Additional Tier Capital (also known as AT1 bonds) is a type of unsecured, perpetual bonds issued predominantly by banks to raise additional Tier 1 capital without any maturity date (perpetual), but they have a call option. These bonds are issued by banks to shore up their core capital base to meet the Basel-III norms. Features…
A bank stress test is an exercise conducted under hypothetical scenarios designed to determine whether the bank has enough capital to withstand a negative economic shock. Most risk management models, including stress tests, use historical statistical relationships to assess risk. They assume that risk is driven by a known and constant statistical process, ie they…
RBI on Friday (08.01.2021) said that all commercial banks (including small finance banks, payments banks, and Local area banks) are required to put in place a risk-based internal audit (RBIA) system as part of their internal control framework that relies on a well-defined policy for internal audit, functional independence with sufficient standing and authority within…
On Risk Management System in Banks, Scheduled Commercial Banks (SCBs) and Urban Co-operative Banks (UCBs) are required to put in place a board-approved credit policy, which, among other things, should prescribe the periodicity and methodology of review/renewal of credit facilities. As per RBI guidelines, regular and ad-hoc credit limits need to be reviewed/regularised not later…
Operational risk is defined as the risk of direct or indirect loss resulting from breakdowns in internal procedures, people, system and external events. Examples of operational risk are frauds, system failure, error in financial transactions, failure to discharge demand of contractual obligations due to insufficient funds, etc. RBI on Thursday (12-12-2019) notified that the bank…
RBI with Circular dated September 12, 2019 notified that a bank’s exposure limit to a single NBFC (excluding gold loan companies) raised to 20% of Tier-I capital of the bank. The communication said that this is a step towards harmonisation of the counterparty exposure limit to single NBFC with that of the general limit. It…
Updated on November 17, 2023 RBI increases risk weights on consumer credit exposure of banks, and NBFCs to 125% from 100%. Measures announced to contain the risk emanating from a sharp rise in unsecured loans – mostly personal loans and credit cards. It has been also decided to increase the risk weights on Credit Card…
Banks, across the world, use different techniques to evaluate the probable risks through sensitivity analysis, scenario analysis, break-even analysis etc. The most commonly used approach is the Risk Adjusted Return on Capital (RAROC). The banking as well as Non-banking financial institution and also large numbers of businesses are utilizing RAROC metric to calculate Return on…
The Reserve Bank Friday (June 28, 2019) relaxed the leverage ratio (LR) for banks from the quarter commencing October 1, 2019. The RBI communiqué said that the decision to relax the leverage ratio for banks is to help them boost their lending capacity. As per RBI notification the leverage ratio stands reduced to 4 per…
The business of foreign exchange dealing is confronted with multiple numbers of risks viz. Rate risk, Open Position risk, Maturity Mismatches risk, overtrading risk, Cash Balance Risk, Counterparty risk, Country risk, Fraud Risk, and so on. Nevertheless, like in any other business, risk taking in forex dealing is also inevitable as it also presents possibilities…