RISK MANAGEMENT AND CREATION OF VALUE IN BANKS
Learning outcomes of the course unit
Students will develop:
1. basic knowledge on the Italian prudential regulation and the general trends at a European level
2. advanced knowledge on the main models for measuring and managing risks in the banking industry;
2. the ability to apply measurement models with respect to the main risks (credit risk, operational risk, interest rate risk on the banking book, liquidity risk, concentration risk).
Students participating in the project work will also develop:
3. the ability to research, analysis and development of public data and information gathered through interviews in the field, with specific reference to strategies, risks assumed by individual banks and profiles of the same capital adequacy;
4. the ability to work in groups and to organize and manage a project;
5. the ability to communicate the achievements, problems encountered and lessons learned, including an independent judgment;
6. the ability to communicate, present the results of group projects, even with multimedia tools and applications.
Basic Skills in Financial Markets and Institutions and in Securities Market.
Course contents summary
The course deals with risk measurement and management in financial institutions. Regulatory and supervisory requirements will be considered, along with a bank management perspective on risk policy and risk management tools.
The content covered are: 1) Prudential regulation: from Basel 2 to Basel 3. 2) Capital definition and management.
3) Credit risk: expected and unexpected loss, determinants of expected loss. 3) Credit risk management in accordance with prudential regulation. The determination of the capital requirements under first pillar. The standardized approach and the IRB (internal rating based approaches). 4) Internal rating systems and rating assignment. 5) The balance sheet analysis. 6) The internal rating: PD quantification (probability of default). 7) The internal rating: LGD (loss given default - loss given default) and its estimation models. 8) The internal rating: the concept of EAD (exposure at default - exposure in case of default). 9) VAR and unexpected losses. 10) Credit risk and pricing of bank loans. 11) The interest rate risk on the banking book. 12) Operational risk: definition and regulatory profiles, measurement. 13) The concentration risk. 14) The liquidity risk. 15) The structure of the ICAAP - Internal Capital Adequacy Assessment Process. 16) The reputational risk. 17) The risk-adjusted performance measures. 18) Capital allocation: guiding principles. 19) Corporate governance and internal control systems: organizational requirements for capital optimization.
Students attending the course will be involved in a project work. This activity is concentrated in the second part of the course and it implies the analysis and evaluation, in working groups, of the organizational characteristics and management of the risk management system and capital adequacy of a sample of Italian and foreign banks. The classroom presentation of the project work will be done through short videos produced by the students themselves. Non-attending students must perform a similar analysis on an individual basis by submitting a written report that will discussed during the final exam.
1. Introduction: risk and risk management in banking. Prudential regulation
2. Regulatory capital and economic capital
3. Financial reporting and banks’ balance sheet
4. From Basel 1 to Basel 2
5. Credit risk: definition, expected loss and unexpected loss
6. Credit risk management and regulation First Pillar. Standardized approach
7. Internal rating based (IRB) approaches
8. Internal rating systems: introduction
9. Rating assignment
10. Rating validation
11. Capital market models
12. Rating quantification
13. The estimation of recovery rates
14. Value at risk and unexpected losses (Creditmetrics)
15. Risk adjusted performance measures
16. Transfer prices
17. Loan pricing
18. Concentration risk
19. Basel 3
20. Interest rate risk and asset & liability management
21. Operational risk
22. Liquidity risk
23. Reputational risk
24. The Internal Capital Adequacy Assessment Process (ICAAP)
25. The internal control system
26. EVA Performance Analysis
A. Resti, A. Sironi, A. Resti – A. Sironi, Rischio e Valore nelle Banche, Seconda edizione, EGEA, Milano, 2008.(Capitoli: 1, 2, 3, 4, 5, 11, 12, 13, 14, 15, 16, 18, 19, 21, 22, 23, 24)
G. De Laurentis, Il credito alle imprese dopo la crisi. Politiche e strumenti di dialogo banca-impresa: rating, analisi e previsione finanziaria, Bancaria Editrice, Roma 2011.
Basel Committee on Banking Supervision, Basel III: A global regulatory framework for
more resilient banks and banking systems December 2010 (rev June 2011).
Other course materials will be added to the website in autumn 2014.
Acquiring knowledge and understanding: lectures and presentations by guest speakers.
Applying knowledge and understanding: exercises presented and solved in the classroom and participation in the project work.
Making informed judgements and choices: participation in the project work.
Acquisition of the ability to learn: classroom discussions, classroom exercises and participation in the project work.
Communicating knowledge and understanding: presentation of the results of the project work.
Acquisition of the ability to work in groups: participation in the project work.
Assessment methods and criteria
The exam will take place in different ways for students participating in the project work and for those who do not participate. For students participating in the project work, the teacher assigns a vote to the outcome of the project carried out by each group, based on an assessment of the ability to learn, to apply knowledge, to make informed judgements, to communicate their knowledge and understanding in an effective way.
This vote accounts for 25% of the final mark and is assigned to the group, and not to the individual, in order to stimulate team spirit. The teacher takes into account the result of a peer evaluation carried out by the class, based on an evaluation grid proposed by the teacher that considers the satisfaction of the classroom with respect to the following items (scale 1-4): mastery of the subject, clarity of exposition, the ability to arouse interest, use of language, homogeneity of the individual contributions, overall satisfaction. The result of the peer evaluation is counted to the extent of 25% of the final grade.
The remaining 75% of the final grade is assigned on the basis of an exam carried out in oral form. In this context, the knowledge, understanding and learning skills are assessed with two questions about some of the main risk measurement models examined in the course. The answers account for half of the final grade. The ability to apply knowledge is established on the base of one or more exercises or case studies.
The final mark will be equal to the weighted average vote of project work (25%) and the vote of the individual test (75%).
For students who do not participate in project works, the verification of the acquired knowledge and the ability to apply will be based on the evaluation of a final report produced on a bank (which will account for 20% on the final grade) and by means of a oral test conducted in a similar way to that described above.