also prevents an institution from suffering unacceptable loss causing an institution to suffer or materially damage its competitive position. Functions of risk management should actually be bank specific dictated by the size and uality of balance sheet, comple!ity of functions, technical" professional manpower and the status of #I$ in place in that bank.
1.2 INTRODUCTION
Risk: the meaning of %Risk& as per 'ebster&s comprehensive dictionary is (a chance of encountering harm or loss, hazard, danger) or (to e!pose to a chance of injury or loss). Thus, something that has potential to cause harm or loss to one or more planned objectives is called Risk. The word risk is derived from an Italian word (Risicare) which means (To *are). It is an e!pression of danger of an adverse deviation in the actual result from any e!pected result. +anks for International $ettlement ,+I$- has defined it as. (Risk is the threat that an event or action will adversely affect an organization&s ability to achieve its objectives and successfully e!ecute its strategies.) Risk Manage en!: Risk #anagement is a planned method of dealing with the potential loss or damage. It is an ongoing process of risk appraisal through various methods and tools which continuously /ssess what could go wrong *etermine which risks are important to deal with Implement strategies to deal with those risks
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1." STUDY PROB#EM

+asel II norms came as an attempt to reduce the gap in point of views between conflict practices. Therefore, the implementation of those resolutions emerged by the banks. Regarding this issue the survey has been made. $tudy problem can be stated as follows0 T$ %&a! e'!en! (anks &a)e i *+e en!e, Base+ II n$- s -e+a!e, !$ en&an.ing in!e-na+ .$n!-$+ in !&e (anks/
1.0 OB1ECTI2ES
1overing different aspects of risk assessment Identifying keys for effective risk management To understand the challenges and impact of Implementing +asel II To analyze the current progress of +asel II in 2ubli.
1.3 METHODO#OGY
3iterature Review *ata collection 4rimary information0 4ersonal interview" 5uestionnaire $econdary information0 Through internet, #anuals, 6ournals, /udit"/nnual reports The +enefits and limitation of +asel II The 1hallenges of Implementing +asel II Impact of +asel II Research method Findings and suggestions 1onclusion
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CHAPTER II: #ITRETURE RE2IE4
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2.1 INTRODUCTION
Base+ I A..$-,: The +asel 1ommittee on +anking $upervision, which came into e!istence in 789:, volunteered to develop a framework for sound banking practices internationally. In 78;; the full set of recommendations was documented and given to the 1entral banks of the countries for implementation to suit their national systems. This is called the +asel 1apital /ccord or +asel I /ccord. It provided level playing field by stipulating the amount of capital that needs to be maintained by internationally active banks. Base+ II A..$-,: +anking has changed dramatically since the +asel I document of 78;;. /dvances in risk management and the increasing comple!ity of financial activities " instruments ,like options, hybrid securities etc.- prompted international supervisors to review the appropriateness of regulatory capital standards under +asel I. To meet this re uirement, the +asel I accord was amended and refined, which came out as the +asel II accord. The new proposal is based on three mutually reinforcing pillars that allow banks and supervisors to evaluate properly the various risks that banks have to face and realign regulatory capital more closely with underlying risks. <ach of these three pillars has risk mitigation as its central board. The new risk sensitive approach seeks to strengthen the safety and soundness of the industry by focusing on0 = Risk based capital ,4illar 7= Risk based supervision ,4illar >= Risk disclosure to enforce market discipline ,4illar ?-
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2.2 BASE# II FRAME4ORK

T&e ne% *-$*$sa+ is (ase, $n !&-ee .a*i!a+ 5!5a++6 -ein7$-.ing *i++a-s !&a! a++$% (anks an,
s5*e-)is$-s !$ e)a+5a!e *-$*e-+6 !&e )a-i$5s -isks !&a! (anks 7a.e an, -ea+ign -eg5+a!$-6 $-e .+$se+6 %i!& 5n,e-+6ing -isks.
Base+ II F-a e%$-k
Pi++a- I Mini 5 Ca*i!a+ Re85i-e en!s
Pi++a- II S5*e-)is$-6 Re)ie% P-$.ess
Pi++a- III Ma-ke! Dis.i*+ine
2.2.1 THE FIRST PI##AR 9 MINIMUM CAPITA# RE:UIREMENTS

The first pillar sets out minimum capital re uirement for the bank. The new framework maintains minimum capital re uirement of ;@ of risk assets. +asel II focuses on improvement in measurement of risks. The revised credit risk measurement methods are more elaborate than the current accord. It proposes for the first time, a measure for operational risk, while the market risk measure remains unchanged.
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2.2.2 THE SECOND PI##AR ; SUPER2ISORY RE2IE4 PROCESS

$upervisory review process has been introduced to ensure not only that bank have ade uate capital to support all the risks, but also to encourage them to develop and use better risk management techni ues in monitoring and managing their risks. The process has four key principles. a- +anks should have a process for assessing their overall capital ade uacy in relation to their risk profile and a strategy for monitoring their capital levels. b- $upervisors should review and evaluate bank&s internal capital ade uacy assessment and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. c- $upervisors should e!pect banks to operate above the minimum regulatory capital ratios and should have the ability to re uire banks to hold capital in e!cess of the minimum. d- $upervisors should seek to intervene at an early stage to prevent capital from decreasing below minimum level and should re uire rapid remedial action if capital is not mentioned or restored.
2.2." THE THIRD PI##AR 9 MARKET DISCIP#INE

#arket discipline imposes strong incentives to banks to conduct their business in a safe, sound and effective manner. It is proposed to be effected through a series of disclosure re uirements on capital, risk e!posure etc. so that market participants can assess a bank&s capital ade uacy. These disclosures should be made at least semi.annually and more fre uently if appropriate. 5ualitative disclosures such as risk management objectives and policies, definitions etc. may be published annually.
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2." TYPES OF RISKS

'hen we use the term (Risk), we all mean financial risk or une!pected financial loss. If we consider risk in terms of probability or occur fre uently, we measure risk on a scale, with certainty of occurrence at one end and certainty of non.occurrence at the other end. Risk is the greatest phenomena where the probability of occurrence or non.occurrence is e ual. /s per the Reserve +ank of India guidelines issued in Act. 7888, there are three major types of risks encountered by the banks and these are 1redit Risk, #arket Risk B Aperational Risk. Further after eliciting views of banks on the draft guidelines on 1redit Risk #anagement and market risk management, the R+I has issued the final guidelines and advised some of the large 4$C banks to implement so as to gauge the impact. Risk is the potentiality that both the e!pected and une!pected events may have an adverse impact on the bank&s capital or its earnings. The e!pected loss is to be borne by the borrower and hence is taken care of by ade uately pricing the products through risk premium and reserves created out of the earnings. It is the amount e!pected to be lost due to changes in credit uality resulting in default. 'here as, the une!pected loss on account of the individual e!posure and the whole portfolio is entirely borne by the bank itself and hence care should be taken. Thus, the e!pected losses are covered by reserves"provisions and the une!pected losses re uire capital allocation.
2.".1 CREDIT RISK

In the conte!t of +asel II, the risk that the obligor ,borrower or counterparty- in respect of a particular asset will default in full or in part on the obligation to the bank in relation to the asset is termed as 1redit Risk. 1redit Risk is defined as.(The risk of loss arising from outright default due to inability or unwillingness of the customer or counter party to meet commitments in relation to lending, trading, hedging, settlement and other financial transaction of the customer or counter party to meet commitments). 1redit Risk is also defined, (as the potential that a borrower or counter party will fail to meets its obligations in accordance in agreed terms).
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2.".2 MARKET RISK

It is defined as (the possibility of loss caused by changes in the market variables such as interest rate, foreign e!change rate, e uity price and commodity price). It is the risk of losses in, various balance sheet positions arising from movements in market prices. R+I has defined market risk as the possibility of loss to a bank caused by changes in the market rates" prices. R+I Duidance Eote focus on the management of li uidity Risk and #arket Risk, further categorized into interest rate risk, foreign e!change risk, commodity price risk and e uity price risk. #arket risk includes the risk of the degree of volatility of market prices of bonds, securities, e uities, commodities, foreign e!change rate etc., which will change daily profit and loss over timeF it&s the risk of une!pected changes in prices or rates. It also addresses the issues of +anks ability to meets its obligation as and when due, in other words, li uidity risk.
2."." OPERATIONA# RISK

Aperational risk is the risk associated with the operations of an organization. It is defined as (risk of loss resulting from inade uate or failed internal process, people and systems or from e!ternal events.) It includes legal risk. It e!cludes strategic and reputational risks, as the same are not uantifiable. Aperational risk includes the risk of loss arising from fraud, system failures, trading error and many other internal organizational risks as well as risk due to e!ternal events such as fire, flood etc. the losses due to operation risk can be direct as well as indirect. *irect loss means the financial losses resulting directly from an incident or an event. <.g. forgery, fraud etc. indirect loss means the loss incurred due to the impact of an incident.
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2.".0 REGU#ATORY RISK

The owned funds alone are managed by an entity, it is natural that very few regulators operate and supervise them. 2owever, as banks accept deposit from public obviously better governance is e!pected from them. This entails multiplicity of regulatory controls. #any +anks, having already gone for public issue, have a greater responsibility and accountability in this regard. /s banks deal with public funds and money, they are subject to various regulations. The various regulators include Reserve +ank of India ,R+I-, $ecurities <!change +oard of India ,$<+I-, *epartment of 1ompany /ffairs ,*1/-, etc. #ore over, banks should ensure compliance of the applicable provisions of The +anking Regulation /ct, The 1ompanies /ct, etc. Thus all the banks run the risk of multiple regulatory.risks which inhibits free growth of business as focus on compliance of too many regulations leave little energy scope and time for developing new business. +anks should learn the art of playing their business activities within the regulatory controls.
2.".3 EN2IRONMENTA# RISK

/s the years roll the technological advancement takes place, e!pectation of the customers change and enlarges. 'ith the economic liberalization and globalization, more national and international players are operating the financial markets, particularly in the banking field. This provides the platform for environmental change and e!posure of the bank to the environmental risk. Thus, unless the banks improve their delivery channels, reach customers, innovate their products that are service orientedF they are e!posed to the environmental risk.
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2.0 BASE#<S NE4 CAPITA# ACCORD

+ankers& for International $ettlement ,+I$- meet at +asel situated at $witzerland to address the common issues concerning bankers all over the world. The +asel 1ommittee on +anking $upervision ,+1+$- is a committee of banking supervisory authorities of D.7G countries and has been developing standards and establishment of a framework for bank supervision towards strengthening financial stability through out the world. In consultation with the supervisory authorities of a few non.D.7G countries including India, core principles for effective banking supervision in the form of minimum re uirements to strengthen current supervisory regime, were mooted. The 78;; 1apital /ccord essentially provided only one option for measuring the appropriate capital in relation to the risk weighted assets of the financial institution. It focused on the total amount of bank capital so as to reduce the risk of bank solvency at the potential cost of bank&s failure for the depositors. /s an improvement on the above, the Eew 1apital /ccord was published in >GG7 by +asel 1ommittee of +anking $upervision. It provides spectrum of approaches for the measurement of credit, market and operational risks to determine the capital re uired. The spread and nature of the ownership structure is important as it impinges on the propensity to induct additional capital. 'hile getting support from a large body of shareholders is a difficult proposition when the bank&s performance is adverse, a smaller shareholder base constrains the ability of the bank to garner funds. Tier I capital is not owed to anyone and is available to cover possible une!pected losses. It has no maturity or repayment re uirement, and is e!pected to remain a permanent component of the core capital of the counter party. 'hile +asel standards currently re uire banks to have a capital ade uacy ratio of ;@ with Tier I not less than :@, R+I has mandated the banks to maintain 1/R of 8@. The maintenance of capital ade uacy ratio is like aiming at a moving target as the composition of risk.weighted assets gets changed every now and then on account of fluctuations in the risk profile of a bank. Tier I capital is known as the core capital providing permanent and readily available support to the bank to meet the une!pected losses. In the recent past, owners of 4$C banks, the government provided ade uate capital to weaker banks to ease the burden. In doing so, the government was not acting as a prudent investor as return on such capital was never a consideration. Further, capital infusion did not result in any cash flow to the receiver, as all the capital was re uired to be reinvested in government securities yielding low returns. Receipt of capital was just a book entry with the only advantage of income from the securities.
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2.3 CAPITA# ADE:UACY

$ubse uent to nationalization of banks, capitalization in banks was not given due importance as it was felt necessary for the reason that the ownership of the banks rested with the government, creating the re uired confidence in the mind of the public. 1ombined forces of globalization and liberalization compelled the public sector banks, hitherto shielded from the vagaries of market forces, come by the condition of terms market realities, where certain minimum capital ade uacy has to be maintained in the face of stiff norms in respect of income recognition, asset classification and provisioning. It is clear that multi pronged approach would be re uired to meet the challenges of maintaining capital at ade uate levels in the face of mounting risks in the banking sector. In banks, asset creation is an event happening subse uent to the capital formation and deposit mobilization.
2.= RISK AGGREGATION > CAPITA# A##OCATION

1apital /de uacy in relation to economic risk is a necessary condition for the long.term soundness of banks. /ggregate risk e!posure is estimated through Risk /djusted Return on 1apital ,R/RA1- and <arnings at Risk ,<aR- method. Former is used by bank with international presence and the R/RA1 process estimates the cost of <conomic 1apital B e!pected losses that may prevail in the worst.case scenario and then e uates the capital cushion to be provided for the potential loss. R/RA1 is the first step towards e!amining the institution&s entire balance sheet on a mark to market basis, if only to understand the risk return trade off that have been made. /s banks carry on the business on a wide area network basis, it is critical that they are able to continuously monitor the e!posures across the entire organization and aggregate the risks so that an integrated view can be taken. The <conomic 1apital is the amount of the capital ,besides the Regulatory 1apital- that the firm has to put at risk so as to cover the potential loss under the e!treme market conditions. In other words, it is the difference in mark.to.market value of assets over liabilities that the bank should aim at or target. /s against this, the regulatory capital is the actual 1apital Funds held by the bank against the Risk 'eighted /ssets. /fter measuring the economic capital for the bank as a whole, bank&s actual capital has to be allocated to individual business units on the basis of various types of risks. This process can be continued till capital is allocated at transaction"customer level.
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2.? RISK BASED SUPER2ISION @RBSA

The Reserve +ank of India presently has its supervisory mechanism by way of on.site inspection and off.site monitoring on the basis of the audited balance sheet of a bank. In order to enhance the supervisory mechanism, the R+I has decided to put in place, a system of Risk +ased $upervision. Cnder risk based supervision, supervisors are e!pected to concentrate their efforts on ensuring that financial institutions use the process necessarily to identify measure and control risk e!posure. The R+$ is e!pected to focus supervisory attention in accordance with the risk profile of the bank. The R+I has already structured the risk profile templates to enable the bank to make a self.assessment of their risk profile. It is designed to ensure continuous monitoring and evaluation of risk profile of the institution through risk matri!. This may optimize the utilization of the supervisory resources of the R+I so as to minimize the impact of a crises situation in the financial system. The transaction based audit and supervision is getting shifted to risk focused audit. Risk based supervision approach is an attempt to overcome the deficiencies in the traditional point.in.time, transaction. validation and value based supervisory system. It is forward looking enabling the supervisors to differentiate between banks to focus attention on those having high.risk profile. The implementation of risk based auditing would imply that greater emphasis is placed on the internal auditor&s role for mitigating risks. +y focusing on effective risk management, the internal auditor would not only offer remedial measures for current trouble.prone areas, but also anticipate problems to play an active role in protecting the bank from risk hazards.
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2.B RISK MANAGEMENT: KEYS FOR EFFECTI2E RISK MANAGEMENT:

To direct risk behaviour B influence the shape of a firm&s risk profile, management should use all available options. Csing financial incentives and penalties to influence risk taking behaviour is effective management tool. $haring of information by keeping confidentiality intact is also helpful to find out different ways for controlling the risk as valuable inputs may be received through this sharing. <ven information on creditworthiness of counterparties that are known to take substantial risk can also help. *iversification is e!tremely important. /s it lowers the variance in investor portfolios, improves corporate ability to raise debt, reduces employment risks, B heightens operating efficiency. Dovernance should never be ignored. 1areful structuring of the alliance in advance of the deal and continual adjustment thereafter help to build a constructive relationship. Ane should not trust while in business. 4ersonal chemistry is good but is no substitute for monitoring mechanism, co.operation incentives, B organizational alignment. 'ithout support system within the organization itself, e!ternal alliances are doomed to fail.
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2.B.1 MARKET RISK MANAGEMENT:

'e may believe that there are limited tools available to mitigate this risk, but this is not so. Future, option, derivatives trading and its many sub types are some of the tools which help to investors to protect the investment or minimize there e!posure toward market risk. In case of derivatives as in broader sense derivatives are considered to be used to hedge against market risk, but they can be used to mitigate various other types of risks, like credit risk, operational risk. The importance of managing market risk has now been well understood by financial institutions and corporate across the world. #arket risk has made the global financial conditions uncertain and unsettled and still recovery of problem is not visible in the near time.
2.B.2 CREDIT RISK MANAGEMENT

Tools of 1redit Risk #anagement0 The instruments and tools, through which credit risk is managed are0 <!posure 1eilings, Review"Renewal, Risk Rating #odel, Risk based scientific pricing, 4ortfolio #anagement, 3oan Review #echanism
2.B." OPERATIONA# RISK MANAGEMENT:

This risk can be reduced to great e!tent by effectively controlling organization as a whole by taking certain steps, like assuring that designed processes is carried out carefully B with the help of e!perts, and are followed in desired way.
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2.C COMPUTATION OF CAPITA# RE:UIREMENT 2.C.1 CREDIT RISK APPROACHES

C-e,i! Risk
S!an,a-,iDe, a**-$a.&
A,)an.e, A**-$a.&
F$5n,a!i$n IRB
A,)an.e, IRB
S!an,a-,iDe, a**-$a.&0 the +asel committee as well as R+I provides a simple methodology for risk assessment and calculating capital re uirements for credit risk called $tandardized approach. This approach is divided into the following broad topics for simpler and easier understanding 7. /ssignment of Risk 'eights0 all the e!posures are first classified into various customer types defined by +asel committee or R+I. Thereafter, assignment of standard risk weights is done, either on the basis of customer type or on basis of the asset uality as determined by rating of the asset, for calculating risk weighted assets. >. <!ternal 1redit /ssessments0 the regulator or R+I recognizes certain risk rating agencies and e!ternal credit assessment institutions ,<1/Is- and rating assigned by these <1/Is, to the borrowers may be taken as a basis for assigning risk weights to the borrowers. +etter rating means better uality of assets and lesser risk weights and hence lesser re uirement of capital allocation. ?. 1redit Risk #itigation0 +asel recognized 1ollaterals and +asel recognized Duarantees are two securities that banks obtain for loans " advances to cover credit risk, which are termed as (1redit Risk #itigants)
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RISK MANAGEMENT IN BANKING SECTOR A,)an.e, A**-$a.&: +asel II framework also provides for advanced approaches to calculate capital re uirement for credit risk. These approaches rely heavily on a banks internal assessment of its borrowers and e!posures. These advanced approached are based on the internal ratings of the bank and are popularly known as Internal Rating +ased ,IR+- approaches. Cnder /dvanced /pproaches, the banks will have > options as under a- Foundation Internal Rating +ased ,FIR+- /pproaches. b- /dvanced Internal Rating +ased ,/IR+- /pproaches.
The differences between foundation IR+ and advanced IR+ have been captured in the following table0 Table >.8.7.70 The differences between foundation IR+ and advanced IR+
Da!a In*5! 4robability of *efault 3oss Diven *efault <!posure at *efault <ffective #aturity
F$5n,a!i$n IRB A,)an.e, IRB 4rovided by bank based on 4rovided by bank based on own own estimates estimates $upervisory values set by the 4rovided by bank based on own 1ommittee estimates $upervisory values set by the 4rovided by bank based on own 1ommittee estimates $upervisory values set by the 4rovided by bank based on own 1ommittee estimates Ar /t the national discretion, provided by bank based on own estimates
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2.C.2 MARKET RISK APPROACHES

Ma-ke! Risk
S!an,a-,iDe, A**-$a.&
In!e-na+ M$,e+ Base, a**-$a.&
Ma!5-i!6 Base,
D5-a!i$n Base,
R+I has issued detailed guidelines for computation of capital charge on #arket Risk in 6une >GG:. The guidelines seek to address the issues involved in computing capital charge for interest rate related instruments in the trading book, e uities in the trading book and foreign e!change risk ,including gold and precious metals- in both trading and banking book. Trading book will include0 $ecurities included under the 2eld for trading category $ecurities included under the /vailable for $ale category Apen gold position limits Apen foreign e!change position limits Trading position in derivatives and derivatives entered into for hedging trading book e!posures.
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2.C." OPERATIONA# RISK APPROACHES

O*e-a!i$na+ Risk
Basi. In,i.a!$A**-$a.&
S!an,a-,iDe, A**-$a.&
A,)an.e, Meas5-e en! A**-$a.&
+asic Indicator /pproach0 Cnder the basic indicator approach, +anks are re uired to hold capital for operational risk e ual to the average over the previous three years of a fi!ed percentage ,7H@ . denoted as alpha- of annual gross income. Dross income is defined as net interest income plus net non.interest income, e!cluding realized profit"losses from the sale of securities in the banking book and e!traordinary and irregular items. $tandardized /pproach0 Cnder the standardized approach, banks activities are divided into eight business lines. 'ithin each business line, gross income is considered as a broad indicator for the likely scale of operational risk. 1apital charge for each business line is calculated by multiplying gross income by a factor ,denoted beta- assigned to that business line. Total capital charge is calculated as the three.year average of the simple summations of the regulatory capital across each of the business line in each year. /dvanced #easurement /pproach0 Cnder advanced measurement approach, the regulatory capital will be e ual to the risk measures generated by the bank&s internal risk measurement system using the prescribed uantitative and ualitative criteria.
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2.1E BENEFITS OF BASE# II

1. Be!!e- a++$.a!i$n $7 .a*i!a+ an, -e,5.e, i *a.! $7 $-a+ &aDa-, !&-$5g& -e,5.!i$n in !&e s.$*e 7$- -eg5+a!$-6 a-(i!-age: +y assessing the amount of capital re uired for each e!posure or pool of e!posures, the advanced approach does away with the simplistic risk buckets of current capital rules. 2. I *-$)e, signa+ 85a+i!6 $7 .a*i!a+ as an in,i.a!$- $7 s$+)en.6: the proposed rule is designed to more accurately align regulatory capital with risk, which will improve the uality of capital as an indicator of solvency. ". En.$5-ages (anking $-ganiDa!i$ns !$ i *-$)e .-e,i! -isk anage en!: Ane of the
principal objectives of the proposed rule is to more closely align capital charges and risk. For any type of credit, risk increases as either the probability of default or the loss given default increases. 0. M$-e e77i.ien! 5se $7 -e85i-e, (ank .a*i!a+: Increased risk sensitivity and improvements in risk measurement will allow prudential objectives to be achieved more efficiently. 3. In.$-*$-a!es an, en.$5-ages a,)an.es in -isk eas5-e en! an, -isk anage en! 0 The
proposed rule seeks to improve upon e!isting capital regulations by incorporating advances in risk measurement and risk management made over the past 7H years. =. Re.$gniDes ne% ,e)e+$* en!s an, a..$ $,a!es .$n!in5ing inn$)a!i$n in 7inan.ia+
*-$,5.!s (6 7$.5sing $n -isk: The proposed rule also has the benefit of facilitating recognition of new developments in financial products by focusing on the fundamentals behind risk rather than on static product categories. ?. Be!!e- a+ign en! $7 .a*i!a+ an, $*e-a!i$na+ -isk an, en.$5-ages (anking $-ganiDa!i$ns !$ i!iga!e $*e-a!i$na+ -isk: Introducing an e!plicit capital calculation for operational risk eliminates the implicit and imprecise (buffer) that covers operational risk under current capital rules.
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B. En&an.e, s5*e-)is$-6 7ee,(a.k: all three pillars of the proposed rule aim to enhance supervisory feedback from federal banking agencies to managers of banks and thrifts. <nhanced feedback could further strengthen the safety and soundness of the banking system. C. En&an.e, ,is.+$s5-e *-$ $!es measurement and risk management. 1E. P-ese-)es !&e (ene7i!s $7 in!e-na!i$na+ .$nsis!en.6 an, .$$-,ina!i$n a.&ie)e, %i!& !&e 1CBB Base+ A..$-,: /n important objective of the 78;; /ccord was competitive consistency of capital re uirements for banking organizations competing in global markets. +asel II continues to pursue this objective. a-ke! ,is.i*+ine: The proposed rule seeks to aid market
discipline through the regulatory framework by re uiring specific disclosures relating to risk
2.11 #IMITATIONS OF BASE# II:

1. #a.k $7 s577i.ien! *5(+i. kn$%+e,ge0 knowledge about banks& portfolios and their future risk.weight, since this will also depend on whether banks will use the standardized or IR+ approaches. 2. #a.k $7 *-e.ise kn$%+e,ge: as to how operational risk costs will be charged. The banks are e!pected to benefit from sharpening up some aspects of their risk management practices preparation and for the introduction of the operational risk charge. ". #a.k $7 .$nsis!en.6: at least at this stage, as to how insurance activities will be accounted for. Ane treatment outlined in the 1apital /ccord is that banks deduct e uity and other regulatory capital investments in insurance subsidiaries and significant minority investments in insurance entities. /n alternative to this treatment is to apply a risk weight age to insurance investments.
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2.12 CHA##ENGES FOR INDIAN BANKING SYSTEM UNDER BASE# II
C$s!+6 Da!a(ase C-ea!i$n an, Main!enan.e P-$.ess: The most obvious impact of +/$<3 II is the need for improved risk management and measurement. It aims to give impetus to the use of internal rating system by the international banks.
A,,i!i$na+ Ca*i!a+ Re85i-e en!: 2ere is a worrying aspect that some of the banks will not be able to put up the additional capital to comply with the new regulation and they may be isolated from the global banking system.
#a-ge P-$*$-!i$n $7 NPAFs: / large number of Indian banks have significant proportion of E4/Is in their assets. /long with that a large proportion of loans of banks are of poor uality. There is a danger that a large number of banks will not be able to restructure and survive in the new environment. This may lead to forced mergers of many defunct banks with the e!isting ones and a loss of capital to the banking system as a whole.
In.-ease, P-$;C6.+i.a+i!6: The increased importance to credit ratings under +asel II could actually imply that the minimum re uirements could become pro.cyclical as banks are re uired to raise capital levels for loans in times of economic crises.
#$% Deg-ee $7 C$-*$-a!e Ra!ing Pene!-a!i$n: India has as few as three established rating agencies and the level of rating penetration is not very significant as, so far, ratings are restricted to issues and not issuers. 'hile +asel II gives some scope to e!tend the rating of issues to issuers, this would only be an appro!imation and it would be necessary for the system to move to ratings of issuers. <ncouraging ratings of issuers would be a challenge.
C-$ss B$-,e- Iss5es 7$- F$-eign Banks: In India, foreign banks are statutorily re uired to maintain local capital and the following issues are re uired to be resolvedF 7. Jalidation of the internal models approved by their head offices and home country supervisor adopted by the Indian branches of foreign banks. >. *ate history maintained and used by the bank should be distinct for the Indian branches compared to the global data used by the head office ?. capital for operational risk should be maintained separately for the Indian branches in India
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2.10 IMPACT OF BASE# II IMP#EMENTATION ON THE INDIAN BANKING INDUSTRY

1. C&anges in Ca*i!a+ Risk 4eig&!e, Asse!s Ra!i$ @CRARA: #ost of the banks are already adhering to the +asel II guidelines. 2owever, the Dovernment has indicated that a cushion should be maintained by the public sector banks and therefore their 1R/R should be above 7>@. +asel I focused largely on credit risk, whereas +asel II has ? risks to be considered, viz., credit risk, operational risk and market risks. /s +asel II considers all these ? risks, there are chances of a decline in the 1apital /de uacy Ratio. 2. Hig& .$s!s 7$- 5*;g-a,a!i$n $7 !e.&n$+$g6: Full implementation of the +asel II framework would re uire up.gradation of the bank.wide information systems through better branch. connectivity, which would entail huge costs and may raise IT.security issues. The implementation of +asel II can also raise issues relating to development of 2R skills and database management. $mall and medium sized banks may have to incur enormous costs to ac uire re uired technology, as well as to train staff in terms of the risk management activities. There will be a need for technological up gradation and access to information like historical data etc. ". Ra!ing -isks: 4roblems embedded in +asel II norms include rating of risks by rating agencies. 'hether the country has ade uate number of rating agencies to discharge the functions in a +asel II compliant banking system, is a uestion for consideration. Further, to what e!tent the rating agencies can be relied upon is also a matter of debate. <ntry norms for recognition of rating agencies should be stricter. Anly firms with international e!perience or background in ratings business should be allowed to enter. This is necessarily given that the Indian rating industry is in its growth phase, especially with the implementation of new +asel II capital norms that encourage companies to get rated. 0. I *-$)e, Risk Manage en! > Ca*i!a+ A,e85a.6: Ane aspect that hold back the critics of +asel II is the fact that it will tighten the risk management process, improve capital ade uacy and strengthen the banking system.
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RISK MANAGEMENT IN BANKING SECTOR 3. C5-!ai+ en! $7 C-e,i! !$ In7-as!-5.!5-e P-$Ge.!s: The norms re uire a higher weight age for project finance, curtailing credit to this is very crucial sector. The long.term impacts for this could be disastrous. =. P-e7e-en.e 7$- M$-!gage C-e,i! !$ C$ns5 e- C-e,i! #$%e- Risk 4eig&!s !$ M$-!gage .-e,i!: 4reference for #ortgage 1redit to 1onsumer 1redit 3ower Risk 'eights to #ortgage credit would accentuate bankers& preference towards it vis.K.vis consumer credit. ?. Base+ II: A,)an!age Big Banks: It would be far easier for the larger banks to implement the norms, raising their uality of risk management and capital ade uacy. This combined with the higher cost of capital for smaller players would ueer the pitch in favour of the former. The larger banks would also have a distinct advantage in raising capital in e uity markets. <merging #arket +anks can turn this challenge into an advantage by active implementation and e!panding their horizons outside the country. B. IT s*en,ing: A,)an!age !$ In,ian IT .$ *anies: An the flipside, Indian IT companies, which have considerable e!pertise in the +F$I segment, stand to gain. #ajor Indian IT companies such as I.fle! and Infosys already have the products, which could help them develop an edge over their rivals from the developed countries.
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CHAPTER III: PRO1ECT TASK
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".1 INTRODUCTION
The reason for conducting this survey was to establish how these new regulations were perceived in terms of priority, urgency and interest within the banks. In addition, aim is to provide a view on strategic issues and to report on key trends related to many aspects of compliance within the +asel II regulatory framework. Finally, to make recommendations on the opportunities offered by the new regulations for the risk management process.
".2 STUDY PROB#EM

+asel II norms came as an attempt to reduce the gap in point of views between conflict practices. Therefore, the difference of bank implementation of those resolutions emerges. $tudy problem can be stated as follows0 T$ %&a! e'!en! (anks &a)e i *+e en!e, Base+ II n$- s -e+a!e, !$ en&an.ing in!e-na+ .$n!-$+ in !&e (anks/
"." OB1ECTI2ES
1overing different aspects of risk assessment Identifying keys for effective risk management To understand the challenges and impact of Implementing +asel II To analyze the current progress of +asel II in 2ubli.
".".1 DATA CO##ECTION

4rimary information0 4ersonal interview" 5uestionnaire $econdary information0 Through internet, #anuals, 6ournals, /udit"/nnual reports
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".0 STUDY CO2ERAGE AND SAMP#E

$tudy coverage consists of all bank employees within internal control, risk management, operations department, and credit department. 7G uestionnaires were distributed over 7G banks in 2ubli, selected on random sampling techni ue. The survey assesses the readiness of the banking industry for implementing the +asel II regulatory framework and provides a view of the strategic issues and key trends related to the many aspects of compliance within this framework.
".3 SCOPE OF THE SUR2EY

The +anking Industry has been assessed the readiness in seven areas0 /wareness of regulations Arganizational structure Reporting ability 1ompliance with +asel II 1apital allocation +asel II action plan Technology
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CHAPTER I2: ANA#YSIS > INTERPRETATION
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0.1 A4ARENESS OF REGU#ATIONS

S$5-.e: A++ !&e (e+$% ana+6sis an, in!e-*-e!a!i$n is ,$ne 7-$ Banks. 7. 'hat is your assessment of your readiness for the new +asel proposals with respect to capital re uirementsL Table :.7.70 Readiness for the new +asel proposal FC33N 4R<4/R<* 4/RTI/33N 4R<4/R<* EAT N<T 4R<4/R<* 1R<*T RI$M ; > #/RM<T RI$M 8 7 A4<R/TIAE/3 RI$M 8 7 !&e s5-)e6 .$n,5.!e, in
Figure :.7.7 Readiness for the new +asel proposal >. 2ave you done a gap analysis between current risk management practice and new capital re uirementsL Table :.7.>0 Dap analysis N<$ EA 1R<*T RI$M 8 7 #/RM<T RI$M H H A4<R/TIAE/3 RI$M 8 7
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Figure :.7.> Dap analysis ?. 'hat degree of priority do you address to the new +asel regulatory frameworkL Table :.7.?0 4riority to new +asel regulatory framework J<RN I#4ART/ET I#4ART/ET EAT I#4ART/ET 1R<*T RI$M 8 7 #/RM<T RI$M 8 7 A4<R/TIAE/3 RI$M 7G
Figure :.7.? 4riority to new +asel regulatory framework :. 2ow do you view +asel II regulation0 as an opportunity to enhance the risk management process, or as a regulatory constraintL
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RISK MANAGEMENT IN BANKING SECTOR Table :.7.:0 Jiew of +asel II regulation 1R<*T A44ARTCEITN 1AE$TR/IET RI$M 7G #/RM<T RI$M ; > A4<R/TIAE/3 RI$M 7G
Figure :.7.:0 Jiew of +asel II regulation OBSER2ATIONS The majority of banks consider themselves to be fully prepared. / majority of banks have performed a gap analysis between their current risk management practice and the new capital re uirements. Anly one bank does not view +asel II implementation as a high priority project. The banks largely believe that +asel II will provide them an opportunity to enhance risk management.
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RISK MANAGEMENT IN BANKING SECTOR INTERPRETATION /lthough the +asel II regulations are considered important to very important by a strong majority of banks, some are only partly prepared for implementation. The banks aim to look beyond the regulatory aspects and aim to benefit from the new regulations as a means to enhanced risk management.
0.2 ORGANISTIONA# STRUCTURE

7. *o you have an assigned 1redit risk, #arket risk and Aperational risk manager in your bankL Table :.>.70 /ssignment of risk manager N<$ EA 1R<*T RI$M 7G #/RM<T RI$M 8 7 A4<R/TIAE/3 RI$M 8 7
Figure :.>.70 /ssignment of risk manager
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RISK MANAGEMENT IN BANKING SECTOR >. To whom does the Risk manager reportL Table :.>.>0 'hom does risk manager report 1R<*T 12I<F <O<1CTIJ< AFFI1<R 12I<F FIE/E1I/3 AFFI1<R /$$<T$ /E* 3I/+3ITN #/E/D<R 1R<*IT RI$M AFFI1<R AT2<R $4<1IFN RI$M : > : #/RM<T RI$M P 7 > A4<R/TIAE/3 RI$M P 7 >
Figure :.>.>0 'hom does risk manager reportL ?. 'hat is the assigned manager&s time dedicated to this activityL Table :.>.?0 Time dedication 1R<*T RI$M G.>G@ >G.HG@ QHG@ > > P #/RM<T RI$M : 7 H A4<R/TIAE/3 RI$M > > P
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Figure :.>.?0 Time dedication :. 2ow many people work in these departmentsL Table :.>.:0 Eumber of people work 1R<*T RI$M 7.? ?.H H. 7G Q 7G > P 7 7 #/RM<T RI$M : : 7 7 A4<R/TIAE/3 RI$M 7 H 7 ?
Figure :.>.:0 Eumber of people work H. *o you have a Risk 1ommitteeL
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RISK MANAGEMENT IN BANKING SECTOR Table :.>.H0 Risk 1ommittee 1R<*T RI$M N<$ EA P : #/RM<T RI$M H H A4<R/TIAE/3 RI$M P :
Figure :.>.H0 Risk 1ommittee OBSER2ATIONS /lmost all of the participating banks have a risk management departemnt. #ost of the industry&s risk managers& report to the 1hief <!ecutive Afficer, /sset and liability manager and 1hief Risk Afficer accounting for the balance in e ual proportions. $lightly more attention is paid to credit and operational risk than to #arket risk, as :G @ of the banks operating do not have risk committee. INTERPRETATION *espite the relatively small size of banks, they are generally well aware of the risk management function, and for this purpose, risk managers spend over half their time performing these functions.
0." REPORTING ABI#ITY
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7. /re you producing reporting for Table :.?.70 Reports produced for 1R<*T RI$M R<DC3/TARN 4CR4A$< ? #AEITARIED 9 *<1I$IAE #/MIED 9 4CR4A$< #/RM<T RI$M : ; : A4<R/TIAE/3 RI$M : ; :
Figure :.?.70 Reports produced for >. *oes e!ternal reporting drive your internal reportingL Table :.?.>0 <!ternal reporting drive internal reporting 1R<*T RI$M J<RN $IDEIFI1/ET3N $IDEIFI1/ET3N EAT /T /33 $IDEIFI1/ET3N : H 7 #/RM<T RI$M H : 7 A4<R/TIAE/3 RI$M : H 7
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Figure :.?.>0 <!ternal reporting drive internal reporting ?. *oes e!ternal reporting affect your decision making processL Table :.?.?0 <!ternal reporting affect decision making process 1R<*T RI$M J<RN $IDEIFI1/ET3N ? $IDEIFI1/ET3N P EAT /T /33 7 $IDEIFI1/ET3N #/RM<T RI$M ? H > A4<R/TIAE/3 RI$M ? P 7
Figure :.?.?0 <!ternal reporting affect decision making process
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RISK MANAGEMENT IN BANKING SECTOR :. 2ow fre uent is your internal reportingL Table :.?.:0 Fre uency of internal reporting 1R<*T RI$M *aily 'eekly #onthly /nnually 7 ; 7 7 ; 7 #/RM<T RI$M A4<R/TIAE/3 RI$M 7 7 9 7
Figure :.?.:0 Fre uency of internal reporting H. 'ill you produce specific internal reporting for 1redit, #arket and Aperational RiskL Table :.?.H0 4roduction of specific internal reporting 1R<*T RI$M N<$ EA 7G #/RM<T RI$M 7G A4<R/TIAE/3 RI$M 7G
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Figure :.?.H0 4roduction of specific internal reporting OBSER2ATIONS /ll risk reporting is compiled largely for monitoring and *ecision making purposes than Regulatory purpose. /ll the +anks produce internal report. #ost of the +anks produce Internal Report monthly. #ost of the banks said <!ternal reporting affect their decision making process.
INTERPRETATION Reporting for all risk still needs to be developed.
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0.0 COMP#IACE 4ITH BASE# II

7. 'hich approach will best suit your organizationL Table :.:.70 /pproach that best suit organization 1R<*T $T/E*/R* FACE*/TIAE /*J/E1<* *AE&T MEA' RI$M ; > #/RM<T RI$M 8 7 A4<R/TIAE/3 RI$M 9 ?
Figure :.:.70 /pproach that best suit organization >. 2ave you performed a 1ost"+enefit analysis for each approach proposed by +asel IIL Table :.:.>0 1ost"+enefit analysis 1R<*T RI$M N<$ EA 7G #/RM<T RI$M ; > A4<R/TIAE/3 RI$M 8 7
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Figure :.:.>0 1ost"+enefit analysis ?. In your situation, could regulatory capital consumption be motivation for0 Table :.:.?0 Regulatory capital consumption be motivation $TA44IED /1TIJITI<$ *<J<A43IED /1TIJITI<$ /15CIRIED /1TIJITI<$ EAE< 1R<*T RI$M #/RM<T RI$M > 7 H 9 7 7 7 7 A4<R/TIAE/3 RI$M > P
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Figure :.:.?0 Regulatory capital consumption be motivation OBSER2ATIONS #ost of the banks believe that the standard approach is most appropriate for their purposes. An the whole, a cost"benefit analysis has been done for each approach. It appears that the banks have completed their cost"benefit analysis only for their elected approach. Regulatory capital consumption is motivated for developing activities.
INTERPRETATION #ost of the banks would prefer to adopt the standard approach, but only few of those who would like to implement the advanced approach and they will implement. The banks that would prefer to adopt the standard approach should try to adopt advanced approach.
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0.3 CAPITA# A##OCATION

7. 2ave you estimated the regulatory capital consumption for each of your individual businessesL Table :.H.70 <stimation of the regulatory capital consumption 1R<*T RI$M N<$ EA 7G #/RM<T RI$M 8 7 A4<R/TIAE/3 RI$M 7G
Figure :.H.70 <stimation of the regulatory capital consumption >. 'ill you outsource activities with high capital consumptionL Table :.H.>0 Autsource activities for high capital consumption 1R<*T RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
N<$ EA
: P
? 9
H 9
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Figure :.H.>0 Autsource activities for high capital consumption ?. 'ill you insure selected RiskL Table :.H.?0 Insure Risk 1R<*T RI$M N<$ EA 9 ? #/RM<T RI$M H H A4<R/TIAE/3 RI$M P :
Figure :.H.?0 Insure Risk :. *o you intend allocating economic capital by +usiness linesL
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RISK MANAGEMENT IN BANKING SECTOR Table :.H.:0 /llocation of economic capital 1R<*T RI$M N<$ EA ; 7 #/RM<T RI$M 9 > A4<R/TIAE/3 RI$M ; 7
Figure :.H.:0 /llocation of economic capital H. 'ill you make use of +asel II re uirements to implement an economic capital allocation throughout your business linesL Table :.H.H0 Cse of +asel II re uirements 1R<*T RI$M N<$ EA 8 #/RM<T RI$M ; 7 A4<R/TIAE/3 RI$M ; 7
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Figure :.H.H0 Cse of +asel II re uirements OBSER2ATIONS #ost of the banks do not outsource activities with high capital consumption. 2alf of the banks insure selected Risk. +anks with less sophisticated approaches are likely to use regulatory capital as the basis for internal capital allocation. INTERPRETATION Jery few banks plan to outsource activities with high capital consumption, but the majority will insure their credit risks, while nearly half will plan to insure their market and operational risks. / strong majority of local banks will allocate economic capital according to business lines, while a stronger majority will use the +asel II re uirements to implement that capital allocation process.
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0.= BASE# II ACTION P#AN

7. 2ave you established an action plan to achieve the +asel II re uirementsL Table :.P.70 <stablishment of action plan 1R<*T RI$M N<$ EA 7G #/RM<T RI$M 7G A4<R/TIAE/3 RI$M 7G
Figure :.P.70 <stablishment of action plan >. 2ow will you e!ecute this action planL Table :.P.>0 <!ecution of action plan 1R<*T RI$M IET<RE/3 R<$ACR1<$ <OT<RE/3 R<$ACR1<$ +AT2 : ? ? 7 : 7 9 #/RM<T RI$M H A4<R/TIAE/3 RI$M ;
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Figure :.P.>0 <!ecution of action plan ?. 'hat will the largest spending area beL Table :.P.?0 3argest spending area 1R<*T T<12EA3ADN 1A##CEI1/TIAE AT2<R ,$4<1IFN*AE&T MEA' RI$M ; 7 #/RM<T RI$M 9 : A4<R/TIAE/3 RI$M ; 7
Figure :.P.?0 3argest spending area
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RISK MANAGEMENT IN BANKING SECTOR :. 2ow far are you in the implementation of your action planL Table :.P.:0 1urrent progress 1R<*T RI$M EAT R</33I$<* 4/RTI/33N R</33I$<* FC33N R</33I$<* H ? H H 9 H #/RM<T RI$M A4<R/TIAE/3 RI$M
Figure :.P.:0 1urrent progress OBSER2ATIONS /ll the banks established by an action plan to achieve the +asel II re uirements. #ost of the banks e!ecute the action plan with internal resources than e!ternal resources. 3argest spending area is technology. 2alf of the bank&s implementation of action plan is partially realized and half fully realized.
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RISK MANAGEMENT IN BANKING SECTOR INTERPRETATION The banks have generally determined an action plan to help them to meet +asel II re uirements. They have partially completed the actions re uired, and will continue with these action plans. Those banks that have not yet begun implementation tend to be the smaller banks, with simpler business models, which re uire less time and resources to meet the +asel II re uirements.
0.? TECHNO#OGY
7. *oes your current IT infrastructure allow you to meet the +asel II re uirementsL Table :.9.70 IT infrastructure 1R<*T RI$M N<$ EA 7G #/RM<T RI$M ; > A4<R/TIAE/3 RI$M 8 7
Figure :.9.70 IT infrastructure
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RISK MANAGEMENT IN BANKING SECTOR >. 'ill you develop an IT solution for Risk managementL Table :.9.>0 IT solution for Risk management 1R<*T RI$M N<$ EA 9 ? #/RM<T RI$M 9 ? A4<R/TIAE/3 RI$M 9 ?
Figure :.9.>0 IT solution for Risk management ?. 2ave you completed a review of potential IT solutions availableL Table :.9.?0 Review of potential IT solutions available 1R<*T RI$M T<12EA3ADN 1AE$C3TIED H : #/RM<T RI$M ? P A4<R/TIAE/3 RI$M : H
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Figure :.9.?0 Review of potential IT solutions available :. 'hat difficulties do you foreseeL Table :.9.:0 *ifficulties that you foresee 1R<*T IET<DR/TIAE 1/4/+I3ITI<$ */T/+/$< *<$IDE #A*<3$ +C*D<T */T/ D/T2<RIED 2C#/E R<$ACR1< AT2<R ,$4<1IFNRI$M ? 7 7 : ? #/RM<T RI$M 7 7 7 7 : ? A4<R/TIAE/3 RI$M 7
P ?
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Figure :.9.:0 *ifficulties that you foresee OBSER2ATIONS #ore than half of the +anking industry will use their IT infrastructure in its current format. *ifficulties that banks foresee are more on *ata Dathering and 2uman Resource.
INTERPRETATION The banks should train their employees, in order to overcome the difficulties in implementing the +asel II norms. The banks should develop sufficient infrastructure to gather the re uired data.
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CHAPTER 2: FINDINGS AND SUGGESTIONS
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3.1 FINDINGS
1redit risk is generally well contained, but there are still problems associated with loan classification, loan loss provisioning, and the absence of consolidated accounts. #arket risk and Aperational risk are clear challenge, as they are relatively new to the areas that were not well developed under the original +asel 1apital /ccord. The new regulations will allow banks to introduce substantial improvements in their overall risk management capabilities, improving risk based performance measurement, capital allocation as portfolio management techni ues. Future comple!ity is e!pected because banks diversify their operations. It is e!pected that banks will diversify their operations to generate additional income sources, particularly fee.based income i.e. non interest income, to improve returns. +asel II leads to increase in *ata collection and maintenance of privacy and security in various issues. The banks that would prefer to adopt the $tandard /pproach should try to adopt /dvanced /pproach.
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3.2 SUGGESTIONS
The +anks should review +asel II components and develop a vision, strategy and action plan for what is e!pected to be a suitable framework based on how the banking system evolves over time. The +anks need regular engagement for sustained support. / ualified long.term advisor would be preferable. / workshop should be planned to produce a road map to +asel II 1ompliance.
Training and additional assistance to make it easier for the banking system to comply with new guidelines on market and operational risk.
*ata 4rivacy and security needs more attention
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CHAPTER 2I: CONC#USION
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=.1 CONC#USION
Implementation of +asel II has been described as a long journey rather than a destination by itself. Cndoubtedly, it would re uire commitment of substantial capital and human resources on the part of both banks and the supervisors. R+I has decided to follow a consultative process while implementing +asel II norms and move in a gradual, se uential and co.ordinate manner. For this purpose, dialogue has already been initiated with the stakeholders. /s envisaged by the +asel 1ommittee, the accounting profession too, will make a positive contribution in this respect to make Indian banking system still stronger.
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CHAPTER 2II: APPENDIH
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?.1 :UESTIONNAIRE
I am +/+/$/+ 4/TI3 studying :th semester #+/ in +<1 *A#$ . I am working on a
project titled (RISK MANAGEMENT IN BANKING SECTORI. In this regard I re uest you to spend your valuable time in filling this uestionnaire @Ti.k !&e a**-$*-ia!e ($'A. This information will be used only for academic purpose and will be kept confidential. INSTITUTIONA# INFORMATION 7. Eame of your bank0 >. 4lease indicate the name of the contact Eame0 person for this uestionnaire and his"her position in the +ank. 4osition0 ?. To which of the following types of 4ublic sector banks does your bank belongL
o o o
4rivate sector Foreign +ank
:. 'here is your parent"head office locatedL Ti.k !&e a**-$*-ia!e ($' A4ARENESS OF REGU#ATIONS 7. 'hat is your assessment of your readiness for the new +asel proposals with respect to capital re uirementsL 1R<*T RI$M FC33N 4R<4/R<* 4/RTI/33N 4R<4/R<* EAT N<T #/RM<T RI$M A4<R/TIAE/3 RI$M
4R<4/R<* >. 2ave you done a gap analysis between current risk management practice and new capital re uirementsL
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RISK MANAGEMENT IN BANKING SECTOR 1R<*T RI$M N<$ EA ?. 'hat degree of priority do you address to the new +asel regulatory frameworkL 1R<*T RI$M J<RN I#4ART/ET I#4ART/ET EAT I#4ART/ET :. 2ow do you view +asel II regulation0 as an opportunity to enhance the risk management process, or as a regulatory constraintL 1R<*T RI$M A44ARTCEITN 1AE$TR/IET ORGANISTIONA# STRUCTURE 7. *o you have an assigned 1redit risk, #arket risk and Aperational risk manager in your bankL 1R<*T RI$M N<$ EA #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
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RISK MANAGEMENT IN BANKING SECTOR >. To whom does the Risk manager reportL 1R<*T RI$M 12I<F <O<1CTIJ< AFFI1<R 12I<F FIE/E1I/3 AFFI1<R /$$<T$ 3I/+3ITN #/E/D<R 1R<*IT RI$M /E* #/RM<T RI$M A4<R/TIAE/3 RI$M
AFFI1<R AT2<R $4<1IFN ?. 'hat is the assigned manager&s time dedicated to this activityL 1R<*T RI$M G.>G@ >G.HG@ QHG@ :. 2ow many people work in these departmentsL 1R<*T RI$M 7R? ?RH H. 7G Q 7G #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
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RISK MANAGEMENT IN BANKING SECTOR H. *o you have a Risk 1ommitteeL 1R<*T RI$M N<$ EA REPORTING ABI#ITY 7. /re you producing reporting for 1R<*T RI$M R<DC3/TARN 4CR4A$< #AEITARIED *<1I$IAE #/MIED 4CR4A$< >. *oes e!ternal reporting drive your internal reportingL 1R<*T RI$M J<RN $IDEIFI1/ET3N $IDEIFI1/ET3N EAT /T /33 $IDEIFI1/ET3N #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
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RISK MANAGEMENT IN BANKING SECTOR ?. *oes e!ternal reporting affect your decision making processL 1R<*T RI$M J<RN $IDEIFI1/ET3N $IDEIFI1/ET3N EAT /T /33 $IDEIFI1/ET3N :. 2ow fre uent is your internal reportingL 1R<*T RI$M *aily 'eekly #onthly /nnually H. 'ill you produce specific internal reporting for 1redit, #arket and Aperational RiskL 1R<*T RI$M N<$ EA COMP#IACE 4ITH BASE# II 7. 'hich approach will best suit your organizationL 1R<*T RI$M $T/E*/R* FACE*/TIAE /*J/E1<* *AE&T MEA' #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
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RISK MANAGEMENT IN BANKING SECTOR >. 2ave you performed a 1ost"+enefit analysis for each approach proposed by +asel IIL 1R<*T RI$M N<$ EA ?. In your situation, could regulatory capital consumption be motivation for0 1R<*T RI$M $TA44IED /1TIJITI<$ *<J<A43IED /1TIJITI<$ /15CIRIED /1TIJITI<$ EAE< CAPITA# A##OCATION 7. 2ave you estimated the regulatory capital consumption for each of your individual businessesL 1R<*T RI$M N<$ EA >. 'ill you outsource activities with high capital consumptionL 1R<*T RI$M N<$ EA #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
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RISK MANAGEMENT IN BANKING SECTOR ?. 'ill you insure selected RiskL 1R<*T RI$M N<$ EA :. *o you intend allocating economic capital by +usiness linesL 1R<*T RI$M N<$ EA H. 'ill you make use of +asel II re uirements to implement an economic capital allocation throughout your business linesL 1R<*T RI$M N<$ EA BASE# II ACTION P#AN 7. 2ave you established an action plan to achieve the +asel II re uirementsL 1R<*T RI$M N<$ EA #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
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RISK MANAGEMENT IN BANKING SECTOR >. 2ow will you e!ecute this action planL 1R<*T RI$M IET<RE/3 R<$ACR1<$ <OT<RE/3 R<$ACR1<$ +AT2 ?. 'hat will the largest spending area beL 1R<*T RI$M T<12EA3ADN 1A##CEI1/TIAE AT2<R ,$4<1IFN*AE&T MEA' Ather ,specify- SSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS :. 2ow far are you in the implementation of your action planL 1R<*T RI$M EAT R</33I$<* 4/RTI/33N R</33I$<* FC33N R</33I$<* TECHNO#OGY 7. *oes your current IT infrastructure allow you to meet the +asel II re uirementsL 1R<*T RI$M N<$ EA #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
>. 'ill you develop an IT solution for Risk managementL 1R<*T RI$M N<$ EA ?. 2ave you completed a review of potential IT solutions availableL #/RM<T RI$M A4<R/TIAE/3 RI$M
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RISK MANAGEMENT IN BANKING SECTOR 1R<*T RI$M T<12EA3ADN 1AE$C3TIED :. 'hat difficulties do you foreseeL 1R<*T RI$M IET<DR/TIAE 1/4/+I3ITI<$ */T/+/$< *<$IDE #A*<3$ +C*D<T */T/ D/T2<RIED 2C#/E R<$ACR1< AT2<R ,$4<1IFN#/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
43/1<0 */T<0
SSSSSSSSSSSSSSSSSS $ignature.
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REFFERENCE
4EB SITES www.bis.org www.rbi.org www.kpmg.com www.cognizant.com www.google.com www.yahoo.com
BOOKS 2and +ook on Risk management B +asel II norms
ARTICA#S Risk #anagement in +anks. .. R $ Raghavan 1hartered /ccountant. +asel Eorms challenges in India R$wapan +akshi 'hite 4aper The Ripple <ffect0 2ow +asel II will impact institutions of all sizes Risk #anagement Duidelines for 1ommercial +anks B *FIs. +/$<3 II R /re Indian +anks Doing to DainL .. $antosh E. Dambhire 6amanalal, +ajaj Institute of #anagement $tudies #umbai +asel II and IndiaIs banking structure 1. 4. 1handrasekhar and 6ayati Dhosh
REPORTS Report on Implementing +asel II0 Impact on <merging <conomies .. 6aydeep M. Thaker E#I#$
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RISK MANAGEMENT IN BANKING SECTOR 4aper on Risk /ssessment and Risk #anagement .. $antosh *eoram 'atpade B $iddhi $hrikant Jyas #<T&s Institute of #anagement Eashik.
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RISK MANAGEMENT IN BANKING SECTOR

RISK MANAGEMENT IN BANKING SECTOR

1.1 THEME OF THE STUDY

RISK MANAGEMENT IN BANKING SECTOR

1." STUDY PROB#EM

RISK MANAGEMENT IN BANKING SECTOR

CHAPTER II: #ITRETURE RE2IE4

RISK MANAGEMENT IN BANKING SECTOR

RISK MANAGEMENT IN BANKING SECTOR

2.2 BASE# II FRAME4ORK

Base+ II F-a e%$-k

Pi++a- I Mini 5 Ca*i!a+ Re85i-e en!s

Pi++a- II S5*e-)is$-6 Re)ie% P-$.ess

Pi++a- III Ma-ke! Dis.i*+ine

2.2.1 THE FIRST PI##AR 9 MINIMUM CAPITA# RE:UIREMENTS

RISK MANAGEMENT IN BANKING SECTOR

2.2.2 THE SECOND PI##AR ; SUPER2ISORY RE2IE4 PROCESS

2.2." THE THIRD PI##AR 9 MARKET DISCIP#INE

RISK MANAGEMENT IN BANKING SECTOR

2." TYPES OF RISKS

2.".1 CREDIT RISK

RISK MANAGEMENT IN BANKING SECTOR

2.".2 MARKET RISK

2."." OPERATIONA# RISK

RISK MANAGEMENT IN BANKING SECTOR

2.".0 REGU#ATORY RISK

2.".3 EN2IRONMENTA# RISK

RISK MANAGEMENT IN BANKING SECTOR

2.0 BASE#<S NE4 CAPITA# ACCORD

RISK MANAGEMENT IN BANKING SECTOR

2.3 CAPITA# ADE:UACY

2.= RISK AGGREGATION > CAPITA# A##OCATION

RISK MANAGEMENT IN BANKING SECTOR

2.? RISK BASED SUPER2ISION @RBSA

RISK MANAGEMENT IN BANKING SECTOR

2.B RISK MANAGEMENT: KEYS FOR EFFECTI2E RISK MANAGEMENT:

RISK MANAGEMENT IN BANKING SECTOR

2.B.1 MARKET RISK MANAGEMENT:

2.B.2 CREDIT RISK MANAGEMENT

2.B." OPERATIONA# RISK MANAGEMENT:

RISK MANAGEMENT IN BANKING SECTOR

2.C COMPUTATION OF CAPITA# RE:UIREMENT 2.C.1 CREDIT RISK APPROACHES

RISK MANAGEMENT IN BANKING SECTOR

2.C.2 MARKET RISK APPROACHES

In!e-na+ M$,e+ Base, a**-$a.&

RISK MANAGEMENT IN BANKING SECTOR

2.C." OPERATIONA# RISK APPROACHES

A,)an.e, Meas5-e en! A**-$a.&

RISK MANAGEMENT IN BANKING SECTOR

2.1E BENEFITS OF BASE# II

RISK MANAGEMENT IN BANKING SECTOR

2.11 #IMITATIONS OF BASE# II:

RISK MANAGEMENT IN BANKING SECTOR

2.12 CHA##ENGES FOR INDIAN BANKING SYSTEM UNDER BASE# II

RISK MANAGEMENT IN BANKING SECTOR

2.10 IMPACT OF BASE# II IMP#EMENTATION ON THE INDIAN BANKING INDUSTRY

RISK MANAGEMENT IN BANKING SECTOR

CHAPTER III: PRO1ECT TASK

RISK MANAGEMENT IN BANKING SECTOR

".2 STUDY PROB#EM

".".1 DATA CO##ECTION

RISK MANAGEMENT IN BANKING SECTOR

".0 STUDY CO2ERAGE AND SAMP#E

".3 SCOPE OF THE SUR2EY