Question

You work in the Risk Department of a leading Commercial Bank and the Board of Directors in their quest to better manage the overall risk profile of the bank has requested the following from the Risk Department:

1. A Risk Register that covers the main risk profile of the bank.

2. In developing your Risk Register, using weighted average, determine the top four (4) key risk areas to which the bank is exposed.

3. Within your Risk Register, articulate no less than two plans to mitigate/ effectively manage each risk.

4. The Risk Register should identify timelines and responsible department to manage the implementation.

Answer 1

Here is your answer:-

The top 4 Key risks that the bank is exposed to are:

1. Interest rate risk -

The banks would face the interest rate risk which would be the highest. The banks profits are highly dependent on interest rates set by the Federal Reserve and hence the weight for this would be 50percent =0.5

2. Credit or default risk -

This is the next important risk the bank faces. In case the borrowers default, the bank will not be able to pay back the depositors and this is next most important and the risk weight would be 25percent = 0.25

3. Business risk from competition-

Most banks in the business are competing and each bank is trying to provide something better and niche from others. So the risk of losing the customer is the next important risk and risk weight would be 15% =0.15

4. Exchange rate risk for letter of credits - The risk in adverse movement of currency exchanges will affect the bank in a minor fashion. The weight for this would be less about 10% = 0.1

Two plans to mitigate:

1. Interest rate hedges in the form of swaps wherein the bank gets the fixed interest rate ires pective of the exact movement of interest rates. This can be done in the form of interest rate forwards or interest rate swaps

2. To reduce currency risk, the bank should so the same with currency exchange forwards and Currency swap. Also the business risks can be mitigated by being customer friendly and processing of customer requests faster.