What is economic capital?
There are three types of capital viz. Regulatory capital, Book capital, and Economic capital. Regulatory capital is the amount of capital a bank is required to hold as per the stipulations prescribed by the banking regulator of the country. Book Capital is the actual capital that the bank has, which includes equity capital, loans, and…
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What is contingency planning?
The contingency planning is a regular part of risk management for exceptional risk though unlikely, may have disastrous consequences when an unexpected event or situation occurs. In the other words, contingency planning is a process that includes risk assessment and a mitigation strategy for those risks. It generally refers to a negative situation like direct…
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Funding Liquidity and Managing Liquidity explained
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…
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What is financial Stress testing?
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…
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What is credit spread?
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.…
What are Risk management and capital Management?
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…
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