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Bankacılık sektöründe kriz ve risk yönetimi: Türkiye uygulaması
Marmara Üniversitesi Bankacılık ve Sigortacılık Enstitüsü, 2002Co-Authors: Okay EsinAbstract:ABSTRACTThe purpose of this dissertation is to provide a selective review of banking crisis in Turkey, the factors behind the depression and the solutions through risk management. The study points out the types of problems arising from banking sector's exposure to loss and how these problems may be approached and solved. Banking system in Turkey that has already turned out to collapse in the last few years cannot get rid of a decline caused by bank shocks and failures. At the same time, the growing economic crisis in Turkey enhances the depression of banks. Turkish banking sector is always supported by reforms and reconstruction along with the economic developments, but the performance, growth and Financial structure of the system are still under influence leading to heavy losses. Unfortunately, banks are headed for a struggle to survive as the consequences change. Especially, because of increasing effects of macroeconomic instability, Financial impasse and frequently changed regulation and implementations during economic crisis, the sources are limited and banking is mismanaged. Also, banking sector in Turkey still experiences serious deficiencies caused by the historical evolution of the system in the past. As a result, the banking sector loses credit and esteem.Turkish banks have worked on enriching their system and adapt themselves to changes in recent years but the level of sophistication is not very high. Additionally, banking sector does not seem to assume and understand risk management and its role to provide efficiency to the bank management. In order to relieve the system from the problems, banks have to pay more attention to risk management. Certainly, Financial risks and risk-taking emerge from Financial operations. At this point, risk management happens to be a perspective to deal with the risks and potential losses. The body of the thesis illustrates a background to show that banks are to fail without risk management. Banks in Turkey do not obey the standard risk financing techniques, methods of controlling and financing exposures, new Financial techniques. Risks are not widely shared and risk pricing and enabling is not performed well by Turkish banks according to their ability and willingness to absorb them. The depression of banking sector in Turkey will drive back and banks will recapture public confidence in the system again if risk management is taken account. Nowadays, the most striking trend in international banking is risk management. The 1980s and 1990s witnessed a major transformation in the international Financial markets. The advent of more complex and dynamic transactions have substantially increased uncertainties in the marketplace. In today's environment, dominated by a dynamic, aggressive Financial Service Industry, market participants are exposed to greater Financial risks than before. A string of disaster stories dominated the Financial news coverage during the last two decades. A variety of factors could be cited as possible causes of these events. They include shortcomings in economic policy, inadequate supervision and, in most cases, poor risk management by the market players themselves. Beyond that, the basic issue is the Financial system's vulnerability to unforeseen events. Much more striking is that the world is tremendously changing. These changes can be good or bad for those affected by them. The first reason is the globalization of the international markets. Markets all over the world are becoming consolidated into a vast world market as obstacles to the free movement of capital are gradually being removed. This can be seen in the present global crisis, which arose because problems occurring in one region of the world promptly made them felt by markets and investors in other regions. Globalization reorganized some concepts such as stabilization, risk-taking, supervision and regulation of banking systems, market discipline, public guaranty on deposit, moral hazard and adverse selection. As a result of Financial developments, every trading institution, including central banks, has become more exposed to changes all over the world economies and Financial markets. Indeed, the recent Asian Financial crisis revealed that the Financial and economic stability of emerging market economies is extremely vital for global Financial and economic stability. Banking business and banking transactions have become very complex. Development of off-balance sheet transactions and derivative markets had an enormous impact on the banks' balance sheet structure, level and variety of risks to which they are exposed. Based on these developments, the importance of derivative instruments in banks' risk profile has increased. It is widely accepted that the risks are arising from globalization and that there are losers as well as winners in this arena. The process of globalization does not evolve equally worldwide. Some countries obtain great benefit from the process, mainly driven by their rapid integration into the global economy relative to other countries. In other words, the integrated global economy does not guarantee that the benefits of globalization are shared by the all countries involved in the process. More importantly, opportunities provided by the globalization process are not always beneficial, as shown by the recent crises. Hence, the process of globalization always carries social, economic, Financial, cultural, and even political risks in addition to the risk of contagion. There are several reasons for this situation. Some of them are beyond the control of the countries involved such as external shocks and other unexpected changes in external environment. Indeed, most of these reasons are due to, - weak macroeconomic and Financial policies implied, - inconsistencies in domestic policies, - increased vulnerability of national economies to external shocks, - higher international capital mobility (i.e. higher sensitivity of international capital flows among economies), - higher volatility of exchange rates due to integrated Financial markets, which hits real sectors of economies. As countries' economies become more vulnerable to external changes, they are exposed to shocks and crises with severe consequences both in Financial and real sectors, as well as facing heavy social costs. Instability emerging in one country can spread almost instantly to other countries. There is no doubt that every country faces its own challenges that are directly affected by their particular economic and social conditions. Positions taken in one country are now being hedged in another and this so-called proxy hedging of country risks spreads shocks and crises across national borders. As a result of this, even a country with no direct exposure to the country in crisis could find itself in deep trouble. In fact, the most recent crises in East Asia and Russia have reminded us how rapidly and compellingly a Financial crisis can erupt.Another reason is that the international markets have become much more volatile. Volatility, which means the fluctuation of market prices and ratios, is one of the principal sources of Financial risk. When market volatility increases, market participants are exposed to greater uncertainty--and greater risk. Still another change of conditions in the international markets is the appearance of new forms of investment with very complex structures. The great variety of these investment tools has led to the development of still others, like derivative instruments, aimed at reducing the degree of risk associated with several Financial transactions. Derivative instruments are being more and more widely used in the hope of reducing risk in the Financial markets, but the losses coming from derivative operations have also begun to increase. The worldwide increase in the supply of loanable funds has also played an important part in the upsurge of Financial risks. This surge, in combination with greater uncertainties, has caused much greater losses due to the materialization of Financial risks. In the 1990s especially, such losses have frequently resulted from Financial scandals. The recent collapse of "Long-Term Capital Management" has clearly shown that not even having Nobel-prize winning managers can always reduce the risk. Finally, one of the principal reasons for the increase in Financial risks is to be found in the greater intensity of international competitiveness. Credit risk in particular has become more complicated since the banking sectors of developed and emerging market countries began to compete in the same arena, and since the larger banks began to compete intensively against non-bank Financial institutions. Every one of these developments has fundamentally affected national and international banking systems. More effective risk management by banks and other Financial institutions has become vital for preserving the Financial stability of both domestic and international markets. The changes show that market participants and departments responsible for Financial control, and also portfolio and other managers, are often unaware of some of the risks to which their institutions are exposed. For all these reasons, the sound measurement of Financial risks and methods for their effective management have become an absolute necessity. It is also important to make regular announcement of information on which market participants can base sound decisions about a bank's Financial standing and risk structure. It is well known that markets have a natural disciplinary mechanism, which rewards banks that manage their risks effectively and penalize banks that show themselves to be risky. Everybody knows that the successful operation of this mechanism depends on the regular dissemination of information making banks and the banking system transparent and allows market participants to arrive at sound decisions. Therefore, change leading to risk -the prospect of gain or loss- and the risk of loss are something that one should be aware of. To be aware of risks does not mean eliminating them completely, which is certainly impossible, nor does it mean that there is nothing to do about risks and accept consequences fatalistically. It means that risk must be managed. To manage risks one must decide what risks to avoid and how to avoid them; what risks to accept and on what terms to accept them; what new risks to take on and so on. Both theory and practice of risk management have developed enormously in the last two and a half decades. The theory has developed to the point where the risk management is now regarded as a distinct sub-field of the theory of finance and risk management has become a separate subject in the master's and MBA programs. The subject has attracted a huge amount of intellectual energy not just from finance specialists but also from specialists in physics. As a result of these developments along with the globalization of Financial markets and changes, every trading institution has become more exposed to changes all over the world economies and Financial markets. This has led all institutions including central banks to develop new processes in their organizations to manage the risks in a more systematic way, although they used to have had implicit risk management practice. Parallel to these developments in risk management, the practice of reserve management by most of the central banks has changed significantly over the last decade. Once characterized by passive short-term investment strategies to preserve principal value and maintain maximum liquidity, many central banks now use a broad range of instruments, extend their portfolio duration and develop performance benchmarks. This increased attention to risk management and new approach to reserve management by central banks has come about not because of any change in central bank missions, but because of the growing recognition that the conduct of core businesses inevitably involve exposure to Financial risks and also because of increased attention to the contribution of central bank profits to national treasuries. Advances in Financial risk management brought more scope for central banks to consider increasing their portfolio returns together with maintaining the desired level of liquidity, which is the primary target for central banks. Then, the important question of how an effective risk management system can be developed comes out. The answer to this question does not change depending on the objectives and the size of the institution. Only for more complex organizations, a more extensive technological infrastructure is needed. To have a well established, in other words, efficient risk management system, first we need to develop the risk culture within our organizations meaning that we need to make sure that at all levels every person understands the risks the institution is exposed to. It is the responsibility of top management to provide that kind of information by having a clear approach to risk, its appetite for risk and assigning responsibility for assuming and controlling risks. Therefore, the first step in risk management process is to identify the risks the institution is exposed and to quantify those risks. Effective risk management requires that a consistent methodology be developed for analyzing risk. Important steps in risk management analysis are as follows: - Identifying the key Financial flows;- Determining the appropriate time horizon;- Setting a benchmark;- Defining the institution's return objectives and views toward risk. As well-known, most progress has been made in the measurement of market risk and much work is now being done in many places to construct models for a better management of credit risk. Difficulties with credit risk measurement lies in the lack of statistics about individual default probabilities. Even if these default probabilities can be estimated reasonably accurately, it is still rather difficult to combine them into portfolio assessments. The reason for that partly stems from the lack of statistical knowledge about the interaction between variables. Therefore, the models mostly tend to rest on simplified assumptions based on subjective judgments. It should be emphasized that it is necessary to combine them with sound judgment and common sense. Since these models are no more than simplified and limited image of the real world, they are better to be used having this fact in mind and the decisions must be taken not solely relying on the results of these models. The results should be supported with scenario analysis, stress testing and most importantly with the sound judgment of the decision makers. Another important aspect of risk analysis is that it should be integrated, meaning that the analysis results for different risk types should be comparable with each other to facilitate decision-making. It necessitates that the assumptions, data, valuation models used in analyzing different types of risks be the same or at least consistent with each other. Organizationally, the integration of risk analysis requires that there be a single, common risk management authority for the whole organization. At the beginning, it might not be easy to look at risk on an institution-wide basis. Since it requires a considerable amount of capital to be invested either in terms of technology, or in terms of staff. Besides that, the risk management system must be flexible enough to adjust to the rapid developments in this area. So, at the end, the risk management system should be established in a way to allow the management to compare risk on a consistent apples for apples basis even for those risk factors such as operational and legal risk, where there limited data is available. The management not only has to set standards for its risk policies but also has to ensure that they are disseminated to and understood by the staff who are affected by them. It is worth to restress since it is impossible to launch the risk culture without ensuring that kind of communication channels in the organization. Reporting and monitoring is really important to check the system's efficiency. Because of this, the risk management function has to have an independent reporting line to provide assurance that the institution is assessing its risks effectively, and is complying with its own risk management standards. With this functionality, reporting is the key component of any risk process, because it is basically the window into the risk management results and the means of communicating risks the institution is exposed to. Therefore, data collection and processing need to be highly efficient so that accurate risk results are available in time and within the necessary level of confidentiality.The task of maintaining the stability of national and international banking systems has come to require new arrangements and dispositions in the banking sector. To lead the way for progress in this area, a committee was established, led by the Bank for International Settlement (BIS) and made up of central banks and banking supervisors from several countries. Almost all of the proposals that ultimately originated in the work of this "Basle Committee" have been adopted for the banking systems of many countries, even though the Committee has no power to apply sanctions. One of the first accomplishments of the Basle Committee was a study of banks' capital adequacy. Issued in 1988, under the title "International Convergence of Capital Measurement and Capital Standards," this report was soon endorsed by many countries. Also known as the "Basle Capital Accord," the study took account of credit risk. Although the variety of risks in the international markets is increasing, credit risk is still the most significant risk category for banks. Credit risk means the probability of defaulting on one's obligation to the other party in any transaction. As mentioned before, the growth of competitiveness in the international credit markets in recent years, the active participation of non-bank Financial institutions in these markets, and borrowers' resort to the capital markets for loans at lower cost, have all brought about a considerable narrowing of profit margins in credit transactions. This has forced the banks to make more loans in order to have a competitive edge. But they have encountered credit problems due to adverse developments in the economic and Financial conditions. All these developments have resulted in the design of new methods for more effectively evaluating the risks and yields of credit transactions. Besides, creating credit rating models for use within banks, these efforts have produced analytical methods calling for intensive data analysis such as retrospective analysis of credit losses, models of bankruptcy probabilities, and stress tests. Credit risk has traditionally been considered to be the most important risk for a commercial bank and poor asset quality has probably been the cause of more bank failures than any of the exposures discussed above. As well as the degree of risk involved in particular types of transaction, the assessment of credit risk involves considering the total size of exposure to any given counterpart or group of connected counterparts, settlement risk and potential country risk and cross-border problems.The analysis, which follows, seeks to classify the relative degrees of credit risk arising from different off-balance-sheet activities according to three categories of risk. It should be stressed that these judgements are made in the light of present knowledge and may well need to be revised as a result of experience. "Full risk" where the instrument is a direct credit substitute and the credit risk is equivalent to that of an on-balance-sheet exposure to the same counterpart; - "medium risk" where there is a significant credit risk but mitigating, - circumstances which suggest less than full credit risk,- "low risk" where there is a small credit risk but not one that can be ignored.Effective management of the credit risks of banks and determining how much capital must be held against contingencies that could arise from such risks are very important for the soundness and stability of the banking sector. The 1988 Basle Capital Accord was the fruit of the work directed to this aim. The Accord targets a bank's capital holdings as a proportion of the credit risk of their on-balance-sheet and off-balance-sheet business. For this purpose, investment instruments were classified into five main categories according to their risk, and a risk coefficient assigned to each group. The weighting formula for asset risk was intended to determine the capital coverage needed for a bank's exposure to credit risk. But this arrangement dating from 1988 proved ineffective against newer developments emerging during the last decade, and work continues particularly at the BIS on how to reduce credit risk. Besides credit risk, the main risk categories that have been identified in transactions and markets: such as market risk, exchange rate risk, interest rate risk, liquidity risk, operational risk, country risk, legal risk, hedging risk. Once the risk is identified, measuring it accurately is generally accepted as the next step in preventing it from happening. The rapid progress of information technology in recent years has brought new risk measurement models to aid in the measurement of market risk. The increasing use of Financial instruments, which do not involve the acquisition by banks of conventional on-balance-sheet assets, raises some difficult questions for individual bank managements, for supervisory authorities and for acc
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Bankacılık sektöründe kriz ve risk yönetimi: Türkiye uygulaması
'Marmara Universitesi Ilahiyat Fakultesi Dergisi', 2002Co-Authors: Okay EsinAbstract:ABSTRACT The purpose of this dissertation is to provide a selective review of banking crisis in Turkey, the factors behind the depression and the solutions through risk management. The study points out the types of problems arising from banking sector's exposure to loss and how these problems may be approached and solved. Banking system in Turkey that has already turned out to collapse in the last few years cannot get rid of a decline caused by bank shocks and failures. At the same time, the growing economic crisis in Turkey enhances the depression of banks. Turkish banking sector is always supported by reforms and reconstruction along with the economic developments, but the performance, growth and Financial structure of the system are still under influence leading to heavy losses. Unfortunately, banks are headed for a struggle to survive as the consequences change. Especially, because of increasing effects of macroeconomic instability, Financial impasse and frequently changed regulation and implementations during economic crisis, the sources are limited and banking is mismanaged. Also, banking sector in Turkey still experiences serious deficiencies caused by the historical evolution of the system in the past. As a result, the banking sector loses credit and esteem. Turkish banks have worked on enriching their system and adapt themselves to changes in recent years but the level of sophistication is not very high. Additionally, banking sector does not seem to assume and understand risk management and its role to provide efficiency to the bank management. In order to relieve the system from the problems, banks have to pay more attention to risk management. Certainly, Financial risks and risk-taking emerge from Financial operations. At this point, risk management happens to be a perspective to deal with the risks and potential losses. The body of the thesis illustrates a background to show that banks are to fail without risk management. Banks in Turkey do not obey the standard risk financing techniques, methods of controlling and financing exposures, new Financial techniques. Risks are not widely shared and risk pricing and enabling is not performed well by Turkish banks according to their ability and willingness to absorb them. The depression of banking sector in Turkey will drive back and banks will recapture public confidence in the system again if risk management is taken account. Nowadays, the most striking trend in international banking is risk management. The 1980s and 1990s witnessed a major transformation in the international Financial markets. The advent of more complex and dynamic transactions have substantially increased uncertainties in the marketplace. In today's environment, dominated by a dynamic, aggressive Financial Service Industry, market participants are exposed to greater Financial risks than before. A string of disaster stories dominated the Financial news coverage during the last two decades. A variety of factors could be cited as possible causes of these events. They include shortcomings in economic policy, inadequate supervision and, in most cases, poor risk management by the market players themselves. Beyond that, the basic issue is the Financial system's vulnerability to unforeseen events. Much more striking is that the world is tremendously changing. These changes can be good or bad for those affected by them. The first reason is the globalization of the international markets. Markets all over the world are becoming consolidated into a vast world market as obstacles to the free movement of capital are gradually being removed. This can be seen in the present global crisis, which arose because problems occurring in one region of the world promptly made them felt by markets and investors in other regions. Globalization reorganized some concepts such as stabilization, risk-taking, supervision and regulation of banking systems, market discipline, public guaranty on deposit, moral hazard and adverse selection. As a result of Financial developments, every trading institution, including central banks, has become more exposed to changes all over the world economies and Financial markets. Indeed, the recent Asian Financial crisis revealed that the Financial and economic stability of emerging market economies is extremely vital for global Financial and economic stability. Banking business and banking transactions have become very complex. Development of off-balance sheet transactions and derivative markets had an enormous impact on the banks' balance sheet structure, level and variety of risks to which they are exposed. Based on these developments, the importance of derivative instruments in banks' risk profile has increased. It is widely accepted that the risks are arising from globalization and that there are losers as well as winners in this arena. The process of globalization does not evolve equally worldwide. Some countries obtain great benefit from the process, mainly driven by their rapid integration into the global economy relative to other countries. In other words, the integrated global economy does not guarantee that the benefits of globalization are shared by the all countries involved in the process. More importantly, opportunities provided by the globalization process are not always beneficial, as shown by the recent crises. Hence, the process of globalization always carries social, economic, Financial, cultural, and even political risks in addition to the risk of contagion. There are several reasons for this situation. Some of them are beyond the control of the countries involved such as external shocks and other unexpected changes in external environment. Indeed, most of these reasons are due to, - weak macroeconomic and Financial policies implied, - inconsistencies in domestic policies, - increased vulnerability of national economies to external shocks, - higher international capital mobility (i.e. higher sensitivity of international capital flows among economies), - higher volatility of exchange rates due to integrated Financial markets, which hits real sectors of economies. As countries' economies become more vulnerable to external changes, they are exposed to shocks and crises with severe consequences both in Financial and real sectors, as well as facing heavy social costs. Instability emerging in one country can spread almost instantly to other countries. There is no doubt that every country faces its own challenges that are directly affected by their particular economic and social conditions. Positions taken in one country are now being hedged in another and this so-called proxy hedging of country risks spreads shocks and crises across national borders. As a result of this, even a country with no direct exposure to the country in crisis could find itself in deep trouble. In fact, the most recent crises in East Asia and Russia have reminded us how rapidly and compellingly a Financial crisis can erupt. Another reason is that the international markets have become much more volatile. Volatility, which means the fluctuation of market prices and ratios, is one of the principal sources of Financial risk. When market volatility increases, market participants are exposed to greater uncertainty--and greater risk. Still another change of conditions in the international markets is the appearance of new forms of investment with very complex structures. The great variety of these investment tools has led to the development of still others, like derivative instruments, aimed at reducing the degree of risk associated with several Financial transactions. Derivative instruments are being more and more widely used in the hope of reducing risk in the Financial markets, but the losses coming from derivative operations have also begun to increase. The worldwide increase in the supply of loanable funds has also played an important part in the upsurge of Financial risks. This surge, in combination with greater uncertainties, has caused much greater losses due to the materialization of Financial risks. In the 1990s especially, such losses have frequently resulted from Financial scandals. The recent collapse of "Long-Term Capital Management" has clearly shown that not even having Nobel-prize winning managers can always reduce the risk. Finally, one of the principal reasons for the increase in Financial risks is to be found in the greater intensity of international competitiveness. Credit risk in particular has become more complicated since the banking sectors of developed and emerging market countries began to compete in the same arena, and since the larger banks began to compete intensively against non-bank Financial institutions. Every one of these developments has fundamentally affected national and international banking systems. More effective risk management by banks and other Financial institutions has become vital for preserving the Financial stability of both domestic and international markets. The changes show that market participants and departments responsible for Financial control, and also portfolio and other managers, are often unaware of some of the risks to which their institutions are exposed. For all these reasons, the sound measurement of Financial risks and methods for their effective management have become an absolute necessity. It is also important to make regular announcement of information on which market participants can base sound decisions about a bank's Financial standing and risk structure. It is well known that markets have a natural disciplinary mechanism, which rewards banks that manage their risks effectively and penalize banks that show themselves to be risky. Everybody knows that the successful operation of this mechanism depends on the regular dissemination of information making banks and the banking system transparent and allows market participants to arrive at sound decisions. Therefore, change leading to risk -the prospect of gain or loss- and the risk of loss are something that one should be aware of. To be aware of risks does not mean eliminating them completely, which is certainly impossible, nor does it mean that there is nothing to do about risks and accept consequences fatalistically. It means that risk must be managed. To manage risks one must decide what risks to avoid and how to avoid them; what risks to accept and on what terms to accept them; what new risks to take on and so on. Both theory and practice of risk management have developed enormously in the last two and a half decades. The theory has developed to the point where the risk management is now regarded as a distinct sub-field of the theory of finance and risk management has become a separate subject in the master's and MBA programs. The subject has attracted a huge amount of intellectual energy not just from finance specialists but also from specialists in physics. As a result of these developments along with the globalization of Financial markets and changes, every trading institution has become more exposed to changes all over the world economies and Financial markets. This has led all institutions including central banks to develop new processes in their organizations to manage the risks in a more systematic way, although they used to have had implicit risk management practice. Parallel to these developments in risk management, the practice of reserve management by most of the central banks has changed significantly over the last decade. Once characterized by passive short-term investment strategies to preserve principal value and maintain maximum liquidity, many central banks now use a broad range of instruments, extend their portfolio duration and develop performance benchmarks. This increased attention to risk management and new approach to reserve management by central banks has come about not because of any change in central bank missions, but because of the growing recognition that the conduct of core businesses inevitably involve exposure to Financial risks and also because of increased attention to the contribution of central bank profits to national treasuries. Advances in Financial risk management brought more scope for central banks to consider increasing their portfolio returns together with maintaining the desired level of liquidity, which is the primary target for central banks. Then, the important question of how an effective risk management system can be developed comes out. The answer to this question does not change depending on the objectives and the size of the institution. Only for more complex organizations, a more extensive technological infrastructure is needed. To have a well established, in other words, efficient risk management system, first we need to develop the risk culture within our organizations meaning that we need to make sure that at all levels every person understands the risks the institution is exposed to. It is the responsibility of top management to provide that kind of information by having a clear approach to risk, its appetite for risk and assigning responsibility for assuming and controlling risks. Therefore, the first step in risk management process is to identify the risks the institution is exposed and to quantify those risks. Effective risk management requires that a consistent methodology be developed for analyzing risk. Important steps in risk management analysis are as follows: - Identifying the key Financial flows; - Determining the appropriate time horizon; - Setting a benchmark; - Defining the institution's return objectives and views toward risk. As well-known, most progress has been made in the measurement of market risk and much work is now being done in many places to construct models for a better management of credit risk. Difficulties with credit risk measurement lies in the lack of statistics about individual default probabilities. Even if these default probabilities can be estimated reasonably accurately, it is still rather difficult to combine them into portfolio assessments. The reason for that partly stems from the lack of statistical knowledge about the interaction between variables. Therefore, the models mostly tend to rest on simplified assumptions based on subjective judgments. It should be emphasized that it is necessary to combine them with sound judgment and common sense. Since these models are no more than simplified and limited image of the real world, they are better to be used having this fact in mind and the decisions must be taken not solely relying on the results of these models. The results should be supported with scenario analysis, stress testing and most importantly with the sound judgment of the decision makers. Another important aspect of risk analysis is that it should be integrated, meaning that the analysis results for different risk types should be comparable with each other to facilitate decision-making. It necessitates that the assumptions, data, valuation models used in analyzing different types of risks be the same or at least consistent with each other. Organizationally, the integration of risk analysis requires that there be a single, common risk management authority for the whole organization. At the beginning, it might not be easy to look at risk on an institution-wide basis. Since it requires a considerable amount of capital to be invested either in terms of technology, or in terms of staff. Besides that, the risk management system must be flexible enough to adjust to the rapid developments in this area. So, at the end, the risk management system should be established in a way to allow the management to compare risk on a consistent apples for apples basis even for those risk factors such as operational and legal risk, where there limited data is available. The management not only has to set standards for its risk policies but also has to ensure that they are disseminated to and understood by the staff who are affected by them. It is worth to restress since it is impossible to launch the risk culture without ensuring that kind of communication channels in the organization. Reporting and monitoring is really important to check the system's efficiency. Because of this, the risk management function has to have an independent reporting line to provide assurance that the institution is assessing its risks effectively, and is complying with its own risk management standards. With this functionality, reporting is the key component of any risk process, because it is basically the window into the risk management results and the means of communicating risks the institution is exposed to. Therefore, data collection and processing need to be highly efficient so that accurate risk results are available in time and within the necessary level of confidentiality. The task of maintaining the stability of national and international banking systems has come to require new arrangements and dispositions in the banking sector. To lead the way for progress in this area, a committee was established, led by the Bank for International Settlement (BIS) and made up of central banks and banking supervisors from several countries. Almost all of the proposals that ultimately originated in the work of this "Basle Committee" have been adopted for the banking systems of many countries, even though the Committee has no power to apply sanctions. One of the first accomplishments of the Basle Committee was a study of banks' capital adequacy. Issued in 1988, under the title "International Convergence of Capital Measurement and Capital Standards," this report was soon endorsed by many countries. Also known as the "Basle Capital Accord," the study took account of credit risk. Although the variety of risks in the international markets is increasing, credit risk is still the most significant risk category for banks. Credit risk means the probability of defaulting on one's obligation to the other party in any transaction. As mentioned before, the growth of competitiveness in the international credit markets in recent years, the active participation of non-bank Financial institutions in these markets, and borrowers' resort to the capital markets for loans at lower cost, have all brought about a considerable narrowing of profit margins in credit transactions. This has forced the banks to make more loans in order to have a competitive edge. But they have encountered credit problems due to adverse developments in the economic and Financial conditions. All these developments have resulted in the design of new methods for more effectively evaluating the risks and yields of credit transactions. Besides, creating credit rating models for use within banks, these efforts have produced analytical methods calling for intensive data analysis such as retrospective analysis of credit losses, models of bankruptcy probabilities, and stress tests. Credit risk has traditionally been considered to be the most important risk for a commercial bank and poor asset quality has probably been the cause of more bank failures than any of the exposures discussed above. As well as the degree of risk involved in particular types of transaction, the assessment of credit risk involves considering the total size of exposure to any given counterpart or group of connected counterparts, settlement risk and potential country risk and cross-border problems. The analysis, which follows, seeks to classify the relative degrees of credit risk arising from different off-balance-sheet activities according to three categories of risk. It should be stressed that these judgements are made in the light of present knowledge and may well need to be revised as a result of experience. "Full risk" where the instrument is a direct credit substitute and the credit risk is equivalent to that of an on-balance-sheet exposure to the same counterpart; - "medium risk" where there is a significant credit risk but mitigating, - circumstances which suggest less than full credit risk, - "low risk" where there is a small credit risk but not one that can be ignored. Effective management of the credit risks of banks and determining how much capital must be held against contingencies that could arise from such risks are very important for the soundness and stability of the banking sector. The 1988 Basle Capital Accord was the fruit of the work directed to this aim. The Accord targets a bank's capital holdings as a proportion of the credit risk of their on-balance-sheet and off-balance-sheet business. For this purpose, investment instruments were classified into five main categories according to their risk, and a risk coefficient assigned to each group. The weighting formula for asset risk was intended to determine the capital coverage needed for a bank's exposure to credit risk. But this arrangement dating from 1988 proved ineffective against newer developments emerging during the last decade, and work continues particularly at the BIS on how to reduce credit risk. Besides credit risk, the main risk categories that have been identified in transactions and markets: such as market risk, exchange rate risk, interest rate risk, liquidity risk, operational risk, country risk, legal risk, hedging risk. Once the risk is identified, measuring it accurately is generally accepted as the next step in preventing it from happening. The rapid progress of information technology in recent years has brought new risk measurement models to aid in the measurement of market risk. The increasing use of Financial instruments, which do not involve
Maninder Bhatia - One of the best experts on this subject based on the ideXlab platform.
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An effective contrast sequential pattern mining approach to taxpayer behavior analysis
World Wide Web, 2016Co-Authors: Zhigang Zheng, Longbing Cao, Chunming Liu, Wei Cao, Wei Wei, Maninder BhatiaAbstract:Data mining for client behavior analysis has become increasingly important in business, however further analysis on transactions and sequential behaviors would be of even greater value, especially in the Financial Service Industry, such as banking and insurance, government and so on. In a real-world business application of taxation debt collection, in order to understand the internal relationship between taxpayers' sequential behaviors (payment, lodgment and actions) and compliance to their debt, we need to find the contrast sequential behavior patterns between compliant and non-compliant taxpayers. Contrast Patterns (CP) are defined as the itemsets showing the difference/discrimination between two classes/datasets (Dong and Li, 1999). However, the existing CP mining methods which can only mine itemset patterns, are not suitable for mining sequential patterns, such as time-ordered transactions in taxpayer sequential behaviors. Little work has been conducted on Contrast Sequential Pattern (CSP) mining so far. Therefore, to address this issue, we develop a CSP mining approach, e C S P, by using an effective CSP-tree structure, which improves the PrefixSpan tree (Pei et al., 2001) for mining contrast patterns. We propose some heuristics and interestingness filtering criteria, and integrate them into the CSP-tree seamlessly to reduce the search space and to find business-interesting patterns as well. The performance of the proposed approach is evaluated on three real-world datasets. In addition, we use a case study to show how to implement the approach to analyse taxpayer behaviour. The results show a very promising performance and convincing business value.
Sang Chan Park - One of the best experts on this subject based on the ideXlab platform.
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Service improvement by business process management using customer complaints in Financial Service Industry
Expert Systems With Applications, 2011Co-Authors: Chong Un Pyon, Jiyoung Woo, Sang Chan ParkAbstract:In Financial Service Industry, Service improvement should be considered from process viewpoint and customer viewpoint because the value creation is ultimately linked with internal business processes on the back office and customers are involved as a co-producer of value. In this perspective, customer complaints through call centers are adequate to support the analysis for Service improvement in Financial Service Industry. In this study, we propose a web-based decision support system for business process management employing customer complaints, namely Voice of the Customer (VOC), and its handling data for Service improvement. It involves VOC conversion for data enrichment and includes analysis of summarization, exception and comparison. The proposed system is evaluated on a major credit card company in South Korea.
Shuchen Kao - One of the best experts on this subject based on the ideXlab platform.
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the effect of organizational attributes on the adoption of data mining techniques in the Financial Service Industry an empirical study in taiwan
The International Journal of Management, 2003Co-Authors: Suchao Chang, Haeching Chang, Chinho Lin, Shuchen KaoAbstract:In this paper, we open up the organizational attributes that significantly influence the adoption of data mining (DM) technique for Financial Service Industry. The technique of factor analysis was employed to explore the features and multivariate data analysis technique t-test to investigate the hypotheses. Based on the data collected from medium-to large-sized firms, the empirical results confirmed that the organizational size, attitude of data resource, and style of decision-making significantly influence the DM adoption. In addition, it was found that the DM adoption did not significantly affected by the types of both marketing orientation and information orientation in terms of organizational culture. Research implications were also discussed in this research. 1. Introduction Information Technology (IT) has been extensively used in a multitude of applications within various industries, in particular the enhancement of organizational intelligence and decision-making. Many studies have addressed that the organizational features play a fairly important role in the adoption of IT [Thong et al., 1995; Fletcher et al., 1996; Fink, 1998, Chengalur-Smith et al., 1999, Cabrera et al., 2001; Dewett et al., 2001]. These features mainly include size, culture, competition, specialization, functional differentiation, and external integration. While a variety of studies looking at the relation of organizational features and IT adoption have presented that a noteworthy one showed significantly in some specific conditions, but not in all cases, a particular technique of Data Mining (DM) is hardly ever revealed, and thus becomes the motivation of this research. DM with a descriptive and predictive ability can elicit patterns that are not predictive, but meaningful and decision-supportable in historical data [Fayyad et al., 1996, 1997; Chen et al., 1996]. Basically, the DM mainly consists of five major phases: data collection, data cleaning, data mining, knowledge formulization and knowledge application. The data collection deals primarily with gathering the concerned data such as bank transactions, retailer transactions, Web shopping transactions, etc. The data cleaning is concerned with the consistency of multi-typed datasets, elimination of redundant attributes, refinement and reconstruction of collected datasets, and discretisation of continuous contexts. The DM returns the outputs that entail association, classification, regression, clustering, or summarization. The knowledge reorganization is conducted in the phase of formulization while practical use in the application. Data mining is one of the important techniques of IT and has been employing in support of management decisions via the discovery of patterns in large databases [Bigus et al., 1996; Chen et al., 1996; Fayyad et al., 1996, 1997; Han et al., 1998; Han et al., 1999]. Pitta (1998) highlights the DM as an important tool that marketers can rely on to reveal patterns in databases while emphasizing the marketing one-to-one strategy. More importantly, the applications in various areas of business depicted in literature in the past few years have also witnessed the increased use of DM. Referable works can be viewed in hotel data mart [Sung et al., 1998], personal bankruptcy prediction [Donato et al., 1999], customer Service support [Hui et al., 2000], and the special issue edited by Kohavi et al., [2001] of an underlying journal. Bigus (1996) and Adriaans et al. (1996) also provides a fundamental concept for the applicability of DM in business problems covering marketing segmentation, customer ranking, real estate pricing, sales forecasting, customer profiling, and prediction of bid behavior of pilots. It is believed that many industries have been adopting DM as an important management tool to help management decisions. However, it may be more relevant for the DM adoption if an Industry can produce tremendous transaction data through organizational activities. …
Zhigang Zheng - One of the best experts on this subject based on the ideXlab platform.
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An effective contrast sequential pattern mining approach to taxpayer behavior analysis
World Wide Web, 2016Co-Authors: Zhigang Zheng, Longbing Cao, Chunming Liu, Wei Cao, Wei Wei, Maninder BhatiaAbstract:Data mining for client behavior analysis has become increasingly important in business, however further analysis on transactions and sequential behaviors would be of even greater value, especially in the Financial Service Industry, such as banking and insurance, government and so on. In a real-world business application of taxation debt collection, in order to understand the internal relationship between taxpayers' sequential behaviors (payment, lodgment and actions) and compliance to their debt, we need to find the contrast sequential behavior patterns between compliant and non-compliant taxpayers. Contrast Patterns (CP) are defined as the itemsets showing the difference/discrimination between two classes/datasets (Dong and Li, 1999). However, the existing CP mining methods which can only mine itemset patterns, are not suitable for mining sequential patterns, such as time-ordered transactions in taxpayer sequential behaviors. Little work has been conducted on Contrast Sequential Pattern (CSP) mining so far. Therefore, to address this issue, we develop a CSP mining approach, e C S P, by using an effective CSP-tree structure, which improves the PrefixSpan tree (Pei et al., 2001) for mining contrast patterns. We propose some heuristics and interestingness filtering criteria, and integrate them into the CSP-tree seamlessly to reduce the search space and to find business-interesting patterns as well. The performance of the proposed approach is evaluated on three real-world datasets. In addition, we use a case study to show how to implement the approach to analyse taxpayer behaviour. The results show a very promising performance and convincing business value.