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Table of Contents

Banking Industry - Part 5

987

Chapter 4. Analysis

4.1 Introduction

This chapter includes the analysis of the data which has been gathered from the responses of individuals through a properly structured questionnaire. The assessment of information after the thorough analysis of the data gathered has helped in developing logical reasoning for the speculated results. The analysis has been formed on the basis of responses from the field surveyed. After the thorough analysis of the data, conclusion and the required recommendations have been developed to understand the functions which make the management dynamic and take measures which could minimize the market risk.

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4.2 Questionnaire Analysis

The analysis of the data collected for the research study entitled dynamics management of risk in the banking sector has been developed with the descriptive analysis of the participants' responses. The descriptive analysis refers to the statistical measure that describe pattern of the data. The summary based pattern of the data is expanded in a meaningful way for the readers.

 

About Risk and Risk Management

QUESTION # 1:

Do you think that banks are able to manage their overall risk today in a better way after the crisis of 2007?

Number of respondents Total

  1. Yes 10 40
  2. No 25
  3. Risk will always remain in the banking industry 5

When the respondents were asked about the banks and its abilities to deal with the risk it was observed that out of 40 respondents 10 said yes. This makes 25% of the total responses from the respondents. 25 respondents said No. They don't think that banks are able to manage the risk after the crisis of 2007. This makes up to 62% of the total sample population. 5 respondents agreed to the fact that the risk can only be minimized but it cannot be mitigated.

From the results which have been gathered it can clearly be observed that the faith of the individuals has reduced after the crisis of 2007. The trust which was previously developed in the banking sector is subject to doubts. Only 13% of the sample population understands that risk cannot be mitigated, it can only be minimized.

QUESTION # 2:

What types of risk do you believe are important that banks face?

Analysis of risk in advance may reduce the chances of forfeiting later. The upcoming challenges may require the banks to be prepared. For this purpose, the banks need to constantly speculate the market and the varying factors. By doing this the chances of facing heavy losses can be avoided.

Least Important Not so important Somewhat Important Relatively Important Very Important Total

a Market risk 0 12 11 9 8 40
b Liquidity risk 0 0 0 25 15 40
c Exchange rate risk 0 5 4 19 12 40
d Counterparty risk 15 3 18 4 0 40
e Operational risk 0 0 10 5 25 40
f Risk from new and innovative financial products such as derivatives, swaps and others 0 4 8 13 15 40

The bankers who were asked to respond and identify the risks that were important for the bank to face have been interviewed, and out of a sample of 40 respondents it was observed that

  1. Market Risk: A varying perspective of the individual shows that 12 respondents don't consider market risk to be very important. 11 responded neutrally that market risk is somewhat important, 9 said that it is important and 8 concluded that it is very important.
  2. Liquidity Risk: The entire respondent considered that keeping a watch on the liquidity risk is very essential. If this risk is not monitored, then the banks may face hardships in operating. Out of 40 25 respondents said that liquidity risk is important. The rest 15 respondents think that proper risk management and monitoring of the liquid flow is essential for the banks to identify any potential threats.
  3. Exchange Rate Risk: The exchange rate risk is such that the valuation or the devaluation of the currency can bring a fluctuation in the flow of investments.

Out of 40 respondents 5 said that the changing exchange rate is not very important for the banks to speculate the risk. 4 of the respondents neutrally said that exchange rate has and does not have impact on the risks which the banks are facing. 31 of the respondents said that keeping a track of fluctuation in the exchange rate is important and this needs to be done to be aware of the risk which could have been mitigated.

  1. Counterparty Risk: This results show that the analysis of this risk is of least importance. This is because out of 40 respondents, 15 said that analyzing this risk is least important, 3 said that analyzing this risk was not important, 18 of the respondents neutrally replied that it is somewhat important and requires to be analyzed. Only 4 of the respondents considered analyzing the counterparty risk as important.

These results can help to conclude that this risk does not hold priority and it may not be very important for the banks.

  1. Operational Risk: Out of 40 respondents 10 replied neutrally that analysis of this risk is somewhat important for the bank. 5 of the respondents said that this risk is relatively important and 25 said that operational risk is a priority and the importance of analyzing this risk is very important for the banks.
  2. Risk from New and Innovative Financial Products Such as Derivatives, Swaps and Others: 4 respondents said that this risk is not important, 8 responded neutrally that this risk is somewhat important and must be analyzed. 13 respondents view this risk to be relatively important and 15 rate this risk at top priority to conclude that this risk is significantly important for the banks.

The representation of the data above has been shown below in a graphical form according to the responses that have been gathered.

The representation of the data has been shown in percentage form to conclude and prioritize the risks which have been identified to be of most importance for the banks.

Liquidity risk, Exchange rate risk, Operational risk and Risk from new and innovative financial products such as derivatives, swaps and others are considered to be of most importance by the bankers.

 

Risk Management Framework

QUESTION # 3:

Do you believe that risk management has become more important after the financial crisis of 2007?

Number of respondents Total

  1. Yes, certainly 27 40
  2. No 5
  3. Well it has always been considered as important aspect of banking 8

When the respondents were asked whether the importance of risk management has increased after the financial crisis of 2007 out of 40 respondents 27 said that the importance has increased. This amounts to 67% of the total responses. 5 said that the importance has not increased. This represents 13% of the total. 8 respondents which make 20% of the total responses said that risk management has always been considered important for banking.

QUESTION # 4:

How important is the role of Government in ensuring stability in financial institutions and banks?

Number of respondents Total

  1. Very important 13 40
  2. Important 10
  3. Somewhat important 11
  4. Not important 6

When the respondents were asked about the importance of government in ensuring the stability of the financial institutions out of 40, 13 respondents (32%) said that it is very important, 10 respondents (25%) consider it to be important, 11 respondents (28%) neutrally consider it to be somewhat important and 6 respondents (15%) say that the role of the government is not important for the stability of the financial institutes.


The conclusion drawn from the responses is that the role of governments is very prominent and important for ensuring the stability of the financial stability and banks.

QUESTION # 5:

Government believes that there is a need of changing policies and procedures to reduce the risk in banking industry. Do you agree?

Number of respondents Total

  1. Yes 21 40
  2. No 8
  3. It may or may not have an impact 11

When the respondents were asked about the need of changing the policies and procedures to reduce the risk in the banking industry out of 40, 21 respondents (52%) replied yes to the need for change in the policies and procedures, 8 respondents (20%) replied No, 11 respondents (28%) neutrally said that the change in the policies and procedures may or may not reduce the risks which the banks face.

The conclusion drawn from the responses is that the concern of the government and their suggestion for changing the policies and procedures will reduce the risk associated to the banking industry.

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QUESTION # 6:

Highlight the role of each of the following groups in managing risk in the banking industry:

Least Important Not So Important Somewhat Important Relatively Important Very Important Total

a. Top management 0 5 6 11 18 40
b. Risk management committee 0 0 4 22 14 40
c. Audit Committee 2 0 14 15 9 40
d. External auditors 5 3 9 13 10 40
e. Employees 5 1 2 22 10 40
f. Operational staff 0 0 14 8 18 40
g. Compliance unit 0 9 8 12 11 40
h. Government 14 5 11 8 2 40
i. Regulatory authority 0 2 12 8 18 40
j. Basel Committee 11 1 14 14 0 40
k. Internal policy makers of the bank 2 0 2 8 28 40

The analysis of the responses shows that the role of top management, risk management committee, internal audit committee, external auditors, employees, operational staff, compliance unit, regulatory authority and the internal policy makers of the bank is considered to be of highest priority in managing the risk in the banking industry.

The Government and the Basel Committee are not considered very important for minimizing the risk of the banking industry.

QUESTION # 7:

Do you believe Basel III report would help in better management of risk?

Number of respondents Total

  1. Yes 15 40
  2. No 5
  3. Not sure 20

When the respondents were asked that whether the Basel III report would help in better management of risk out of 40, 15 respondents (37%) replied yes Basel III would help in better management of risk, 5 respondents (13%) replied No and 20 respondents (50%) neutrally said that they were not sure whether the Basel III would help in better management of risk.

The conclusion which can be drawn from the response is that most of the respondents are unaware of Basel III and are not sure that whether or not its application will work for better management of risk. The knowledge of Basel III must be delivered to the workers.

QUESTION # 8:

Which of these following activities are most important in managing risk information technology?

Number of respondents Total

  1. Governance of Information Technology 5 40
  2. Powerful certification and access control entity of security management. 5
  3. Process of performance monitoring. 13
  4. Involvement of third party vendor system reflects managing the technology service providers. 5
  5. Audit feasibility. 12

When the respondents were asked that which of the factors were most important for managing the risk in IT out of 40, 5 respondents (12%) said that governance of information technology is of priority, 5 respondents (12%) said that powerful certification and access control entity of security management was important, 13 respondents (33%) said that the process of performance monitoring is best, 5 respondents (13%) said that the involvement of third party vendor system reflects managing the technology service provider is important and 12 respondents (30%) said that the audit feasibility was a priority.

The analysis of the results shows that the process of performance monitoring and audit feasibility is very important for effectively managing the risk in Information Technology.

Tools For Risk Management

QUESTION # 9:

Which of these risk management techniques are used by your bank (you can select more than one).

Respondents

  1. Diversifying the portfolio within the country
  2. Using techniques such as VAR
  3. Diversifying the portfolio outside the country
  4. Stress testing
  5. Monte Carlo
  6. Mark to market model
  7. Limit monitoring
  8. All 40

When the respondents were asked to answer that which of the technique was used by their banks to mitigate risk and improve the risk management system all the 40 respondents answered that all the mentioned techniques were used. The lists of the techniques that are used by the banks are

  1. Diversifying the portfolio within the country
  2. Using techniques such as VAR
  3. Diversifying the portfolio outside the country
  4. Stress testing
  5. Monte Carlo
  6. Mark to market model
  7. Limit monitoring

All the respondents of the questionnaire said that all the listed techniques were used by their banks to manage the risk in the most efficient way possible.

QUESTION # 10:

Which of these risk management techniques you think is most efficient in risk management

Number of respondents Total

  1. Diversifying the portfolio within the country 5 40
  2. Using techniques such as VAR 9
  3. Diversifying the portfolio outside the country 6
  4. Stress testing 8
  5. Monte Carlo 5
  6. Mark to market model 6
  7. Limit monitoring 1

When the respondents out of 40 were asked that which of the techniques were most efficient for them from the following

  1. Diversifying the portfolio within the country: 5 respondents (12%) considered this technique efficient
  2. Using techniques such as VAR: 9 respondents (22%) considered this technique efficient
  3. Diversifying the portfolio outside the country: 6 respondents (15%) considered this technique efficient
  4. Stress testing: 8 respondents (20%) considered this technique efficient
  5. Monte Carlo: 5 respondents (13%) considered this technique efficient
  6. Mark to market model: 6 respondents (15%) considered this technique efficient
  7. Limit monitoring: 1 respondent (3%) considered this technique efficient

As per the results shown above it can be clearly stated that using the VAR Technique and stress testing methods which most efficiently help with risk management. The weight age which was assigned to most of the method is equivalent. This shows that each of the technique helps n mitigating the risk in some way or the other. The limit monitoring method can be considered as least effective.

All the techniques and the methods that are used are most effective to mitigate the risk. It only depends on the particular situation in which the technique is applied to acquire maximum effectiveness.

Improvement in the Dynamic Management of Risk

QUESTION # 11:

Rate the importance of following areas in better risk management

Least Important Not so important Somewhat Important Relatively Important Very Important Total

a High Level Controls 0 6 9 6 19 40
b Controlling the major functional areas 0 4 13 9 14 40
c Controlling Financial Accounting 2 0 11 18 9 40
d Controlling IT 5 3 5 11 16 40
e Controlling the statutory and regulatory requirements 5 1 9 9 16 40

The table and the graphs which are shown above show the responses of the respondents regarding

  1. High level controls
  2. Controlling the major functional areas
  3. Controlling Financial Accounting
  4. Controlling IT
  5. Controlling the statutory and regulatory requirements.

Most of the respondents classified that all the controls were very important, relatively important and somewhat important for mitigating the risks. This can be seen in the graph plotted above that very few respondents consider that the following areas of risk management are not so important or are of least importance. The responses from the respondents show that all the controls that are applied are very important for the betterment of the risk management practices.

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4.3 Conclusion

In this analysis a careful study of the data gathered has been done. This data was gathered to form dynamics management of risk in the banking sector. The effective risk management is very necessary for the banks and the financial markets. This study of the responses was necessary to find out the steps which the banks take to effectively do so.

This analysis includes step by step explanation of the responses from the respondents. The areas which have been identified very important and least important for risk management by the respondents have also been discussed accordingly. The analysis of this data shows the steps which can make the management of any organization dynamic and can prescribe the ways to mitigate risk.

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