BUSINESS RISK CONTROL AND MANAGEMENT
Introducing and monitoring the main banking risks (dealing with Pillar 1 and Pillar 2) according to the current European and domestic regulatory framework. At the end of the course, the student will be able to define, estimate and manage the following risks: market risk, credit risk, interest rate risk and (funding) liquidity risk. From a regulatory point of view, we will mainly focus on the analysis of the Regulation UE 575/2013 (CRR) and of the Bank of Italy circular n. 285/2013.
Formally none; basic knowledge of the banks’ balance sheet and income structure and basic knowledge of the banking risks facilitate the understanding of the topics. For students lacking these prerequisites, an integration including a relevant bibliographic references will be provided.
An Introduction to main basic tools used by the risk management in order to manage the banking risks (10 hours): duration, convexity, beta, greeks, IRS, forward and futures, classroom exercises.
Pillar I° risks:
market risk (12 hours): VaR and Expected Shortfall; modeling building approach; historical simulations; stressed VaR (stress tests); the standardized approach; key points of the new regulatory framework: the Fundamental Review del Trading Book (FRTB); classroom exercises;
credit risk (8 hours): PD, LGD and cure rate; basics on Credit Metrics and KMV models; the regulatory framework of the credit risk: standardized approach and IRB models; classroom exercises.
Pillar II° risks:
interest rate risk of the banking book (8 hours): refinancing risk and reinvestment risk; repricing gap model; duration gap model; current regulation; key points of the new regulation: BCBS IRRBB Standards; classroom exercises;
liquidity risk (10 hours): funding and market liquidity risk; short – term liquidity and the basic tools of the short - term liqudity; Counterbalancing Capacity; ECB assets’ eligibility; maturity ladder; current regulatory framework of the short-term liquidity: the Liquidity Coverage Ratio (LCR) and the Additional Liquidity Monitoring Metrics (ALMM); classroom exercises.
The course analyses the main basic tools used by the risk management in order to manage the banking risks: duration, convexity, beta and greeks. Then, we will turn to the investigation of the market risk, the interest rate risk and the funding liquidity risk. According to risk management process, for each analysed risk, we will focus on the following features: risk’s definition, risk’s estimation and risk’s management (monitoring).
Classroom lessons; classroom exercises; extra learning material and supports are available on the teacher’s home page.
Rischio e valore nelle banche, A. Sironi (second edition), Egea, 2008;
- Risk management and financial institutions, J. C. Hull (fourth edition), Wiley, 2015;
- slides and additional material will be provided by the teacher during the course;
- http://www.bis.org/publ/bcbs158.pdf (“Revisions to the Basel II market risk framework”, July 2009)
- http://www.bis.org/publ/bcbs189.pdf (“Basel III: A global regulatory framework for more resilient banks and banking systems”, June 2011);
- http://www.bis.org/bcbs/publ/d352.htm (“Minimum capital requirements for market risk”, January 2016);
- http://www.bis.org/bcbs/publ/d368.htm (“Interest rate risk in the banking book”, April 2016);
- Regulation (EU) No 575/2013 (CRR);
- Bank of Italy, Circular no. 285 of 17 December 2013;
- Bank of Italy, Circular no. 286 of 26 April 2016;
- Bank of Italy, Circular no. 2015/61.
The assessment is based on a written examination which is composed (circa 80%) of three numerical exercises and one open question (circa 20%) on the program’s topics.
In their answers students should be able to show the fundamental concepts acquired during their studies. In order to assess the student’s knowledge of the analysed topics, some mathematical discussion and/or exposition of models and theories discussed at lesson can be required. The written examination is made up of four questions; to each of them a maximum of 7.5 mark-points is allocated up to grand total of 30. The laude can be assigned if the student shows a particular ability to deepen the required topics. The duration of the written examination is 1 hour and 45 minutes. During the examination, the use of notes, books and informatics devices (smartphone, tablet, pc, ecc.) is not allowed.
An oral examination can also be held, in case the teacher judges it useful to better ascertain the student’s knowledge. The vote of the oral examination is expressed in scale from 0 to 30, and it is averaged with the vote of written examination (equal weighting) in order to determine the final vote.
Expected learning outcomes
Knowledge and understanding: the student should be able to understand and to manage the main types of banking risk in the light of the current European and Italian regulatory environment; moreover, he/she has to manage the analysed risks in an integrated way, as the bank's risk managers do.
Applying knowledge and understanding: the student should be able to apply the specific achieved knowledge in assessing the trade-off between the bank's risk tolerance and an adequate level of profitability of the financial institution, taking into account the current regulatory framework. To this end, theoretical and analytical scheme for the study and the evaluation of the risk management policies will be exposed in classroom lessons, with the aid of real-world examples and applications. These applications and themes can also be discussed during student’s assistance time.
At the end of the course the student must have acquired the ability to critically evaluate the main regulatory texts (i.e. EC regulations, ECB regulations and guidelines, circulars of the Bank of Italy), in order to properly measure and manage the bank’s risks and to monitor the minimum capital requirements. Judicial autonomy is developed during the course through frontal lessons and seminar meetings, that constantly seek the interaction between the teacher and the student.
Communication: the student should be able to answer in a clear and technical language to the questions of the written examination. In particular, students should speak in a technical way that allows them to communicate with the risk managers and other professional figures involved in the risk management process.
Lifelong learning skills: the student should be able to show a good learning ability, by widening, for example, his/her knowledge with use of relevant bibliographic references and regulatory texts referring to the investigated topics. The student should also be able to evaluate the impact and the constraints of the current regulatory schemes on the banks’ risk and profitability.