MODULE A: RISK AND RISK MANAGEMENT FRAMEWORK
Why Banks are Special
Functions Banks Perform, Bank’s Role in the Economy, Other Uniqueness of Banks
Risks and Risk Management in Banks
What is Risk?, Definition of Risk, Risk in Banks, Business Risk vs Control Risk, Financial Risk vs Non-Fi- nancial Risk, Interconnectedness Among Banking Risks, Recent Developments Connected with Risk Management, Banking Reforms in India, New Trends in Indian Banking System, Risk Management Going Ahead, Various Types of Risks Faced by a Bank, Non-Financial Risks
Risk Management Framework
Lessons from Crisis, Benefits of Risk Management, Risk Management Concept, Risk Management Approach, Risk Culture, Risk Management Architecture, Elements of Risk Management Framework, Organisational Structure, Risk Management Policy, Risk Appetite, Risk Limits, Risk Identification Pro- cess, Risk Measurement, Risk Mitigation, Risk Monitoring and Risk Control, Management Information System, Enterprise Risk Management, Events-Risk and Opportunity, Enterprise Risk Management Defined, Achievement of Objectives, Components of Enterprise Risk Management, Relationship of Objectives and Components, Effectiveness, Encompasses Internal Control
Asset Liability Management and Interest Rate Risk in Banking Book
What is ALM?, Objectives of ALM, ALM Process, Interest Rate Risk, Duration GAP Analysis, Measure- ment System Reports, Stress Testing, Back Testing, Interest Rate Risk Mitigation
Liquidity Risk Management
What is liquidity?, Liquidity and solvency, Forms of liquidity risk, Liquidity Management, Factors contributing to liquidity risk, Liquidity risk and Balance Sheet, Risk Management framework for Liquidity Risk, Identification and measurement of liquidity risk
MODULE B: CREDIT RISK
Credit Risk Management Framework
What is Credit Risk?, Obligor (or) Borrower Level Risk vs Portfolio Risk, Systematic vs Unsystematic Risk, Need for Credit Risk Management Framework, Credit Risk Culture, Building Blocks of Credit Risk Management, Strategy, Financial Goals, Risk Appetite, Portfolio Risk and Reward, Loan Policy, Due Diligence Process, Loan Approval Process, Limits on Aggregate Loans and Commitments., Underwriting Criteria, Exceptions to Credit Policy, Organization Structure
Obligor/Borrower Risk
Business Risk (or) Operating Risk, Financial Risk, Interaction between Business Risk and Financial Risk, Different Risk Levels, Sources of External Risk, Industry Risk Analysis, Entity Level Risk, Financial Risk Credit Rating System
What is Credit Rating?, Usefulness of Rating System for Banks, Features of Internal Credit Rating System, Rating Exercise and Rating Assignment, Rating by External Rating Agencies
Portfolio Credit Risk
Systematic Risk, Unsystematic/ idiosyncratic/Diversifiable Risk, Concentration Risk, Correlation Risks
Credit Risk Models
Uses of Credit Models, Types of Models
Measurement of Credit Risk
Probability of Default (PD), Methods for Estimating PD, Exposure at Default, Loss Given Default (LGD), Portfolio Assessment of Credit Risk, Risk Adjusted Return on Capital (RAROC), Application of the Concept of Economic Capital in RAROC Model, Uses of RAROC, Risk Based Pricing, Methods of Risk- Based Pricing
Credit Derivatives
What is a Credit Derivative?, Protection Buyer, Protection Seller, Advantages to the Protection Buyer, Advantages to the Protection Seller, Credit Events, Payout, Credit Default Swap, Total Return Swap (TRS), Credit Options, Credit-Linked Notes
MODULE C: MARKET RISK
Market Risk
What is Market Risk?, Trading Portfolio in a Bank, Interest Rate Risk, Equity Price Risk, Foreign Ex- change Risk, Commodity Price Risk, Liquidity Risk, Credit and Counterparty Risks, Model Risk, Market Risk Management Framework, Organizational Structure to Manage Market Risk, Organizational Structure for Trading Activity, Risk Management Strategy, Policies and Procedures
Fixed Income Securities
What is a Bond?, Government of India in the Bond Market, Bond Market in India, Bond Valuation
Measurement of Interest Rate Risk
Measurement of Interest Rate risk, Sensitivity approach, Price value of a Basis point method, Computation of portfolio PVBP, Hedging using basis point value, Other uses of PVBP, Duration, Definition of duration, Properties of duration, Portfolio duration, Modified Duration and Price elasticity of interest rate, Price volatility characteristics of Bonds, Convexity, Bond portfolio management
Value at Risk
Historical background, Definitions of VaR, Assumptions for calculation of VaR, Building blocks of VaR, VaR methodology, Comparison of different methodologies to compute VaR, Comparative advantages and disadvantages of various methods to compute VaR, Limitations of VaR, Extreme Value Theory, Stress Test, Back testing of VaR models
MODULE D: OPERATIONAL RISK
Operational Risk and Operational Risk Management Framework
Developments Giving Rise to Increasing Operational Risk, Peculiarity of Operational Risk, Definition of Operational Risk, Operational Risk Culture, Operational Risk Organizational Framework, Policy Guide- lines and Strategic Approach, Operational Risk Identification Process, Assessment of Operational Risk Collection of Internal Loss Data and External Loss Data
Collection of Loss Data, Minimum Loss Data Standard, Specific Criteria on Loss Data Identification, Col- lection and Treatment, Near-Misses and Opportunity Costs, External Loss Data, Root-Cause Analysis Risk and Control Self-Assessment (RCSA) & Key Risk Indicator (KRI)
RCSA Process, Defining Inherent Risk, Study of Effectiveness of Control, Computation of Risk Zone, Col- or-Coded Risk Levels, Key Risk Indicators, Various Forms of KRI, Selecting KRIs, Risk Appetite, Scenario Analysis, Uses of KRIs
Technology Risk
Basic Principles of Information Security, Information Security Governance, Organizational Structure, Roles and Responsibilities, Critical Components of Information Security, Security Measures Against Malware, Patch Management, Change Management, Audit Trails, Information Security Reporting and Metrics, In- formation Security and Critical Service Providers/Vendors, Network Security, Remote Access, Distributed Denial of Service Attacks (DDoS/DoS), Implementation of ISO 27001 Information Security Management System, Wireless Security, Business Continuity Considerations, Information Security Assurance, General Information Regarding Delivery Channels, Emerging Technologies and Information Security, Implementa tion of Recommendations of the Working Group on Information Security,Electronic Banking, Technology Risk Management and Cyber Frauds
Corporate Governance
Corporate Governance Definition, Corporate Governance – Banking Industry Perspective, Basel Commit- tee and Corporate Governance, Importance of Risk Management in Corporate Governance, Benchmarking Risk Governance
Climate Risk and Sustainable Finance
Climate Situation in India, Basel Committee and Climate Risk, Climate Risk, Unique Characteristics of Climate Change and Implication, Financial Risks Emerging from Climate Related Risk, Climate Risk Management Framework, Green Finance for Sustainable Development
MODULE E: BASEL AND RBI GUIDELINES ON RISK MANAGEMENT
Why Do Banks Need Regulation?
Need for Regulation of Banks, Banking Regulation and Supervision, Banking Regulation and Supervision in India, Global Banking Regulation, Basel Committee on Banking Supervision, The Concordat, Basel-I Accord, Basel Committee Amendment 1996, Basel II Accord
Global Financial Crisis and Basel III
Regulatory Shortcomings and Regulatory Reform, Response of Basel Committee to Global Financial Crisis
Regulatory Capital and Capital Adequacy
Bank Capital: An Accounting Residual, Why Bank Needs Capital, Should Regulator Prescribe Minimum
Capital for Banks?, Basel III Capital Regulation, Standardized Approach - Capital Charge for Credit Risk, Off-Balance Sheet Items, Total Counterparty Risk, External Credit Assessments, Applicability of ‘Issue Rating’ to Issuer/Other Claims, Credit Risk Mitigation, Internal Rating Based Approach
Capital Allocation Against Market Risk
Scope and Coverage of Capital Charge for Market Risks, Measurement of Capital Charge for Interest Rate Risk
Capital Charge for Operational Risk
Definition of Operational Risk, The Measurement Methodologies, The Basic Indicator Approach, The Standardized Approach, Advanced Measurement Approach, Shortcomings of Present Approaches for Calculating Capital Requirement for Operational Risk, New Standardized Approach, Business Indicators, Risk Weighted Assets, Technical Guidance Note on Minimum Capital Requirements for Operational Risk Supervisory Review Process and Internal Capital Adequacy Assessment Process (ICAAP) Objective of Pillar 2 Supervisory Process, ICAAP Principles, Definitions, Coverage by ICAAP, The Structural Aspects of the ICAAP, Risk Appetite, Actual and Target Risk Structure, Identifying, Measuring, Monitoring and Reporting of Risk, Internal Control, Submission of the Outcome of the ICAAP to the Board and the RBI, ICAAP to be an Integral part of the Management and Decision-Making Culture, The Principle of Proportionality, Regular Independent Review and Validation, ICAAP to be a Forward-Looking Process, ICAAP to Include Stress Tests and Scenario Analyses, Identifying and Measuring Material Risks in ICAAP, Capital Planning, Capital Allocation
Stress Testing
Stress Testing Part of ICAAP, Objective, Stress Testing Process, Sensitivity Analyses, Scenario Analyses, Reverse Stress Testing, Stress Testing Framework, Single Factor Stress Tests, Classification of Banks for the Purpose of Stress Testing, Prompt Corrective Action (PCA) Framework for Scheduled Commercial Banks, Criteria for PCA
Market Discipline
General, Definition, Achieving Appropriate Disclosure, Interaction with Accounting Disclosures, Vali- dation, Materiality, Proprietary and Confidential Information, General Disclosure Principle, Regulatory Disclosure Section
Basel III Buffers, Liquidity Ratios, Leverage Ratio
Objectives of Capital Buffers, Capital Conservation Buffer Framework, Counter - Cyclical Capital Buffer, Domestic Systemically Important Banks, Leverage Ratio, Liquidity Standards, Net Stable Funding Ratio
Risk Based Supervision
Background, Reserve Bank of India Initiatives, Bank Supervision Process in India, Supervisory Approach, Features of an Effective bank Supervisory Framework, Benefits of Risk Based Supervision, Supervisory Methods/Tools
Risk Based Internal Audit
What is Risk Based Auditing, Objective of Risk Based Internal Audit, Board and Management Oversight, Audit Policy, Functional Independence, Identification of Auditable Units, Conduct Risk Assessment, Risk Profile, Communication
MODULE F: DERIVATIVES AND RISK MANAGEMENT
Derivatives and Risk Management
What is Derivative?, Features of Derivatives, Over the Counter vs Exchange Traded Derivative, Uses of Derivatives, Misuse of Derivative, Major Types of Derivatives, Long and Short Position, Derivative Mar- kets in India
Forward Contract
Definition and Characteristics, Advantage of Entering Forward Contract, Problems Associated with Forward Contract, Pay-off on a Forward Contract, Pricing the Underlying, Benefits and Costs of Holding Assets, The Concept of Price and Value of a Forward Contract, Forward Rate Agreement
Futures
What is a Futures Contract?, Futures Contract vs Forward Contract, Performance of contract, The Clearing House, Margin A/c, Relationship between Spot Price and Future Price, Delivery, Cash Settlement, Pricing of Future Contracts, Contango vs Normal Backwardation, Interest Rate Future Options
Definition, Option Terminology, Call Option, Put Option, Pricing of Option, Interest Rate Options
SWAP
Definition, Characteristics of SWAP, SWAP Terminology, Types of SWAP, Interest Rate Swap, Calculating Interest Rate Swap Cash Flows, Uses of Interest Rate Swap, Swaptions
APPENDIX: STATISTICAL CONCEPTS
Statistical Measures
Frequency Distribution, Measures of Central Tendency, Measures of Dispersion, Measures of Skewness, Measures of Kurtosis, Measures of Correlation, Measures of Regression, Expected Return, Average of Ratios, Risk, Average Growth Rate, Portfolio Diversification, Beta, Performance Evaluation
Probability Theory
Probability, Conditional Probability, Random Variable, Distribution Function, Expectation and Standard De- viation, Binomial Distribution, Poisson Distribution, Normal Distribution, Credit Risk, Value at Risk (VaR), Option Valuation