Econ 470:Seminar in Economics

Bank Risk Management

Risk

What is risk? Risk:

“Danger, or the possibility of danger, defeat or loss”

--- Cambridge Dictionary of American English

“The possibility of loss or injury”

--- Merriam-Webster’s Dictionary

“The probability of a loss or threat” --- Wikipedia

Risk

Two common characteristics: Exposure to “bad things” Uncertainty

Definition of Financial risks:The concept of financial risks denotes a

potential (negative) impact to an asset that may arise in the future.

An Example: Bank Risk Management

Essential questions for a risk manager: Attribute: what kind of risk will be caused? Quantification: how much could the bank

lose? Assessment: Is the risk worth being taken

compared with the return? Treatment:

Passive: Can the bank absorb the loss? Active: How to reduce the risk without significantly

reducing the return?

Anatomy of A Bank CEOCEO

RetailBankingRetail

BankingCorporateBanking

CorporateBanking

SupportSupportAsset

ManagementAsset

ManagementInsuranceInsurance

BrokeringBrokering

Private BankingPrivate Banking

MortgagesMortgages

Credit CardsCredit Cards

Checking &Lending

Checking &Lending

UnderwritingUnderwritingMergers &

AcquisitionsMergers &

Acquisitions

Sales &TradingSales &Trading

CommercialFinance

CommercialFinance

ResearchResearch

Financial Reporting Financial Reporting

Risk Management

Risk Management

OperationsOperations

Audit &Compliance

Audit &Compliance

InformationTechnology

InformationTechnology