1、Risk ManagementChapter 14Lead-inLanguage NotesKey PointsFollow-up Tasks14.114.314.214.4CONTENTS14.5Extended Tasks14.1Lead-inThis chapter will first of all discuss the definition of financial riskthe definition of financial risk.Then it will introduce the main typesthe main types of financial risk.Fi
2、nally,this chapter will suggest different ways to different ways to control financial riskcontrol financial risk.In finance,risk is the chance that the return achieved on an investment will be different from what is expected,and also takes into account the size of the difference.A fundamental idea i
3、n finance is the relationship between risk and return.Financial risk is any of various types of risk associated with financing,including financial transactions that include company loans in risk of default.Financial Risk 14.2 Key Points14.2.1 Definition of Financial Risk 14.2 Key Points14.2.2 Types
4、of Riskan FI will be required to make a payment when the assets that the intermediary has available to make the payment are long term and cannot be converted to liquid funds quickly without a capital loss.Liquidity riskchanges in exchange rates cause the dollar value of foreign currency or foreign f
5、inancial assets to fall.the borrower will be unwilling or unable to live up to the terms of the liability it has sold.Credit or default riskthe interest rate will unexpectedly change so that the costs of an FIs liabilities exceed the earnings on its assets.Interest rate riskExchange rate risk14.2 Ke
6、y Points14.2.3 Financial Risk ManagementCapital requirementsSince 2015,a minimum Common Equity Tier 1(CET1)ratio of 4.5%must be maintained at all times by the bank.This ratio is calculated as follows:Furthermore,Basel III introduced two additional capital buffers:A mandatory“capital conservation buf
7、fer”is equivalent to 2.5%of risk-weighted assets.Considering the 4.5%CET1 capital ratio required,banks have to hold a total of 7%CET1 capital ratio,from 2019 onwards.A“discretionary counter-cyclical buffer”allows national regulators to require up to an additional 2.5%of capital during periods of hig
8、h credit growth.The level of this buffer ranges between 0%and 2.5%of RWA and must be met by CET1 capital.14.2 Key Points14.2.3 Financial Risk ManagementLeverage ratioBasel III introduced a minimum“leverage ratio”.This is a non-risk-based leverage ratio and is calculated by dividing Tier 1 capital by
9、 the banks average total consolidated assets(sum of the exposures of all assets and non-balance sheet items).The banks are expected to maintain a leverage ratio in excess of 3%under Basel III.In July 2013,the U.S.Federal Reserve announced that the minimum Basel III leverage ratio would be 6%for 8 Sy
10、stemically Important Financial Institutions(SIFI)banks and 5%for their insured bank holding companies.14.2 Key Points14.2.3 Financial Risk ManagementLiquidity requirementsBasel III introduced two required liquidity ratios.The“Liquidity Coverage Ratio”was supposed to require a bank to hold sufficient
11、 high-quality liquid assets to cover its total net cash outflows over 30 days.Mathematically it is expressed as follows:The Net Stable Funding Ratio was to require the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress.14.2 Ke
12、y Points14.2.3 Financial Risk ManagementU.S.version of the Basel Liquidity Coverage Ratio requirementsThe LCR consists of two parts:the numerator is the value of HQLA,and the denominator consists of the total net cash outflows over a specified stress period(total expected cash outflows minus total e
13、xpected cash inflows).HOLA(high-quality liquid assets)categories:Level 1 represents assets that are highly liquid(generally those risk-weighted at 0%under the Basel III standardized approach for capital)and receives no haircut.Level 2A assets generally include assets that would be subject to a 20%ri
14、sk-weighting under Basel III and includes assets such as GSE-issued and-guaranteed securities.Level 2B assets include corporate debt and equity securities and are subject to a 50%haircut.bankrupt bkrpt 破产的denominate dnmnet 以（某种货币）为单位 fluctuate flktuet 波动forthright f:rat 直接的liability lablti 债务mitigat
15、e mtget 减少mortgage m:gd 抵押贷款nebulous nebjls 朦胧的，模糊的portfolio p:tfli 投资组合position pzn 头寸，指款项profitability prftblt 盈利能力tradeoff tred:f 折衷，权衡transaction trnzkn 交易variance verins 差异，方差14.3 Language NotesI.Wordsadjustable rate loans Banking Holding Companies(BHC)Base III(or the Third Basel Accord)Basel C
16、ommittee on Banking Supervision(BCBS)Bernard Madoff cover the losses credit risk default risk excessive risk 14.3 Language NotesII.Phrases Federal Reserve Board of Governorsfinancial intermediation fraudulent behaviorhigh-quality liquid assets(HQLA)high return interest rate risk lender of last resor
17、t liquidity riskmarket risk modern portfolio theory moral hazard net borrower net lender Systemically Important Financial Institutions(SIFI)standard deviationTier 1 capital quantify the terms 14.3 Language NotesII.Phrases risk management standard deviation Value-at-Risk(VaR)1.Credit or default risk
18、is the risk that the borrower will be unwilling or unable to live up to the terms of the liability it has sold.2.Another type of risk that must be managed is the interest rate risk.This is the risk that the interest rate will unexpectedly change so that the costs of an FIs liabilities exceed the ear
19、nings on its assets.3.Liquidity risk is the risk that an FI will be required to make a payment when the assets that the intermediary has available to make the payment are long term and cannot be converted to liquid funds quickly without a capital loss.4.In the banking sector worldwide,the Basel Acco
20、rds are generally adopted by internationally active banks for tracking,reporting and exposing operational,credit and market risks.5.In addition,it introduces requirements on liquid asset holdings and funding stability,thereby seeking to mitigate the risk of a run on the bank.14.3 Language NotesIII.S
21、entences 14.4 Follow-up TasksI.Matching()1.ability-to-sleep-at-night test A.经营目标()2.bad assets B.金融市场()3.business goals C.对冲政策()4.financial market D.高风险()5.financial skydiving E.安稳性测试()6.hedging policies F.市场交易量()7.high risk G.不良资产()8.low return H.控制措施()9.market turnover I.低收益()10.regulatory measure
22、s J.金融资产价值跳水 Directions:Match the English words and phrasesEnglish words and phrases in the leftleft column with the proper ChineseChinese equivalents in the rightright column.14.4 Follow-up TasksII.JudgmentsDirections:Decide whether each of the following statements is true(T)true(T)or false(F).1.Ri
23、sk means the investor may lose some or even all of his investment.()2.The traditional approach to risk management is to sell assets with credit risk.()3.Liquidity risk is also called the breach of contract risk.()4.The broad foreign exchange risk includes credit risk,accounting risk,national risk an
24、d so on,but excludes interest rate risk and exchange rate risk.()5.The external precautions against foreign exchange risks involve choosing favorable pricing currency and set appropriate commodity prices.()14.4 Follow-up TasksIII.Short Answer Questions Directions:Answer each of the following questio
25、ns brieflybriefly.1.What are the proper ways to reduce liquidity risks?2.How will the interest rates be affected when the central bank lessens its supply of money?3.How do the western commercial banks manage interest risks?4.What became the focus of the banking regulatory authorities when the“core p
26、rinciples of effective banking regulation”was introduced in 1997?5.What are the proper ways to reduce foreign exchange risks?14.4 Follow-up TasksIV.Translation Directions:Translate the following Chinese paragraph into Englishinto English.金融风险是指与金融有关的风险。常见的金融风险有市场风险、信用风险、流动性风险、操作风险等四类。随着经济全球化和金融一体化的发
27、展，金融风险日趋复杂化和多样化。一旦发生系统性金融风险，就会导致全社会经济秩序的混乱，甚至引发严重的政治危机。因此，必须把金融风险控制在合理的、可控的范围之内。Nothing ventured,nothing gained.English proverbThe reality is that risk is variable.Those in the financial world know it.Jason FriedOptimizing the ratio between risk and reward including accepting higher risks at times w
28、hen the ratio was favorable.George SorosRisk comes from not knowing what youre doing.Warren BuffettOnly when the tide goes out do you discover whos been swimming naked.Warren Buffett14.5 Extended TasksI.Proverbs and Quotes14.5 Extended TasksII.Interview ExcerptWarren Buffett is an American business
29、magnate,investor,speaker and philanthropist.He also serves as the chairman and CEO of Berkshire Hathaway.In this speech excerpt,Buffett warns about the risks inherent in investments.14.5 Extended TasksIII.Movie ClipThis clip quotes Buffet that the lies and frauds are rampant in the Wall Street,which makes investments highly risky.Thanks
