1. Risks in Banking Operations
Banking Finance and Insurance Institute of Nepal Ltd. (BFIN)
Conference on
Transformation of Human Capital for a Digital World
Risks in Banking Operations
Narayan Prasad Paudel
December 23, 2018
Kathmandu

2. Risk: General Types Risk Specific characteristics
Business Risk The nature of business
Financial Risk Use of greater debt in the capital structure
Credit Risk The probability of being default
Liquidity Risk Inability to sell assets quickly for cash
Interest Rate Risk The unfavorable effects of interest rate
Management Risk Risk associated with managerial decisions.
Purchasing Power Risk Inflationary effect on the rate return
Legal Risk Failure to comply with statutory or regulatory obligations 
Sovereign risk Risk of investment in a particular country
Reputational Risk Risk of loss resulting from damages to an organization’s reputation

3. Financial and Non- Financial Risks
Financial Risk Non-Financial Risks
Interest Rate Risk Operational Risk
Exchange Rate Risk Legal Risk
Market Risk Reputational Risk
Credit Risk Strategic and Policy Risk
Liquidity Risk Country Risk

4. Risk Governance Framework
Risk Governance Structure:
- The Board of Directors
- Board Level Risk Committee
- Board Level Audit Committee
Risk Management Structure:
- Business Areas ( First Line of Defense - Risk Managing)
- Risk Management Department
(Second Line of Defense - Risk Monitoring)
- Audit Department

5. Risk Management Framework
An effective risk management framework includes:
Clearly defined risk management policies and procedures covering risk identification, acceptance, measurement, monitoring, reporting and control.
A well constituted organizational structure defining clearly roles and responsibilities of individuals involved in risk taking as well as managing it.
Banks, in addition to risk management functions for various risk categories may institute a setup that supervises overall risk management at the bank.
Such a setup could be in the form of a separate department or bank’s Risk Management Committee (RMC) could perform such function.
There should be an effective management information system that ensures flow of information from operational level to top management and a system to address any exceptions observed. There should be an explicit procedure regarding measures to be taken to address such deviations.
The framework should have a mechanism to ensure an ongoing review of systems, policies and procedures for risk management and procedure to adopt changes.

6. Risk Management
Risk Management is a discipline at the core of every bank and encompasses all activities that affect its risk profile. It involves identification, measurement, monitoring and controlling risks
Became the hot topic after the 2008 financial crisis
A sound risk management system should have the following elements:
Active board and senior management oversight
Adequate policies, procedures and limits
Adequate risk measurement, monitoring and management information system; and
Comprehensive internal controls.

7. Risk Management Functions
Identifying current and emerging risks;
Developing risk assessment and measurement systems;
Establishing policies, practices and other control mechanisms to manage risks;
Developing risk tolerance limits for Senior Management and Board approval;
Monitoring positions against approved risk tolerance limits; and
Reporting results of risk monitoring to Senior Management and the Board.

8. Directive on Risk Management (Directive No. 5)
Credit risk
Operational risk
Liquidity risk
Market
Interest rate risk
Foreign Exchange risk
Other risk (Reputational, strategic, AML/CFT)

9. Risk Based Supervision
Six Major Inherent Risks:
Credit
Liquidity
Market
Interest Rate
Foreign Exchange
Operation

10. Banking Risks Liquidity risk Operational risk Credit risk
Market risk
FX risk
Interest rate risk

11. Risk Based Supervision
Quantity of Risk:
High
Moderate
Low
Quality of Risk Management:
Strong
Acceptable
Weak

12. Risk Based Supervision Aggregate Risk Matrix:
Quantity of Risk
Low
Moderate
High
Quality of Risk Management
Strong
Acceptable
Weak

13. Risk Based Supervision
Direction of Risk:
Decreasing
Stable
Increasing

14. Risk Based Supervision: Recommended Supervisory Regime Matrix:
Aggregate Risk
Low
Moderate
High
Direction of Risk
Decreasing
Normal Regime
Closely Monitor and/ or Supervisory Action
Stable
Closely Monitor
Increasing
Supervisory Action

15. Thank you