Risk Assessment and Stress Test

Understanding The Role Of Regulatory Bank Capital

• Overview of financial statements of banks – accounting principles
• Composition of the balance sheet – types of assets and liabilities
• Understanding the key elements of the P&L – statement of income
• Review of the distinction between the banking book and the trading book
• The equity capital of financial Institutions
• Illustration of the contrast between liquidity and solvency issues
• Explanation of bail-in able capital
• Accounting and regulatory definitions for own funds
• Prudential filters and revaluation reserves, AOCI
• Treatment of goodwill, intangibles, deferred tax assets
• Treatment of securitizations and off-balance sheet exposures

Requirements for Qualifying Capital under Basel III

• Definitions of Regulatory Capital – Core Tier 1, Tier 2
• Core Tier 1 – equity capital and disclosed reserves
• Supplementary Capital – Tier 2 – subject to discretion of supervisor/central bank
• Revaluation reserves – limitations
• Hybrid capital – equity-like e.g. perpetual preferred shares
• Subordinated debt instruments – criteria and restrictions
• Short-term subordinated debt covering market risk (Tier 3)
• Loss absorbency requirements
• Deductions from capital – goodwill and subsidiaries
• Supervisory discretion over cross holdings of other banks

Operational Risk under Basel

• Definition of Operational Risk introduced into the Basel II framework
• The life cycle of Operational Risk
• Basel measurement approaches
• Risk weightings under each approach
• Rogue trading – severity of losses
• Scenario generation – KRI's, management involvement in adverse scenario modelling
• Quantifying the exposure and severity of “outliers” and tail risk
• Loss Distribution Approach (LDA) and Scenario Based Analysis (SBA)
• Application of VaR techniques to operational risk (Op VaR)
• Loss identification – measurement, management, monitoring, reporting
• Integrating operational risk management into the organizational risk management

Modelling and Stress Testing

• Explanation of the techniques for conducting stress tests
• Back testing using historical returns
• Scenario generation – stress testing using hypothetical returns
• Sizes of historical samples
• Danger of optimizing risk management parameters – over-fitting to the historical data
• Modelling methods – contingency scenarios
• Limitations of normal distribution as basis for probabilistic modelling
• Quantifying the exposure and severity of “outliers” and tail risk

Implementation and Reporting Systems for Basel Compliance

• Efficacy of the monitoring and reporting mechanisms within banks and how they interface
• with overall risk management
• Avoiding silos
• Accounting, surveillance, IT systems and data storage back-up systems
• Monitoring of controls – quality and integrity of the procedures
• Development of contingency scenarios
• Role of the Chief Risk Officer
• Role of the Internal Auditor