Risk Management and Control

Risk Management and Control
Market risk is controlled by implementing the business policies and setting of market risk
limits or controlling through economic measures with the objective of attaining higher
RAROC. Risk is managed by the following:
1. Limits and Triggers
2. Risk Monitoring
3. Models of Analyses. Calculation of Capital Charge of Market Risk
The Basel Committee has two approaches for calculation of Capital Charge on Market
Risk as under:
1. Standardized approach
2. Internal Risk Management approach

Under Standardized approach, there are two methods: Maturity method and duration
method. RBI has decided to adopt Standardization duration method to arrive at capital
charge on the basis of investment rating as under:
Investment rating Capital Required
AAA to AA 0%
A+ to BBB
Residual term to maturity
Up to 6 M .28%
Up to 24M 1.14%
More than 24 M 1.80%
Unrated 9.00%
Rated BB and Below 13.5%
How to Calculate RWAs, if Capital Charge is given:
RWAs for Market Risk = Capital Charge (If required CAR is 9%)
.09%
Other Risks and Other Risks like Liquidity Risks, Interest Rate Risk, Strategic Risk, Capital Reputational Risks and Systemic Risks are not taken care of while
Requirement calculating Capital Adequacy in banks.

Pillar – II SRP has two issues:
Supervisory 1. To ensure that bank is having adequate capital. Review Process 2. To encourage banks to use better techniques to mitigate risks. (SRP) SRP concentrates on 3 main areas:  Risks not fully captured under Pillar -1 i.e. Interest Rate Risks, Credit concentration Risks, Liquidity Risk, Settlement Risks,  Reputational Risks and Strategic Risks. Risks not at all taken care of in Pillar -1.  External Factors. This pillar ensures that the banks have adequate capital. This process
also ensures that the bank managements develop Internal risk capital
assessment process and set capital targets commensurate with bank‘s
risk profile and capital environment. Central Bank also ensures through
supervisory measures that each bank maintains required CRAR and
components of capital i.e. Tier –I & Tier –II are in accordance with
BASEL-II norms. RBIA and other internal inspection processes are the
important tools of bank‘s supervisory techniques. Every Bank will prepare ICAAP (Internal Capital Adequacy Assessment
Plan) on solo basis which will comprise of functions of measuring and
identifying Risks, Maintaining appropriate level of Capital and
Developing suitable Risk mitigation techniques. Pillar – III Market discipline is complete disclosure and transparency in the
Market balance sheet and all the financial statements of the bank. The
Discipline disclosure is required in respect of the following:  Capital structure.  Components of Tier –I and Tier –II Capital  Bank‘s approach to assess capital adequacy
 Assessment of Credit Risks, Market Risk and Operational Risk.  Credit Aspects like Asset Classification, Net NPA ratios, Movement of NPAs and Provisioning. Frequency of Disclosure
 Banks with Capital funds of Rs. 100 crore or more will make
interim Disclosures on Quantitative aspects on standalone basis
 on their respective websites. Larger banks with Capital Funds of Rs. 500 crore or more will
disclose Tier-I capital , Total Capital, CAR on Quarterly basis on
website.