By Eddie Cade
This booklet fills a spot in banking literature by means of delivering a qualified and complicated 'risk' primer for financial institution administrators, executives and employees at each point in addition to scholars, analysts and commentators at the banking scene. The breadth of concentration is phenomenal in masking the complete variety of banking hazards, instead of the commonplace expert phase.
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Netting of individual counterparty exposures is permitted under defined conditions (see Chapter 5). Exposures are multiplied by their respective risk weighting and summated to produce total weighted risk assets (WRAs). Off-balance sheet items such as guarantees and commitments are multiplied by credit conversion factors in order to arrive at credit equivalent exposures (CEEs). Interest- and foreign exchange-related instruments (derivatives) have to be converted to CEE by a process of marking them to market (valuing at current market price) and then adding a prescribed percentage of the notional principal amount to allow for future volatility during the remaining life of the contract.
It has widespread disciplinary applications, but is not a necessary risk type in its own right. g. 'key personnel risk'); all of which, for the purpose of this book, fall within operating risks. These, at any rate, are the inconclusive kinds of arguments generated by the attempt to put banking risks in boxes. For the sake of progress, let us accept the framework of risks as set out above. These categories, however, do not exist in watertight compartments but can spill over into one another, causing multiple effects.
Arguably two-way in the sense that expected loss may not materialise, in which case you 'win'. Loan trades could also produce winners as well as losers through revaluations. Conversion of hard core debt into shares changes the risk to a price risk, which is two-way. Interest rate risk Two-way. Risk is both upside and downside. Price risks Two-way. Gains or losses are possible. Operating risks Mainly one-way, apart from serendipity, the occasional fluke that can yield a windfall gain. Can arguably be classified as two-way in those cases where an expected loss does not materialise (as for credit risk above).