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Financial Markets and Institutes1FINANCIAL MARKETS AND INSTITUTESBy (Student’s Name)Professor’s NameCollegeCourseDate

Financial Markets and Institutes2FINANCIAL MARKETS AND INSTITUTESRisk management: How is operational and Financial Risk Managed? (I) Operational Risk (OP) Management: Operational risk is that likelihood of loss established by unsuccessful/insufficientinternal processes, systems, people or outdoor considerations like legal risk. Thus, operationalrisk weighted assets denote the assets amount the reserved by the bank to bar damage wherethere is bank’s exposure this risk. This risk is managed via the application of “Basic IndicatorApproach” according to Basel II guidelines about the measurement of operational risk. Here, theoperational risk weighted asset is computed as the gross income function. The stress is applied inmanaging this risk by measurement of the influence of feasible damage to physical asset is done.In instance of stressed scenario, the loss of OP is taken be one percent of regulatorycapital hence plugged into present OP weighted asset to establish an adverse influence on capitaladequacy ratio. Because OP is measured as a gross income’s function in Basic IndicatorApproach (BIA), whereby stress testing shock context is employed to this risk in similar manner,the risk amount deceases thereby creating a plus influence on ratio of capital adequacy.Management of this risk is by addition of the damage amount to be assumed in the assets(physical) to legal capital reserved for OP for measuring influence of this damage upon ratio ofcapital adequacy. (II) Financial Risk Management Financial risk management focuses on such strategies to tackle for example, thelikelihood of loss which a bank could become exposed to because of failure of credit customersto meet their obligations of enacted contract and failure to perform such obligations, fully orpartially, in the planned timeframe. Thus, the Credit Risk Weighted Assets is used in managing

Financial Markets and Institutes3financial risk to denote the amount of assets banks have to reserve to bar damage in case it isexposed to credit risk. Where the credit losses increase in the stressed scenario, the credit risk losses surge andaverage risk weights remain influenced by worsening classes of risk because of assumed class ofrisk mitigations. The bank then uses the internal and external loss and default data alongsidehistorical as well as scenario macroeconomic data in predicting effects of prevailing creditportfolios taking into account loss levels and default rates by portfolio and country. This allowsthe bank to identify a range of parts of portfolio allowing banks to mage this risk more efficientlyand effectively. The bank also handles the risk of huge exposures via the stimulation of effects ofdefault by 1 or more of investment grade rating (Rad 2016.). Capital Adequacy: Basel II and How Capital Adequacy and Risk Management are Linked(I) About Basel IIBasel II denotes an array of regulations (international) that Basel Committee has put inplace on supervising bank thus levelling the field of global regulation universal guidelines andrules. It extended the rules for requirement of minimum capital created under its predecessor,Basel I, 1st regulatory (international) accord, alongside offered the framework for reviewingregulatory alongside established requirements for disclosure for banks’ requirements of capitaladequacy. The major diversion from Basel I is that the second one has incorporated asset creditrisk the financial institution hold in determining capital ratios of regulatory. It is the 2nd global banking regulatory consensus which is anchored on 3 major pillars:regulatory supervision; minimum capital requirement and market discipline. The minimal capitalrequirement is playing a key part in Base II thereby further obligating each bank to hold aminimal of regulatory capital ratio over risk-weighted assets. Since regulations of banking

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