Analyzing and Managing Banking Risk : A Framework for Assessing Corporate Governance and Financial Risk

by Van Greuning, Hennie; Bratanovic, Sonja Brajovic

• ISBN13: 9780821354650
• ISBN10: 0821354655
• Edition: 2nd
• Format: Hardcover
• Copyright: 2003-04-01
• Publisher: World Bank

Summary

'Analyzing Banking Risk (2nd edition)' provides a comprehensive overview of topics dealing with the assessment, analysis, and management of financial risks in banking. This book focuses on risk-management principles and stresses that key players in the corporate governance process are accountable for managing the different dimensions of financial risk.This second edition remains faithful to the objectives of the original publication ('Analyzing Banking Risk'). A significant new addition is the inclusion of chapters on the management of the treasury function and management of a stable liquidity investment portfolio. New material also consists of a discussion of proprietary trading activities and asset management liability components.Chapters include:- Organization of the Treasury Function- Investment/Stable Portfolio Management- Proprietary Trading/Market Risk Management- Asset-Liability Management Components- Key Players in the Corporate Governance and Risk Management Process- Transparency in the Financial Statements of BanksManaging the risks associated with the banking industry today has become more difficult. The approach used in this publication provides a framework for identifying the key players in the risk-management process and discussing their accountability for the various dimensions of the financial and other risk management processes.The hardcover edition includes a CD-ROM.

Author Biography

Sonja Brajovic Bratanovic is a senior financial sector specialist in the World Bank. Hennie van Greuning is currently a Senior Adviser in the World Bank's Treasury and has previously worked as a sector manager for financial sector operations in the Bank.

Table of Contents

Foreword to the Second Edition	xiii
Acknowledgments	xv
Analyzing and Managing Banking Risk	1	(14)
Introduction: The Changing Bank Environment	1	(2)
Bank Exposure to Risk	3	(2)
Corporate Governance	5	(3)
Risk-Based Analysis of Banks	8	(3)
Analytical Tools Provided	11	(4)
A Context for the Risk-Based Review of Banks	15	(16)
Introduction: Why Banks Are Analyzed	15	(2)
Banks as Providers of Financial Information	17	(1)
A Framework for Financial Sector Development	18	(6)
A Holistic View of the Entire Financial System	24	(3)
Disclosure and Transparency of Bank Financial Information: A Prerequisite for Risk-Based Analysis	27	(4)
Key Players in the Corporate Governance and Risk Management Process	31	(28)
Introduction: Corporate Governance Principles	31	(2)
Regulatory Authorities: Establishing a Corporate Governance and Risk Management Framework	33	(2)
Supervisory Authorities: Monitoring Risk Management	35	(3)
The Shareholders: Appointing the Right Policymakers	38	(2)
The Board of Directors: Ultimate Responsibility for a Bank's Affairs	40	(6)
Management: Responsibility for Bank Operations and the Implementation of Risk Management Policies	46	(5)
The Audit Committee and Internal Auditors: An Extension of the Board's Risk Management Function	51	(2)
External Auditors: A Reassessment of the Traditional Approach of Auditing Banks	53	(3)
The Role of the General Public	56	(3)
Balance Sheet Structure and Management	59	(22)
Introduction: Composition of the Balance Sheet	59	(3)
Asset Structure: Growth and Changes	62	(5)
Liabilities Structure: Growth and Changes	67	(5)
Overall On- and Off-Balance-Sheet Growth	72	(4)
Managing Risk Effectively	76	(5)
Profitability	81	(20)
Introduction: The Importance of Profitable Banks	81	(2)
Income Statement Composition	83	(6)
Income Structure and Profit Quality	89	(7)
Profitability Indicators	96	(1)
Profitability Ratio Analysis	97	(4)
Capital Adequacy	101	(34)
Introduction: The Characteristics and Functions of Capital	102	(2)
Constituents of Regulatory Capital (Current Methodology)	104	(4)
Coverage of Risk Components by Constituents of Capital (Current Methodology)	108	(5)
Basel II: Proposed Changes for Determining Capital Adequacy	113	(8)
Implementation of the Basel Accord	121	(2)
Assessing Management Information with Respect to Capital Adequacy	123	(7)
Annex to Chapter 6	130	(5)
Credit Risk Management	135	(32)
Introduction: Components of Credit Risk	135	(1)
Credit Portfolio Management	136	(4)
Review of Lending Function and Operations	140	(2)
Credit Portfolio Quality Review	142	(4)
Nonperforming Loan Portfolio	146	(5)
Credit Risk Management Policies	151	(3)
Policies to Limit or Reduce Credit Risk	154	(5)
Asset Classification	159	(5)
Loan Loss Provisioning Policy	164	(3)
Liquidity Risk Management	167	(22)
Introduction: The Need for Liquidity	167	(2)
Liquidity Management Policies	169	(3)
The Regulatory Environment	172	(3)
The Structure of Funding: Deposits and Market Borrowing	175	(2)
Maturity Structure and Funding Mismatches	177	(4)
Deposit Concentration and Volatility of Funding	181	(1)
Liquidity Risk Management Techniques	182	(7)
Treasury Organization and Risk Management	189	(32)
Introduction: Overview of Treasury Functions	189	(3)
Establishing the Overall Policy Framework	192	(7)
Market Operations	199	(2)
Risk Analytics and Compliance	201	(6)
Treasury Operations	207	(6)
Corporate Governance and Operational Risk Assessment	213	(8)
Management of the Stable Liquidity Investment Portfolio	221	(10)
Nature of the Stable Liquidity Investment Portfolio	221	(2)
Investment Policy	223	(1)
Eligible Instruments	224	(1)
Credit Risk	224	(1)
Market Risk	225	(1)
Benchmark Portfolio	225	(2)
Active Management	227	(1)
Risk Management and Risk Budgets	228	(1)
Management Reporting	229	(2)
Market Risk Management and Proprietary Trading	231	(18)
Introduction: Market Risk Characteristics	231	(3)
Portfolio Risk Management Policies	234	(3)
Trading Book and Management of Trading Activities	237	(3)
Market Risk Measurement	240	(4)
Value at Risk	244	(2)
Stress Testing	246	(3)
Interest Rate Risk Management	249	(12)
Introduction: Sources of Interest Rate Risk	249	(3)
Risk Management Responsibilities	252	(1)
Models for the Management of Interest Rate Risk	253	(5)
The Impact of Changes in Forecast Yield Curves	258	(3)
Currency Risk Management	261	(20)
Introduction: Origin and Components of Currency Risk	261	(2)
Policies for Currency Risk Management	263	(7)
Currency Risk Exposure and Business Strategy	270	(4)
Currency Risk Management and Capital Adequacy	274	(7)
Transparency in the Financial Statements of Banks	281	(16)
Introduction: The Importance of Useful Information	281	(2)
Transparency and Accountability	283	(2)
Transparency in Financial Statements	285	(5)
Disclosure in the Financial Statements of Banks	290	(3)
Deficiencies Found in Bank Accounting Practices	293	(4)
The Relationship between Risk Analysis and Bank Supervision	297	(1)
Introduction: The Bank Supervisory Process	297	(1)
The Analytical Review Process	298	(6)
Banking Risks and the Accountability of Regulatory/Supervisory Authorities	304	(3)
The Supervisory Process	307	(7)
Consolidated Supervision	314	(5)
Supervisory Cooperation with Internal and External Auditors	319	(4)
Appendixes
1 Background Questionnaire to Facilitate Analysis of Banks	323	(36)
2 IAS-Required Disclosure in Financial Statements, by Risk Category	359	(6)
3 Deficiencies Found in Accounting Practices	365