DBFI402 BASEL AND RISK MANAGEMENT IN BANKING

Description

SESSION	FEB MARCH 2025
PROGRAM	MASTER OF BUSINESS ADMINISTRATION (MBA)
SEMESTER	04
COURSE CODE & NAME	DBFI402 BASEL REGULATIONS AND RISK MANAGEMENT IN BANKING

 

 

Assignment Set – 1

 

 

Q1. Briefly explain different types of Risk. 10      

Ans 1.

Different Types of Risk in Banking

Banking Risks

Banks operate in a highly dynamic environment, and risk is an integral part of their operations. To maintain financial stability and protect the interests of depositors and stakeholders, banks must identify, assess, and manage various risks. The Basel framework provides comprehensive guidelines for managing such risks in a structured manner. Let us explore the major

 

 

Q2. a) Critically examine the advantages of Asset Liability Management.

1. b) Briefly explain the Techniques of Liquidity Management by the ALM desk of a Bank. 6+4

Ans 2.

Advantages of ALM and Techniques of Liquidity Management

1. a) Advantages of Asset Liability Management (ALM)

Asset Liability Management (ALM) is a strategic framework used by banks to manage the financial risks that arise due to mismatches between assets and liabilities. It plays a crucial role in ensuring that a bank operates efficiently, profitably, and within acceptable risk levels.

One of the primary

 

 

Q3. a) Discuss a Bank’s Components of Capital Funds as Regulatory Capital under the Basel Accord.

1. b) As a percentage of risk-weighted assets, classify the regulatory capital requirement for each component of capital funds for a bank. 5+5

Ans 3.

Components and Requirements of Regulatory Capital

1. a) Components of Capital Funds under the Basel Accord

The Basel Accords, developed by the Basel Committee on Banking Supervision, set international standards for capital adequacy and risk management. Under Basel III, capital funds are classified into three main components—Tier 1 Capital (Core Capital), Additional Tier 1 (AT1) Capital, and Tier 2 Capital (Supplementary Capital).

Tier 1 Capital consists

 

Assignment Set – 2

 

Q4. a) Discuss Value at Risk to measure the financial risk level associated with a Bank’s asset or investment instrument. Enlist common methods used to measure VaR explaining any one method briefly.

1. b) A Rs.100,000,000 portfolio has 1-week expected portfolio return and standard deviation as 0.00188 and 0.0125, respectively. Calculate the 1-week VaR with a 95% confidence level. (z-Score for 95% confidence level is 1.65) 6+4

Ans 4.

Value at Risk (VaR) and Its Application

1. a) Value at Risk and Its Measurement Methods

Value at Risk (VaR) is a key financial risk metric used to estimate the potential loss in value of an asset, portfolio, or investment over a specific period under normal market conditions at a given confidence level. In the context of banking, VaR is widely used to assess market risk, particularly in the trading book, by quantifying the maximum expected loss due to market movements such as changes in interest rates, exchange rates, or stock prices.

VaR answers the question: “What is the worst-case loss over a target horizon with a specified confidence level?” For

 

Q5. Evaluate securitisation, emphasising the advantages for the originator and investor.

Ans 5.

Evaluation of Securitisation

Securitisation

Securitisation is a financial process through which illiquid assets, such as loans or receivables, are pooled together and converted into marketable securities that are sold to investors. It allows

 

Q6. Summarize the bank’s available stable funding components and its required stable funding for calculating Net Stable Funding Ratio to control liquidity risk in Banks as per Basel III. 10           

Ans 6.

Net Stable Funding Ratio (NSFR) and Liquidity Risk Management

NSFR

The Net Stable Funding Ratio (NSFR) is a key liquidity standard introduced under Basel III to promote long-term resilience in the funding profile of banks. It ensures that banks maintain a stable funding structure relative to the liquidity characteristics and maturities of their assets and off-balance-sheet exposures.

NSFR is defined as:

NSFR = Available