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Fundamentals of Risk Management



The preparation of Basel reports will become very important over the next few years following the recent banking credit crisis where weaknesses in the way that banks disclosed risks became apparent. Not only must the existing regulatory regime change, the way that the information is gathered and the way that it is audited must too be reformed. The task is not made easy given the complexities of Basel 2 and the extra complexities that Basel 3 will create.

This creates an additional challenge that risk managers and bankers must face. Our practical course is designed for principally for those involved in the preparation and audit of Basel 2 /3 and will range from Stress Testing to ICAAP reports. It will equip risk managers, internal auditors and traders to prepare them for the new requirements of the Basel 3 rules and the auditing of information that is disclosed. In particular, the course examines how banks should identify what is required from their databases and offer practical guidance on the inputs required for measuring, Loss Given Defaults (LGD’s), Probabilities of Default (PD) on a long term basis. The arbitrage opportunities that were present under Basel 2, and soon to be eliminated under Basel 3 are also identified. Methodology We will use case studies, published Basel 2 (Pillar 3 Disclosures), examples using excel spreadsheets and group case studies to illustrate the practical aspects of the Basel Accord.

Aims of the Course

This practical hands-on course will allow delegates to understand market risk and to calculate Market Risk/Value at Risk for various products like FRA’s, Swaps Forward Currency Agreements and Options. The course will commence with an introduction to financial statistics including, standard deviation, volatility, the normal distribution curve and correlation. We will then concentrate on introducing the concept of VaR and how it can meet regulatory requirements as well as improving internal decision making. Delegates will also sell how matrices operate and will use spread sheets to calculate VaR. Comparisons between the various VaR methods will also be covered.

At the end of the course delegates will be able to:

• Evaluate the different Basel calculation methods
• Exploit the potential methods in order to improve risk results
• Pillars 1, 2 and 3 and their interaction
• See how credit portfolio techniques can be used to estimate credit risk
• Optimal capital allocation and setting limits
• Integrating Credit and Market risk. Agenda 


Session 1/4

Recap on Basel 2

• Overview of the Framework

• Market, Credit Liquidity and Operational risk
• Tier One and Tier Two Capital
• Pillar One calculations, Pillar Two supervisory and Pillar Three disclosure requirements.
Interaction between Basel 2 and International Accounting Reporting Standards
• Incurred Loss v Expected Loss
• Solvency and Volatility of Earnings
• Identifying Tier One and Tier Two capital from accounting information
• ICAAP and its importance in risk control Case Study: Identifying Operational, Liquidity, Credit and Liquidity risk in a Treasury Environment.

Session 2/4
Auditing of Leverage Ratio and Off Balance Sheet Issues

• Importance of Leverage
• Leverage and Impact on Bonuses
• Concealed Leverage
• Basel 3 approach Case Study: Barings Bank, Allied Irish Bank and Societe Generale

Introduction to Value at Risk

• Evolution of the Regulatory Environment
• Capital Adequacy Directives
• Basle Proposals

Session 3 / 4

Portfolio Risk Measurement

• Standard Deviation
• Correlation and Covariance
• Capital Asset Pricing Models
• Case Study – Using Spread sheets to calculate Value at Risk at 95% and 99% levels

Risk Analysis for Treasury Products
  • • Forwards
  • • Futures
  • • Swaps
  • • Call and Put Options
Session 4/4

Application of Black & Scholes Model to Risk and Valuation and Implications for VaR
• Expected Return
• Time to Expiry v Volatility
• Introduction to Stochastic Processes
• Overview of Delta Normal
Case Study- Measuring Portfolio Risk Using Spread sheets
• Spread sheet Analysis - Standard Deviation
• Normal Distribution Curve
• Stress Factors and Sensitivity Analysis
• Impact of Interest Rates
Traders Risk Managers Accountants Middle Office Treasury Managers
Throughout the course we will present you with many case studies, including sample calculations on excel which will allow you to understand the formulas as well as the rationale for the new rules. We also include detailed case studies examining what went wrong in the past and whether the new rules are realistic enough to cover the risks that banks face.
There is considerable interaction between Basel 3 and other forms of regulation, in particular the International Financial Reporting Standards as well as new rules on disclosures and how banks should calculate bonuses. What is clearly emerging is that regulators, risk managers, accountants and bankers need to develop a ‘joined up’ approach to implementing Basel 3 as well as the various other regulatory changes. Throughout this practical case study driven course, delegates will have an opportunity to identify the market, credit, liquidity and operational risks associated with various vanilla and complicated products. They will also see the accounting and disclosure implications and the impact that they have on Operational risk.
In its ‘off-the-shelf’ form, this is a 1-day course. However, the course duration and content can be tailored to suit specific requirements.