RISK MODELLING (3) Answer ALL the questions below. QUESTION 1 (25 Marks) Effective credit risk management has gained an increased focus in recent years, largely due to the fact that inadequate credit risk scoring models are still the main source of serious problems within the banking industry. Managing credit risk thus remains an essential and challenging corporate function. The chief goal of an effective credit risk management must be to maintain the key components which are adopted the best practice approach of credit risk scoring models, maintaining a good data quality management and enhancing a robust technology in Corporation Bank of Malaysia (CBM). Adapted: Liew, C.K. and Dileep, K.M.(2012), Credit Risk Scoring Models: A Best Practice Approach for Effective Risk Management in a Malaysian Bank. 1.1 In that context explain what you understand by the term credit risk and why is credit risk the main source of the serious problems within the banking sector? (15 marks) 1.2 Critically discuss the THREE (3) pillars of effective credit risk management and do you agree and / or disagree that this is what we need in the banking sector in our country? (10 marks) QUESTION 2 (25 Marks) In model building, the modelling approach and its level of complexity to be adopted by the organisation will depend on the data availability and portfolio size a model covers. The 3 types of modelling approach adopted by the institution are statistical method, expert judgement, expert overlay or external rating. Adapted: Liew, C.K. and Dileep, K.M.(2012), Credit Risk Scoring Models: A Best Practice Approach for Effective Risk Management in a Malaysian Bank. 2.1 In that context discuss the THREE (3) types of modelling approaches highlighted in the above extract. (15 marks) 2.2 Discuss ANY FIVE (5) benefits of risk modelling which can improve and enhance an organisations transparency. (10 marks) QUESTION 3 (25 Marks) Risk map classifies net risks as critical, high, medium and low. Depending on the exposure of each risk, a treatment strategy is chosen: accept, transfer, avoid and reduce. For each risk, the risk owner decides the appropriate strategy. In view of the fact that the potential returns of some financial risks are attractive in comparison to the risks faced, some PMD financial risks were accepted, and risk owners (asset managers) had to manage their risks under the appropriate risk tolerance which. Adapted: Risk Assessment Case Studies Summary Report, Techneau, July 2010 3.1 In that context discuss what you understand by the term risk mapping. (10 marks) 3.2 Discuss the FIVE (5) key challenges an organisation encounters in the implementation of full risk modelling activities. (15 marks) 2 CD QUESTION 4 (25 Marks) Each identified risk has to be assessed taking into consideration the likelihood of occurrence and impact on the achievement of the organizations objectives over time horizon. The gross, net and residual risks are assessed in terms of likelihood and impact. Quantitative and qualitative approaches are combined to assess. Adapted: Risk Assessment Case Studies Summary Report, Techneau, July 2010 4.1 In light of the above differentiate between qualitative and quantitative risk approaches. (15 marks) 4.2 Discuss the advantages and disadvantages of using a combined quantitative and qualitative approach to assess risk within your organisation. (10 marks)