毕博上海银行咨询RM SeminarSeoul051901.ppt

Risk Management,May 2001,Page 1,Consider four questions,What is“risk”?What is“risk management”?Why should a firm manage risk well?How should a firm manage risk well?,Page 2,What is“risk”?,“Risk is ANY variation in an outcome.”Lawrence C.Galitz,Financial Engineering,1995,“the product of the probability and utility of some future event.”Adams,Risk,1995,“Any action,inaction or event that prevents a firm from achieving its business objectives and executing its business strategies successfully.Arthur Andersen LLP and The Economic Intelligence Unit,Managing Business Risk:An Integrated Approach,1995,“Measurable possibility of losing or not gaining value.”Barrons Dictionary of Financial and Investment Terms,1996,“there are three components of risk the magnitude of loss,the chance of loss,and the exposure to loss.”MacCrimmon and Wehrung.Taking Risks.1986,“the chance that a hazard will cause a problem.”Kit Sadgrove,The Complete Guide to Business Risk Management,1996,“the likelihood of injury,harm,damage or loss multiplied by its potential magnitude”Vernon L.Grose,Managing Risk,1987,“the possibility that one or more individuals or organizations will experience adverse consequences from an event or circumstances”CICA,COCO report,1998,“the chance of something happening that will have an impact on objectives.It is measured in terms of consequences and likelihood.”AS/NZS,Risk Management,1999,“Uncertainty as to the amount of benefits.The term includes both potential for gain and exposure to loss.”ASB,FRS 5,1994,Page 3,What is“risk management”?,Control over hazardsA means for a firm to transform“uncertainty”to“risk”,and to determine its ideal portfolio of“risks”A means to maintain firm performance within tolerable limits“The process of understanding exposures in a firm and balancing the appropriate control and financing tools for a given exposure or portfolio of exposures.”Levin and Rubinstein,“A Unique Balance”,Risk Management,September 1997,Page 4,Risk management principles come from modern portfolio theory(MPT),Risk=Volatility,Risk Free Rate r(f),Efficient Frontier,Business Units,Sub-Portfolios,Transactions,ACTION:Improve return through loan repricing or capital deploymentReduce risk by improving diversification,hedging,or capital coverage,ReturnE(r),Standard Deviation(),Ultimately,this theoretical foundation allows us to build market-sensitive pricing capabilities,Page 5,Why should a firm manage risk well?,Improved decision-makingEnhanced competitive advantageIncreased shareholder value,Page 6,How should a firm manage risk well?,Design and implement risk strategyAdvanced risk assessment as part of a comprehensive processManage risk as a portfolio,with respect to economic capitalProgressive performance managementPromote appropriate risk culture,Page 7,Risk Identification,Counterparty riskFacility riskCountry risk,Trading riskInterest Rate RiskLiquidity Risk,Business riskEvent risk,Risk,EarningsVolatility,Market Risk,Volatility due to variation in market prices,rates,liquidity,Volatility due to changes in operating economics(e.g.:volume,margins,costs),Operating Risk,Credit Risk,Volatility due to variation in credit losses,Page 8,Two principal approaches to risk measurement,Measures of Loss(Direct Calculation),Expected Loss and Unexpected LossUnexpected Loss=Standard deviationApplied to Credit and Operating Risks most commonly,Builds to Volatility,Starts with Volatility,Page 9,All measures begin with volatility,regardless of risk class and business unit,MARKET RISK,DM Appreciation,USD Appreciation,2 Standard Deviations(VAR),OPERATING RISK,Time,OperatingRiskCapital,Mean:Standard Deviation:Other Terms:,Expected LossUnexpected Loss CARCredit VaREaR,Mean:Standard Deviation:Other Terms:,Mean:Standard Deviation:Other Terms:,Expected ReturnVaRDEaREaRBIS VaRHolding Period-Adjusted VaR,Expected LossEarnings VolatilityUnexpected LossAsset VolatilityExpense VolatilityVolume VolatilityCaRVaR,注意,Page 10,Credit Risk starts with the concepts of Expected Loss and Unexpected Loss,注意,Page 11,Expected loss information:from loan characteristics and borrower information,Expected Loss,Severity(LGD),Expected Default Probability(PD or EDP),Exposure at Default(EAD),Amount of outstanding principle,fees,and interest owed at the time of default,The probability that a loan or group of loans will become irreversibly delinquent over some time horizon(usually one year),Percentage of exposure which will be lost after all recovery efforts,including legal expenses,time value of money,recovery expenses,X,X,Each of these elements combine with correlation information to build Unexpected Loss and distribution characteristics,Page 12,Probability of default:uses classification system that can range in sophistication and rigor,Pure Judgment,Template,Scoresheet,Model,Expected Loss,Severity,Expected Default Probability,Exposure at Default,Grades are set judgmentally against a setof qualitative guidelines,Final ratings are ultimately judgmental,but graders are provided with a“template”of quantitative benchmarks for each rating category,Graders are provided a“scoresheet”which combines a set of objective characteristics with subjective factors in a predetermined manner,Grades are derived purely mechanically,with no role for subjective inputs,Page 13,Credit Grading or Scoring,S&P MoodiesAAAAAA AA AA A A.D D,IIIIII.Default,Score Card170150130.10,.02%.05%.10%.100%,Stratification,Calibration,Corporate Credit Grade,Middle Market,Credit Card,Expected Default Frequency,Both a Counterparty Score and a Facility Score must be DevelopedCredit Migration Analysis will Ultimately Provide Additional Accuracy and support risk-based pricing,Expected Loss,Severity,Expected Default Probability,Exposure at Default,Page 14,Exposure at Default,Expected Loss,Severity,Expected Default Probability,Exposure at Default,$Amount,Time,Principle,Credit Line,Payment,Payment,Line Draw,Line Draw,Line Draw,Exposure Given Default Behavior,The“race to default”is a key concern for line lending,Determined through matrix migration analysis or behavioral analysis,How quickly can we shut down the line?,Page 15,Severity:all costs,including time value of money,Expected Loss,Severity,Expected Default Probability,Exposure at Default,Usually dependent upon:Collateral Type and ValueServicing practicesGeographyProduct typeBorrower behaviorLoan to Value(LTV),Recovery AmountCost of CarryLegal ExpensesOperating ExpensesNPV(Net Recovery),Page 16,Function of Borrower,Facility,and Local Market Characteristics,Expected Loss,Severity,Expected Default Probability,Exposure at Default,Facility typeCredit draw-down characteristics,Corporate credit ratingCustomer behaviorDelinquency status,Collateral typeLoan-to-valueCost of carryAdministrative costsTime to recoveryLegal costs,X,X,Page 17,Once EL/UL are Obtained,Limit Structures can be Created,Base limits initially on ELAs the methodology evolves,base limits on capital contribution and risk exposureDesign limit structures to reflect correlations and concentrations:customersproductsbusiness linesUltimately,create links across firm,to establish global counterparty limitsBusiness units administer control structures,and independent risk management monitors them,Types of limits may include:House LimitsCounterpartyGlobal exposureIndustryGeographyRelationship Manager,Page 18,Ultimately,risk analytics drive risk process decisions and provide MIS in lending units,Credit Process Tasks,Credit Structuring Full risk-based pricingRisk-based pricingRisk-Based Profitability PerformanceLoan ApprovalPortfolio ManagementLoan SalesRisk-based incentives,Risk Rating/Scoring,Credit Measures,Calibration,ExposureGivenDefault,Severity,ExpectedLoss,UnexpectedLoss,RAROC,Risk-based limitsInitial Portfolio ManagementPosition controlsEconomic Capital Attribution,Initial credit structuring techniquesLoss ForecastingReservingInitial Risk-Based PricingInitial Risk-Based Limits,Collection ProcessingLoan ServicingRecovery Management,Global Exposure MonitoringDisbursement Management,Initial Loan Approval,Loan Monitoring,The credit process can be streamlined using risk information to drive out excess costs and increase profitability,Best practice Frontier,Page 19,Market Risk typically incorporates trading and treasury activities,Trading Risk,Asset/Liability,Mismatch,Market Risk,Price risk for liquid,actively traded positions,Interest rate risk and liquidity risk due to structural mismatch between liquid assets and liabilities,Page 20,“Value-at-Risk”has become the industry standard for measuring Market Risk,Market Movement Distributions,Current Positions,Exposure to Indices,Loss Distributions,Correlations Between Markets,Risk Tolerance,For Trading as well as in A/LM Interest Rate Risk,Page 21,Translate differences between assets and liabilities into exposure to interest rates,Economic Value,Probability,Economic Capital,Page 22,Apply volatility measures to both,注意,Page 23,Several VaR measurement techniques,Parametric VaR,Monte Carlo Simulation,Historical and Scenario Simulation,Most Advanced VaR Calculators Include these-or variations on these techniques.,Normal distribution assumptionEasy to calculateNo event risk capabilitiesNo compensation for“fat tails”No ability to fully calculate non-linear instruments,Can simulate many price pathsLimits model riskAccounts for non-linearity and non-normalityComputationally expensive,Ability to test current portfolio over past periods(even crash conditions)Relies on the existence of historical price seriesIncorporates non-linearities and abnormal distributionsDoesnt necessarily reflect future conditions,Page 24,The structural mismatch position can frequently be revisited to yield new opportunities,Longer-term funding opportunities,Reduced cost of funding,Page 25,Base limits on capital,and translate to VaR,Limits can be structured for all organizational levels,products,currencies,or geographiesGlobal counterparty limits for credit exposure should be developed and tied to corporate lendingBoth daily limits and stop-loss policies must be developedLimit levels should incorporate management intervention modelingPolicies must be structured to provide clear direction for management and a clear role for risk administration,Interest rate products$64,581M,Trader,Trader,Trader,Trader,Trader,Trader,Trader,Trader,Trader,Trader,Types of limits may include:VARCounterpartyCreditDaily exposureStop LossMarginTrader/Desk/OrganizationIndustryHouse,Limit:,Limit:,Trading$40,225M,ConsolidatedTrading$91,800M,Treasury$65,180M,Limit:,Equities$30,170,Limit:,Options$22.465M,Limit:,Limit:,Limit:,Limit:,=0.35,=0.15,=0.15,Fixed Income$37,795 M,=0.15,Fx$5,870M,Page 26,In trading areas,risk analytics support optimized dealing room management,TradingProcess Tasks,Risk-Based Profitability PerformancePortfolio ManagementRisk-based Trader incentives,Position Exposure,Market Risk Analytics,Liquidity Risk,Monte Carlo Simulation,Historical/Scenario Simulation,Credit Risk,RAROC,Credit Risk ReservingCounterparty Exposure MonitoringRisk-based pricingPosition controls,What if analysisStress testingScenario planningHedging and Deal Structuring,Improved Capital EstimateNon-linear risk limitsCapital attribution and planning,Holding Period limitsAged Inventory AnalysisStop Loss Policies,Position LimitsPortfolio LimitsInitial Capital Estimates,PositionMonitoring,Parametric VAR,Page 27,In ALM,techniques are more complex but can provide extraordinary opportunity,A/LMProcess Tasks,Product StructuringProduct pricing Risk-Based Profitability PerformancePortfolio ManagementRisk-based incentivesEconomic Capital Attribution,Maturity&Duration Matching,Methodologies,Earnings Simulation,Replicating Portfolio:MVPE,VAR,Liquidity VAR,Indeterminate Maturity Modeling,RAROC,Basis risk capitalBreak cost policiesPosition controlsFixed rate Deposit funding,Advanced Funds Transfer PricingInitial Risk-Based Pricing,Capital attributionLimit settingStop/Loss policiesInitial portfolio planning,Advanced hedging strategiesProduct structuring,Hedging StrategiesBasic Transfer Pricing,Liquidity strategyDynamic Hedging,Page 28,Divide Operational risk into two types,defined by source,Operational Risk,Risks to revenues,expenses,asset values,or franchise value from uncertainties in the firms general business environment(other than credit or market risks)affecting the success of its strategy such as:Internal:Success of marketing and solicitation Cost of processes and inputs Success of new product development and research External:New competition Taxation rules Regulation of business activities,Risks to revenues,expenses,asset values,or franchise value(other than credit or market risks)resulting from non-economic events such as:Internal EventsPeople:errors,theft or fraudProcess:control failures and errorsSystems:breakdowns,failures External Events Supplier failures Legal action from external parties Social and political upheavals Natural disasters,Business Risk,Event Risk,Page 29,Extreme and highly unlikely scenarios which the firm may not be able to survive.,Severe losses which are unlikely,though predictable,that the firm should be able to absorb in the normal course of its business.,Catastrophic loss,Expected loss,Unexpected loss,Likelihood of loss,Severity of loss,Moderate losses that occur on a continuing basis with relative frequency that are part of the cost of undertaking particular business.,Different risk management approaches are appropriate for different segments of the risk distribution,The degree and mix of management response depends on the probability and severity of expected losses,Frequency distribution for risk event type 1,Risk event type 2,Optimal management requires a thorough understanding of the probability distribution,注意,Page 30,All business units measured using same methodologiesLinks risk and returnEmploys effects of correlation and concentrationApplied at any level:Transaction Customer Product Business unit Group,Connect top down with bottom up analysis,Page 31,Operating riskcapital is allocatedto each BU,INTERNAL ANALYSIS,Factor,Score,Revenue VolatilityFixed/Variable Cost MixCustomer Concentration,Total Operating Risk Score,Scorecards are used to quantify event risks through assessing key performance indicators(KPI),and operational risk capital is then allocated to each business unit appropriately,OPERATIONAL RISK SCORE,BUSINESS TYPE(EXAMPLE),Data Processing,Retail Distribution,High,Normal,Low,1007040,502510,Risk assessment at the management dashboard of KPIs,Predictive KPI,Qualitative assessment is scored/quantified,Risk scorecard establishes bottom-up measurement,Page 32,Apply economic and finance concepts to capital management,Expected Loss(EL),Anticipated average loss rateForeseeable“cost”Reserves and provisionsCaptured through charge to income statement,Provisions and Reserves(Dynamic Provisioning),Capital,Page 33,In a portfolio,we review aggregate loss and probability characteristics,Probability of Loss,Amount of Loss,Individual Loa