October Risk Forum

The JBF Center, in cooperation with the Professional Risk Managers’ International Association (PRMIA) Philippines Steering Committee, conducted its first Monthly Risk Forum last October 19, 2004 at the Quezon Ballroom A, Shangri-la Hotel, Makati City. The Theme for the forum is “Basel II: From Regulation to Profit”. The Monthly Risk Forum is a partnership between the JBF Center and PRMIA Philippines, which was formalized in a signing of a Memorandum of Understanding as well as the joint hosting of the 2004 Risk Management Convention Manila, Philippines, held last September 13. The center and PRMIA have invited Mr. John Foulley, Principal Consultant for Risk, SAS Asia Pacific Region, as the guest speaker to discuss the topic on how banks will need to implement revised minimum capital requirements on credit risk as well as market and operational risk; execute new supervisory review processes and improve market disclosure. 

November Risk Forum

The JBF Center, in cooperation with the Professional Risk Managers’ International Association (PRMIA) Philippines Steering Committee, conducted its second Monthly Risk Forum last November 4, 2004 at the Philippine Veterans Bank 5th Floor DAO 1 Building, Legaspi Village, Makati City. The Theme for the forum is “Roadmap for Risk Adjusted Performance Management (RAPM)”.

Dr. Chris Marshall, the speaker for the month’s risk forum is the Senior Director of the Financial Services Industry team at Oracle Corporation, Asia Pacific Division. He specializes in Risk Management and Performance Measurement for banking and finance customers in Asia Pacific. In the convention, Dr. Chris Marshall described different elements of which RAPM (Risk Adjusted Performance Measurement) is composed of and how all of these elements interact and need to be understood together if one is to avoid chaotic implementation of separate projects by different parts of the bank. The agenda of the forum are as follows:
  

 Business Driver: Why RAPM will revolutionize Banking
 Elements of RAPM solution: What goes into the RAPM

I. Cost Management: Allocating Direct and Indirect Costs
II. Funds Transfer Pricing: Understanding the Cost of Funds
III. ALM (Asset Liability Management)
IV. Credit Scoring and PD Modeling
V. Corporate Governance and Internal Control
VI. BIS II Compliance
VII. Economic Capital Management
VIII. Enterprise Reporting
IX. Building an Enterprise Architecture for RAPM

December Risk Forum

CONCENTRATION RISK IN LOAN PORTFOLIO AND ITS RELATIONSHIP TO HIGHER CAPITAL ADEQUACY REQUIREMENT
9th Dec 2004 to 9th Dec 2004 
at 12:00 PM 

Time: 9 December 2004 , Thursday, 12:00 pm – 2:00 pm 

Venue: 
Philippine Veterans Bank 
2nd Flr. DAO 1 Bldg. Salcedo St . 
Legaspi Village 
Makati City (beside Prudential Bank)

Guest Speaker: 
DHEERAJ BAHUKHANDI, FRM

Dheeraj is the Co-Chairman of the PRMIA Philippines Education Committee. He has over six years of experience in the financial sector in India and the Philippines and until last year was employed with the Citibank Manila office as an Assistant Vice President. Dheeraj currently manages his own pharmaceutical business and is also a member of the Finance faculty with the Graduate School of Business at De La Salle University, Manila . He holds an MBA (Finance) from the Asian Institute of Management and was a Freeman Scholar to the Wharton School, USA. Dheeraj is also a Certified Financial Risk Manager (FRM) from the Global Association of Risk Professionals (GARP) and a CFA Level 2 candidate.

Dheeraj's presentation is based on a paper written by Dr. Javier Marquez Diez Canedo of Central Bank of Mexico and presented in a seminar sometime in 2002. The paper has practical insights into credit risk of loan portfolios peculiar to Emerging Markets.

Many thanks to the Philippine Veterans Bank for providing the venue for the Forum.

The abstract below has been taken from his original paper of Dr. Canedo.

ABSTRACT 

Current credit risk methodologies rely extensively on numerical methods to obtain the portfolio loss distribution, so that the determination of risk measures such as VaR, capital requirements and single obligor limits, is an empirical process that requires a considerable amount of information and computational effort. This makes them difficult to apply and implement in emerging markets. The measurement of risk concentration in loan portfolios and the identification of segments that exhibit excessive concentration, is a problem that has remained elusive despite its recognized importance.

Assuming default probabilities of the loans and their correlations are given exogenous parameters, a default model is developed which obtains a closed functional form for the loss distribution, under the premise that it can be characterized by its mean and its variance. The resulting explicit mean-variance representation of Value at Risk (VaR) provides a lower bound on the banks' capitalization ratio and the resulting inequality establishes capital adequacy.

The Herfindahl-Hirshman index emerges as a measure of numerical loan concentration, providing a precise quantification of how concentration contributes to overall credit risk of the portfolio. Two new properties of the index are obtained that relate single obligor limits to concentration along different segments of the portfolio so as to ensure capital adequacy. Furthermore, the effect of default correlation on concentration is analyzed and a measure of risk concentration is proposed.

Throughout the paper, the implications for risk management and regulation are discussed. Numerical exercises performed to date on real portfolios provide results comparable to those obtained using other methodologies, at a considerable reduction in computational effort. This is specially attractive for application to emerging markets where the type of information required by the more standard credit risk measurement methodologies is not available.