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Capital Market Essay

9713 words - 39 pages

Risk is an inevitable component of intermediation
and trading activity. Given the fundamental
trade-off between risks and returns, the objective
of regulators is to determine when risk
exposures either become excessive relative to
the financial institution’s capital position and
financial condition or have not been identified to
the extent that the situation represents an unsafe
and unsound banking practice.
Determination of whether the institution’s
risk-management system can measure and control
its risks is of particular importance. The
primary components of a sound risk-management
process are a comprehensive risk-measurement
approach; a detailed structure of limits, ...view middle of the document...

The examiner must become
familiar with the institution’s range of business
activities, global risk-management framework,
risk-measurement models, and system of internal
controls. Furthermore, the examiner must
assess the qualitative and quantitative assumptions
implicit in the risk-management system
as well as the effectiveness of the institution’s
approach to controlling risks. The examiner
must determine that the computer system, management
information reports, and other forms of
communication are adequate and accurate for
the level of business activity of the institution.
The primary goal of risk management is to
ensure that a financial institution’s trading,
position-taking, credit extension, and operational
activities do not expose it to losses that
could threaten the viability of the firm. Global
risk management is ultimately the responsibility
of senior management and the board of directors;
it involves setting the strategic direction of
the firm and determining the firm’s tolerance for
risk. The examiner should verify that the risk
management of capital-markets and trading
activities is embedded in a strong global (firmwide)
risk-management system, and that senior
management and the directors are actively involved
in overseeing the risk management of
capital-markets products.
Role of Senior Management
and the Board of Directors
Senior management and the board of directors
have a responsibility to fully understand the
risks involved in the institution’s activities,
question line management about the nature and
management of those risks, set high standards
for prompt and open discussion of internal
control problems and losses, and engage management
in discussions regarding the events or
developments that could expose the firm to
substantial loss. The commitment to risk management
in any organization should be clearly
delineated in practice and codified in written
policies and procedures approved by the board
of directors. These policies should be consistent
with the financial institution’s broader business
strategies and overall willingness to take risk.
Accordingly, the board of directors should be
informed regularly of the risk exposure of the
institution and should regularly reevaluate the
organization’s exposure and its risk tolerance
regarding these activities. Middle and senior
Trading and Capital-Markets Activities Manual February 1998
Page 1
management, including trading and control staff,
should be well versed in the risk-measurement
and risk-management methodology of the financial
Senior management is responsible for ensuring
that adequate policies and procedures for
conducting long-term and day-to-day activities
are in place. This responsibility includes ensuring
clear delineations of responsibility for managing
risk, adequate systems for measuring risk,
appropriately structured limits on risk taking,

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