Foundations of Financial Risk

Gain a deeper understanding of the issues surrounding financial risk and regulation

Foundations of Financial Risk details the various risks, regulations, and supervisory requirements institutions face in today's economic and regulatory environment. Written by the experts at the Global Association of Risk Professionals (GARP), this book represents an update to GARP's original publication, Foundations of Banking Risk. You'll learn the terminology and basic concepts surrounding global financial risk and regulation, and develop an understanding of the methods used to measure and manage market, credit, and operational risk. Coverage includes traded market risk and regulation, treasury risk and regulation, and much more, including brand new coverage of risk management for insurance companies. Clear explanations, focused discussion, and comprehensive relevancy make this book an ideal resource for an introduction to risk management.

The textbook provides an understanding of risk management methodologies, governance structures for risk management in financial institutions and the regulatory requirements dictated by the Basel Committee on Banking Supervision. It provides thorough coverage of the issues surrounding financial risk, giving you a solid knowledgebase and a practical, applicable understanding.

• Understand risk measurement and management

• Learn how minimum capital requirements are regulated

• Explore all aspects of financial institution regulation and disclosure

• Master the terminology of global risk and regulation

Financial institutions and supervisors around the world are increasingly recognizing how vital sound risk management practices are to both individual firms and the capital markets system as a whole. Savvy professionals recognize the need for authoritative and comprehensive training, and Foundations of Financial Risk delivers with expert-led education for those new to risk management.

Autorentext

The Global Association of Risk Professionals (GARP) is a not-for-profit association consisting of 74,890 individuals around the world who are involved in financial risk management. Members come from more than 100 countries and work in regional and global banks, asset management firms, insurance companies, central banks, securities regulators, hedge funds, universities, large industrial corporations and multinationals.

Inhalt

Preface xv

Acknowledgments xxiii

Introduction xxv

CHAPTER 1 Functions and Forms of Banking 1

1.1 Banks and Banking 2

1.1.1 Core Bank Services 2

1.1.2 Banks in the Economy 4

1.1.3 Money Creation 5

1.1.4 Payment Services 8

1.1.5 Other Banking Services 8

1.2 Different Bank Types 10

1.2.1 Retail Banks 10

1.2.2 Wholesale Banks 11

1.2.3 Bank Holding Companies 12

1.2.4 Cooperative Banks 13

1.2.5 Credit Unions 14

1.2.6 Micro-finance Institutions 14

1.2.7 Central Banks 15

1.3 Banking Risks 16

1.3.1 Credit Risk 18

1.3.2 Market Risk 19

1.3.3 Operational Risk 23

1.3.4 Liquidity Risk 24

1.3.5 Systemic Risk 24

1.3.6 Other Risks That Banks Face 25

1.4 Forces Shaping the Banking Industry 27

CHAPTER 2 Managing Banks 31

2.1 Balance Sheet and Income Statement 32

2.1.1 Bank Assets 32

2.1.2 Bank Liabilities 34

2.1.3 Equity 35

2.1.4 Income Statement 36

2.1.5 The Role of Bank's Equity 39

2.2 Loan Losses 43

2.2.1 Valuing Assets in the Trading Book 44

2.2.2 Value of Assets in the Banking Book, Performing Loans 45

2.2.3 Value of Assets in the Banking Book, Non-performing Loans 46

2.2.4 Provision for Loan Losses and Loan Loss Reserves 48

2.2.5 Loan Loss Reserves and Loan Losses 49

2.3 Asset and Liability Management 54

2.3.1 Interest Rate Risk 54

2.3.2 Liquidity Risk 56

2.3.3 Liquidity Standards in Basel III 60

2.4 Corporate Governance 61

2.4.1 Corporate Governance Structures 61

2.4.2 Corporate Governance Techniques 64

2.4.3 Senior Management and Corporate Strategies 65

2.4.4 Values and Culture 65

2.4.5 Financial Incentives 66

2.4.6 Internal and External Auditors 66

2.4.7 Transparency 66

CHAPTER 3 Banking Regulation 69

3.1 The Evolution of Risk Regulation in Banking 70

3.1.1 Why Banks Are Special and Need to Be Regulated 71

3.1.2 Liquidity Crises and Bank Runs 71

3.1.3 Bank Panics 73

3.2 Foundations of Bank Regulation 76

3.2.1 Regulatory Objectives 77

3.2.2 The Regulatory Process 77

3.2.3 Stabilization: The Lender of Last Resort 78

3.3 International Regulation of Bank Risks 80

3.3.1 Bank for International Settlements 80

3.3.2 The Basel Committee 82

3.3.3 The Basel I Accord 83

3.3.4 The Market Risk Amendment 86

3.3.5 Weaknesses of Bank Capital Requirements in Basel I Accord 87

3.3.6 The Basel II Accord 88

3.3.7 Adopting Basel II 90

3.3.8 Limitations of Basel II 91

3.3.9 The Basel III Accord 92

3.4 Deposit Insurance 93

3.4.1 Deposit Insurance Coverage 94

3.4.2 Deposit Insurance Around the World 95

CHAPTER 4 Credit Risk 97

4.1 Introduction to Credit Risk 98

4.2 Lenders 100

4.2.1 Investment Banks 101

4.3 Borrowers 101

4.3.1 Retail Borrowers 101

4.3.2 Corporate Borrowers 102

4.3.3 Sovereign Borrowers 105

4.3.4 Public Borrowers 105

4.4 Characteristics of Credit Products 105

4.4.1 Maturity 106

4.4.2 Commitment Specification 108

4.4.3 Loan Purpose 110

4.4.4 Repayment Source 110

4.4.5 Collateral Requirements.111

4.4.6 Covenant Requirements 113

4.4.7 Loan Repayment 114

4.5 Types of Credit Products 116

4.5.1 Agricultural Loans 116

4.5.2 Asset-Based or Secured Lending 117

4.5.3 Automobile Loans 117

4.5.4 Commercial Paper 118

4.5.5 Corporate Bonds 118 4.5.6 Covered Bonds 1...