Risk Management Systems: Process, Technology and Trends by Martin Gorrod (auth.)

By Martin Gorrod (auth.)

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Extra info for Risk Management Systems: Process, Technology and Trends

Sample text

Risk management technologies built to comply with the first Basel Accord for credit risk were typically based on the use of 25 chapter one W H AT I S R I S K MANAGEMENT? 1 Approaches to risk measurement in the new Basel Accord Risk Class Increasing complexity in approach Market Minor changes to existing methodology Credit Standardized Additions to Basel 88 approach Internal ratings-based methods (IRB) Foundation Advanced approach approach Breakdown by As for exposure category Foundation with parameters but all determined by both parameters institution and input calculated by from regulator institution Basic indicator approach Use of a single risk indicator or aggregate activity measure multiplied by a fixed multiple or alpha Standardized approach Different business units are assigned different risk indicators or aggregate activity measures which are multiplied by a fixed multiple or beta determined by the regulator Operational Advanced measurement approach Internally calculated, based on a more complex analysis of the current risk taken within organization a data warehouse and monolithic applications.

Issued shareholder equity and retained earnings (defined as Tier 1 Capital) 2. General provisions and issued subordinated debt as defined in the Accord (Tier 2 Capital) 3. Some short-term issued subordinate debt (Tier 3 Capital). The aim is to ensure that assets that have higher levels of risk associated with them require higher levels of capital to be maintained. The minimum regulatory capital requirement is then given as a percentage 244 of the risk-weighted assets, which can be compared against the actual regulatory capital of the organization.

Regulatory compliance External regulatory changes, such as Basel 2, are driving risk management changes (especially in credit and operational risk). There are also internal demands for better business intelligence and tighter controls. Straight through processing (STP) Improved and more efficient internal processes that require minimal manual intervention. This is being driven by regulatory pressure and the desire for potential cost savings. In addition, market volatility has increased in many markets with liquidity reducing in others.

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