Cover -- Title Page -- Contents -- Foreword to the Third Edition -- Acknowledgments -- 1 Overview of Banking Risks -- Key Messages -- 1.1 Introduction: The Changing Bank Environment -- 1.2 Bank Exposure to Risk -- 1.3 Corporate Governance -- 1.4 Risk-Based Analysis of Banks -- 1.5 Analytical Tools Provided -- Questionnaire to facilitate the risk-based analysis of banks -- Data input tables -- Graphs -- 2 A Framework for Risk Analysis -- Key Messages -- 2.1 Financial Management -- 2.2 Why Banks Are Analyzed -- 2.3 Understanding the Environment in Which Banks Operate -- Financial System Infrastructure -- 2.4 The Importance of Quality Data -- 2.5 Risk-Based Analysis of Banks -- Computation Versus Analysis: The Importance of Integrated Financial Analysis -- 2.6 Analytical Tools -- Questionnaires and Data-Input Tables -- Automated Processing of Data -- Ratios -- Graphs and Charts -- 2.7 Analytical Techniques -- Ratio Analysis -- Common-Size Analysis -- Structure of the Balance Sheet -- Analysis of the Income Statement -- Cross-Sectional Analysis -- Trend Analysis -- Variations of Trend Analysis -- Annual Growth (Year-to-Year) -- Cumulative Growth from a Base Year -- Regression Analysis -- 3 Corporate Governance -- Key Messages -- 3.1 Corporate Governance Principles -- 3.2 Major Developments in Corporate Governance Principles -- 3.3 Regulatory Authorities: Establishing a Risk-Based Framework -- 3.4 Supervisory Authorities: Monitoring Risk Management -- 3.5 The Shareholders: Appointing the Right Policy Makers -- Assessing the Role of Shareholders -- 3.6 The Board of Directors: Ultimate Responsibility for a Bank's Affairs -- 3.7 Management: Responsibility for Bank Operations and the Implementation of Risk Management Policies -- Management Information Availability to the Board of Directors -- Risk Analysis: Assessment of Management.

3.8 The Audit Committee and Internal Auditors: An Extension of the Board's Risk Management Function -- Audit Committee and Internal Audit Responsibilities -- 3.9 External Auditors: A Reassessment of the Traditional Approach of Auditing Banks -- 3.10 The Role of the General Public -- Annex 3A: National Initiatives to Improve Corporate Governance -- OECD Principles of Corporate Governance -- Committee of Sponsoring Organizations of the Treadway Commission, United States (COSO) -- Integrated Framework for Internal Control of Financial Reporting -- Risk Management Framework -- Other Initiatives -- 4 Balance Sheet Structure -- Key Messages -- 4.1 Introduction: Composition of the Balance Sheet -- 4.2 Bank Assets -- Cash and Balances with the Central Bank -- Financial Assets Held for Trading -- Loans and Advances to Customers -- Tangible Assets -- Investments in Associates, Subsidiaries, and Joint Ventures -- Other Assets -- 4.3 Bank Liabilities -- Central Bank Funding -- Financial Liabilities Held for Trading: Repurchase Agreement Obligations -- Financial Liabilities Measured at Amortized Cost -- Deposits from Banks and Other Credit Institutions -- Deposits from Customers -- Foreign Borrowings -- 4.4 Equity and Other Items -- Off-Balance-Sheet Items -- 4.5 Growth and Changes in the Balance Sheet -- 4.6 Risk Analysis of the Balance Sheet Structure and Growth -- Mismatches -- Growth Trends -- Low-Earning and Nonearning Assets -- Off-Balance-Sheet Growth -- 5 Income Statement Structure -- Key Messages -- 5.1 Profitability -- 5.2 Income Statement Composition -- Interest Income -- Interest Expense -- Net Interest Income -- Gains (Losses) on Financial Assets and Liabilities Held for Trading -- Other Operating Income -- Exchange Differences -- Administrative Costs -- Depreciation -- Provisions -- Impairment Losses.

Share of the Profit or Loss of Associates Accounted for Using the Equity Method -- 5.3 Analyzing the Sources of Banking Income -- 5.4 Analyzing Quality of Earnings -- 5.5 Analysis of Profitability Indicators and Ratios -- 5.6 Assessing Internal Performance -- 6 Capital Adequacy -- Key Messages -- 6.1 Introduction: The Characteristics and Functions of Capital -- 6.2 Capital Adequacy Standards and the Basel Accords -- 6.3 Constituents of Capital and Minimum Capital Requirements -- Tier 1 Capital -- Tier 2 Capital -- Tier 3 Capital -- Minimum Capital Requirements -- 6.4 Risk-Based Regulatory Capital Allocation: Pillar 1 -- Credit Risk -- The Standardized Approach -- Internal Ratings-Based (IRB) Approaches -- Market Risk -- Standardized Framework -- Internal Model Approach: The Use of Value-at-Risk (VAR) -- Operational Risk -- Basic Indicator Approach -- Standardized Approach -- Advanced Management Approaches (AMAs) -- 6.5 Supervisory Review: Pillar 2 -- 6.6 Market Discipline: Pillar 3 -- 6.7 Management of Capital Adequacy -- 6.8 Analysis of a Bank's Capital Adequacy -- Analysis of the Structure of a Bank's Capital -- Analysis of a Bank's Risk Profile -- Evaluation of a Bank's Current and Future Capital Needs -- Annex 6A: Credit Risk-Related Weight Assignments Under the Basel I Accord, Covered by Tier 1 and Tier 2 Capital -- Credit Risk Related to On-Balance-Sheet Items -- Credit Risk Related to Off-Balance-Sheet Items -- Credit Risk Related to Derivative Instruments -- Annex 6B: Calculation of the Capital Adequacy Ratio to Include Market Risk (Tier 3 Capital) -- Background -- Example: Calculation of the Capital Adequacy Ratio to Include Market Risk (Tier 3 Capital) -- Solution-see table 6B.1 -- Notes -- 7 Credit Risk Management -- Key Messages -- 7.1 Establishing Policies for Managing Credit Risk -- 7.2 Regulatory Policies to Limit Exposures.

Large Exposures to a Single Customer or Connected Parties -- Related Party Financing -- 7.3 Management Policies to Reduce Credit Risk -- Lending Authority -- Type of Loans and Distribution by Category -- Appraisal Process -- Loan Pricing -- Maturities -- Exposure to Geographic Areas or Economic Sectors -- Insistence on Availability of Current Financial Information -- Collections Monitoring -- Limit on Total Outstanding Loans -- Maximum Ratio of Loan Amount to the Market Value of Pledged Securities -- Impairment Recognition -- Renegotiated Debt Treatment -- Written Internal Guidelines -- 7.4 Analyzing Credit Risk -- Loan Portfolio Structure -- Loan Portfolio Review -- Interbank Deposits -- Off-Balance-Sheet Commitments -- 7.5 Asset Classification and Loan Loss Provisioning -- Asset Classification Categories -- Nonperforming Loans -- Overdue Interest -- Classifying Assets -- Loan Loss Provisioning -- Loss Assets and Workout Procedures -- 7.6 Assessing Credit Risk Management Capacity -- Lending Processes -- Human Resources Analysis -- Information Flows -- 8 Liquidity Risk Management -- Key Messages -- 8.1 The Need for Liquidity -- 8.2 Liquidity Management Policies -- Foreign Currency Aspects -- 8.3 The Regulatory Environment -- 8.4 The Structure of Funding -- Interbank Funding -- 8.5 Cash Flow Analysis -- 8.6 Volatility of Funding and Concentration of Deposits -- 8.7 Liquidity Risk Management Techniques -- 9 Managing Liquidity and Other Investment Portfolios -- Key Messages -- 9.1 Nature of the Liquidity Portfolio -- 9.2 Investment Policy -- Benchmark Position -- 9.3 Strategic Asset Allocation -- Central Bank Aspects -- 9.4 Benchmark Portfolio -- 9.5 Eligible Instruments -- 9.6 Credit Risk -- 9.7 Market Risk -- 9.8 Active Management -- 9.9 Risk Budgets -- Stop-Loss Limits -- Position Limits -- 9.10 Management Reporting -- Notes.

10 Market Risk Management -- Key Messages -- 10.1 Sources of Market Risk: Selected Concepts -- Volatility -- Recognizing Price Changes and Marking to Market -- Interest Rate Risk -- Equity Risk -- Commodity Risk -- Currency Risk -- Other Risks -- 10.2 Measuring Interest Rate Sensitivity -- Interest-Rate Risk Sources -- Duration -- 10.3 Portfolio Risk Management -- Position Limits -- Stop-Loss Provisions -- Limits to New Market Presence -- Information Technology -- Organization -- 10.4 Market Risk Measurement: Value at Risk (VAR) as a Possible Tool -- Value at Risk -- 10.5 Risk and Performance Measurement -- Performance Reporting -- Interest Rate Risk Measurement Using Key Rate Duration -- Credit Spread Risk Measurement Using Key Rates -- 10.6 Stress Testing and Scenario Analysis -- 11 Currency Risk Management -- Key Messages -- 11.1 Introduction: Origin and Components of Currency Risk -- 11.2 Policies for Currency Risk Management -- Risk Exposure Limits -- Net Open Position Limits -- Currency Position Limits -- Other Position Limits -- Stop-Loss Provision -- Concentration Limit -- Settlement Risk -- Counterparty Risk -- Revaluation -- Liquidity Risk Concerns -- Accounting Treatment -- 11.3 Currency Risk Exposure and Business Strategy -- Spot Trading -- Forward Transactions -- Currency Swaps -- 11.4 Review of Currency Risk Management Procedures -- Capital Charges -- Alert Systems -- Staffing -- Information Systems -- 12 Asset-Liability Management -- Key Messages -- 12.1 Objective of Asset-Liability Management -- Asset-Liability Management Committee -- 12.2 Interest Rate Risk Management Responsibilities -- 12.3 Models for the Management of Interest Rate Risk in the Balance Sheet -- "Gap" Model -- Sensitivity Analysis -- Simulation -- Duration Analysis -- Current Market Practice -- Net Interest Income -- Economic Value of Equity.

12.4 The Impact of Changes in Forecast Yield Curves.