ASSESSMENT OF FINANCIAL RISKS IN A BANKING BUSINESS AND THEIR CALCULATION METHODS
Journal Title: Проблеми системного підходу в економіці - Year 2018, Vol 5, Issue 67
Abstract
The purpose of this article is to highlight the best practices of the financial risk management, defining the main categories and calculation methods of financial risk. Sound financial risk management system is required to run a healthy bank, which will save the clients and shareholders from financial loss. Therefore, banks are spending a huge amount of resources for compliance departments and risk management specialists, which helps to fulfill all regulatory requirements and ensures stability and effective operating of the company itself. Transaction or business activity that bears a big risk not under precise control of the banks, and in result create a healthy environment for financial risk decision making. This research also showed how much attention and resources modern credit organizations are spending on financial risk management. Highlighted different types of financial risk and explained their methods of assessment and analysis. Moreover, this article has a comprehensive description of pros and cons for each risk calculation method, supported with the short analysis of those. The research has also proven that most effective ways for the bank to calculate a capital for financial risk are: internal rating based approach (IRB) for credit or market risk, LCR and NSFR ratios for liquidity risk, and advanced measurement approach (AMA) for operational risk. Best practices in risk management and recommendations of international organizations on banking supervision were used in this article. Methods of the financial risk calculation that were highlighted in this research can be applied in the regular activities of the bank, independently of the size of its capital or resources. In order to properly calculate financial risks, banks should, in accordance with the international best practices and regulatory requirements of the Basel Committee on Banking Supervision (BCBS), classify their assets. After proper classification, it is necessary to introduce appropriate systems for managing each type of financial risk. There are quite a lot of calculation systems that allow banks of different sizes and resources to use the right and proper techniques. The complexity of the implementation and maintenance of such management systems is inversely proportional to the efficiency of the use of bank capital, that is, the more complex the method of calculating the risk – the less capital to be deducted on it. The most effective methods for calculating capital for banks today are the internal rating method for credit and market risk, the LCR and NSFR ratios for liquidity risk, and advanced measurement approach (AMA) for operational risk.
Authors and Affiliations
B. M. Mushynskyi
Keywords
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- EP ID EP562318
- DOI 10.32782/2520-2200/2018-5-29
- Views 129
- Downloads 0
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