Risk Management in Banking E-Book

Joël Bessis

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 775

Veröffentlichungsjahr: 2015

Beschreibung

The seminal guide to risk management, streamlined and updated

Risk Management in Banking is a comprehensive reference for the risk management industry, covering all aspects of the field. Now in its fourth edition, this useful guide has been updated with the latest information on ALM, Basel 3, derivatives, liquidity analysis, market risk, structured products, credit risk, securitizations, and more. The new companion website features slides, worked examples, a solutions manual, and the new streamlined, modular approach allows readers to easily find the information they need. Coverage includes asset liability management, risk-based capital, value at risk, loan portfolio management, capital allocation, and other vital topics, concluding with an examination of the financial crisis through the utilisation of new views such as behavioural finance and nonlinearity of risk.

Considered a seminal industry reference since the first edition's release, Risk Management in Banking has been streamlined for easy navigation and updated to reflect the changes in the field, while remaining comprehensive and detailed in approach and coverage. Students and professionals alike will appreciate the extended scope and expert guidance as they:

• Find all "need-to-know" risk management topics in a single text
• Discover the latest research and the new practices
• Understand all aspects of risk management and banking management
• See the recent crises – and the lessons learned – from a new perspective

Risk management is becoming increasingly vital to the banking industry even as it grows more complex. New developments and advancing technology continue to push the field forward, and professionals need to stay up-to-date with in-depth information on the latest practices. Risk Management in Banking provides a comprehensive reference to the most current state of the industry, with complete information and expert guidance.

Leseprobe

CONTENTS

Cover

Series Page

Title Page

Copyright

Foreword

Preface

About the Author

Chapter 1: Risks and Risk Management

1.1 Uncertainty, Risk and Exposure to Risk

1.2 Broad Classes of Financial Risk

1.3 Business Lines in Banking

1.4 Banking Regulations and Accounting Standards

1.5 Risk Management

Chapter 2: Banking Regulations Overview

2.1 Regulation Principles

2.2 Capital Adequacy

2.3 Some Lessons of the Financial Crisis

2.4 The Responses of Regulators to the Financial Crisis

Chapter 3: Balance Sheet Management and Regulations

3.1 The New Regulatory Ratios

3.2 Compliance of a Commercial Balance Sheet: Example

3.3 Creation of Value

Chapter 4: Liquidity Management and Liquidity Gaps

4.1 Liquidity and Liquidity Risk

4.2 Liquidity Gap Time Profiles

4.3 Types of Liquidity Gaps

4.4 Managing Incremental Gaps

4.5 Dynamic Liquidity Gaps

4.6 Funding Liquidity Management

4.7 Liquidity Crises and Stress Scenarios

Chapter 5: Interest Rate Gaps

5.1 Interest Rate Risk

5.2 Interest Rate Gaps

5.3 Calculations of Interest Rate Gap

5.4 The Gap Model

5.5 Net Interest Income and Interest Rate Gaps

5.6 Gap Management and Hedging

5.7 Limitations of Interest Rate Gaps

5.8 Appendix: Gaps and Interest Rate Sensitivity

Chapter 6: Hedging and Gap Management

6.1 The Trade-Offs of Gap Management

6.2 Managing Interest Rate Gaps with Interest Rate Derivatives

6.3 Managing Interest Rate Gaps

6.4 Setting Limits to Gaps

6.5 Hedging the Variations of the Term Structure of Interest Rates (Case Study)

6.6 Hedging Business Risk and Interest Rate Risk

Chapter 7: Economic Value of the Banking Book

7.1 Economic Value and Its Sensitivity

7.2 Economic Value and Net Interest Income

7.3 The Sensitivity of Economic Value to Interest Rates

7.4 Appendix: Convexity

Chapter 8: Convexity Risk in Banking

8.1 Convexity Risk and Economic Value

8.2 An Extended Framework for Stochastic Cash Flows: Valuation

8.3 Appendix: The Value of Convexity

Chapter 9: Convexity Risk: The Case of Mortgages

9.1 The Convexity Risk of Mortgages

9.2 The Valuation of the Prepayment Option and Its Pricing

9.3 Appendix 1: Valuation of A Bond Using An Interest Rate Tree

9.4 Appendix 2: Calibration of the Binomial Tree

Chapter 10: Funds Transfer Pricing Systems

10.1 Internal Fund Pricing Systems

10.2 Funds Transfer Pricing in the Banking Book

10.3 Economic Transfer Prices in the Banking Book

10.4 Risk-Based Pricing: Lending

Chapter 11: Returns, Random Shocks and Value-at-Risk

11.1 Value-At-Risk

11.2 Random Shocks As Asset Returns

11.3 Stochastic Processes

11.4 Modeling Random Shocks

11.5 VaR Calculation for a Single Asset

11.6 Distribution of Value under Normal Returns

11.7 From Shocks on Risk Factors to Shocks on Asset Value

11.8 Appendix 1: Continuous Returns As Limit of Discrete Returns

11.9 Appendix 2: Common Processes

Chapter 12: Portfolio Risk and Factor Models

12.1 Portfolio Return Volatility, Correlations and Covariances

12.2 Factor Models

12.3 Sensitivities of Common Instruments

12.4 Non-Linear Instruments

12.5 Volatility of the Portfolio Return

12.6 Closed-Form Matrix Formulas for the Volatility of the Portfolio Return and for VaR

12.7 Appendix 1: Correlation and Volatility of a Sum of Random Variables

12.8 Appendix 2: Mapping an Instrument to Risk Factors

Chapter 13: Delta-normal VaR and Historical VaR

13.1 Delta-Normal VaR

13.2 Historical VaR: Forward Contract Example

Chapter 14: Extensions of Traditional VaR

14.1 E-VaR or Expected Shortfall

14.2 Monte Carlo Simulations

14.3 Appendix: Cholesky Decomposition

Chapter 15: Volatility

15.1 Volatility

15.2 Exponentially Weighted Moving Average Model (EWMA)

15.3 Garch Models

15.4 Maximum Likelihood Methodology

15.5 Estimating EWMA Volatility

Chapter 16: Simulation of Interest Rates

16.1 Interest Rates and Factor Models

16.2 Modeling the Term Structure of Interest Rates with Principal Component Analysis

16.3 Interest Rate Simulations

16.4 Application to Market VaR

16.5 Simulations of Interest Rates for the Banking Book

Chapter 17: Market Risk Regulations

17.1 The Market Risk Regulations as of June 2006

17.2 Revision to the Market Risk Framework (2011)

17.3 Revisions to the Basel 2 Market Risk Framework

Chapter 18: Credit Risk

18.1 Credit Risk Components

18.2 Credit Risk Modeling

18.3 Loss Distributions for Credit Risk

Chapter 19: Credit Risk Data

19.1 Default Statistics

19.2 Recovery Statistics

19.3 Transition Matrices

19.4 Cumulative and Marginal Default Probabilities

19.5 Migration Matrices and Cumulative Probabilities

Chapter 20: Scoring Models and Credit Ratings

20.1 Scoring

20.2 Accuracy of Scoring Models: The “CAP”

20.3 Credit Ratings

20.4 Appendix: Rating Scales of Rating Agencies

Chapter 21: Default Models

21.1 Default Intensity Models

21.2 The Option Theoretic Approach to Default

21.3 Appendix: Valuation of the Put Option to Default

Chapter 22: Counterparty Credit Risk

22.1 Credit Exposures

22.2 Potential Future Exposure

22.3 Credit Risk For Derivatives: Methodology

22.4 Calculating the Potential Future Exposure For an Interest Rate Swap

22.5 Regulatory Rules for Counterparty Credit Risk

Chapter 23: Credit Event Dependencies

23.1 Joint Default Probability Using Discrete Variables

23.2 Support

23.3 Modeling Joint Defaults With the Structural Model

23.4 Joint Migration Probabilities

Chapter 24: Credit Portfolio Risk: Analytics

24.1 Independent Default Events: The Binomial Distribution

24.2 The Structural Model

24.3 Application: The Stressed Default Probability Under Basel 2

24.4 Modeling Defaults in a Uniform Portfolio: The Limit Distribution

24.5 Appendix: The Limit Distribution

Chapter 25: Credit Portfolio Risk: Simulations

25.1 Simulations of Dependent Default Events With the Asset Model

25.2 Simulations of Times to Default

25.3 Credit Portfolio Models

Chapter 26: Credit Risk Regulations

26.1 The Basel 2 Accord

26.2 The Standardized Approach

26.3 Internal Ratings-Based Framework

26.4 Credit Risk Mitigation

26.5 Specialized Lending

26.6 Securitizations

26.7 Counterparty Credit Risk

26.8 Interest Rate Risk

26.9 Pillar 2: Supervisory Review Process and Market Discipline

26.10 Appendix: Operational Risk in Basel 2

Chapter 27: Capital Allocation and Risk Contributions

27.1 Risk and Capital Allocations

27.2 Risk Contributions to an Existing Portfolio

27.3 Calculations of Risk Contributions

27.4 Marginal Risk Contributions

27.5 Appendix: Matrix Formula for Risk Contributions

Chapter 28: Risk-adjusted Performance Measures

28.1 Risk-Adjusted Measures of Performance

28.2 Risk-Based Pricing and Marginal Risk Contributions

28.3 Risk Premium and Risk-Based Pricing

28.4 Shareholder Value Added Measures

28.5 Risk-Based Performance, Pricing and Capital Allocation

Chapter 29: Credit Derivatives

29.1 Definitions of Credit Derivatives

29.2 Usage of Credit Derivatives

29.3 Credit Portfolio Management

29.4 Trading Credit Risk and the Return on Capital of a Bank

Chapter 30: Securitizations

30.1 The Motivations of Securitizations

30.2 The Principles of Securitizations

30.3 The Economics of Securitization

30.4 Variations in the Securitization Scheme

30.5 The Risk of Asset-Backed Notes

References

Index

End User License Agreement

List of Tables

Table 3.1

Table 3.2

Table 3.3

Table 3.4

Table 4.1

Table 4.2

Table 5.1

Table 5.2

Table 5.3

Table 6.1

Table 7.1

Table 7.2

Table 7.3

Table 7.4

Table 7.5

Table 7.6

Table 7.7

Table 7.8

Table 7.9

Table 7.10

Table 7.11

Table 9.1

Table 9.2

Table 9.3

Table 9.4

Table 9.5

Table 9.6

Table 9.7

Table 9.8

Table 9.9

Table 9.10

Table 9.11

Table 9.12

Table 9.13

Table 10.1

Table 10.2

Table 10.3

Table 10.4

Table 11.1

Table 12.1

Table 12.2

Table 13.1

Table 13.2

Table 13.3

Table 13.4

Table 13.5

Table 13.6

Table 14.1

Table 14.2

Table 15.1

Table 15.2

Table 16.1

Table 16.2

Table 16.3

Table 16.4

Table 16.5

Table 16.6

Table 16.7

Table 16.8

Table 18.1

Table 18.2

Table 18.3

Table 19.1

Table 19.2

Table 19.3

Table 19.4

Table 19.5

Table 19.6

Table 19.7

Table 19.8

Table 20.1

Table 20.2

Table 20.3

Table 20.4

Table 21.1

Table 21.2

Table 22.1

Table 22.2

Table 22.3

Table 24.1

Table 24.2

Table 25.1

Table 25.2

Table 25.3

Table 25.4

Table 25.5

Table 26.1

Table 27.1

Table 27.2

Table 27.3

Table 27.4

Table 27.5

Table 27.6

Table 28.1

Table 28.2

Table 30.1

Table 30.2

Table 30.3

Table 30.4

List of Illustrations

Figure 1.1

Figure 2.1

Figure 3.1

Figure 4.1

Figure 4.2

Figure 4.3

Figure 4.4

Figure 4.5

Figure 4.6

Figure 4.7

Figure 4.8

Figure 5.1

Figure 5.2

Figure 5.3

Figure 5.4

Figure 5.5

Figure 5.6

Figure 6.1

Figure 6.2

Figure 6.3

Figure 6.4

Figure 6.5

Figure 6.6

Figure 6.7

Figure 6.8

Figure 6.9

Figure 7.1

Figure 7.2

Figure 7.3

Figure 7.4

Figure 7.5

Figure 7.6

Figure 8.1

Figure 8.2

Figure 8.3

Figure 8.4

Figure 8.5

Figure 9.1

Figure 9.2

Figure 9.3

Figure 9.4

Figure 10.1

Figure 10.2

Figure 10.3

Figure 10.4

Figure 10.5

Figure 10.6

Figure 11.1

Figure 11.2

Figure 13.1

Figure 13.2

Figure 14.1

Figure 14.2

Figure 15.1

Figure 16.1

Figure 16.2

Figure 16.3

Figure 18.1

Figure 18.2

Figure 18.3

Figure 18.4

Figure 18.5

Figure 18.6

Figure 19.1

Figure 19.2

Figure 19.3

Figure 20.1

Figure 20.2

Figure 20.3

Figure 20.4

Figure 20.5

Figure 20.6

Figure 20.7

Figure 21.1

Figure 21.2

Figure 21.3

Figure 21.4

Figure 21.5

Figure 21.6

Figure 21.7

Figure 22.1

Figure 22.2

Figure 22.3

Figure 23.1

Figure 23.2

Figure 23.3

Figure 24.1

Figure 24.2

Figure 24.3

Figure 24.4

Figure 24.5

Figure 24.6

Figure 25.1

Figure 25.2

Figure 25.3

Figure 25.4

Figure 25.5

Figure 25.6

Figure 26.1

Figure 29.1

Figure 30.1

Figure 30.2

Figure 30.3

Figure 30.4

Guide

Cover

Table of Contents

Begin Reading

Begin Reading

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“For bank managers, risk managers, and students of financial risk management in banking, this indispensable guide provides a comprehensive coverage of all related topics, from balance sheet management to market and credit models. The text groups all that they need to know to understand the techniques, the practices and the main models, to navigate by themselves in the ever-evolving and highly technical literature on risks, and towards further specialisations as needed. There is so much one can talk about, that many authors have a narrow and specialized approach, which does not help readers to appreciate the full scope of the field. On the other hand, this book stays focused on risk management while addressing all angles of the field. The book is an extremely valuable contribution to the knowledge of risk management.”

Christian Jimenez, Regional Director, PRMIA Paris

“This comprehensive volume is ideal for finance professionals who aspire to deepen their knowledge of risk management in the banking sector. In an ever ever-changing environment of financial services, this entirely revised edition provides the keys to the sophistication and the technicalities of risk management techniques and models. With a combination of intellectual rigor and pragmatic application, the text integrates concisely a wide body of work, avoiding the narrower approaches of specialists. Overall, Joël Bessis offers a balanced, extensive yet relevant coverage of the far-reaching expertise needed to control and supervise risks in financial institutions.”

Elie Heriard-Dubreuil, Senior Director, Global Supranationals, Sovereign Ratings, Standard & Poor’s Rating Services

“Understanding how banking firms operate and how risk models are designed and implemented has now become central in modern finance. This book provides a concise overview of these topics and combines analytical rigor with relevance and practices inspired by the academic and professional experiences of the author. A must-read for all students and practitioners who need to have a practical knowledge of how risk management is conducted and will evolve in banking.”

Christophe Perignon, Associate Professor of Finance, HEC Paris

“The author’s balanced profile, combining academic background with the experience of professional life, shows up in the ‘how to’ approach for implementing models, techniques and processes, accessible to non-specialists, in the real world. A truly fantastic book and an enduring and worthy part of the financial markets literature.”

Professor Moorad Choudhry, Department of Mathematical Sciences, Brunel University, and former Treasurer, Corporate Banking Division, Royal Bank of Scotland

“In a context where banking firms face new challenges of risk management and risk regulations, which have a direct influence of how banks develop, it is more important than ever that all professionals, bank managers and risk managers alike, have a comprehensive view of the diversity of risk management contributions, from asset-liability management to banks systems and risk models. This concise and applied coverage of risk management in banks will enable professionals to effectively to master the technicalities of the field and form educated judgments on what risk managers and risk engineers do, which impacts their own roles.”

Patrick Legland, Global Head of Research and Member of Global Capital Markets Executive Committee, Société Générale

Risk Management in Banking

Fourth Edition

Joël Bessis

This edition first published 2015

© 2015 Joël Bessis

Second edition published 2007, third edition published 2011 by John Wiley & Sons, Ltd

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Library of Congress Cataloging-in-Publication Data

Bessis, Joël.

[Gestion des risques et gestion actif-passif des banques. English]

Risk management in banking / Joël Bessis. — Fourth edition.

pages cm

Includes bibliographical references and index.

ISBN 978-1-118-66021-8 (paperback)

1. Bank management. 2. Risk management. 3. Asset-liability management. I. Title.

HG1615.B45713 2015

332.1068’1—dc23

2015010257

A catalogue record for this book is available from the British Library.

ISBN 978-1-118-66021-8 (paperback) ISBN 978-1-118-66018-8 (ebk)

ISBN 978-1-118-66019-5 (ebk)

Cover Design: Wiley

Building detail ©Shutterstock/K images; Background ©iStock.com/svariophoto

Foreword

It is a truism that while every financial crisis is different, errors made in risk management in banking are timeless. I remember well reading an article from 1994, published by the Federal Reserve Bank of Minneapolis, that highlighted mistakes made by both large and small banks in the US banking crisis of 1980–81. Every single one of the recommendations made by the authors of that paper would have been relevant and applicable to banks that crashed in 2008–09. An ineffective risk management framework, coupled with an aggressive asset origination policy, will always combine to bring badly-run banks down the next time there is an economic downturn. Sound principles of risk management are vital at all times, throughout the cycle. In essence, they are timeless.

This book is timeless. I have been familiar with it since it was first published, and have been its biggest fan ever since. It is great to see it being issued now in its 4th edition. It is one of those rare books that combines the rigor of a sound, balanced academic approach, essential if one is to operate in finance without emotion and with logic, with the accessibility and real-world relevance that is an imperative for the practitioner. It is a genuine “handbook”, one can read it and apply its principles right away in just about every type of banking institution in the world, and that bank would be better off as a result.

Every single chapter in the book is worthy of study. I am very enthusiastic about the chapters on ALM gap and hedging. The author places everything in context, and ties in market risk and banking book risk, together with credit risk – a rare, combined approach that plays to my own strong belief about how risk management in banks should be governed by the Asset-Liability Committee (ALCO). Balance sheet risk needs one oversight body that operates with board authority, and as the balance sheet is impacted by ALM, market and credit risk together, it makes sense to view these from the ALCO table.

As a young man I used to play the bass guitar. Being asked to write this Foreword is a bit like being asked by Paul McCartney to play bass on his next album, it is that much of a privilege! Professor Bessis has made a fantastic and most worthwhile contribution to the financial economics literature with this book, right from its first edition, and I am lucky to have had a copy on the desk with me ever since it was first published. I do hope that this exciting and interesting new edition makes balance sheet risk in banking something that is more mainstream at the board level, and furthermore spurs readers on to their own research and investigation – if they follow the application and dedication evident in this work, they will not be going far wrong.

Professor Moorad Choudhry

Department of Mathematical Sciences

Brunel University

Former Treasurer, Corporate Banking Division, Royal Bank of Scotland

November 2014

Preface

Risk management in banks became, and remained, a hot topic after the financial crisis. Addressing risk management in this context is challenging given that the magnitude of the crisis suggests that risk management was inefficient, that risk models were inadequate and that regulations failed to meet their goal of avoiding a major crisis. Indeed, it is ironic that the crisis started when the new Basel 2 regulations were enforced.

Risk management has made considerable progress, however, as the practices became more sophisticated and as the regulations put pressure on enhancing the resilience of banking firms. It has become a core management field in banking with a large concentration of resources dedicated to better identify, assess and control risks.

The book addresses risk management in three main core sections dedicated, respectively, to asset-liability management, market risk and credit risk. It has been largely inspired from the observation of gaps in the knowledge of the field of risk management in banks.

In business schools and other graduate programs, students are comfortable with corporate finance and capital markets, but much less so with the finance of financial firms. The financial management of banks has not much to do with the corporate finance of commercial and industrial firms. Still many would like to better understand the inside mechanisms of banks and many aim at developing themselves in banking careers. These students of finance do not need standard finance, but rather be acquainted with the specifics of the financial management of banks and the technicalities of risk management. This book is designed to address these needs.

Many professionals in banks perceive themselves as specialists of their own fields and feel that they need more background, conceptual and practical, on the expanding core area of risks. Furthermore, the usage of risk models remained in the hands of a relatively small group of “quants”. Experts are embedded in banks, but being embedded does not imply that expertise is shared. The financial literature is broad, specialized and often highly technical in the field of risks. For those professionals of finance who are not model specialists, navigating through the variety of contributions is a challenge. This text is designed to provide a balanced background in risk techniques. The main risk models are introduced through a number of examples that should shed some light where more theoretical texts cannot help.

The volume of literature on market risk and credit risk has grown considerably, but less so in the field of asset-liability management, of which coverage is relatively limited, notably for non-specialists of banks. However, asset-liability management is a core function in banking. It concentrates the financial issues of banks and the attention of regulators who impose new rules on the balance sheet structure of banks. The text provides the minimum background on the area that all students or managers interested in banking should be acquainted with.

In short, this text is designed to address all that is needed to know for students and practitioners to be comfortable with the field and able to navigate further in related areas by themselves, but not more.

This edition has been streamlined compared to previous editions, with a focus entirely on financial issues, and technical developments have been reduced to the minimum for making the text self-contained. Many of my former colleagues and professionals with whom I have had the chance of working in the risk departments of banks have contributed to this text as they shared their experience. All participants in risk management seminars have also helped by raising many excellent and challenging questions, which allowed to refine the approach of the book. They all deserve many thanks for the enrichments that they inspired to this text.

Joël Bessis

Professor of Finance at HEC Paris

About the Author

Joël Bessis is Professor of Finance at HEC Paris, the leading French business school, where he conducts training in risk management throughout Europe, the US and Asia. Over the course of his career Joël has developed a dual expertise – as an academic and as a practitioner, holding permanent consulting assignments in corporations and, later, in banks. Joël worked for over 15 years in risk management departments of financial institutions – as a consultant to the risk departments of several banking institutions in Europe, including Banque Paribas and the European Bank for Development (EIB). Joël took a leave of absence from HEC Paris between 2000 and 2007 where he held positions as Director of Research at Fitch, Head of Risk Analytics and Model Validation at the Risk Department of IXIS, a Paris-based investment bank, and at the Groupe Caisse d'Epargne, a major financial institution in France. Joël graduated as an engineer from École Centrale in Paris, before earning a Master's in Business Administration from Columbia University in New York, and a PhD in Finance from the Université Paris-Dauphine. As an academic, Joël has published various papers and books in the fields of corporate finance, industrial economics and financial markets.

1Risks and Risk Management

For risk managers and regulators of banks, risk refers to the uncertainty of outcomes and to the negative consequences that it may have on a firm, and both aim at enhancing the resiliency of firms to adverse situations. As a result of their efforts, risks became better identified, assessed and monitored, risk practices improved and risk models became more widespread. Today, risk management has become a core central function for financial firms, banks, funds and insurance companies.

This introductory chapter presents the definitions of financial risks in banking and introduces typical organizations of the risk management function in banks, defining who should be accountable for risk controlling and processes.