International Board of Standards - The Official Certifying Body USA Offices
AAFM ™ Board of Standards, Academy, and Fellows. AAFM.US

Risk Management References

Click for: Lecture notes and slides

Additional materials: Tables from Berkowitz&O’Brien (2002), Basel vs RiskMetrics requirements to market risk measurement, Tables on credit risk

Exam with solutions

Data for the project on market risk:

·        Data on most liquid Russian stocks in 1/1999-3/2007: basic information (id, name, # issued stocks, dividends) and trading data (daily close prices and trading volumes, in rubles)

·        Macroeconomic data, including Euro and dollar exchange rates, oil price, MIACR (interbank credit rates), money balances, RTS, MICEX, S&P/RUX, AK&M, Cbonds indices, risk-free (GKO-OFZ) rates of different maturities in 1/1999-3/2007 (daily)

·        The daily NAVs of Russian mutual funds (PIFs) can be downloaded from http://www.investfunds.ru/; the latest end-of-quarter portfolio should be reported in the fund’s website.

·        It is recommended to use

o       RTS or S&P-RUX as stock market index

o       Cbonds as bond index,

o       AKM or RUX industry indices as local equity risk factors,

o       MSCI stock indices as international equity factors

 

Readings (required, supplementary, and advanced)

Cases

·        Risk management at PIMCO. Description of measurement and management of fixed-income risks.

·        Kuprianov, 1995, Case studies of large losses in derivative markets. Metallgesellschaft and Barings.

·        Digenan et al., 1995, Metallgesellschaft AG: A Case Study.

·        Krapels, 2001, Re-examining the Metallgesellschaft Affair and its Implication for Oil Traders.

·        Orange County case by Philippe Jorion

·        Jorion, 2000, Risk management lessons from Long-Term Capital Management, European Financial Management 6, 277-300. Analysis of LTCM failure.

·        Coy and Woolley, Failed wizards of Wall street, 1998, Business Week. Discussion of strategies pursued by LTCM and other arbitrageurs.

Surveys

·        West, 2004, Risk measurement for financial institutions. General survey.

·        Alexander, 2003, The present and future of financial risk management, ISMA Center Discussion Papers in Finance 2003-12. The first part of the paper discusses the recent trends in risk management.

Market risk

·        Berkowitz and O’Brien, 2002, How accurate are Value-at-Risk models at commercial banks? Journal of Finance 57(3), 1093-1111. Backtesting of VaR, comparison with GARCH.

·        Christoffersen and Diebold, 1999, How relevant is volatility forecasting for financial risk management. Model-free procedure for assessing volatility forecastability across different horizons.

·        Brooks and Persand, 2003, Volatility forecasting for financial risk management, Journal of Forecasting 22, 1-22.

·        Ahmed, 2001, Forecasting correlation among equity mutual funds, Journal of Banking and Finance 25, 1187-1208. Good survey of different methods to estimate future correlations.

·        Campbell, 2001, Optimal portfolio selection in a Value-at-Risk framework, Journal of Banking and Finance 25, 1789-1804.

·        Billio and Pelizon, 2000, Value-at-Risk: A multivariate switching regime approach, Journal of Empirical Finance 7, 531-554.

·        Longin, 2000, From value at risk to stress testing: the extreme value approach, Journal of Banking and Finance 24, 1097-1130.

·        Hawkins, 1997, Risk analysis techniques, GARP FRM exam review class notes. Survey of VaR methods, including sample exam questions and answers.

Liquidity risk

·        Bekaert, Harvey, and Lundblad, 2003, Liquidity and expected returns: lessons from emerging markets.

Credit risk

·        Crouhy, Galai, and Mark, 2000, A comparative analysis of current credit risk models, Journal of Banking and Finance 24, 59-117.

·        Bharath and Shumway, 2004, Forecasting Default with the KMV-Merton Model. Comparing the default forecasting quality of the KMV model with a simpler approach.

·        Vassalou and Xing, 2004, Default Risk in Equity Returns, Journal of Finance 59(2), 831-868. Studying relation between default risk and other (e.g, size and book-to-market) equity risks.

Additional sources

·        RiskMetrics Group:

o       RiskMetrics technical document (1996), evolution of a standard (its update, 1999), and practical guide (1999)

o       CreditGrades technical document (description of the structural model, 2002), CreditMetrics technical document (1997)

·        Moody’s KMV white papers on credit risk

·        FRM 1997 exam problems with answers

·        Risk management links on the web

·        Articles on credit risk from Tavakoli Structured Finance

 Information above from this link: http://www.nes.ru/~agoriaev/RiskMgt.htm

US Financial Risk Management Manual of Examination Policies

2.1 Capital

• Introduction
• Capital
• Contingent Liabilities
• Evaluation of a Bank's Capital Adequacy
• Rating the Capital Factor

3.1 Asset Quality

• Introduction
• Evaluation of Asset Quality
• Rating the Asset Quality Factor

3.2 Loans

• Introduction
• Loan Administration
• Portfolio Composition
• Other Credit Issues
• Loan Problems
• Loan Appraisal and Classification
• Concentrations
• Federal Funds Sold and Repurchase Agreements
• Fundamental Legal Concepts and Definitions
• Consideration of Bankruptcy as it Relates to Collectability of a Debt
• Syndicated Lending
• Credit Scoring
• Subprime Lending

3.3 Securities and Derivatives

• Introduction
• Policies, Procedures, and Risk Limits
• Internal Controls
• Unsuitable Investment Activities
• Risk Identification, Measurement, and Reporting
• Board and Senior Management Oversight
• Compliance
• Report of Examination Treatment
• Other Guidance
• Investment Strategies
• Market Risk Modification Strategies
• Accounting Guidance
  

3.4 Cash and Due from Banks

• Types of Accounts
• Examination Objectives
• Examination Procedures

3.5 Premises and Equipment

• Definitions
• Fixed Assets Accounting
• Extent of Fixed Assets Investment
• Analysis of Fixed Assets
• Fire and Extended Coverage on Bank Premises, Furniture and Equipment
• Examination Procedures

3.6 Other Real Estate

• Other Real Estate
• Other Real Estate Reserves

3.7 Other Assets and Liabilities

• Introduction
• Other Assets
• Other Liabilities

3.8 Off-Balance Sheet Activities

• Introduction
• Off-Balance Sheet Items and Derivatives
• Off Balance Sheet Lending Activities
• Off-Balance Sheet Asset Transfers
• Off-Balance Sheet Contingent Liabilities
• Adversely Classified Contingent Liabilities

4.1 Management

• Introduction
• Management/Directors
• Federal Banking Laws and Regulations Primarily Pertaining to Bank Directors
• Other Issues
• Evaluation of Management
• Rating the Management Factor

4.2 Internal Routine and Controls

• Introduction
• Basic Elements of an Internal Control System
• Audit
• Corporate Governance
• The Examiner's Responsibilities
• Other Related Matters

4.3 Related Organizations

• Definitions and Authorities
• Gramm-Leach Bliley Act
• Examination Authority
• Bank Holding Companies
• Parent Companies which Are Not Bank Holding Companies
• Holding Company Effect on Subsidiary Banks
• Tying Arrangements
• Chain Banking Groups
• Affiliates
• Subsidiaries
• Examination of Subsidiaries
• Examination and Investigaton of Unaffiliated Third Party Servicers

4.4 Fidelity and Other Indemnity Protection

• Introduction
• Fidelity Insurance Protection
• Other Desirable Insurance Coverage

4.5 Violations of Laws and Regulations

• Introduction
• Basic Causes and Significance of Violations
• Scheduling Violations
• Types of Violations
• Contraventions of FDIC Statements of Policy
• Violations and the Evaluations of Bank Management

4.6 Miscellaneous Banking Activities

• Remote Disbursement Activities and Zero-Balance Accounts
• Funds Transfer System Risk

5.1 Earnings

• Introduction
• Evaluation of Earnings Performance
• Rating the Earnings Factor

6.1 Liquidity and Funds Management

• Introduction
• Liquidity Management
• Warning Indicators and Contingency Liquidity Plan
• Funding Sources: Assets
• Funding Sources: Liabilites
• The Role of Capital and the Bank Holding Company
• Evaluation of a Bank's Liquidity
• Rating the Liquidity Factor

7.1 Sensitivity to Market Risk

• Introduction
• Examination Standards and Goals
• Types of Interest Rate Risk
• Management Responsibilities
• IRR Measurement Methods
• IRR Measurement System Review
• Variance Analysis
• Other Market Risk Factors
• Evaluation of a Bank’s Sensitivity to Market Risk
• Rating the Sensitivity to Market Risk Factor
• Market Risk Glossary

Part III - Other Examination Issues

8.1 Bank Secrecy Act, Anti-Moneylaundering and Office of Foreign Assets Control

• Introduction to the Bank Secrecy Act
• Financial Crimes Enforcement Network Reports and Recordkeeping Requirements
• Customer Identification Program
• Special Information Sharing Procedures to Deter Money Laundering and Terrorist Activities
• Customer Due Diligence
• Banking Services and Activities with Greater Potential for Money Laundering and Enhanced Due Diligence Procedures
• Monitoring Bank Secrecy Act Compliance
• BSA Violations and Enforcement
• Identification of Suspicious Transactions
• Suspicious Activity Reporting
• Office of Foreign Assets Control
• Examples of Proper Citation of Apparent Violations of the BSA Related Regulations in the Report of Examination
• Web-Site References

9.1 Bank Fraud and Insider Abuse

• Introduction
• Subject Areas
• Corporate Culture/Ethics
• lnsider Transactions
• Loan Participations
• Real Estate Lending
• Secured Lending
• Third Party Obligations
• Lending to Buy Tax Shelter Investments
• Linked Financing/Brokered Deposits
• Credit Cards and ATM Transactions
• Advance Fee Schemes
• Offshore Transactions
• Wire Transfers
• Money Laundering
• Securities Trading Activities
• Miscellaneous

10.1 Suspicious Activity and Criminal Violations

• Introduction
• Bank Management’s Role
• The Examiner’s Role
• Interagency Cooperation
• Examiner Assistance to Federal Law Enforcement Authorities
• Federal Grand Jury Subpoenas
• Safeguarding and Documenting Evidence
• Notification to the Bonding Company
• Other Matters of Importance
• Criminal Statutes

11.1 International Banking

• Introduction
• Country Risk Management
• International Activities
• Supervision of U.S. Operations of Foreign Banks and Other International Banking Entities
• Laws and Regulations
• Glossary of International Banking Terminology

12.1 Formal Administrative Actions

• Applications for Deposit Insurance
• Applications to Establish a Branch or to Move Main Office or Branch
• Applications for Consent to Exercise Trust Powers
• Change in Bank Control Act
• Application for Retirement of Capital
• Applications for Mergers
• Applications by Undercapitalized Depository Institutions for a Waiver to Accept, Renew or Rollover Brokered Deposits
• Policy Statement on Encouragement and Preservation of Minority Ownership of Financial Institutions
• Applications Pursuant to Section 19 of the FDI Act – Crimes Involving Dishonesty or Breach of Trust or Money Laundering, or Pretrial Diversion Programs for Such Offenses
• Applications Pursuant to Part 362 of the FDIC’s Rules and Regulations – Activities and Investments of Insured Depository Institutions
• Other Applications

Part IV - Administrative & Enforcement Actions

13.1 Memorandums of Understanding

• Introduction

14.1 Civil Money Penalties

• Introduction
• Violations
• Assessment of Civil Money Penalties
• Examination Procedures
• Other Considerations
• Guidelines for Using the CMP Matrix

15.1 Formal Administrative Actions

• Introduction
• Reports of Examination Containing a Basis for Section 8 Charges
• Unsafe or Unsound Practices
• Section 8(a) - Termination of Insurance
• Cease and Desist Proceedings
• Suspension and Removal Procedures
• Use of Written Agreements and Capital Directives
• Prompt Corrective Action Directive
• Orders to Correct Safety and Soundness Deficiencies
• Capital Plans

Part V - Examination Report

16.1 Report of Examination Instructions

General Instructions

• Inventory of Report Pages
• Examination Conclusions and Comments (ECC)
• Compliance with Enforcement Actions
• Risk Management Assessment
• Violations of Laws and Regulations
• Information Technology Assessment (ITA)
• Fiduciary Activities Assessment (FAA)
• Examination Data and Ratios (EDR)
• Comparative Statements of Financial Condition
• Loan and Lease Financing Receivables
• Recapitulation of Securities
• Items Subject to Adverse Classification
• Items Listed for Special Mention
• Analysis of Loans Subject to Adverse Classification
• Analysis of Other Real Estate Owned Subject to Adverse Classification
• Assets with Credit Data or Collateral Documentation Exceptions
• Concentrations
• Capital Calculations
• Analysis of Earnings
• Comparative Statements of Income and Changes in Equity Capital Accounts
• Relationships with Affiliates and Holding Companies
• Extensions of Credit to Directors/Trustees, Officers, Principal Shareholders, and Their Related Interests
• Signatures of Directors/Trustees
• Officer's Questionnaire
• Officer's Questionnaire (Bank Secrecy Act)
• Confidential – Supervisory Section
• In-House Information Technology
• Trust Supervisory Section (Short Form)
• Directors/Trustees and Officers
  

International Report Pages and Workpapers

• International Report Pages -- Country Risk
• International Report Page Transfer Risks Subject to Classification or Comment
• International Report Page Analysis of the Country Exposure Management System
• International Report Page Selected Concentrations of Country Exposures
• International Workpapers
• International Workpaper International Loans, Acceptances, and Letter of Credit – Distribution
• International Workpaper International Loans, Acceptances, and Letters of Credit – Questionnaire
• International Workpaper Eurocurrency Operations
• International Workpaper Foreign Exchange Activities
• International Workpaper Position Analysis – Major Currency Positions
• International Workpaper Position Analysis – Other Currencies
• International Workpaper Maturity Distribution (Gap) Analysis
• International Workpaper Revaluation and Income/Loss Analysis
• International Workpaper Income/Loss Schedule
• International Workpaper Policies and Procedures
• International Workpaper Audit and Internal Controls – Audit
• International Workpaper Audit and Internal Controls – Internal Controls
• International Workpaper Parallel-Owned Banking Organizations (PBO)

Appendix A Abbreviations

Appendix B Report of Examination Grammar and Punctuation Guide

17.1 Bank of Anytown-Report of Examination

Examination Conclusions and Comments

• Compliance with Enforcement Actions
• Risk Management Assessment
• Violations of Laws and Regulations
• Information Technology Assessment
• Fiduciary Activities Assessment
• Examination Data and Ratios
• Comparative Statements of Financial Condition
• Loans and Lease Financing Receivables
• Recapitulation of Securities
• Items Subject to Adverse Classification
• Items Listed for Special Mention
• Analysis of Loans Subject to Adverse Classification
• Analysis of Other Real Estate Owned Subject to Adverse Classification
• Assets with Credit Data or Collateral Documentation Exceptions
• Concentrations
• Capital Calculations
• Analysis of Earnings
• Comparative Statements of Income and Changes in Equity Capital Accounts
• Relationships with Affiliates and Holding Companies
• Extensions of Credit to Directors/Trustees, Officers, Principal Shareholders, and Their Related Interests
• Signatures of Directors/Trustees
• Confidential - Supervisory Section
• In-House Information Technology
• Trust Supervisory Section (Short Form)
• Directors/Trustees and Officers

International Report Pages and Workpapers

• Transfer Risks Subject to Classification or Comment
• Analysis of the Country Exposure Management System
• Selected Concentrations of Country Exposure
• International Loans, Acceptances, and Letters of Credit - Distribution
• International Loans, Acceptances, and Letters of Credit - Questionnaire
• Eurocurrency Operations
• Foreign Exchange Activities
• Position Analysis - Major Currency Positions
• Position Analysis - Other Currencies
• Maturity Distribution (GAP) Analysis
• Revaluation and Income/Loss Analysis
• Income/Loss Schedule
• Policy and Procedures
• Audit and Internal Controls - Audit
• Audit and Internal Controls - Internal Controls
• Parallel-Owned Banking Organization (PBO)

18.1 Report of Investigation Instructions

General Instructions

• References
• Application Processing
• Report of Investigation Procedures
• Statutory Factors
• Miscellaneous Report Issues
• Cover - Report of Investigation
• Table of Contents
• Investigation Report Conclusions and Recommendations
• Financial History and Condition
• Adequacy of the Capital Structure
• Earning Prospects
• General Character of Management
• Risk to the Funds
• Convenience and Needs of the Community to be Served
• Consistency of Corporate Powers
• Other Matters
• Investigation Report Summary
• Appendix A
• Management/Director Interview Form
• Community/Competition Interview Questionnaire

19.1 Bank of Anytown-Report of Investigation

Conclusions and Recommendations

• Investigation Report Conclusions and Recommendations

Assessment

• Financial History and Condition
• Adequacy of the Capital Structure
• Future Earnings Prospects
• General Character of the Management
• Risk to the Funds
• Convenience and Needs of the Community to be Served
• Consistency of Corporate Powers

Other

• Other Pertinent Information
• Investigation Report Summary

 

Complete guide to Financial Risk

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