2.3 Analysis of the major risks and their management

First of all, 4 basic risks were identified from the positions of the enterprise and for each of them the main management methods were formulated. So, the credit risk was defined as the risk of losses related to the non-fulfillment of contractual obligations by the counterparty, the borrower. The main methods of managing this risk were: use of a rating system for more accurate risk measurement, setting limits and controlling them, the principle of risk capital, pricing and motivation systems, and the creation of reserves to cover the expected losses. Market risk or the risk of losses associated with changes in the prices of stocks and debt instruments, interest rates, exchange rates and other market factors, is managed through the analysis of liquidity and volatility of instruments, as well as the system limits on VAR and volume. As a liquidity risk, the enterprise considers the risk of becoming insolvent due to the inability to finance illiquid assets with the help of existing liabilities. To reduce this risk, an assessment is made of the inflows - flowing flows and limits on time costs. Finally, the operational risk of a bank is defined as the risk of a bank's loss due to staff errors and electronic systems during transactions and malfunctions in the systems controlling the activities of the units. The main method of managing this risk is to monitor the implementation and improvement of operational procedures.

Such a scheme of organization of risk management makes it possible to clearly identify and distribute the functions of the units. Thus, the units involved in credit risk management perform the following functions:

1. Credit analysis of counterparties / borrowers and assignment / revision of their ratings.

2. Preparation of credit protocols and recommendations on the size of limits.

3. Provision of reserves to cover expected losses.

4. Monitoring the financial status of existing counterparties and reviewing the limits

5. Control exposures to credit risk and monitor the concentration of risks by instruments, industries, regions, etc.

6. Creation of regular reports on credit risks

7. Support for databases containing information on exceeding limits and violations of credit policy.

8. Creation and development of methods of credit analysis and risk models.

The main functions of the department for managing market risks are:

1. Identification, analysis and measurement of market risks and liquidity risks to which the assets and liabilities of an enterprise are exposed

2. Calculation of VAR (most often by the method of historical volatility) for all product lines, portfolios with detailed contributions of individual instruments.

3. VAR aggregation for different product lines

4. Setting and reviewing limits on market risks.

5. Creation of regular reports on exposures to market risks

6. Improving and testing risk models

7. Calculating the behavior of portfolios in stressful situations

8. Creating recommendations on the optimal allocation of capital.

When managing operational risks, there is no separate department, because the operational risk management process can not be localized because all employees are included in it. However, the system still exists. It includes the following components:

1. Management activities and culture of control.

2. Risk identification and assessment.

3. Conducting control procedures

4. Providing communication and information systems

5. Monitoring of current activities.

Note that the most significant for the activities of "ForteBank" JSC are still credit risks. That is why the company concentrated its efforts to create and implement a unique credit risk management system for our market. And it is this fact that led to a more detailed coverage of the company's policy in the sphere of credit risk management.

Let us consider in more detail the process of managing credit risks.

The main element of risk management is the limits. The credit limit can be defined as the maximum amount of credit risks that an enterprise can bear when lending to counterparties. We note that the transition from a system of limits to the nominal sizes of credit and market positions to a system of limits for risk exposures allows to realize the following advantages: limits directly begin to limit possible losses, the size of the limit can be quantitatively taken into account the risk of the instrument, it becomes possible to measure the risks of complex instruments, As well as the ability to measure the risk / income ratio and compare tools on this basis. The amount of expected losses directly affects the profit from the loan product, since it is necessary to deduct the insurance amount in the reserve highly liquid fund from each loan, this amount must be at least EL. The magnitude of unexpected losses on the portfolio also indirectly affects the profit from lending, as it determines its own level of reliability of the loan portfolio and the enterprise as a whole. The own level of reliability is determined by the correspondence of capital at risk (own economic capital) to possible unexpected losses that can occur with a probability that adds to the full probability (level) of reliability. More strictly, UL is measured by the value of VAR (Value at risk) at a level of reliability.

(5)

The requirement of matching capital looks as simple as ,

where CAR (Capital at risk) is the relative amount of equity. To estimate the value , it is necessary to construct a loss curve for the portfolio, which is a non-trivial task.

One of the main and non-trivial tasks in risk assessment is the task of calculating the probability of default of the borrower. We have two approaches to calculating PD. The first is based on a qualitative and quantitative assessment of the borrower's rating by its internal financial indicators and special business factors. The second is based on the borrower's capitalization in the market and the level of his debts to creditors. Unfortunately, the second approach, although it is the most objective, is applicable only to a small number of Russian open companies.

Calculation of the probability of default of the borrower

The method of calculating the probability of borrower default for private companies, which is the majority in the loan portfolio, is based on the basic formula that establishes the relationship between financial relations from accounting records and PD. Further, after calculating the base PD, an expert evaluation is built up, from which follows the overall score of the borrower, correcting this PD. The main financial ratios x1, x2, .... x7 for the basic formula, calculated from the quarterly reports of the 1st and 2nd forms for the last year, are as follows:

1. log of annual revenue (log (US $))

2. operating margin = operating profit / annual revenue

3. Return on assets = operating income / assets

4. interest coverage = operating income / interest for loans

5. capital structure = equity / assets

6. coverage of obligations = free cash / liabilities

7. liquidity = short-term assets / liabilities

The formula for the average annual probability of default:

(6)

It is similar to that used for Western companies, but with coefficients adapted to Kazakhstan. It was developed by analysts and covers medium-sized manufacturing and trading companies (for the latter, one parameter pertaining to operating margin varies). The formula allows for a continuous series of quarterly reports to calculate a number of PD, which experiences fluctuations in accordance with the change in the financial position of the company. To calculate a single PD value, financial statements must be submitted during the previous year, since the financial ratios calculated for the year neutralize the seasonal fluctuations.

The second part of the PD assessment is a qualitative assessment of the borrower, carried out by an experienced appraiser, it is necessary to correct incomplete objectivity and take into account additional factors that are missing in the basic formula.

The specialist answers dozens of questions concerning the company's business, which should influence the risk of default. Each section of the assessment corresponds to some weight and each issue in the section too. Before answering questions, the evaluator must carefully prepare his opinion on the maximum information provided by the borrower company. After answering the questions, a correction factor is calculated for the base PD estimate, which can increase or decrease the base PD. In the neutral case the coefficient remains equal to unity. The overall qualitative score of the borrower is influenced by qualitative and financial indicators.