MANAGING RISK IN FINANCIAL INSTITUTIONS

SHE Level 4
SCQF Credit Points 20.00
ECTS Credit Points 10.00
Module Code MHN325740
Module Leader Mauricio Silva
School Glasgow School for Business and Society
Subject Finance and Accounting
Trimester
  • B (January start)

Pre-Requisite Knowledge

Introductory finance/economics, basic numeracy skills, fundamentals of statistics

Summary of Content

This module aims to provide a critical understanding of the financial theories, concepts, and techniques required to analyse and evaluate the financial risks faced by financial services firms and the methods and markets through which these risks are managed and controlled. Risk management is a central aspect of finance, dealing in how to handle control, and profit from risk. All decisions in firms involve choices on which managers must decide the level of risk they are willing to accept: this module will provide students with an understanding of the procedures to evaluate the magnitude of the risk and methods to analyse and reduce its impact. Financial services firms must take risks if they are to manage efficiently their portfolio of financial assets and their liabilities; decisions are constantly being made on whether the risks are worth the expected returns (and/or costs) and what alternative courses of action are available if they are not. This module will help students to develop the knowledge and understanding of risk management practices for those students who want to advance their careers in risk management in financial services.

Syllabus

This module enables students to understand the financial risks faced by business managers, and the methods and markets through which these risks are managed and transferred with a special focus on the following topics: Background: the concept of risk, diversification, CAPM, overview of financial risks and instruments, risk management failures Interest risk: cause of interest rate risk (IRR); the different types of IRR; various models to measure IRR and their advantages and weaknesses. Market risk: different definitions of market risk; the importance of measuring market risk exposure; discussion of the market risk indicators; advantages and disadvantages of three popular risk measurement approaches. Credit risk: three components of credit risk and their own contributions to credit risk; discuss the indicators/measurements of the three components; be able to understand the basic credit risk measurement models and their applications. Off-balance sheet risk: definition of Off-balance sheet risk; main OBS activities and risks involved. Foreign exchange risk: foreign exchange rate; foreign exchange rate volatility; foreign exchange (FX) risk; measure the size of FX exposure; the causes of FX exposure in business activities Liquidity risk: liquidity risk faced by FI; different types of liquidity risk; the measurement of liquidity risk Country/Sovereign risks: distinguish the differences between country risk and sovereign risk; the nature of sovereign risk; external and internal evaluating models; popular indicators in CRA and their problems. Deposit insurance: the rationale of deposit insurance; the moral hazards involved and the corresponding solutions in deposit insurance; the U.K. deposit insurance scheme and its main functions Diversification: understanding how diversification works; relating diversification to managing credit and market risk incurred by FIs; being able to calculate the variance and return of the portfolios; Derivatives: Understanding forward, future, option and swap; their differences; their advantages and disadvantages in managing risks. Securitisation: loan sale; its benefit to banks; securitisation; the types of assets that can be securitised and its impact on FIs.

Learning Outcomes

On successful completion of this module, the student should be able to:1 Show an understanding of contemporary procedures utilised in the financial risk management of financial institutions including interest rate, market, credit, foreign exchange, liquidity, off-balance sheet and sovereign risks;2 Demonstrate a critical understanding of the relationship between financial risk management and the overall performance of financial services institutions and their implication to the firm and its stakeholders;3 Demonstrate a critical awareness of the current trends in managing the risks encountered by financial institutions4 Show a working knowledge of the key elements in contemporary risk regulatory frameworks including stress testing and scenarios;5 Develop a critical understanding of different risk management approaches and benefits and problems associated with their use; 6 Demonstrate a working knowledge of derivative financial instruments and how these are employed by firms and financial institutions7 Evaluate the complexity of risk management strategies and their implications to policy makers, regulators and financial institution professionals

Teaching / Learning Strategy

The module provides a combination of lectures, seminars, practical based student activity. The lectures will provide a framework for the analysis of the range of risks encountered by financial institutions and participation in class discussions will provide students with the opportunity to expand their knowledge and understanding of the management of risks in financial institutions. Through the study of relevant cases, participants will critically analyse how financial institutions manage risks. The practical element of this module will be provided by lab sessions in which students will use spreadsheets to measure and understand how different types of financial risk models are applied and the impact of hedging techniques on portfolio risk. A: Facilitating the development of self-assessment. Students will be provided with a template for the evaluation of their coursework. They will be encouraged to identify the strengths and weaknesses of their own work in relation to the criteria prior to submission. B: Encouraging dialogue Time will be set aside in seminars to discuss generic feedback. Students will also be encouraged to meet with module tutors to review their personal performance. C: Clarifying good performance. Students will be given clear guidance on requirements using marking criteria sheets and performance level definitions. D: Providing opportunities to close the gap between current and desired performance. Feedback will identify generic and individual action points for improving performance. E: Delivering high quality information about your learning. Feedback will identify strengths, weaknesses and corrective advice. Time will also be set aside in seminars to provide feedback on formatitive assignments. F: Encouraging positive motivational beliefs and self-esteem. All feedback will be constructive and clear. It will identify strengths in performance. G: Providing information to teachers that can be used to help shape the teaching. Discussion Boards will be utilised to identify the areas of coursework students found most challenging. GCU Learn site. Discussion boards are set up to discuss and provide feedback on both coursework and also to help in exam preparation. GSBS will continue to use the advancement of GCU Learn as a blended learning tool through its teaching and learning as well as through engagement with students. GSBS will ensure that all modules are GCU Learn enabled and with the support of the Learning Technologists at the cutting edge of development of online materials. Academic staff and the Learning Technologists will continue to work together to develop and operate all modules on GCULearn to ensure student support and information sharing. Students are provided with formative and summative feedback via a variety of mechanisms. Feedback on coursework is provided within 3 working weeks of submission.

Indicative Reading

Books and articles: In addition to the main text, other texts, journal articles and web sites will be utilised on this module: Main Texts (latest edition preferred): Hull, J; Risk Management and Financial Institutions,John Wiley & Sons Bessis, J.; Risk Management in Banking, John Wiley & Sons Saunders, A., Cornett, M.; Financial institutions management, A risk management approach. McGraw-Hill Other Texts: Christoffersen, P; Elements of Financial Risk Management; Academic Press Allen, S; Financial Risk Management: A Practitioner's Guide to Managing Market and Credit Risk; Wiley Finance Erickson, H.K.; Financial Risk Management: A Simple Introduction Journals: Journal of Finance Journal of Banking & Finance Journal of Financial Services Research Journal of Risk Management in Financial Institutions Journal of Financial Intermediation Journal of Money & Credit Web Sites: Bank of England: www.bankofengland.co.uk Bank for International Settlement: www.bis.org British Bankers Association: www.bba.org.uk European Central Bank: www.ecb.int FSA: www.fsa.gov.uk International Monetary Fund: www.imf.org International Organisation of Securities Commission: www.iosco.org Risk Centre: www.riskcentre.com The Global Association of Risk Professionals: www.garp.com The Operational Risk Research Forum: www.orrf.org The Outsourcing Institute: www.outsourcing.com The World Bank: www.worldbank.org

Transferrable Skills

By the end of this module students will be able to: Critically analyse data to assess its relevance and significance in relation to financial risk in the decision-making of financial services firms Examine current issues in economics, politics, and society at large, and consider how to manage their risk implications and complexity in the planning and implementing of sustainable and lasting financial controls for financial institutions. Discern potential issues with the data and methodology of calculated financial risks the potential social, environmental and economic impact on financial decision-making Appreciate the importance of responsible and ethical use of financial risk information and analysis in addressing issues in the financial institutions, business environment, as well as in relation to personal financial decision-making.

Module Structure

Activity Total Hours
Lectures (FT) 24.00
Assessment (FT) 40.00
Practicals (FT) 12.00
Independent Learning (FT) 124.00

Assessment Methods

Component Duration Weighting Threshold Description
Exam (Dept) 01 2.00 50.00 35% Class Test
Exam (Dept) 02 2.00 50.00 35% Class Test