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Questions and Answers
What is the primary focus of Basel 1 in terms of risk categories?
What is the key difference between Basel 2 and Basel 1?
What is the primary focus of the Pillar 1 in Basel 1?
What is the minimum capital requirement for banks under Basel 3?
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What is the key innovation of Basel 2?
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What is the primary focus of Basel 3 in terms of risk management?
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What is the primary difference between Basel 2 and Basel 3?
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What is the primary focus of the Pillar 2 in Basel 2?
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What is the primary innovation of Basel 1?
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What is the primary focus of Basel 2 in terms of risk management?
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Study Notes
Risk Management in Companies
- A company can align its measures to be taken with what it wants to accomplish, such as hiring additional regulatory staff for expansion areas it is currently unfamiliar with.
Risk/Event Identification
- Positive events can have a great impact on a company, while negative events can have detrimental outcomes on a company's ability to operate.
- Companies should identify important areas of the business and associated events that may have dire outcomes.
- High-risk events can pose risks to operations (e.g., natural disasters) or strategic plans (e.g., government regulation).
Risk Assessment
- Risk assessment involves understanding the likelihood and financial impact of risks.
- Risks include direct risks (e.g., a natural disaster making an office unusable) and residual risks (e.g., employees may not feel safe returning to the office).
- Companies should consider quantifying risks by assessing the percentage change of occurrence and the dollar impact.
Risk Response/Treatment
- Companies can respond to risk in four ways:
- Risk Avoidance: leaving the activity that causes the risk.
- Risk Reduction: minimizing the likelihood or magnitude of the risk.
- Risk Sharing: moving forward with the current risk profile and sharing potential losses with an independent third party.
- Risk Acceptance: determining whether mitigating practices are financially worth pursuing.
Risk Monitoring and Reporting
- This component involves tracking and reviewing the performance and effectiveness of risk response strategies.
- It also includes reporting and communicating risk information to relevant stakeholders.
- Feedback, analyzing company data, and informing management of unprotected risks are important aspects of risk monitoring and reporting.
Integrating ERM into Organizational Strategy
- To integrate ERM into organizational strategy, an organization needs to follow a systematic and iterative process.
- This process involves understanding the internal and external factors that may influence the organization's strategy.
Basel Framework
- Basel 1 categorized assets into four risk categories based on risk weights of 0%, 20%, 50%, and 100%.
- Basel 2 introduced internal models to calculate risk weights for different types of exposures and focused on market risk and operational risk.
- Basel 3 introduced more standardized and conservative measures for credit risk, market risk, and operational risk.
- Basel 3 also expanded the scope of the framework and deepened the requirements.
- The capital requirement increased from 8% to 10.5% minimum capital.
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Description
Learn about the importance of risk and event identification in Enterprise Risk Management (ERM) and how companies can align measures with their goals. Identify areas of business and associated events that may impact operations.
