BANKING RISK

MORGHAN STANLEY

Abstract:
This paper delves into the complexities of RISK control within the banking area, with a selected
recognition at the 2020 annual document launched with the help of Morghan Stanley. Through a
critical evaluation of monetary metrics and chance factors, it elucidates the various assets of
threat, the methodologies employed for their calculation, and the techniques adopted by using the
bank for danger mitigation. A massive part of the discussion revolves round operational risk, a
project confronted by many financial institutions in terms of assessment and analysis Of unique
interest is the framework used by Morghan Stanley to evaluate and adapt to the dynamic
regulatory panorama impacting the banking industry inside the United States. Additionally, the
paper endeavors to quantify fraud risks stemming from both internal and external actors driven
with the help of personal reasons. As certainly one of the most important financial establishments
globally, Morghan Stanley contends with a myriad of risks. Its capability to navigate these
challenges is critical now not most effective for its own success but additionally for the
prosperity of its shareholders. This necessitates the presence of an professional crew capable of
navigating the intricacies of the economy to persuade the financial institution towards endured
achievement.
Table of Contents
Chapter 1:.........................................................................................................................................1
Introduction:....................................................................................................................................1
Assets and liability committee:........................................................................................................1
Liquidity Risk:.................................................................................................................................4
Chapter 2:.........................................................................................................................................5
Literature:........................................................................................................................................5
Operation Risk:................................................................................................................................5
Fraud risk:........................................................................................................................................8
Fraud risk assessment framework:...................................................................................................9
1. Identification of Potential Fraud Risks and Plans:......................................................................9
2. Assessment of Likelihood of Predetermined Risks:....................................................................9
3.Assessment of Impact on Organization........................................................................................9
4. Identification of Potential Perpetrators:.......................................................................................9
5. Mapping Controls and Measures to Fraud Risks:........................................................................9
6. Evaluation of Effectiveness of Controls:.....................................................................................9
7. Response to Residual Risks.......................................................................................................10
Revised IRR:..................................................................................................................................10
References:.....................................................................................................................................11
Appendices:...................................................................................................................................11

Chapter 1:
Introduction:
Role of ALCOs:

1. Strategic Decision Making: ALCOs are responsible for making strategic decisions
regarding the bank's balance sheet, including setting interest rate risk and liquidity risk
tolerances, and defining risk management strategies to achieve these objectives.
 2. Risk Measurement and Monitoring: ALCOs use various quantitative and qualitative
techniques to measure, monitor, and evaluate interest rate and liquidity risk exposure
across different time horizons. This involves assessing the potential impact of changing
interest rates and liquidity conditions on the bank's earnings and capital.

3. Asset and Liability Management (ALM): ALCOs oversee the bank's ALM function,
ensuring that the composition and maturity profile of assets and liabilities align with the
bank's risk appetite and regulatory requirements. They may adjust the mix of assets and
liabilities to optimize the balance sheet structure in response to changing market
conditions.

4. Stress Testing and Scenario Analysis: ALCOs conduct stress tests and scenario analyses
to assess the bank's resilience to adverse market conditions, such as sudden interest rate
movements or liquidity shocks. These exercises help identify vulnerabilities and evaluate
the effectiveness of risk management strategies.

5. Communication and Reporting: ALCOs facilitate communication and coordination

among different departments within the bank, including risk management, treasury,
finance, and business lines. They provide regular reports to senior management and the
board of directors on the bank's risk profile, key metrics, and performance against
established targets.

Measurement Techniques:

1. Gap Analysis: ALCOs use gap analysis to measure the difference (or gap) between the
repricing or maturity characteristics of interest-sensitive assets and liabilities within
predefined time buckets. Positive gap indicates higher interest rate risk exposure, while
negative gap suggests higher liquidity risk exposure.

1. Gap Analysis:

Data:

• Short-term assets: $100 million

 • Short-term liabilities: $80 million

• Medium-term assets: $120 million

• Medium-term liabilities: $100 million

• Long-term assets: $150 million

• Long-term liabilities: $130 million

Calculation:

Short-term gap = Short-term assets - Short-term liabilities = $100M - $80M = $20

million

Medium-term gap = Medium-term assets - Medium-term liabilities = $120M - $100M =

$20 million

Long-term gap = Long-term assets - Long-term liabilities = $150M - $130M = $20

million

Interpretation: A positive gap in each time bucket indicates that the bank's interest-
sensitive assets exceed its interest-sensitive liabilities, implying exposure to interest rate
risk.

2. Duration Analysis: Duration measures the sensitivity of the bank's assets, liabilities, and
equity to changes in interest rates. ALCOs calculate the duration gap to assess the overall
interest rate risk position and manage the bank's exposure accordingly.

 Asset duration: 5 years

 Liability duration: 4 years

Interpretation: The higher duration of assets compared to liabilities suggests that the
bank's assets are more sensitive to changes in interest rates than its liabilities

3. Liquidity Coverage Ratio (LCR): ALCOs calculate the LCR, which measures the
bank's ability to withstand short-term liquidity shocks by comparing high-quality liquid
assets (HQLA) with net cash outflows over a 30-day period. This ratio helps ensure the
bank maintains adequate liquidity buffers to meet its obligations under stress conditions.
 4. Net Interest Income (NII) Simulation: ALCOs conduct NII simulations to estimate the
impact of changes in interest rates on the bank's net interest income. By varying interest
rate scenarios and analyzing the resulting NII, ALCOs can assess the sensitivity of
earnings to interest rate movements and implement hedging strategies as necessary.

5. Liquidity Risk Metrics: ALCOs monitor various liquidity risk metrics, including
funding concentration, funding gaps, and funding duration, to assess the bank's liquidity
position and potential vulnerabilities. They may also calculate liquidity risk premiums to
incentivize appropriate funding behavior and liquidity management practices.

 High-quality liquid assets (HQLA): $200 million

 Net cash outflows over 30 days: $150 million

Calculation:

LCR = HQLA / Net cash outflows = $200M / $150M = 1.33

Interpretation: An LCR ratio of 1.33 indicates that the bank has 33% more high-quality
liquid assets than its expected cash outflows over the next 30 days, suggesting a
comfortable liquidity buffer.

ALCOs play a critical role in measuring and managing interest rate and liquidity risk within
banks by making strategic decisions, overseeing ALM activities, conducting risk measurement
and stress testing, and communicating with stakeholders. They employ a range of measurement
techniques, including gap analysis, duration analysis, LCR, NII simulation, and liquidity risk
metrics, to assess risk exposure and ensure effective risk management practices.

Chapter 2:
Literature:
Operation Risk:
Operational risk (OR), often considered the residual risk after quantifying all other potential
risks, has evolved from a minimalistic concern to a significant challenge in contemporary
business landscapes. Historically, its significance may have been downplayed, but as sectors
have grown in complexity, operational failures have emerged as substantial threats, leading to
loss of business value. This risk, however, lacks a singular, universally accepted definition, as
each organization categorizes it uniquely based on its operational structure and context. Despite
this variability, operational risk commonly encompasses failures within internal processes,
people, systems, or external events.
One of the key challenges in managing operational risk lies in its qualitative nature, which
contrasts with the quantitative data typically used in risk assessment. Despite this hurdle, banks
and financial institutions are compelled to conduct rigorous assessments to ensure preparedness
for emergencies stemming from operational failures. Operational risk is often generalized into
three primary categories: technical, human, and external risks. Technical risks pertain to failures
within systems or technology infrastructure, while human risks involve errors or misconduct by
individuals within the organization. External risks, on the other hand, are associated with events
beyond the organization's control, such as natural disasters or regulatory changes.
To provide a standardized framework for addressing operational risk, the Basel Committee
introduced a classification system comprising seven standard operational risk areas. These areas
aim to unify risk assessment practices across organizations, facilitating a more systematic
approach to identifying, assessing, and mitigating operational risks. By categorizing operational
risks into distinct classes, organizations can better prioritize their risk management efforts and
develop strategies to mitigate potential threats effectively. Thus, despite its qualitative nature and
inherent complexities, operational risk management remains a critical aspect of ensuring the
resilience and stability of financial institutions in an increasingly dynamic and uncertain
operating environment. (Abdul-Rahman 2018)

Figure 1.2 Common operation risks (Alaba et al., 2018).

Quantifying operational risk poses a substantial project because of its qualitative nature and the
involvement of external activities. Companies regularly motel to bureaucratic techniques,
formalizing every component of operations, which could exacerbate the problem. For example,
mandating personnel to sign inside and out for bathroom breaks may additionally inadvertently
increase operational risk via pressuring key personnel and leading to resignations. Despite the
complexities involved, dependable dimension of operational risk may be done thru various
methods. The following diagram illustrates the formulas used to calculate the operational threat
faced with the help of banks

Figure operation risk formula:

Morghan Stanley implements a number of strategies for assessing its risks, which are outlined in
its economic documentation. The company's approach to risk management is guided by its global
Compliance Enterprise Policy and Operational Risk Management - Enterprise Policy. These
policies establish criteria for reporting compliance and operational risk data to executive
management and the board or relevant board-level committees. This facilitates the responsibility
of Global Compliance and Operational Risk in providing independent oversight of the company's
compliance and operational risk management.

The Audit Committee and the ERC oversee compliance risk, while the oversight of operational
risk falls under the remit of the ERC. A key operational risk facing the company is data security,
especially cyber security. Cybersecurity risk includes exposure to service failures, interruptions
or security breaches, including malicious technological attacks. These risks may compromise the
confidentiality, availability or integrity of the company's operations, systems or data, as well as
those of third parties such as financial data aggregators and downstream service providers.

To address data security risk, Morghan Stanley maintains internal policies governing a
comprehensive data security program. This program is structured to enable preventive, detective
and responsive measures to mitigate data and cyber security risks. Oversight of cybersecurity and
data security risks is provided by the Board of Directors and the ERC, with the global
information security team overseeing day-to-day implementation.

The financial documentation contains data derived from Morghan Stanley's 2020 report on its
risk exposure and calculation methodology. This figure represents the bank's estimate of the
value of each risk, measured in billions of dollars, and compares it to values from the previous
year. It presents two estimation approaches: one based on standard procedures and the other
based on advanced techniques. This analysis makes it easy to quantify the potential losses that
the company may face in the current fiscal year. By collecting and analyzing these risk value
estimates, Morghan Stanley gains insight into the financial implications of its risk exposure,
enabling informed decisions to effectively mitigate and manage those risks. ( Lynch, B. M
2017).

Figure 1.4 quantitative risk:

Fraud risk:
The banking system in the United States has roots going as far back as the 1790s, coinciding
with the founding of the country. Over the centuries it has evolved into a complex form,
supported by numerous legislative acts and monetary opportunities. The regulations governing
the sector have undergone numerous amendments and creations resulting from a dynamic and
challenging regulatory environment to deal with major economic downturns such as the Great
Depression, the subprime mortgage disaster and the Great Recession further shaping banking
policy. (Lynch, B. M. 2017).
Assessing the chances of fraud in the banking industry is necessary due to the increasing
incidence of fraud worldwide, especially in North America. Research shows that these cases cost
up to $1 per year. Four billion annually, with advances in the creation and comprehensive fraud
strategies Morghan Stanley identifies fraud as one of its top risks in its 2020 file, highlighting the
critical nature of addressing the potential for fraud
A fundamental operational risk passing through banks is the security of facts, especially cyber.
This chance lies in publicity that spoils or interrupts service, security breaches and malicious
technological attacks affecting the confidentiality, availability or integrity of operations,
structures or. The management of threats to the security of statistics requires complete internal
rules governing preventive, detective and reaction measures.
Given the persistent risk of fraud, a robust fraud risk assessment framework is essential for banks
to effectively control and capture day-to-day risks. This framework must be tailored to the
specific challenges and regulatory environment of the banking business in the United States.
Drawing on the fraud theory literature will inform the development of a comprehensive
evaluation framework for effective fraud risk mitigation. ( Lynch, B. M 2017).
Fraud risk assessment framework:
Stanley Morgan, the following framework for fraud threat control is proposed, encompassing
tailor-made steps and methods to successfully mitigate risks:
1. Identification of Potential Fraud Risks and Plans: Stanley Morgan identifies and
documents capability fraud risks specific to its operations and implements plans to deal with
them.
2. Assessment of Likelihood of Predetermined Risks: The likelihood of identified fraud
dangers is classified thru statistics analysis, inspecting each the chance of occurrence and beyond
frequency of similar dangers.
3.Assessment of Impact on Organization: The capability impact of identified fraud dangers on
Stanley Morgan is evaluated, considering both financial and non-economic implications. A
descriptor scale is used to categorize the impact, which include catastrophic, principal, moderate,
minor, and incidental.
4. Identification of Potential Perpetrators: Stanley Morgan identifies employees and
individuals who are most in all likelihood to dedicate fraud thru records series techniques like
workshops, brainstorming sessions, and undercover investigations.
5. Mapping Controls and Measures to Fraud Risks: Controls and measures are mapped to
applicable fraud risks to mitigate their prevalence or effect correctly.
6. Evaluation of Effectiveness of Controls: The effectiveness and performance of controls put
in region are assessed via ongoing monitoring and evaluation, ensuring they adequately cope
with identified fraud dangers.
7. Response to Residual Risks: Residual fraud risks that stay unsolved or unmitigated are
addressed thru the development of preferred controls or extra measures.
Stanley Morgan utilizes statistics collected from inner resources, external sources, and real fraud
instances to prioritize and address high-rating fraud dangers. An outside nameless reporting
machine is mounted to inspire reporting of fraud instances, complemented via normal meetings
to talk about capability pressures, incentives, and possibilities main to fraud. Compliance with
regulatory standards, together with those set with the help of the Federal Deposit Insurance
Commission (FDIC), is ensured to mitigate criminal and regulatory dangers related to fraud.
Assessment of the probability and impact of fraud dangers is carried out using quantitative and
qualitative facts evaluation strategies, knowledgeable through inner guidelines and enterprise
requirements. An instance of a comprehensive fraud risk evaluation framework is illustrated
under, tailored to the specific needs and operations of Stanley Morgan. Through diligent
implementation and continuous refinement of this framework, Stanley Morgan efficiently
manages fraud risks and minimizes their negative results on its operations and stakeholders

Principle / Compliance Description

Adheres to regulations set forth by governmental bodies such as
Regulatory Compliance the SEC, FINRA, and others.
Maintains a comprehensive code of ethics outlining expected
Code of Ethics behavior and conduct for employees.
Employs robust practices to identify, assess, and mitigate various
Risk Management risks including market, credit, and operational risks.
Strict protocols and procedures to safeguard client information and
Client Confidentiality maintain confidentiality.
Anti-Money Laundering (AML) Compliance with AML and KYC regulations to prevent illicit
and KYC Regulations activities such as money laundering and terrorist financing.
Maintains a strong system of governance including oversight by a
Corporate Governance board of directors.
Conducts business fairly and transparently, providing clear
Fair and Transparent Practices information about products, services, fees, and risks.
Prioritizes initiatives to create a more equitable workplace and
Diversity and Inclusion better serve a diverse client base.
Conclusion:
This paper provides an in-depth analysis of risk management in the banking sector, highlighting
insights from the Stanley Morgan 2020 Annual Report Summary Through a thorough
examination of financial metrics and risks it focuses risk outcomes, methods of analyzing them
in evaluation And in analytics, it is a formidable challenge faced by many financial institutions
Of particular interest is Stanley-Morgan’s strategy to navigate and adapt to the ever-changing
regulatory environment affecting the banking industry in the United States This strategy provides
valuable insight into the bank’s approach handles legislative changes and ensures compliance
with legislation while it remains in effect. In conclusion, this study highlights the challenges of
risk management in the banking industry and emphasizes the importance of developing robust
policies and procedures to effectively mitigate risk. By evolving and adapting to regulatory
developments, robust risk assessments provide valuable insights that can inform future risk
management practices and contribute to the resilience and sustainability of financial institutions
exist permanently in a rapidly evolving environment

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Morghan Stanley. (n.d.). Annual reports & proxy statements. Retrieved April 20, 2021, from
https://investor.bankofamerica.com/annual-reports-and-proxy-statements

Drechsler, I., Savov, A., & Schnabl, P. (2018). Banking on deposits: Maturity transformation
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Ghenimi, A., Chaibi, H., & Omri, M. A. B. (2017). The effects of liquidity risk and credit risk on
bank stability: Evidence from the MENA region. Borsa Istanbul Review, 17(4), 238-248. Link

Lynch, B. M., & Morgan, C. L. J. (2017). Morghan Stanley, NA. Link

Mock, T. J., Srivastava, R. P., & Wright, A. M. (2017). Fraud risk assessment using the fraud risk
model as a decision help. Journal of emerging technologies in accounting, 14(1), 37-56. Link

Singh, N. P., & Hong, P. C. (2020). Impact of strategic and operational risk management
practices on firm performance: An empirical investigation. European Management Journal,
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Appendices: