The International Monetary Fund (IMF) defines funding liquidity as “the ability of a solvent institution to make agreed-upon payments in a timely fashion”. According to the IMF, funding liquidity is the ability lending agency agrees payment with immediacy. Funding liquidity is the availability of credit to finance the purchase of financial assets for a business…
Stress test is a process or simulation technique that evaluates an institutions reaction to different crisis situations. Stress testing and capital planning are increasingly linked to many risk management processes that require coordination across risk, treasury, and financial planning and analysis functions. Banks have been using stress tests to evaluate their potential vulnerability to certain…
In banking jargon the word ‘spread’ is used in issuance of corporate bonds,interest levied on loans and in foreign exchange transactions. In foreign exchange transactions the difference between the buying rate and selling rate is referred as spread or margin. The term ‘credit spread’ is used in the fixed income corporate bonds and bank loans.…
Risk management and capital Management are two sides of the same coin. Both of these indicate that the sufficient capital contribution in the business provides stable resources to help the owner to absorb any losses arising from the risks in a business. The objective of Capital management as well as its risk appetite is to…
The standardized approach for counterparty credit risk (SA-CCR) is a new computational method for exposure at default (EAD) under the Basel capital adequacy framework. This approach replaces the Current Exposure Method (CEM), used by banks in India, for measuring exposure for counterparty credit risk arising from derivative transactions, with effect from April 1, 2018. The…
The Current exposure method (CEM) is a measurement of the replacement cost within a derivative contract in the case of a counterparty default. Here, the credit equivalent amount of a market related off-balance sheet transaction calculated using the current exposure method which will be the sum of current credit exposure and potential future credit exposure…
In general, market discipline is defined as the transparency and disclosure of the risks associated with a business or entity. In case of banks, market discipline refers to the obligation by the banks and financial institutions to conduct business while considering the risks to their stakeholders in the passage of their day-to-day operations. Therefore, bank…
The supervisory review process (SRP) of bank management is intended not only to ensure that banks have adequate capital to support all the risks in their business, but also to encourage banks to develop and use better risk management techniques in monitoring and managing their risks. SRP includes assessment by the supervising authority to ensure…
The regulatory capital framework placed by RBI under Pillar 1 has increased importance on risk management and banks are required to employ suitable procedures and systems in order to ensure their capital adequacy. Such procedures employed by the banks are referred collectively as the Internal Capital Adequacy Assessment Process (ICAAP). The purpose of the Internal…
The liquidity coverage ratio (LCR) refers to highly liquid assets held by financial institutions to meet short-term obligations. LCR forms on traditional liquidity “coverage ratio” methodologies used internally by banks to assess exposure to contingent liquidity events. The LCR guidelines ensure reduction in funding risk over a 30 days horizon by requiring banks to fund…