Risk Management

&
Risk Mitigation by Banks
 Submitted By

Shumaila Naz

Student ID Mc080203696

Virtual University Of
Pakistan

Date of Submission of Project Proposal

November 09, 2010

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Table of Content

Page No.

1. Introduction of the project 3

2. Why this research is needed 3

3. Back Ground 3

4. Objectives 4

5. Significance 4

6 Project Proceeding 5

7. Managing Operational Risk 5

8. Credit Risk Management 6

9. Marketing Risk Management 6

10. Liquidity Risk Management 7

11. Methodology 8

13. Bibliography 9

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Chapter No.01.

Introduction of the project.

Risk Management and Risk Mitigation by Banks.

My project is based on the research about Risk Management and Risk Mitigation by
Banks. Mainly it involves the practices and procedures adopted by bankers to identify
measure, monitor and control risk. These all activities collective can be called Risk
Management

When we use the word “Risk” in banking organization it means banking risk. These risks
are the outcomes of an action or event that could bring up adverse impacts such as direct
loss of earnings, capital loss, or imposition where it becomes difficult for a bank to meet
its business objectives. Therefore I have chosen this topic as my project so that my project
may deliver a comprehensive material for one to acquire skills to
.
Rationale – Why this research is needed?

Risk Management and its acceptance are common to the business of bank as its role is as
finanancial intermediaries. Risk management as generally thought is not just minimizing
the risk; rather the goal of risk management is to optimize risk reward trade-off. Although
it is a fact that banks are in the business of taking risk, it should be recognized that an
institution need not to engage in business in a manner that unnecessarily impose risk upon
it, nor it should absorb risk that can be transferred to other participants. Rather such risk
risks should be accepted that are the uniquely part of the array of bank’s service.
So to decide what risk taking and moving ahead and what risk to keep oneself away from
requires a lot of skill, knowledge and expertise in risk management. My project is to
conduct a research as how to develop such expertise and knowledge about risk
management.

Back Ground
The word risk can be traced from a Latin word “Rescum” meaning risk at sea or that cuts.
Risk is an important factor in every walk of life but while speaking of financial
institutions it importance become more significant. In today’s competitive environment
banks can’t afford to take such risk that harm their business capital or repute. Therefore
banks always formulate policies and different procedures to avoid different types of

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financial and non-financial risks. Risks and uncertainties are essential part of banking
these may be termed as taking risks.
During my visit to a nearby Branch of Bank Alfalah Ltd I met with the bank officials and
in my meeting with some bank officials it was discussed that banks generally face, Credit,
Market, Liquidity, and Operational, Compliance or legal regulatory and reputation risk.
Each transaction that a bank performs may be responsible to change the bank risk profile.
In Today environment where money laundering and terrorism by the extremists are a
burning issue of the world each bank must monitor each and every transaction that comes
under above normal business of their customers. In other words the banks must get more
and more efficient procedures to be informed of their customers and the employees
activities regarding business transactions.

Objectives
1. Conduct research to acquire knowledge of different areas of risk such as
operational risk, credit risk, liquidity and market risk.
2. To apply the knowledge and compare the two banks risks and their methods to
manage risks.
3. Getting familiarized with the expertise needed to identify risk, and the practices
commonly adopted to minimize or mange risk
4. Sharing experiences of the bankers on real grounds how they faced and managed
risks in their professions. So that to learn from their experience.
5. To study system and procedures laid down by the banks for the Risk Management.
6. Studying Internal and external frauds that badly affect the business of the bank.

Significance
While speaking of the importance of bank I will quote the comment of the bank manager
of Bank Alfalah ltd in my meeting with him.

“ While being a banker it is always necessary to develop such skills that no such activity
is performed on behalf of you for which neither you nor your bank is put on a risk”.

So my project will help me out to study the current knowledge of the Risk Management
by the banks. It will also help to enhance my exposure to Banking Practice and improve
my skills and knowledge.

As it is said that greater the risk greater is the profit, and the business grow by taking risks
sot it becomes more significant to know or make a research of Risk Management.

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 Project Proceedings

Chapter No.02

Introduction
What is Risk?

What does it mean by Risk Management in banking?

Components of Risk Management:

• Risk Identifying,
• Risk measuring,
• Risk monitoring
• Risk controlling
• Reviewing Risk
• Risk mitigation

Contingency Planning

Types / Area of Risk in Banking

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Chapter No.03

Managing Operational Risk

• Definition of Operational Risk.
• Some Recent Bank Losses due to Operational Risk
• Operational Risk events
• Dimensions of Operational Risk
• Operational Risk Environment
• Role of the Board of Directors
• Role of Senior Managers
• Banking Risk and Financial Activities
• Inter Relation of Banking Risk
• Operational Risk Frame Work
• Analysis of Frequency of events that may lead to higher Risk.
• Severity of Events
• Control and Risk Mitigation
• Monitoring of operational Risk
• Contingency Planning
• Capital Allocation

Chapter No.04

Credit Risk Management

• Defining Credit Risk
• Risk Management Components
• System & Procedures
• Credit Origination
• Limit Setting
• Credit Administration
• Measuring Credit Risk
• Internal Risk Rating
• Credit Risk Monitoring & Control
• Risk Review
• Managing Credit Problems
•

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Chapter No.05

Marketing Risk Management

• Interest Rate Risk
• Foreign Exchange Risk
• Equity / Commodity Price Risk
• Element of Market Risk Management
• Board And Senior Manager Oversight
• Organization Structure
• Risk Management Committee
• Middle Office
• Risk Measurement
• Repricing Gap Models
• Earning at Risk & Economic Value of Equity Models
• Value at Risk
• Risk Monitoring
• Risk Controls
• Audit

Chapter No.06

Liquidity Risk Management

• Early Warning Indicators

• Board And Senior Manager Oversight
• Liquidity Risk Strategy and Policy
• ALCO/ Investment Committee
• Liquidity Risk Management Process
• MIS
• Liquidity Risk Measurement & Monitoring
• Contingency Funding Plan
• Cash flow Projections
• Liquidity Ratios and Limits
• Internal Controls
• Monitoring and Reporting Risk Exposures

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Chapter No.07

Methodology

Data Collection source

Primary Data Collection source

My Primary Data Collection source is a nearby branch of Bank Alfalah

Secondary Data Collection source

My secondary Data Collection sources are Internet and other Research Books.

Data Collection Tools / Instruments:

Structured Interviews

I have planned some structured interviews from the branch manager Bank Alfalah,
Muhammad Ashraf Khan (thirty-one years of experience in banking field) and credit
officer of the said branch.

Observations

In a meeting with the branch officers they have been agreed to share some data of my
importance for my project for observations and review.

Field Work / Data Collection:

I have arranged to visit Bank Alfalah Branch to provide you access (physical, time,
documents) that I need for my project.Questionries also be used in project. I have
planned some structured interviews from the branch manager Bank Alfalah , Muhammad
(thirty-one years of experience in banking field) and credit officer of the said branch.

Data processing and analysis.

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I have good command on Microsoft Excel so I have planned to use Microsoft Excel for
Data Processing and analysis’s Word can also be used.

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