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  • Potential Risks &

    Risk Management Procedures

    by

  • Management of Financial Institution

    Submitted To: Suborna Barua

    Course Instructor FIN-4116

    United International University

    School of Business

    Submitted By: Mahin Ahmed

    ID- 111 101 119

    Sec- A

    B.B.A.

    Date of Submission: 14th January, 2013

    United International University FALL 2012

  • iii

    Letter of Transmittal

    January 14, 2013

    Suborna Barua

    Course Instructor- FIN-4116

    United International University

    School of Business

    Subject: A term paper on potential risks exposer & risk management procedures by Prime

    Bank Bangladesh Ltd.

    Dear Sir,

    I am submitting herewith my report entitled A term paper on potential risks exposer & risk

    management procedures by Prime Bank Bangladesh Ltd.

    The main purpose of this report is to get a set of concepts on potential risks faced by Prime Bank

    Bangladesh Ltd & how they manage those risks.

    It is mainly a descriptive report completed with primary & secondary data. Though I have put

    my best efforts yet it is very likely that the paper may have some mistakes and omissions that are

    unintentional.

    I hope that this report will merit your approval.

    Respectfully yours

    . Mahin Ahmed

    ID: 111101119

    Sec: A

  • iv

    ACKNOWLEDGMENT

    I give thanks to the Almighty for giving me the understanding, knowledge and wisdom during

    the course of our study.

    Additionally, we thank our course instructor Suborna Barua who believed

    that I could terminate this term paper on time. His moral guidelines, endless effort, and joyful

    encouragement made me successful in this paper.

    I would like to express my gratitude towards my parents & member of (Prime Bank Bangladesh

    Ltd) for their kind co-operation and encouragement which help me in completion of this report. I

    would like to express my special gratitude and thanks to Russel Ahmed for giving me such

    attention and time.

  • v

    TABLE of CONTENT

    EXECUTIVE SUMMARY ......................................................................................................................... vi

    OBJECTIVES OF THE STUDY .................................................................................................................. 8

    METHODOLOGY OF THE STUDY .......................................................................................................... 8

    Risk Management: ........................................................................................................................................ 9

    Objectives of risk management ..................................................................................................................... 9

    Prime Bank Limited .................................................................................................................................... 10

    There are 5 (Five) Subsidiaries of Prime Bank Limited which is as under: ........................................... 10

    Techniques of Risk Management by the Bank: .......................................................................................... 10

    GAP Analysis.......................................................................................................................................... 10

    Duration-GAP Analysis .......................................................................................................................... 11

    Value at Risk (VaR) ................................................................................................................................ 11

    Risk Adjusted Rate of Return on Capital (RAROC) .............................................................................. 12

    Securitization .......................................................................................................................................... 12

    Sensitivity Analysis ................................................................................................................................ 12

    Internal Rating System ............................................................................................................................ 12

    Market Discipline [Disclosures on Risk Based Capital (Basel II)] ............................................................. 13

    Risk Management Process ...................................................................................................................... 13

    Scope of Application: ............................................................................................................................. 14

    Credit Risk: ................................................................................................................................................. 14

    Qualitative Discloser: .............................................................................................................................. 15

    Quantitative disclosures: ......................................................................................................................... 16

    Interest Rate Risk in the Banking Book (IRRBB) ...................................................................................... 19

    Interest Rate Risk Analysis ..................................................................................................................... 19

    Market Risk:................................................................................................................................................ 20

    Measurement Methodology: ................................................................................................................... 20

    Quantitative Disclosers: .......................................................................................................................... 22

    Operational Risk: ........................................................................................................................................ 22

    Potential external events ......................................................................................................................... 23

    Policies and processes for mitigating operational risk: ........................................................................... 24

    Stress Testing in PBL: ............................................................................................................................ 26

    Approach for calculating capital charge for operational risk: ................................................................. 26

    Quantitative disclosures .......................................................................................................................... 27

    CONCLUSIONS......................................................................................................................................... 27

  • vi

    EXECUTIVE SUMMARY

    It is a descriptive research & is the based on the primary data. The primary data, on types of risk,

    techniques to measure risk etc. have been collected through a personal contact with an executive

    in Prime Bank Ltd. Banking business is in most cases risk management. Banks have to make

    profits for competitive survival. Their day to day activity is nothing other than management of

    various risks associated with their businesses which include credit risk, liquidity risk, interest

    rate risk, and foreign exchange risk. Here I mainly focused on Basel II [disclosers on risk based

    capital].

    There are several techniques that the Bank uses to manage risk- GAP analysis, Duration GAP

    analysis, Value @ Risk, Risk Adjusted Rate of Return on Capital, Securitization, Sensitivity

    Analysis, and Internal Rating System.

    Credit risk arises from the potential that a bank's borrower will fail to meet its obligations in

    accordance with agreed terms. Credit risk also refers the risk of negative effects on the financial

    result and capital of the bank caused by borrower's default on its obligations to the bank. To

    address this it follows CRG [Credit Risk Grading].

    Interest rate risk is the risk where changes in market interest rates might adversely affect a bank's

    financial condition. Changes in interest rates affect both the current earnings (earnings

    perspective) as well as the net worth of the bank (economic value perspective). Re-pricing risk is

    often the most apparent source of interest rate risk for a bank and is often gauged by comparing

    the volume of a banks assets that mature or re-price within a given time period with the volume

    of liabilities that do so. The short term impact of changes in interest rates is on the banks Net

    Interest Income (NII). In a longer term, changes in interest rates impact the cash flows on the

    assets, liabilities and off-balance sheet items, giving rise to a risk to the net worth of the bank

    arising out of all re-pricing mismatches and other interest rate sensitive position.

    Market risk is the possibility of losses of assets in balance sheet and off-balance sheet positions

    arising out of volatility in market variables i.e., interest rate, exchange rate and price. Allocation

    of capital is required in respect of the exposure to risks deriving from changes in interest rates

    and equity prices in the banks trading book, in respect of exposure to risks deriving from

    chang