Risk Management in Banking

379 Pages·2015·3.58 MB·English

by  Joel Bessis

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“Forbankmanagers,riskmanagers, andstudentsoffinancialriskmanagement inbanking,
thisindispensableguideprovidesacomprehensivecoverageofallrelatedtopics,frombalance
sheetmanagementtomarketandcreditmodels.Thetextgroupsallthattheyneedtoknowto
understandthetechniques,thepracticesandthemainmodels,tonavigatebythemselvesinthe
ever-evolvingandhighlytechnicalliteratureonrisks,andtowardsfurtherspecialisationsas
needed.Thereissomuchonecantalkabout,thatmanyauthorshaveanarrowandspecialized
approach,whichdoesnothelpreaderstoappreciatethefullscopeofthefield.Ontheother
hand,thisbookstaysfocusedonriskmanagementwhileaddressingallanglesofthefield.The
book is an extremely valuable contribution to the knowledge of risk management.”
Christian Jimenez, Regional Director, PRMIA Paris
“This comprehensive volume is ideal for finance professionals who aspire to deepen their
knowledgeofriskmanagementinthebankingsector.Inaneverever-changingenvironmentof
financialservices,thisentirelyrevisededitionprovidesthekeystothesophisticationandthe
technicalitiesofriskmanagementtechniquesandmodels.Withacombinationofintellectual
rigorandpragmaticapplication,thetextintegratesconciselyawidebodyofwork,avoiding
the narrower approaches of specialists. Overall, Joël Bessis offers a balanced, extensive
yet relevant coverage of the far-reaching expertise needed to control and supervise risks in
financial institutions.”
Elie Heriard-Dubreuil, Senior Director, Global Supranationals,
Sovereign Ratings, Standard & Poor’s Rating Services
“Understanding how banking firms operate and how risk models are designed and
implemented has now become central in modern finance. This book provides a concise
overviewofthesetopicsandcombinesanalyticalrigorwithrelevanceandpracticesinspired
bytheacademicandprofessionalexperiencesoftheauthor.Amust-readforallstudentsand
practitionerswhoneedtohaveapracticalknowledgeofhowriskmanagementisconducted
and will evolve in banking.”
Christophe Perignon, Associate Professor of Finance, HEC Paris
“The author’s balanced profile, combining academic background with the experience of
professionallife,showsupinthe‘howto’approachforimplementingmodels,techniquesand
processes, accessible to non-specialists, in the real world. A truly fantastic book and an
enduring and worthy part of the financial markets literature.”
Professor Moorad Choudhry, Department of Mathematical Sciences,
Brunel University, and former Treasurer,
Corporate Banking Division, Royal Bank of Scotland
“Inacontextwherebankingfirmsfacenewchallengesofriskmanagementandriskregulations,
whichhaveadirectinfluenceofhowbanksdevelop,itismoreimportantthaneverthatall
professionals,bankmanagersandriskmanagersalike,haveacomprehensiveviewofthe
diversityofriskmanagementcontributions,fromasset-liabilitymanagementtobankssystems
andriskmodels.Thisconciseandappliedcoverageofriskmanagementinbankswillenable
professionalstoeffectivelytomasterthetechnicalitiesofthefieldandformeducatedjudgments
onwhatriskmanagersandriskengineersdo,whichimpactstheirownroles.”
Patrick Legland, Global Head of Research and Member of
Global Capital Markets Executive Committee, Société Générale
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R
ISK
M
ANAGEMENT
B
IN ANKING
FOURTH EDITION
Joël Bessis
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Thiseditionfirstpublished2015
2015JoëlBessis
Secondeditionpublished2007,thirdeditionpublished2011byJohnWiley&Sons,Ltd
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LibraryofCongressCataloging-in-PublicationData
Bessis,Joël.
[Gestiondesrisquesetgestionactif-passifdesbanques.English]
Riskmanagementinbanking/JoëlBessis.—Fourthedition.
pagescm
Includesbibliographicalreferencesandindex.
ISBN978-1-118-66021-8(paperback)
1. Bankmanagement. 2. Riskmanagement. 3. Asset-liabilitymanagement. I. Title.
HG1615.B457132015
332.1068´1—dc23 2015010257
AcataloguerecordforthisbookisavailablefromtheBritishLibrary.
ISBN978-1-118-66021-8(paperback)ISBN978-1-118-66018-8(ebk)
ISBN978-1-118-66019-5(ebk)
CoverDesign:Wiley
Buildingdetail©Shutterstock/Kimages;Background©iStock.com/svariophoto
Setin10/12ptTimesNewRomanMTStdbyThomsonDigital,Noida,India
PrintedinGreatBritainbyTJInternationalLtd,Padstow,Cornwall,UK
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Contents
Foreword vii
Preface ix
AbouttheAuthor xi
1 RisksandRiskManagement 1
2 BankingRegulationsOverview 13
3 BalanceSheetManagementandRegulations 21
4 LiquidityManagementandLiquidityGaps 31
5 InterestRateGaps 43
6 HedgingandGapManagement 57
7 EconomicValueoftheBankingBook 67
8 ConvexityRiskinBanking 81
9 ConvexityRisk:TheCaseofMortgages 91
10 FundsTransferPricingSystems 109
11 Returns,RandomShocksandValue-at-Risk 123
12 PortfolioRiskandFactorModels 135
13 Delta-normalVaRandHistoricalVaR 149
14 ExtensionsofTraditionalVaR 159
15 Volatility 169
16 SimulationofInterestRates 179
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vi CONTENTS
17 MarketRiskRegulations 189
18 CreditRisk 199
19 CreditRiskData 211
20 ScoringModelsandCreditRatings 221
21 DefaultModels 237
22 CounterpartyCreditRisk 253
23 CreditEventDependencies 263
24 CreditPortfolioRisk:Analytics 271
25 CreditPortfolioRisk:Simulations 283
26 CreditRiskRegulations 293
27 CapitalAllocationandRiskContributions 303
28 Risk-adjustedPerformanceMeasures 315
29 CreditDerivatives 323
30 Securitizations 331
References 345
Index 351
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Foreword
It isatruism that while every financialcrisis isdifferent,errorsmade inrisk managementin
bankingaretimeless.Irememberwellreadinganarticlefrom1994,publishedbytheFederal
ReserveBankofMinneapolis,thathighlightedmistakesmadebybothlargeandsmallbanksin
the US banking crisis of 1980–81. Every single one of the recommendations made by the
authors of that paper would have been relevant and applicable to banks that crashed in
2008–09. An ineffective risk management framework, coupled with an aggressive asset
origination policy, will always combine to bring badly-run banks down the next time there
is an economic downturn. Sound principles of risk management are vital at all times,
throughout the cycle. In essence, they are timeless.
Thisbookistimeless.Ihavebeenfamiliarwithitsinceitwasfirstpublished,andhavebeen
itsbiggestfaneversince.Itisgreattoseeitbeingissuednowinits4thedition.Itisoneofthose
rarebooksthatcombinestherigorofasound,balancedacademicapproach,essentialifoneisto
operate in finance without emotion and with logic, with the accessibility and real-world
relevancethatisanimperativeforthepractitioner.Itisagenuine“handbook”,onecanreadit
andapplyitsprinciplesrightawayinjustabouteverytypeofbankinginstitutionintheworld,
and that bank would be better off as a result.
Everysinglechapterinthebookisworthyofstudy.Iamveryenthusiasticaboutthechapters
onALMgapandhedging.Theauthorplaceseverythingincontext,andtiesinmarketriskand
bankingbookrisk,togetherwithcreditrisk–arare,combinedapproachthatplaystomyown
strongbeliefabouthowriskmanagementinbanksshouldbegovernedbytheAsset-Liability
Committee (ALCO). Balance sheet risk needs one oversight body that operates with board
authority, and as the balance sheet is impacted by ALM, market and credit risk together, it
makes sense to view these from the ALCO table.
AsayoungmanIusedtoplaythebassguitar.BeingaskedtowritethisForewordisabitlike
beingaskedbyPaulMcCartneytoplaybassonhisnextalbum,itisthatmuchofaprivilege!
Professor Bessis has made a fantastic and most worthwhile contribution to the financial
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viii FOREWORD
economicsliteraturewiththisbook,rightfromitsfirstedition,andIamlucky tohavehada
copy on the desk with me ever since it was first published. I do hope that this exciting and
interestingneweditionmakesbalancesheetriskinbankingsomethingthatismoremainstream
attheboardlevel,andfurthermorespursreadersontotheirownresearchandinvestigation–if
they follow the application and dedication evident in this work, they will not be going far
wrong.
Professor Moorad Choudhry
Department of Mathematical Sciences
Brunel University
Former Treasurer, Corporate Banking Division,
Royal Bank of Scotland
November 2014