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1、Advancing Risk Management by Financial InstitutionsThe Case of Japanese Banks,Tsuyoshi OyamaBank of Japan,Workshop on Risk Management in Banking SectorShanghai, December 21, 2005,1,Agenda,Background of Banks Efforts to Enhance Risk Management and the BOJs Initiatives to Encourage These Efforts Topic
2、s from the Sound Practices Papers and Discussions in the Seminars “Advancing Credit Risk Management through Internal Rating Systems” “Advancing Operational Risk Management” “Advancing Integrated Risk Management”,2,Background of Banks Efforts,The experience of overcoming NPL problems since the 1990s
3、Enhance the risk management of Japanese financial institutions particularly in the area of credit risk management Entail stability of financial system, which led to the lifting of blanket deposit insurance in April, 2005 In this new environment, financial institutions are expected to develop further
4、 creative business services that meet the needs of customers through Assessing various risks not only in a conservative way but also in an accurate way. In other words, financial institutions are expected to grasp effectively the various risks inherent in their business (e.g. economic value and its
5、volatility of all the assets they possess and transactions they engage in), and also to establish a framework that manages these risks in an integrated way. In addition, Basel II implementation surely pressures banks to intensify the above efforts.,3,Advancing Risk Management-Means What?,Our underst
6、anding of “advancing risk management” Enhancing the communication tools among stakeholders (senior managers, risk managers, shareholders, regulators, etc.) to reach a consensus view of risk profile and amounts. Not necessarily indicating a more use of Greek letters and math formula What banks need i
7、s more objective and more persuasive tools to assess risks Objective and persuasive risk assessments lead to higher transparency of risk management process and thereby clarify the responsibility associated with risk taking activities help ensure the direction toward improving risk management. There
8、are no best practices of banks risk management, which could differ depending on their facing environments need to establish the incentive mechanism to ensure the direction toward improving risk management.,4,BOJs Initiative (1) - Publication of Sound Practices Papers,5,The Bank of Japan established
9、the Center for Advanced Financial Technology in July, 2005. One major mission of this new organization is to develop the third channel, besides on-site examinations and off-site monitoring, to communicate with banks about the risk management framework and methods. Using the three sound practice pape
10、rs as the main subjects, the Center has already hosted: 2 seminars for the large number of financial institutions focusing on overall risk management issues that are dealt with by three papers, and 12 seminars for regional banks (2030 banks for each) focusing on the issues that are dealt with by one
11、 paper for each seminar.,BOJs Initiative (2) - Hosting a Series of Seminars for Banks,6,BOJs Organizational Changes and Setting up the Center for Advanced Financial Technology,Before,After July 8th ,Financial Systems and Bank Examination Dept.,Center for Advanced Financial Technology(Newly Establish
12、ed),Planning and Implementation,International Issues,On-site Examination,Off-site Monitoring,7,Advancing Risk Management-Its Relation with Basel II,The concept of “advancing risk management” is in line with “successfully implementing Basel II” The concept of Basel II that strongly pushes banks towar
13、d the direction of assessing risks “more precisely” and “transparently” in a “self-disciplined” manner is completely shared by us when advocating for the need of advancing risk management. Our strategy is to capitalize on, to the maximum, the implementation of Basel II and its accompanying momentum
14、of advancing risk management among banks. The greatest challenge for us is how to convince banks of the need and usefulness of advancing risk management “by themselves” in “a flexible manner” and thereby avoid the case where banks seek for an excessively detailed “one-size-fits-all” type guidance.,8
15、,“Advancing Credit Risk Management through Internal Rating Systems”,9,SPP-I: “Advancing Credit Risk Management through Internal Rating Systems”,Contents Architecture of internal rating system Rating process and rating models Estimation of risk components Uses of internal rating systems Validation of
16、 internal rating systems Quantification of credit risk The paper tries to show our thinking of sound practices, being compared with current practices of major banks and thereby facilitate small banks to consider them as the real world cases.,10,Framework of Advancing Credit Risk Management,Migration matrix Probability of default(PD),Internal use,Risk Components,Loss given default (LGD),Exposure at default (EAD),Correlation,Calculation of credit risk amount,Expected loss (EL) Un
