The concept of banking risks and their causes

 

Introduction

 

 

     Bank as a commercial organization is committed to making a profit, which ensures the stability and reliability of its operation, and can be used to expand its activities. But the focus on profitability is always associated with the various types of risks, which in the absence of their limitations can result in losses. Therefore, any bank in determining its strategy of forming a system of measures, which on the one hand, the aim of making a profit, and, on the other hand, take into account the possibility of loss prevention in the implementation of banking.      

The successful solution of the problems the optimization of the "profitability - risk" in the implementation of the bank's credit operations is largely determined by the use of effective credit mechanism.     

Note that it is lending activity - this is the activity for which the Bank and is created as a credit institution. And although over time the banks will certainly expand the complex of services, namely income from credit operations are their main source of profit.     

However, any loans associated with some risk, especially in an emerging market. When, at any stage there is a risk.     

Risk management is a major in banking. Although initially only banks take deposits, they quickly matured, becoming intermediaries in the transfer of funds, thereby taking on other risks, such as credit. Credit has become the basis of banking and the basis on which the judge of the quality and the work of the bank. Particularly noteworthy credit risk management process, because of its quality depends on the success of the bank.     

Studies of bank failures around the world indicate that the main reason was the poor quality of assets. The key elements of good governance are: well-developed credit policies and procedures, good portfolio management, effective control of the loans, and, most importantly, a well-prepared to work in this system staff.     

Modern banking market, who is today a crisis situation, illustrates the urgency of the matter.     

The purpose of this paper is a summary of approaches to the classification of banking risks, methods of assessment and management, as well as identifying ways to minimize them.     

The structure of the work is as follows:     

- In the first chapter the term "banking risks" and their classification;     

- In the second chapter discusses the methodological framework for the analysis and assessment of risks;     

- In the third chapter identifies the most effective methods of bank risk management.

1.The nature and classification of banking risks

 

1.1.The concept of banking risks and their causes

 

 

     In the course of their activities, banks are faced with a set of different types of risks, differing in the place and time of occurrence, the external and internal factors affecting their level, and therefore the methods of their analysis methods and their descriptions. All kinds of risks are interrelated and affect the performance of the bank.     

Modern banking market is unthinkable without risk. The risk is present in any operation it may be only different scales and different offset. It would be extremely naive to look for options for banking operations, which would completely eliminate the risk in advance and would guarantee a certain income statement. With this approach to business in the market for a long time can not remain "afloat". Consequently, for the banking activities is important not to avoid risk at all, and the foresight and reduced it to the minimum level.     

Risk - the probability, or rather the threat of losing the bank of its resources, revenue or work extra costs as a result of the exercise of certain financial transactions.     

Bank risk - is situational characteristics of the bank, showing the uncertainty of its outcome and characterizing the potential negative deviation from the expected reality.     

Since the risk - this is only the possibility of loss, ie, there is always more or less the probability that the loss will not, and will only profit (risk benefits) so far, many banks can not afford not to seek ever greater profits, and thus become more competitive in the market and more attractive to customers.     

The possibility of high returns in the future is the driving force for risky operations and at the same time an instrument of market competition, which "administers" cases on the market. The pursuit of high profits in the end turns reinforcement and consolidation of some banks and the weakening, the absorption and the bankruptcy of other banks. The market would not be a market if its members are not risked. The scale of bank capital such that, if successful, a risky operation profit from it can be so great that for a long time spans on losses from other small risk operatsiy.1      

Banks tend to have the highest profit. But this tendency is limited to the possibility of incurring losses. The higher the expected return, the higher the risk. Relationship between the yield of the bank's operations and its risk in a very simplified form, can be expressed as linear dependence.     

Fig. 1 The relationship of risk and return.     

Risk-taking - the basis of banking. Banks are successful when they are taking reasonable risks, to control and are within their financial means and expertise.     

An important task is to create an organizational banks analysis service of economic conditions of the market and economic assessment of commercial loans, which will assess the real usefulness of the specific operations, and coordinate the activities of all banking units. To effectively analyze banking risks and the development of methods to reduce them, you must first be divided by type of risk and type, and then develop ways to reduce or eliminate specific risks.

 

1.2. The classification of banking risks

 

 

     The effectiveness of risk management organization largely depends on the classification. Under the classification of risk should understand the distribution of risk at specific groups according to certain criteria in order to achieve their goals. Science-based risk classification allows you to clearly define the place of each in the overall system. It creates opportunities for efficient use of appropriate methods, techniques, management.     

Each risk corresponds to an individual system optimization techniques. In the scientific literature, one can find various options for risk classification in general and banking in particular. Our task here is to attempt to find a common basis for the synthesis of the variety of bank risk in a single system that could cover specific features previously developed classifications and preserve the integrity of the structural relationships between different groups, species and varieties of risks

On sphere of influence risks are divided into external and internal, as the scope of the commercial bank itself is influenced by both external macro-environment and internal conditions microenvironment of the institution. Accordingly, the external risks can be grouped by the width of the coverage area and the impact factor, and internal risks are grouped according to the nature of banking operations, the composition of the bank's clients and types of commercial banks.     

The external risks are not directly related to the activities of the bank or contact the audience. From the width of the coverage area, they may be in the country and the current conditions, a high degree of international economic integration, it makes sense to talk about the risks of the world. There are not only due to the global problems of humanity, but also the economic crises in individual regions of the world, which are also reflected in a very economically prosperous countries. Depending on the impact of external factors appropriate to allocate the risks of political and legal risks, economic risks, natural and natural risks.     

Internal risks arise as a result of the activities of the banks and their customers. In turn, are divided into risks osnovnoyi in supporting activities of the bank. The former are the most widespread group of risk: credit, interest rate, currency and market risks. The latter include the loss on the formation of deposits, risks for new activities, the risks of banking abuse, the risk of a downgrade.     

By the time of occurrence of the risks allocated to the retrospective, current and the promising. Risk allocation over time is important for predicting future bank losses. When taking into account the time of the risk can be avoided by applying the last of risks and errors on the future operations of the bank.     

According to the degree (level) banking risks can be divided into low, moderate and complete. The degree of bank risk is characterized by a probability of events leading to the loss of bank funds for the operation, expressed as a percentage or ratios.     

By the method of calculating the risks are complex and private. The complex includes a risk assessment and prediction of the amount of risk the bank and compliance with prudential regulations of bank liquidity. Private risk based on the creation of the scale of risk ratios or risk weighing on the single banking transaction or group.      

By type of bank risks of commercial banks are divided into specialized, industry and universal. In each of them there are all kinds of risks, but the probability of their occurrence frequency and specificity depend on the type of the banking institution.     

The activities of universal banks also versatile. They are involved in virtually all types of banking services (credit, settlement and financial). So they have all the areas of risk, but these risks are weighed. Universal banks are considered less risky.     

Specialized commercial banks orient its activities mainly on the provision of any particular service, ie have a distinct commodity orientation. For example, innovation, investment, savings and loan, mortgage, deposit, clearing and other banks. Branch banks specialize in serving certain categories of customers by sector (agriculture, industry, construction) or functional (stock exchange, insurance, trust, cooperative, communal) characteristics.     

Risks on the composition of customers (small, medium and large) determine the degree of risk itself. Thus, the small borrower is subject to greater dependence on the chance of a market economy than large. However, large loans to a single large customer are often the cause of bank failures.     

For the main factors of banking risks are divided into economic and political. Political risks - risks due to changes in the political environment that adversely affects the performance of enterprises (military operations on the territory of the country, the closing of borders, the ban on the export or import of goods, etc.). Economic risks - risks arising from adverse changes in the economy or the economy of the bank or the country as a whole. They can be represented by a change in market conditions, the level of management, etc. These basic types of risk are related, and in practice they are often difficult to separate.     

On the scope of banking risks can also be classified as follows: risk countries, the risk of an individual bank financial strength (failure risks the bank's capital, unbalanced liquidity, lack of required reserves), the risk of a particular type of banking transactions (the risk of non-payment, non-refund, encashment - bank guarantee, the legal risk , the risk of non-profitability of credit, etc.)     

By the nature of accounting operations, banking risks are divided into risks on balance sheet and off-balance sheet transactions, and those other risks are divided into active and passive operations risks. The risks of active operations include interest and portfolio risks, inflation, credit, transportation, leasing, factoring, etc. The risks for passive operations include risks related to the increase in share capital through earnings, loans received from other entities, deposit operations, etc.       

Inflation risk - the risk, which is defined by the life cycle of industries.     

Of particular interest are the so-called transport risks. Their classification was first shown the International Chamber of Commerce in Paris (1919g.) and unified in 1936., When they were first released Incoterms rules. After the recent correction (1990) various transportation risks are classified according to the degree of responsibility and in four groups E, F, C, and D.     

Leasing and factoring risks arise in the implementation of leasing and factoring operations.     

Leasing - a method of financing the development of new technology, the expansion of sales of equipment, which is especially important in the period of urgency in the implementation of certain elements of the real capital, reduced product life cycles, etc. Leasing is currently in operation at risk. Therefore, it is expedient to cover losses from him from the reserve fund of the bank.     

Factoring - a kind of trade and commission operations, in which a specialized company credits the seller during their shipment to the transaction of purchase and sale, purchasing accounts receivable from customers and exacting her own.     

Interest rate risk - is the risk of loss due to excessive bank interest rates on deposits above the interest rates on loans (or a significant reduction in the margin), as well as due to the increase in market interest rates on the securities, which leads to their depreciation.      

Portfolio risk - is the probability of loss on certain types of securities, as well as the entire category of loans. Portfolio risks are divided into financial, liquidity risk, systematic and unsystematic.      

Currency risk - or the risk of exchange losses associated with the internationalization of banking operations, the creation of transnational (cooperative) enterprises and banking institutions and the diversification of their activities and represents an opportunity to monetary losses as a result of currency fluctuations.     

Credit risk - the risk of default by the borrower of principal and interest (in a broad sense here include any bank risks associated with the failure by other market participants of their obligations to the bank.) Expression of the degree of credit risk operations is the highest interest rate for transactions with credit nature (actually loans, factoring, discounting bills, guarantees), as compared with other assets. Rate on the loan to compensate the Bank the funds provided for the period, the risk of changes in value of collateral and the risk of default on its obligations. The risk of default on its obligations is determined by many factors, united in the concept of the creditworthiness of the client: legal capacity, financial condition and reputation of the client, the quality of collateral, the forecast of the firm, market risk and so on. The correctness of the estimate depends on the propriety of the valuation technique is a timely response to changes in the financial condition of the customer.     

Very often, the credit risk arising from on-balance sheet transactions, applies to off-balance-sheet activities, such as bankruptcy of the company. An important consideration is the right degree of possible losses from the same activities taking place at the same time as on-balance sheet and off-balance sheet accounts. By the bank's balance sheet risks include risks - credit, interest rate, liquidity, capital structure (non-compliance with the capital adequacy ratio, non-rational organization of its structure).       

Liquidity risk - the ability to quickly handle financial assets into cash. Priority - maintaining instant liquidity - linked to the need for customer payments to the day. The consequences of the loss of instant liquidity can be significant; problems with customers and banks kontragentami.3     

Risk capital structure - is that the capital structure with a large proportion of articles revaluation reserve bank, which invested heavily in customer lending operations with a maturity of more than possible to attract resources to the situation changes in the market can bear the additional costs (in the case of increased cost of resources) and be bankrupt due to the recognition of     

Off-balance sheet risks mean that the bank will not be able to answer on guarantees entered into transactions with securities, credit obligations entered into foreign exchange transactions.     

Opportunity management allocate public and private risks. Open the risks the bank is unable to locate them. Closed risks are managed through a policy of diversification, that is, by a wide redistribution of loans in small amounts, given the large number of clients while maintaining the overall volume of the bank's operations, the introduction of certificates of deposit, loan and deposit insurance, etc.     

Some authors identify but considered, the following categories of banking risk:     

Market risk - are closely linked to interest rate and currency risks. It means a loss, unexpected expenses from changes in the market value of the assets or liabilities, changes in the degree of liquidity. Especially susceptible to this kind of risk of investing in securities. The market value is generated by supply and demand, that is quoted. At the quotation of securities may be affected and the oscillation rate of interest on loans (an increase in interest rates leads to an impairment of securities), the change in profitability and financial health of the issuing companies, inflationary devaluation of money. It is especially important to take into account market risk in the collateral for credit operations, as changes in securities prices or deterioration in the property market could lead to losses in the recovery.     

The risk of the formation of deposits (resource base) - is closely related to market, interest rate and currency risks. In the formation of the resource base of the bank should take into account the likelihood of increased costs to attract resources in the event of changes in the situation on the financial market. Deposit policy of the bank aims to provide a resource bank for a certain time at a certain price for certain active operations. Its implementation is the solution of two opposing objectives: the stability of the resource base and to minimize the costs of its formation. Ideal - long-term investments should be balanced long-term depozitami.Drugaya form of manifestation of the risk of formation of the deposit base - it damages in lost revenue due to the need to keep a certain percentage of the amount of the resource base in the form of cash for settlement services. For the bank assets that are not revenue.     

General market risk of falling prices - is the risk of forgone income for any financial assets. Most often it is associated with a fall in prices of all marketable securities at the same time. In countries with developed market economies, there are firms observer who constantly analyze the risk level of the portfolio of various securities.      

The risk of loss of profits - is the loss due to not carrying out any operation.     

Risk operating environment the bank accepts as a regulated firm which is a key part of the payment system. They combine the risks that are protecting the interests of the bank, but by which the control is carried out over the bank, as well as those that are generated by the environment of a commercial bank: the risk of legislative, legal and regulatory risks, risks of competition, country risk.     

Management risks include the risk of fraud on the part of the staff of the bank, the risk of inefficient organization, the risk of failure of the bank's management to take suitable solid solutions, as well as the risk that the banking system of remuneration does not provide an appropriate stimulus. That is, the risks of this category due to lack of qualified bank staff, selfish objectives pursued by bank employees.     

Risks associated with the delivery of financial services, arise in the provision of banking services and products and are divided into technological, operational, strategic risks and the risk of the introduction of new products.     

Technology risk arises in every case, when the current system of service is less effective than the newly created.     

Operational risk, sometimes called the burden of risk is the ability of the bank to provide financial services profitable way. That is, as the ability to provide services, and the ability to control the costs associated with providing these services are equally important elements.     

The risk of introduction of new financial instruments related to the supply of new banking products and services. Similar problems arise in the case where the demand for new services is lower than expected, higher than expected costs, and the actions of the bank in the new market is not too thought out.     

Strategic risk reflects the ability of the bank to choose the geographic and product segments, presumably profitable for the bank in the future, taking into account the comprehensive analysis of the future operating environment.     

Financial risks can be defined as follows: the more loans are banks, joint-stock companies, including cooperative banks, the higher the risk for their shareholders, founders. At the same time, the borrowed funds are an important and lucrative source of funding, as is most often less expensive than the production and sale of reprints of the securities. According to the accepted standards for borrowers ratio between equity and debt - the debt ratio (Kd) - varies within 0.2 - 0, 3. This risk is closely associated with the risk of leverage (leverage - leverage), which depends on the ratio of capital invested in securities with fixed-income, non-fixed-income and the amount of fixed and working capital. This security risk is measured using the following formula:     

ROE = ROAxEM,     

where: ROA - Return on assets, ie level of efficiency in the use of all funds of the bank;     

ROE - the level of efficiency in the use of the share capital;     

EM - the coefficient of the bank's property.     

This classification is different complexity and criteria underlying the economic classification are intended not so much to list all types of banking risks, as a demonstration of the presence of a particular system, which allows banks not to miss some varieties of banking risks in the aggregate amount of risk in the commercial and industrial sector.     

One should not forget about the high degree of abstraction of any classification, and hence the close interconnectedness and interdependence of all species is at risk.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2. Methods of assessment of banking risks

 

 

      Banking is very diverse, each of them has its specific features, and therefore a certain level of risk, or a fixed probability of loss. All variety of banking operations complemented by a variety of clients and changing market conditions, which significantly complicates the development of some of the criteria for risk assessment. These circumstances make substantial changes in the collection of emerging banking risks and the methods of their study. However, this does not exclude the presence of the common problems of risks and trends in the dynamics of their level.     

Change one kind of risk cause changes almost all the other species. All this, of course, complicates the choice of the method of analysis of specific risk and decision-making to optimize it leads to in-depth analysis of a variety of other risk factors. Therefore the choice of a particular method of analysis of the level, the selection of the optimal factors are very important. The consequences of incorrect assessments of risks or inability to oppose effective measures can be most unpleasant until the complete bankruptcy of the bank.      

The basis of the methodology of the market risk management system are the analysis of the bank's assets and the calculation of market risk parameters on the basis of the risk factors. This methodology is successfully applied in several major Russian banks.     

The implementation methodology usually consists of three main stages: analysis, design and testing / training documentation.      

At the first stage the notion of "the market" in relation to the bank's portfolio - a set of risk factors, ie, Since market rates, rates and indices that affect the value of the portfolio.