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TitleSapna Final Black Book
Tags Risk Banks Beta (Finance) Value At Risk
File Size573.6 KB
Total Pages41
Table of Contents
                            4.2 Risk Management in Banking
	PRODUCTS AND SERVICES
		SBI offers :-
		1. Working Capital Finance
		2. Project Finance
		3. Deferred Payment Gaurantees
		4. Corporate Term Loans
		5. Structured Finance
		6. Dealer Financing
		7. Channel Financing
		8. Equipment Leasing
		9. Loan Syndication
		10. Financing Indian Firms Overseas Subsidiaries or JVs
		11. Construction Equipment Loan
	How we can help to manage your foreign exchange risk
                        
Document Text Contents
Page 1

Chapter 1

Introduction

Risk management in Indian banks is a relatively newer practice, but has already shown to

increase efficiency in governing of these banks as such procedures tend to increase the corporate

governance of a financial institution. In times of volatility and fluctuations in the market,

financial institutions need to prove their mettle by withstanding the market variations and

achieve sustainability in terms of growth and well as have a stable share value. Hence, an

essential component of risk management framework would be to mitigate all the risks and

rewards of the products and service offered by the bank. Thus the need for an efficient risk

management framework is paramount in order to factor in internal and external risks.

The financial sector in various economies like that of India are undergoing a monumental

change factoring into account world events such as the ongoing Banking Crisis across the globe.

The 2007–present recession in the United States has highlighted the need for banks

to incorporate the concept of Risk Management into their regular procedures. The various

aspects of increasing global competition to Indian Banks by Foreign banks,

increasing Deregulation, introduction of innovative products, and financial instruments as

well as innovation in delivery channels have highlighted the need for Indian Banks to be

prepared in terms of risk management.

Indian Banks have been making great advancements in terms of technology, quality, as well as

stability such that they have started to expand and diversify at a rapid rate. However, such

expansion brings these banks into the context of risk especially at the onset of increasing

Globalization and Liberalization. In banks and other financial institutions, risk plays a major part

in the earnings of a bank. The higher the risk, the higher the return, hence, it is essential to

maintain a parity between risk and return. Hence, management of Financial risk incorporating

a set systematic and professional methods especially those defined by the Basel II becomes an

essential requirement of banks. The more risk averse a bank is, the safer is their Capital base.

1

https://en.wikipedia.org/wiki/Risk_management
https://en.wikipedia.org/wiki/Basel_II
https://en.wikipedia.org/wiki/Financial_risk
https://en.wikipedia.org/wiki/Indian_Banks
https://en.wikipedia.org/wiki/Indian_Banks
https://en.wikipedia.org/wiki/Deregulation
https://en.wikipedia.org/wiki/Indian_Banks
https://en.wikipedia.org/wiki/2007%E2%80%93present_recession_in_the_United_States

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understand what the term "Risk" means, as a prerequisite for the theoretical analysis of a

problem is the definition of terms. Risk is not understood merely as “uncertainty about the

future” or the “probability of sustaining a loss” but is defined as “an expression of the danger

that the effective future outcome will deviate from the expected or planned outcome in a

negative way” (Geiger, 1999). This definition implies that a bank does not accept risks

simply as fate but deals with them actively to avoid failures. Therefore, understanding of risk

from banking perspective is vital. The focus of this section is to provide an analytical

framework for the risks associated with the international banking. The international banking

industry faces many risks based on its internal and external environment and the risks that can

be classified as interrelated. Some of the key risks faced by international banks are briefly

explained below:

 Operational Risk is one the oldest risk that banks face. A newly established

international bank can be confronted with operational risks before it even decides on its

first credit transaction or market position. The term is explained, as “Operational risk is

the risk of direct or indirect loss resulting from inadequate or failed internal processes,

people and systems or from external events.” (Geiger, 2010) There are two key elements

of this definition. First, the focus is on internal aspects, which the bank can and should

shape and influence. These are often actions or failure of bank internal processes, systems

and its staff. Second, the focus is on external aspects such as market and credit risks

(Geiger, 2010).
 Interest Rate Risk: A bank's main source of profit is converting the liabilities of

deposits and borrowings into assets of loans and securities. It profits by paying a lower

interest on its liabilities than it earns on its assets—the difference in these rates is the net

interest margin.

 Foreign Exchange Risk: International banks trade large amounts of currencies, which

introduces foreign exchange risk, when the value of a currency falls with respect to

another. A bank may hold assets denominated in a foreign currency while holding

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liabilities in their own currency. If the exchange rate of the foreign currency falls, then

both the interest payments and the principal repayment will be worth less than when the

loan was given, which reduces a bank's profits (Spaulding, 2011).

 Sovereign Risk: Many foreign loans are paid in U.S. dollars and repaid with dollars.

Some of these foreign loans are to countries with unstable governments. If political

problems arise in the country that threatens investments, investors will pull their money

out to prevent losses arising from sovereign risk.

In this scenario, the native currency declines rapidly compared to other currencies, and

governments will often impose capital controls to prevent more capital from leaving the

country. It also make foreign currency held in the country more valuable; hence, foreign

borrowers are often prohibited from using foreign currency, such as U.S. dollars, in

repaying loans in an attempt to conserve the more valuable currency when the native

currency is declining in value (Spaulding, 2011). The above mentioned, operational risk

can be classified as internal; the interest rate and foreign exchange rate risk s are external

and sovereign risk is interrelated. The internal and external risk can affect the

international banks directly, while the interrelated risk can affect multiple banks.

Therefore, managing of all the three types of risks are crucial for international banks and

in the next section, the importance of managing risks is outlined.

3.5 International Banking and Foreign Exchange Risk

Management

 International wire transfers through ZIONSFX® trading platform to quickly send or

receive foreign currency payments to and from more than 40 countries

 Hedging strategies/forward contracts help manage foreign exchange risks and

opportunities associated with fluctuating currency values

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