Risk Management and Capital Allocation in Financial Institutions

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Trends in Risk Management

• The Changing Assumptions about Risk Management
• The Evolution of Risk Management – from Duration to ERM
• Risk Integration and the Need for more Efficient Capital Allocation
• How Effective Risk Management Can Create Value

Approaches to Measuring and Managing Risks

• Alternative Measures of Risk
• Volatility, VaR, LPM and Extreme VaR
• The “Silo” Approach to Measuring and Managing Risks
  • The Basel II/Solvency II Risk Measurement Frameworks
• Problems with the Silo Approach
  • Loss of Diversification Benefits, System Redundancy, Data Inconsistency
• Enterprise-wide Risk Management
  • Why an Enterprise Risk Management Approach?
  • Core Components of an ERM Framework
  • The COSO Framework for Measuring and Managing Risks
• Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Economic Capital – the Foundation for Modern Risk Management

• Why Economic Capital Planning Has Become Increasingly Important to Overall Competitiveness
• Economic Capital as a “Common Currency” for Risk
• Economic Capital in Banks
  • Differences between VaR and Economic Capital
  • What Risks Should be Included when Calculating EC?
  • How Much Capital Is Need to Support the Bank’s Total Risk?
  • How Much Capital Is Needed to Obtain Target Rating?
  • Using Mathematical Modelling for Measuring Economic Capital
• Economic Capital in other Types of Financial Institutions
  • Calculating “Probability of Ruin”
  • Calculating EC as Amount of Assets Needed to Reduce Probability of Ruin to Acceptable level
• Tie-In of Economic Capital to Regulatory/Rating Agency Capital
  • Historical Ways of Calculating Solvency Levels
  • New Capital Adequacy Models with Greater Regard to Institutions’ Proprietary Models
  • Case Study: S&P’s Dynamic “FPC” Model
• Small Exercises

Day Two

09.00 - 09.15 Brief recap

09.15 - 12.00 Capital Allocation and Risk Adjusted Performance Measurement

• Allocating Capital Across Business Units
  • Making Risk-Return Profiles Comparable Across Business Lines
  • Estimating How Much Risk Each Business Unit Contributes to the Institutions’ Total Risk
  • Determining Major Sources of Concentration and Diversification
  • Deciding Who Gets the Diversification Benefits
  • Deriving Appropriate Limits for All Risks and Business Lines
• Measuring and Evaluating Risk-Adjusted Performance
  • The Origins of Risk-Adjusted Performance Measures
  • From RORAC via RARORAC to RAROC
  • Are Business Units Creating or Destroying Value?
  • Case Study: Measuring RAROC in “NoHope Bank”
• Risk Pricing
  • Measuring the Market Price of Risk
  • Risk-Adjusted Loan Pricing
  • How a Portfolio-Based Approach to Loan Pricing Can Lead to Competitive Advantages
• Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.00  Implementing a Risk Capital Allocation System

• The Internal Capital Adequacy Assessment Process (ICAAP)
• Setting Strategic Risk and Earnings Targets
  • Which Risks to Take, Which Risks to Hedge/Transfer?
  • What Price to Charge for Bearing Risks?
• Integrating Regulatory and Economic Capital Models into an Overall Framework
• Using EC Planning to Realize Benefits Beyond Basel II/Solvency II
• Aligning The Incentives System with the Institution’s Risk and Earnings Targets
• Developing an Organizational Risk Culture
  • Providing Guidance to Advance the Use of a More Corporate and Systematic Approach to Risk Management;
  • Building a “Risk-Smart” Workforce
  • Creating an Environment that Allows for Innovation and Responsible Risk Taking
• Some Practical Issues
  • Obtaining Internal and External Data
  • Data Cleaning, Data Warehousing and Data Processing
  • Risk Control and Reporting
  • Implementing and Testing Controls

Summary, Evaluation and Termination of the Seminar