Basics of Management: Functions, Principles, and Key Aspects
Management is fundamentally the process of coordinating and overseeing the work of others to achieve organizational goals efficiently and effectively. It involves the systematic application of various functions—planning, organizing, leading, and controlling—to guide people and resources towards the attainment of specific objectives. In essence, management is about getting things done through others by optimizing available…
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Economic Capital and RAROC: Tools for Risk Management and Performance Evaluation
Risk-Adjusted Return on Capital (RAROC) is defined as the ratio of risk-adjusted return to economic capital (EC). Economic capital refers to the amount of capital that a bank or financial institution needs to ensure its survival in extreme, worst-case scenarios. It acts as a financial buffer against unexpected shocks in market conditions. Banks must assess…
Read article Risk Aggregation and Capital Allocation: Concepts and Strategic Importance
Risk Aggregation: An Overview Risk aggregation refers to the systematic process of combining various individual risks to assess the total risk exposure of an organization. This process involves identifying and quantifying distinct risk types—such as credit, market, operational, and liquidity risks—and analyzing their interdependencies. The goal is to derive a consolidated risk profile that supports…
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RAROC and Profit Planning in Banking
Risk-Adjusted Return on Capital (RAROC) is a risk-based profitability measurement framework that evaluates financial performance on a risk-adjusted basis. It provides a consistent metric to assess profitability across different business lines and asset classes, enabling better capital allocation and pricing decisions. RBI Guidelines on Asset Acquisition and Pricing As per the Reserve Bank of India…
Read article Impact of Interest Rate Risk on Banks and Financial Instruments
Overview of Interest Rate Risk Interest rate risk refers to the potential for financial loss due to unexpected changes in market interest rates. This risk is particularly relevant for fixed-income securities, such as bonds, where fluctuations in interest rates can significantly affect market valuations. Specifically, when interest rates rise, the market value of existing fixed-income…
Principles of Sound Interest Rate Risk Management
Effective management of interest rate risk (IRR) requires the structured application of four fundamental elements across a bank’s asset, liability, and off-balance-sheet exposures. These core elements are: * Appropriate oversight by the Board and senior management; * Comprehensive risk management policies and procedures; *Robust risk measurement, monitoring, and control functions; and * Strong internal controls…
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