financial risk fitness gmbh

Landsberger Straße 98 - D-80339 Munich
Phone +49 89 46139112 - www.financial-risk-fitness.com

Market Risk under Basel III – for Bank Risk Management Professionals

This two day training course purports to review the main features of consecrated market risk management modeling and point to the shortcomings that have triggered the BCBS´s overarching review of the methodology, the risk measure employed and of the processes. A special emphasis will be placed on the measurement of risk in banking books and on regulatory capital consequences arising from the new regulatory regime expected to commence in 2018 (IRRBB) and 2019 (FRTB).

The course will discuss via case studies the impacts that the new regime will have on product and business profitability and will shed new lights on how commercial banks can enhance net interest income in the future while complying with the ever stringent regulatory demands

Who should attend

  • Market Risk ManagersCorporate Treasurers
  • Capital Markets and Trading Managers
  • Management Accountants/ Product Controllers
  • Financial Accountants
  • Auditors
  • Capital Management Professionals
Day One

Session 1

  • Risk in the Banking Books
  • The Treasury Business Remit:
  • The Treasury “Banking Books”: Net Interest Income Generation (with / without customer Margin)
    • Liquidity Risk (internal lender of last resort)
    • Re-Pricing Risk (interest rates, FX)
  • Maturity Mismatch Risk & the Dynamics of Liquidity Gaps
  • ST (MT & LT) Funding & Securing of Contingent Funding / Liquidity sources
  • Liquidity Gaps
  • Managing Asset Liquidity
  • Stress Testing Deposit “Stickiness”- Case Study
  • Accounting for Treasury Books: IFRS
  • Repricing Gaps vs liquidity Gaps
    • Illustrations
    • Case Study
  • Dynamic Gaps under uncertain Cash flows
  • Counterparty Risk Management
  • Link to MtM Risk Measures (VaR)
  • Accrued vs MtM Accounting for Banking books – IFRS vs GAAP

Session 2

  • A quick review of the fundamentals of interest rate risk measurements
    • Duration
    • Convexity
    • DV01, PV01
    • The Options Greeks
  • Banking Book measures:
    • Repricing Gaps
    • Maturity (Liquidity) Gaps
  • CSRBB
  • Deriving Economic Value of Equity via multiple means (case Study)
  • Banking books vs Trading books (a business driven segmentation)
  • Banking books vs Trading books – regulatory boundaries
    • Limits to product transfers between books under IRRBB (case studies)
  • Governance Principles
  • Risk appetite identification embedded in IRRBB regulation
  • IRBB standards for risk measures:
    • Economic Value
    • Earnings
    • Assessment Horizons
  • The 6 Scenarios specifications and recommended computational steps

Session 3

  • Treatment of NMDs and other NMPs
  • Replicating portfolio Models
  • Stochastic Optimization Models
  • Options Adjusted Spread Models
Day Two

Session 1

  • Duration of Equity, EVE
  • Case Study: Changes in EVE under the 6 Scenarios
  • Case Study: Changes in NII under the 6 Scenarios
  • Treatment of Basis Risk within IRRBB
  • Internal Market Risk Models
    • Delta/ Gamma & other Parametric Models
    • Historical Simulations
    • Monte Carlo Simulations
    • Tailored Simulations – when to use?
    • Marginal, Incremental & component VaR
    • The Basel II/III Capital Adequacy Rules
    • Advanced Issues: Dimensionality Reduction, Interpolation and Bootstrapping Errors

Session 2

BCBS FRTB Stipulations
The boundary between Trading Book and Banking Book

  • What defines a Banking book
  • What defines an Investment Book
  • Restrictions of transferring instruments among various books and treatment of internal risk transfers
  • Treatment of counterparty risk in trading books
  • Transitional agreements

The Standardized Approach

  • Key features
  • Risk Factors
  • Treatment of linear and curvature risks
  • Treatment of index instruments and multi-underlying options
  • The Default risk charge (intro)
  • Sensitivity Definitions and Methods: Delta weights and correlations: Delta GIRR, Delta CSR, Equity, Commodity and FX risk

Expected Shortfall and the New Internal Model Approach

  • What makes a Coherent Risk Measure and why VaR may fail as a coherent risk measure
  • ES vs VaR – workshop
  • Partial ES
  • Aggregation of Risks at the firmwide level
  • Numerical Case Study
  • Qualitative Validation Standards
  • Quantitative Validation Standards
  • Eligibility of Trading Activities
  • Interaction with the Standardized Approach Method
  • Specification of Market risk Factors and P&L attribution
  • Treatment of Default and Credit Risk
  • Capitalization of Risk Factors
  • Stress Testing
  • Designing stress Scenarios – Case Study

Session 3

  • Treatment of Credit Risk
  • Scope of the Default Risk Charge („DRC“)
  • Jump to Default applications
  • Netting and Default Risk Computations – Case Study
  • Discussion