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Davronov Shuhrat Zuhurovich, Independent researcher, Banking and Finance Academy of the Republic of Uzbekistan
E-mail: [email protected]
Improving management of risks related to international operations in bank engineering
Abstract: This article describes main risks associated with international operations in banking engineering practice. There is a review of the situation on the international market in this area. It is concluded to use the concept ofVaR method for the objective estimation of the risks of commercial banks.
Keywords: banking engineering, banking risks, credit risk, liquidity risk, legal risk, strategic risk, reputation loss risk.
While the economy is globalizing all over the world, the activity of banks is also expanding. Expansion of the banks' activities is connected with the fact that, first of all, banks offer services for foreign economic activities of the clients and, banks start their performance in the world financial markets. Therefore, international activity ofthe bank can comprise ofdifferent aspects such as foreign exchange operations, lending, accounting, fund and guarantee operations. Clients of the bank can be both residents and non-residents of the country and it, in turn, raises probability of risks.
The difference of bank's internal operations from its international operations is that more sources of risks can occur in the international performance. The participants of these operations can include a client, a bank itself and a foreign representative office. All
above-mentioned statements prove the urgency to study not only national participants of international operations, but also foreign participants with the account of factors of risks which can occur.
The global factor of raising the risks in international activity of banks is reduction of the volume of operations on the best assets and liabilities from the liquidity point of view and increase of the operations related to capital mitigation, in particular, increase of the volume of virtual operations with securities. Rapidly increasing number of virtual agreements in the world financial markets can result in financial fluctuations and it, in its turn, in conditions of interconnection of economic liberalization and national economy is extending weaknesses of international bank operations like chain reaction.
0 5 10 15 20
Fig. 1. Illegal (hidden) operations in some countries (for 2012, in trillion USD) [10]
Fig. 2. Illegal (hidden) financial and bank operations performed via offshore zones (2012, in relations to GDP, %) [10]
From the analysis we can see that all over the world in 2012 the indicator of performing illegal operations sharply rocketed. In particular we can see that if in 2002 this indicator accounted for 26 trillion USD, in 2007 it was 62 trillion USD and in 2012 this indicator amounted to trillion USD.
Significant increase of the volume of operations performed via banks offshore zones can be considered to be the issue of concern. In Hong Kong the relation of illegal operations to GDP accounts for 520 %, in the Netherlands this relation amounts to 490 %. During
700
400
200
6-month period of 2012 we can observe a sharp rise of the number of companies registered in offshore zones. This situation illustrates lack of the appropriate measures undertaken to reduce a negative impact of the world financial economic crisis.
Moreover, a sharp increase of derivatives makes a huge impact on the practice of performing international operations. In 2012 the total value of over-the-counter derivatives accounted for 290 trl. USD, stock exchange derivatives amounted to 300 trl. USD and global assets made 610 trl. USD.
610
480
300 300 290
- 1 i 1 1 i
bank deposits
securities
global assets
stock exchange derivatives
OTC derivatives
Fig. 3. Value of total assets
Growing number of these indicators results in increase of risks inherent to international operations. A comprehensive approach to the risks occurred in international banking operations enables to systematize these types. Among these risks a foreign exchange risk (currency risk) is considered to be the most important because since signing foreign trade or credit agreement and over the duration of the contract there is a possibility of the risk of foreign exchange loss because of the change of the exchange rate price in relation to the payment exchange rate. There are the following types of foreign exchange risk: the risk related to operations — the risk of bearing a loss or receiving a profit not in a full amount; the risk related to the balance (translation) — noncompliance of assets and liabilities stated in foreign exchange. The basis of foreign exchange risk consists of changes of the value of money obligations in the fixed period of time. The bank and its exporting customer can bear some loss because of the reduction of the exchange rate of the agreement, and, as a result, they receive the real value which is less that the value expected in the contract. Like the situation stated above, the bank — lender can bear the risk of non-getting back the equivalent of the loan temporarily given to the borrower. On the contrary, the increase of the loan exchange rate in relation to the national currency can raise the possibility of the foreign exchange risk for the bank. In both cases the national currency equivalent of the borrower at the same time can seem a rather small amount for counterparties signing the agreement. In case of operations between banks and customers, fluctuations of the exchange rates can bring profit to the one counterparty, but another one can bear loss at the same time. Foreign exchange risks can be dangerous for all participants of international bank operations. Foreign exchange risks of banks can occur in case of open exchange positions. Changes of the exchange rates make an impact on the result of the performance of banks engaged in implementing investments on different currencies and different countries. When the foreign exchange faces devaluation while implementing real settlements in national currency, an amount of capital placements can be lower than at the moment of placing investments, and, in turn, can lead to the loss.
in 2012 in trillion USD [11]
Sharp short-term and significant long-term fluctuations of exchange rates lead to the over-estimation or under-estimation of the foreign exchange in the national and global markets. This creates favourable opportunities for wide-spread speculation of foreign exchange.
If the bank possesses an open foreign exchange position, if liabilities and obligations on sold foreign exchange exceed assets and requirements, short-type risks can occur. On the contrary, if assets and requirements on sold foreign exchange exceed liabilities and obligations, long-type foreign exchange risks always happen.
At the time of counter-agreement execution as well as at the moment of buying foreign exchange previously sold and selling foreign exchange previously bought, and if the changes aren't favourable and beneficial for the bank, this bank can be subject to the risk. The bank buys foreign exchange in the amount which is less than the amount sold and pays the equivalent sum which amount is more than previously bought foreign exchange. Profit and loss are connected with the direction of forex change or with the currency position of the bank.
At the time of performing international credit operations banks can be subject to risk as a lender and a borrower. The bank getting a loan from abroad can face the following risks [9]:
• Foreign exchange (currency) risk;
• Low efficiency of international credit operations.
This risk can occur if the average term of the use of the total amount f the loan received in foreign exchange is much bigger than its total term. It depends on the term fixed in the agreement, use of the principal and its maturity and a grace period of servicing external debt.
• In case if the value of international credit is determined by the contract increases or if it grows as a result of being hidden, it can lead to profitability. This is connected with the possibility of reduction of the interest rates of the loan capital in the world market in relation to the rates determined in the contract and can occur due to the implementation of different commissions by lending foreign bank (negotiations, participation, management and accepting an amount of the loan as a reserve). This risk is connected with open elements of the
loan value: 1st degree security of the borrower, in particular, liquid assets, insuring unfavourable conditions by some insurance companies, demand for introducing reserve requirements to the volume of the loan. Some elements of the value of the international loan cannot be assessed by money, they can be very important in establishing supervision under the bank-borrower. External preference conditions of some international lenders are connected with hidden expenses and cannot make risks more expensive.
Credit risk is considered to be the most typical risk for the bank as an international lender. It can occur in case if a borrower doesn't accomplish his financial obligations in compliance with the contract completely and in time [6]. The bank which has extended an international loan can be subject to the risk of non-payment of the principal and interest by the borrower. Peculiarities of these obligations depend on the type of the international loan. These types can be the following: export-import loans, tratta (transfer bill), consortium/syndicated loan, financing the project, leasing, factoring, forfeiting, etc. [4].
Non-remittance of the international settlement resources implemented by banks, risk of non-payment (especially with applying in-cashment through open account without additional guarantees), foreign exchange risk, submitting false or fraudulent documents to banks, various export-import contracts on different sums of agreement are widely spread in the world practice [5].
Peculiarities of the market risk connected with international agreements of the banks include financing issues, for example, negative changes in the financial market, leading to possible losses. Market risks include interest rate risks, foreign exchange risks and stock risks [3]. Stock risks can occur when banks perform operations with securities and at that time their market quotations become unfavourable for the bank [3].
Liquidity risk happen if performing international operations the bank cannot execute its financial obligations for domestic and foreign customers and counterparties. Liquidity risks can lead to difficult consequnces like bankruptcy and possibility to charge the amount of financial obligation by the court house [8].
Legal risk can occur when the procedure of the international bank operation isn't in compliance with national legal regulators, requirements of international regulations and traditions and doesn't suit the terms of the contract between a domestic and a foreign customer or counterparty. This risk can also happen due to the mistakes made by bank employees while preparing documents for international operations of the bank. Losses can be also resulted because of existing law non-perfection [1].
Strategic risk can happen if to rely on non-accurate strategy while performing international operations without taking into account overall risks faced by the bank, non-correct determination of the perspectives of the bank's international activity and its foreign counterparties [8].
In international bank's activity the risk of reputation loss deserve a particular attention. This risk is considered to be the risk of losing reputation and trust and can appear in the form when the operations performed by the bank don't meet expectations ofresident and nonresident counterparties. It can also occur when the general public has a negative opinion about financial stability of the bank as well as professional skills and qualifications of the bank management and its employees. The risk of the reputation loss can negatively impact attraction of external debts and developing cooperation between foreign customers and counterparties.
In conditions of global expansion of operations with hidden capital, legalization of criminal income and terrorism financing
we cannot deny a possibility of entering these negative processes in international bank's operations and such kind of risk is dramatically rising.
Outflow of the capital from Russia in 2000-2008 accounted for 427 bln. USD. During 1990-2008 years 21-32 trl. USD were hidden from taxation in offshore zones. If in 2008 capital outflow accounted for 4-8 % to the GDP, in 2011 this indicator amounted to 12 %. According to the results of 2011 outflow from Russia kept 30-40 % of private assets in offshore countries. In the USA this indicator is equal to 2-3 %, in the European Union it amounts to 10 % [2]. In order to be aware of the risk of the liquidity loss as well as withdrawing a license from the bank by supervising authorities it is required to detect suspicious bank operations and inform them the agency for financial monitoring.
Nowadays one of the most widely-used methods of assessing these risks is the method of comparing open trade position with expected changes of the cost of assets formulating this position. No doubt, the accuracy and reliability of this method of risk assessment depends on how accurately and correctly price changes are forecasted. An experienced specialist who perfectly knows market laws and methods of technical analysis can make a reasonable conclusion about market rates and quotations. However, there are more factors which should be taken into consideration. The more factors influencing fluctuations of financial markets and leading to unexpected situations we take into account, the more important problem is raised. In turn, it is leading to the necessity of using the approach which enables to provide a more exact forecast of a big volume of operations and inherent market fluctuations. The sample of such kind of approach is the VaR method which enables to assess the value of the risk.
The concept of determining risk value cannot change the essence of methods assessing market risks. Therefore it is recommended to introduce additional restrictions to calculate the volume of probable loss. The restrictions can be the following:
• Maximal value of probable losses which can be faced by investors in the market;
• Probability of non-exceeding the maximal value of losses expected by the investor through confidence;
• Exceeding maximal losses expected by the investor which have been entirely unexpected during the period of time.
So we can make a conclusion that value at risk (VaR) denotes the maximal degree of the risk expected within an exact term on the portfolio placements during a certain period of time. According to the rule, while calculating VaR, the period of time can vary from 1 day to 10 days, and a reliable limits of this value fluctuates between 95-99 %.
The VaR can be calculated according to the following formula:
K = R2 -100%,
where:
q — quants' denoting a reliable limit, q for a reliable limit of 95 % is equal to1.65, of 99 % is equal to 2.33;
d. — denotes standard deviation for i asset;
OTP — open trade position (for i asset).
Moreover, in compliance with the recommendations of the Basel Committee on Bank supervision while calculating the VaR the following points should be taken into account:
• it is necessary to take into account at least 1 year retrospective data at calculating changes of the value of market prices;
• the period of maintaining this position consists of 10 days because keeping this position for 1 day has rather optimistic
peculiarities so closing this position even in the market of the high liquidity requires time. In case if the period of maintaining this position consists of 10 days in order to take into account raising degree of risks it is necessary to multiply daily standard deviation into the square root of10 or 3.16; • to provide additional protection for financially unstable cases occurred during the past time it is advisable to use a coordination multiplier which is equal to 3 (so-called "Basel" multiplier). In conclusion we can say that the VaR method widely used in assessing risks connected with international operations of banks has
the following advantages: its results are obviously seen, this method is scientifically-grounded and can be used at assessing different kinds of risks.
Nowadays the VaR method is considered to be the most common method used for assessing risks for participants of the banking system in western countries. European agencies are gradually paying more attention to the VaR method as the method used to supervise ban activity. Therefore in conditions of integration of the banking system of developing countries with the western countries' banking systems the importance of using VaR method in practice and market of Uzbekistan is significantly increasing.
References:
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Mayorova Elena Aleksandrovna, Plekhanov Russian University of Economics, Senior Lecturer, Department of Trade policy
Nikishin Alexander Fedorovich, associate professor, Department of Trade policy
Pankina Tatiana Viktorovna, associate professor, Department of Trade policy E-mail: [email protected]
Potential of the Internet network in formation of the assortment of the trade organizations
Abstract: Provision of availability to population of goods is the important social task of organizations of trade. But than population density is lower, the narrower is the offered assortment of goods to the consumers, and the higher are costs for organization of physical distribution with it. Use of e-commerce mechanisms serves to the solution of this task. Keywords: trade, retail trade, electronic commerce, electronic trading, range of trade, digital goods.
Retail is one of the industries with which the consumers directly interact. The organizations of retail carry out direct contact with population, mostly, determining quality of its life. It defines high social responsibility of trade organizations in modern economy. However, striving of trade organizations to optimize costs for goods movement leads to reduction of the proposed assortment, reducing possibilities of a consumer choice.
Now the lower is the population density, the narrower is the offered assortment of goods to the consumers, and the higher are costs for organization of physical distribution with it. It is being explained by the fact that, on one hand, cost of delivery of goods to the regions is higher and on another side probability of a purchase of goods by buyers is lower. Reduction of the level of prices on goods being sold is the important task of regional goods movement. Unfortunately, lower density of population of regions leads to the fact
that value of goods is dividing into a smaller number of people, which leads to increase of value of goods and hence to reduction of a breadth of assortment. Organization of a large quantity of regional decentralized goods connections is the more complex problem than use of hub system of goods supply. Efficiency of investment in creation of such a system is sufficiently high.
Requirements of buyers are the major factor determining a realized assortment of products. Use of e commerce mechanisms serves to the solution of this task.
Provision of availability to population of goods is the important social task of organizations of trade [1]. But in traditional trade, as was said above, high costs for goods movement are hampering resolution of the mentioned task.
Electronic trade is a modern direction of trade development. Development of electronic trading was in the first place determined
