Economic Capital for Market Risk

Qualified market risk management of asset and liability portfolios or trading activities is of key importance for banks and financial institutions. It is not only about quantitative measurement of the risks, but also about organizational and regulatory principles. Besides relatively simple market risk measures, we will define and explain various approaches to Value at Risk (VaR) and Conditional VaR estimation and backtesting. The two risk measures are used for day-to-day management as well as key regulatory capital concepts, or as tools of strategic risk management based on economic capital allocation. Market risk management, in particular in case of OTC derivatives, is also closely related to the counterparty credit risk management and measurement in terms of CVA (Credit Valuation Adjustment) that will be in detail discussed in the last section of this chapter.

This study was conducted to examine the impact of risk management on the financial performance of conventional banks in Indonesia. Effective and efficient banking industry financial performance from time to time is highly expected to maintain banking financial stability itself and even the stability of a country. The increase in losses borne by banks as a result of inadequate risk management practices is a major concern of bank management and regulators. The data tested in this study is conventional bank data that listed on the Indonesia Stock Exchange during the 2015-2019 period. Data analysis using Multiple Linear Regression Model. The results show that there is a significant relationship between market risk management (NIM), operational risk management (BOPO) and liquidity risk management (LDR) with bank financial performance (ROA). Meanwhile, credit risk management (NPL) has no effect on bank financial performance (ROA). For this reason, it can be said that adequate risk management practices as demonstrated by the ratio of interest rate risk, liquidity risk and operational risk are the main driving factors for profitability for the banking sector in Indonesia. Therefore, bank management must mobilize resources to understand a sound risk management system which in turn will have an impact on improving the bank's financial performance.Keywords: Conventional Banks, Risk Management, Financial Performance.

The Securities and Exchange Commission's enhanced disclosure rule on risk oversight, state laws requiring public disclosure of compromised customer information, and high-profile customer information breaches have caused Information Technology (IT) risk management practices to be a major concern for boards of directors and management. The Committee of Sponsoring Organizations of the Treadway Commission's (COSO) Enterprise Risk Management (ERM) framework emphasizes the importance of the board's oversight role while also bringing attention to the firm's reporting structure. Consequently, our study examines whether the maturity of IT risk management practices depends on Chief Information Officer (CIO) reporting structure and Chief Executive Officer (CEO)/Chairman duality. We develop a scale to measure strategic and operational maturity under the larger auspice of IT risk management and distribute a survey to high-level IT professionals. Our survey also captures the reporting structure of their firms. Consistent with our hypothesis, we find that the maturity of strategic IT risk management practices are higher when the CIO reports directly to the CEO. However, contrary to expectations, we do not find that operational risk management is more mature when the CIO reports to the Chief Financial Officer (CFO). Instead, operational risk management is higher when the CIO reports to the CEO. For public firms, the maturity of IT risk management practices are higher when the CEO is also the chairman of the board of directors. As C-level officers may have asymmetric access to the board, understanding reporting structures may inform firms, regulators, and interested stakeholders on how well IT risk is managed and factors that affect IT governance.

The primary objective of this paper is to examine the market risk and liquidity risk management techniques and practices followed by the Indian scheduled commercial banks (SCB) consisting of public sector banks (PSBs) and private sector banks (PVSBs) for five years from 2016-17 to 2020-21. The other objective is to compare market and liquidity risk management practices between the public sector banks (PSBs) and private sector of banks (PVSBs). The other purpose of the study is to review the strategies adopted by the SCBs in risk management practices. To study the risk management practices, six largest banks each from PSBs and PVSBs are taken for sample study. This study finds that the SCBs are facing credit risk, market risk (Interest rate risk, foreign exchange risk, commodity price risk and equity price risk,) liquidity risk and operational risk. It also finds that the PSBs are better reporting and presenting their risk management practices in their annual reports than that of PVSBs in risk identification, risk assessment and risk analysis. The results indicate that there is no significant difference between the PVSBs and PSBs in the policies and practices of market risk and liquidity risk assessment, evaluation, monitoring risk controlling and risk taking. This paper will be relevant and value to those interested in research in the risk management banking industry. This is a descriptive research based on secondary data.

Purpose. The aim of the article is substantiation of the methodology of strategic management of risk resistance of a retail enterprise. Methodology of research. The works of domestic and foreign scientists on strategic risk management in the enterprise are the theoretical and methodological basis of the study. The tasks set in the work were solved using the following methods: analysis and generalization - when analysing models of strategic risk management; a systematic approach, an abstract and logical one - when determining the main stages of strategic management of the risk resistance of a retail enterprise, developing a “bow tie” diagram for assessing the risks of a retail enterprise; economic and mathematical modelling - when developing a tuple of structural elements of an information system for managing the risk resistance of a retail enterprise. Findings. Scientific approaches to the formation of a strategic enterprise risk management system were studied. The key aspects of the methodology “Risk management of the organization. Integrated Model” were considered. A PPRR-model of strategic management of the risk resistance of a retail enterprise was developed. The main stages of strategic management of the risk resistance of a retail enterprise are determined. A tuple of structural elements of the information system for managing the risk resistance of a retail enterprise was formed. A methodical approach to the construction of a “bow tie” diagram for risk assessment of a retail enterprise is substantiated. This approach takes into account the relationship between the sources of risk and the consequences of its implementation. Originality. An organizational and methodological approach to the formation of a strategic management system for the risk resistance of a retail enterprise has been developed, unlike existing ones, it creates the opportunity to quickly and timely respond to changes in the external environment, identify sources of risk, establish cause-and-effect relationships between risk factors and its consequences, analyse and prove relevant information at risk for strategic decision makers. Practical value. Practical implementation of the results of the study lies in the development of applied tools that can be used to make informed strategic decisions to mitigate the consequences of the onset of risk events, increase the level of risk resistance of retail enterprises under resource and time constraints, while contributing to the achievement of the set targets for the activities of a trading enterprise. Key words: risk, risk resistance, strategic management, PPRR model, information system, assessment, “bow tie” diagram.

This book serves as a technical yet practical risk management manual for professionals working with water and wastewater organizations. It provides readers with a functional comprehension of water and wastewater operations as well as a broad understanding of industry derivations and various stakeholder interconnectivity. This knowledge is imperative, as most administrative professionals are proficient in their respective areas of expertise but sometimes lack fluency on the broader technical aspects of their organization’s purpose, operations, and externalities. It also examines risk management best practices and provides an actionable review of doing the right thing, the right way, every time through a combination of core risk management principles. These include enterprise, strategic, operational, and reputational risk management, as well as risk assessments, risk/frequency matrixes, checklists, rules, and decision-making processes. Finally, the book addresses the importance of risk transfer through insurance policies and provides best practices for the prudent selection of these policies across different scenarios. Features: Provides an understanding of water and wastewater technical operations to properly implement sound risk management and insurance programs. Emphasizes the importance of building well-designed, resilient systems, such as policies, processes, procedures, protocol, rules, and checklists that are up to date and fully implemented across a business. Offers a detailed look into insurance policy terms and conditions and includes practical checklists to assist readers in structuring and negotiating their own policies. Handbook of Risk and Insurance Strategies for Certified Public Risk Officers and Other Water Professionals combines practical knowledge of technical water/wastewater operations along with the core subjects of risk management and insurance for practicing and aspiring professionals charged with handling these vital tasks for their organizations. Readers will also gain invaluable perspective and knowledge on best-in-class risk management and insurance practices in the water and wastewater industries.

12 - Enterprise-wide risk management

This paper provides insights on the link between operational risk management, disaster recovery (DR), business continuity planning (BCP), outsourcing and operational resilience, for financial services. Core of the analysis of this paper is examining the use of stress and scenario testing for operational risks, focusing on the UK insurance sector as a case study. Specifically, it presents a critical analysis on the application of this risk management tool in risk and crisis management, from a resilience lens. The aim of this practical paper is to highlight the relationship between DR, BCP, third party risk management (TPRM) and operational resilience from a scenario analysis angle and testing requirements. This comparison of existing regulatory prescribed stress tests supports the recommendations for the development of company-specific severe but plausible scenarios. Guidance on the development, design, assessment and quantification of idiosyncratic scenarios is presented, building on the lessons learned from the regulatory prescribed stress tests. Overall, this research highlights the application of scenario analysis and stress testing as a core element of risk management practices for UK insurance companies in meeting operational resilience requirements, while enhancing their DR, BCP, TPRM and their overall approach in managing operational risks. Insights on advances in scenario analysis and stress testing for cyber risks and operational resilience are sought, considering the developments around FinTech and providing practical guidance for their implementation. This article is also included in The Business & Management Collection which can be accessed at https://hstalks.com/business.

The article examines operational risk in banking, emphasizing its significance due to potential severe losses, particularly amidst technological advancements and competitive pressures. The purpose of the study is to identify banking factors influencing operational risk and analyze their relationships, thereby enhancing risk management practices. The problem addressed is the impact of various factors on operational risk, seeking to determine which have the most significant effects and the best management strategies. The research focuses on 24 banking factors across 13 European banks from 2014 to 2016, employing regression analysis to evaluate their effects within different macroeconomic and microeconomic environments. The methodology combines deductive and inductive reasoning, using both Advanced Measurement Approach (AMA) and Standardized Approach (SA) for analysis. It draws on case studies and secondary data from banks to maintain ethical standards and enhance validity. Key conclusions indicate a significant relationship between operational risk and various banking factors, with the AMA approach capturing all potential losses and demonstrating significant correlations across all variables studied. In contrast, the Standard approach only highlights a few factors, suggesting it inadequately addresses operational risk. The findings advocate for improved resource allocation in operational risk management, emphasizing the need for banks to adopt comprehensive strategies to mitigate risks effectively.

The commodity trading sector, particularly within the oil and energy markets, faces unprecedented challenges driven by rising uncertainties, reduced global demand, geopolitical risks, and market volatility. The onset of the Russia–Ukraine war, compounded by the Covid-19 pandemic, has accelerated the adoption of digital technologies and virtual collaborative tools among trading firms, fundamentally reshaping business processes. This study investigates the impact of digital disruptions on the oil and energy trading sector in the United Arab Emirates (UAE), with a specific focus on the integration and adoption of Commodity Trading and Risk Management (CTRM) solutions. By employing a comparative analysis of trading operations before and after CTRM implementation, alongside detailed case studies of UAE-based firms, this research examines how advanced digital technologies have transformed operational efficiency, strategic management, and risk management practices within the sector. Primary data from 68 oil and energy trading firms were collected through a cross-sectional descriptive research design, using a comprehensive questionnaire that addressed pre- and post-adoption scenarios. Results reveal significant enhancements in operational efficiency and risk management capabilities following the adoption of CTRM digital solutions. Case studies highlight how UAE firms have leveraged these technologies to improve market responsiveness, reduce transaction times, and enhance transparency and security in trading operations. The study concludes that firms have become better equipped to navigate volatile markets, mitigate risks, and increase profitability, with stakeholder feedback affirming improved efficiency throughout the trade cycle. This research contributes to the energy trading industry by demonstrating how embracing digital technologies for CTRM functions can foster sustainable competitive advantages and align with future market developments. It underscores the importance of continuous innovation and strategic agility in the evolving digital landscape.

The present study discussed and analyzed a number of issues concerning the operational risk faced by Islamic Financial Services, for example concepts of operational risks, risk management approaches and risk mitigation techniques and standards as these exist in the financial industry, unique operational risks of the Islamic Financial Services industry and the perceptions of Islamic Financial Services about these risks, regulatory concerns with respect to operational risks and their management, and Shari'ah related challenges concerning risk management has been identified and discussed. This study is an exploratory study therefore, based on the literature review relating to operational risk, risk management approaches and risk mitigation techniques. Guidelines on Stress Testing, issued by State Bank of Pakistan including sensitivity analysis and scenario analysis were also studied. The major part of the data consisting of secondary source was collected through research journals, internet and relevant books. Citation and literature discussion have been the major approach of this study. Banks should aim to develop a framework for operational risk management particularly for collecting operational loss data. In respect of designing operational risk stress tests, key indicators, like human errors, frauds, or failure to perform in timely manner, breaching limits, failure of information technology systems or events such as major fires or other disasters may be identified against the business lines. Shocks may be given to these risk events, their frequency and severity of losses. Once the operational loss events are identified, the level of shocks may be designed by looking into both the historical as well as hypothetical level of losses under those risk events.

This study aims to investigate the impact of board gender diversity on firm performance and risk management, with a focus on the moderating effects of CEO education, CEO power, and institutional investors, in companies listed on the Tehran Stock Exchange. The statistical sample includes 116 companies listed on the Tehran Stock Exchange over the period from 2018 to 2022. The models employed in this study are multivariate linear regression models, analyzed using EViews 10 software. The hypothesis testing results indicate a significant and negative relationship between board gender diversity and financial performance (return on assets). There is a significant and positive relationship between board gender diversity and financial performance (return on equity). No significant relationship was found between board gender diversity and financial performance (Tobin's Q). A significant and positive relationship was identified between board gender diversity and economic performance (market value added and economic value added). Moreover, there is a significant and positive relationship between board gender diversity and non-financial performance (corporate social responsibility). However, no significant relationship was found between board gender diversity and other non-financial performance indicators (innovation, employee growth, internal process factor, customer factor, and learning and growth factor). Additionally, no significant relationship was observed between board gender diversity and risk management (operational risk, reporting risk management, and strategic risk management). There is, however, a significant and positive relationship between board gender diversity and risk management regarding non-compliance with laws and regulations.

This paper presents a theoretical research framework that was used to analyse operational risk management (ORM) system practices in Australia. It provides a new perspective on how to use national and international operational management system standards as a basis for systematic management of operational risks. Based on the extensive literature review and the analysis of operational risk management system practices that are common in Australian organisations, this paper identifies the critical factors for effective use of an ORM system. The proposed framework could also be used as a model to research ORM system applications in other countries.

The management of operational risk is not a new concept in the banking industry. Operational risks such as external fraud, internal fraud, and processing errors have had to be managed since the beginning of banking. Traditionally, these risks were managed using insurance protection and audit. Globalisation, complex financial products and changes in information technology, combined with a growing number of high-profile operational loss events worldwide have increased the importance of operational risk management for the banking industry. This has prompted regulators to decide that banks have to set aside risk capital to cover operational risk losses. The Basel Committee on Banking Supervision (BCBS) began the discussions on operational risk management in 1998 leading to the inclusion of operational risk capital requirements into the new international regulatory framework, Basel II, developed during 2001–2006. Currently, major banks are undertaking quantitative modelling of operational risk to satisfy these requirements. This chapter gives an overview of the Basel II requirements for operational risk management, several important loss data collection exercises conducted by regulators in different countries and proposed modelling approaches.

A strategically minded CFO will realize that strategic corporate risk management is about finding the right balance between risk prevention and proactive value generation. Efficient risk and performance management requires adequate assessment of risk and risk exposures on the one hand and performance on the other. Properly designed, a risk measure should provide information on to what extent the firm’s performance is at risk, what is causing that risk, the relative importance of non-value-adding and value-adding risk, and the possibilities to use risk management to reduce total risk. In this chapter, we present an approach – exposure-based cash-flow-at-risk – to calculating a firm’s downside risk conditional on the firm’s exposure to non-value-adding macroeconomic and market risk and to analyzing corporate performance adjusted for the impact of non-value-adding risk.