RISK MANAGEMENT IN ABN AMRO BANK - Essay Example

Credit risk on loans is mitigated by reducing loan limits and exposures to companies that are below investment grade (BBB or UCR1 to UCR3-) levels. Limits are imposed on companies operating in industries that have been given an unfavorable economic outlook. In addition to carrying out a stress test on individual portfolios the company has also sought to mitigate credit risk by hedging in the form of credit default swaps (CDS) (ABN AMRO, 2010, p. ). Furthermore, the company carries out an assessment of the value of its collateral portfolio in order to determine how secured its loans are and therefore the extent of their exposure.

Credit officers are given the task of monitoring the quality of ABN AMROs loan portfolio on a regular basis (ABN AMRO 2003, p.8). Credit risk is reported in the form of an analysis according to the industry sector in which the loans are made, the type of loans, with an indication of the carrying amount of the loans. An analysis of its credit exposure and their currency status is also given (ABN AMRO 2010, p.68-70). According to Bessis (2002, p15-16) and ABN AMRO (2010, p.71) Country risk is the risk that there are crisis related situations in a country.

The causes of country risk in ABN AMRO are that funds or goods cannot be transferred from the country as a result of convertibility and transfer restrictions (ABN AMRO 2003, p. 10). . 10). According to ABN AMRO (2010, p.94-95), interest rate risk is measured by calculating the net interest income (NII); NII-at-Risk; duration of equity; and VaR. The company monitors interest rate risk by noting the development of the NII under different yield curve scenario to determine the NII- at-Risk. Interest rate risk is mitigated by hedging, in the form of interest rate swaps.

The company reports interest rate risk by providing a comparative analysis of the percentage NII-at-Risk; duration of equity in terms of years; and VaR banking book between the current and prior year. Currency risk is measured using VaR. It monitored by comparing short and long positions with limits set by the Group Risk Committee (GRC). Currency risk is mitigated with the use of various hedging strategies such as futures. Foreign currency gains and losses are reported in the Income Statement (ABN AMRO 2010, p.

95; 2003, p. 14). According to ABN AMRO (2010, p. 83-84), market risk is measured using VaR and a wide array of stress tests. Risks are controlled by setting limits for each trade desk and by setting counterparty credit exposure limits. ABN AMRO mitigates this risk by diversifying its risks across geographic locations and industries. Market risk is reported using a graph as well as a comparative analysis of the highest, lowest and average VaR of the current and prior year. Liquidity risk is measured using Loan to Debt (LtD) ratio, stable funding over non-liquid assets ratio (SF/NLA) which is an internally developed ratio and survival period (ABN AMRO 2010, p. 87). In order to mitigate liquidity risk ABN AMRO diversifies its currency and geography and maintains a wide investor base (ABN AMRO 2010, p. 87). A