Latin america training and development center

Latin america training and development center

Risk Management

05/15/96

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INTRODUCTION

Introduction: Risk Management Module vii

Overview vii

Introduction to Risk Management xi

Overview xi

Objectives xi

Topics xii

The Workbook xii

UNIT 1: Risk Categories

Introduction 1-1 Unit Objectives 1-1 Major Risk Categories 1-2 Credit Risk 1-3

Lending Risk 1-4

Direct Lending Risk 1-4 Contingent Lending Risk 1-4

Issuer Risk 1-5 Counterparty Risk 1-6

Pre-settlement Risk 1-6 Settlement Risk 1-7

Clearing Risk 1-8 Summary — Credit Risk 1-8 Market Risk 1-9

Price Risk 1-9

Interest Rates 1-9 Commodity Prices 1-10 Volatility in Options 1-11

UNIT 1: Risk Categories (Continued)

Funding Liquidity Risk 1-12 Trading Liquidity Risk 1-12

Market Risk in Credit-related Products 1-12

Issuer Risk 1-13 Pre-settlement / Settlement Risk 1-13

Summary — Market Risk 1-13Other Major Risks 1-14

Equity Risk 1-15Country Risk 1-15

Political (Sovereign) Risk 1-16 Convertibility Risk 1-16 Transfer Risk 1-16

Fiduciary Risk 1-17Documentation Risk 1-18Disclosure Risk 1-18Legal and Regulatory Risk 1-19Systems Risk 1-19Summary — Other Major Risks 1-20Examples of Product-related Risks 1-21

Trade Finance 1-21International Securities Services — Custody 1-22

Operational Risk: Settlement 1-23 Credit Risk: Settlement 1-23 Operational Risk: Post-settlement 1-23

Unit Summary 1-24Progress Check 1 1-25

UNIT 2: Citibank's Risk Management Organization

Introduction 2-1

UNIT 2: Citibank's Risk Management Organization (Continued)

Credit Policy Committee (CPC) 2-4Market Risk Policy Committee (MRPC) 2-6

Summary  Management Committee, CPC, MRPC 2-8Line Management 2-8

Credit Risk Management 2-9

Senior Credit Officers 2-11 Senior Securities Officers 2-11

Market Risk Management 2-12Summary — Line Management 2-12Business Risk Review (BRR) 2-13

Portfolio Risk Assessment 2-14Process Assessment 2-14Unit Summary 2-15Progress Check 2 2-17

Unit 3: Managing Credit Risk in Citibank

Introduction 3-1Unit Objectives 3-1Overview of the Credit Process 3-2

Credit Management Model 3-2Phase I: Portfolio Strategy and Planning 3-4

Concentration Limits 3-5Credit Policies 3-6Business Strategy 3-6Target Market and Risk Acceptance Criteria 3-7Line Management Responsibility 3-8Phase II: Credit Origination and Maintenance 3-9

Origination 3-9Evaluation 3-9Approval 3-10

UNIT 3: Managing Credit Risk in Citibank (Continued)

Problem Recognition 3-12 Remedial Management 3-13

Citibank’s Credit Classification System 3-15Distribution to Investors 3-17Summary — Phases I and II 3-18Phase III: Performance Assessment and Reporting 3-19

Portfolio Monitoring 3-19

Relationship 3-19 Customer (Obligor) 3-19 Facility 3-20

BRR Portfolio and Process Reviews 3-21

I Business Strategy, Staffing, and Organization 3-22

II Risk Origination and Structuring 3-22 III Structuring and Distribution 3-23

IV Transaction Monitoring, Maintenance, and Collection 3-23

V Portfolio Management 3-24

Summary 3-24Progress Check 3.1 3-29Portfolio Management 3-39

Objectives of a Portfolio Management System 3-40Risk Ratings 3-40Loss Norms 3-41Citibank's Risk Ratings 3-42Customer (Obligor) Risk Ratings 3-45Facility Risk Ratings 3-45Risk-Adjusted Earnings 3-46Summary 3-47Progress Check 3.2 3-49

UNIT 4: Managing Market Risk in Citibank

Introduction 4-1Unit Objectives 4-1Overview of the Market Risk Process 4-2

Managing Price Risk 4-2Managing Liquidity Risk 4-4

Funding Liquidity Risk 4-5 Trading Liquidity Risk 4-6

Market Risk Management Organization 4-6

MRPC 4-7Regional Treasurer 4-7Country Treasurer 4-8ALCO 4-8Risk Management Process 4-9

Risk Identification 4-10Risk Measurement 4-10Evaluation of Risk Management Capacity 4-11Limit Setting 4-11Ongoing Validation 4-12Limit Approval Process 4-12

Price Risk Limits 4-12Liquidity Risk Limits 4-13Summary 4-13Progress Check 4 4-17

Appendix

Glossary G-1

Index

Index I-1

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This self-instruction workbook provides an overview of risk management in Citibank

and prepares you for the more advanced risk concepts presented in the Credit Risk

Management Basics and Market Risk workbooks When you complete the Introduction

to Risk Management, you will be familiar with the risk management vocabulary, the

structure of the risk management organization, the basic credit process, and the market riskmanagement concept in use at Citibank The information in this workbook will be

a valuable reference as you study the other workbooks

OBJECTIVES

When you complete this workbook, you will be able to:

+ Identify the major categories of risk associated with a bank activity

or product

+ Recognize the development, implementation and review process for

risk management policies in the bank

+ Define the roles and responsibilities of all groups involved in risk

management+ Identify the phases of the credit risk management process

+ Understand the fundamental issues of market risk management

+ Identify other major categories of risk related to bank activities

and products

This workbook is divided into four units:

Unit 1: Risk Categories

Unit 2: Citibank's Risk Management Organization

Unit 3: Managing Credit Risk in Citibank

Unit 4: Managing Market Risk in Citibank

THE WORKBOOK

This workbook is designed to give you complete control over your own learning The

material is divided into workable sections, each containing everything you need to masterthe content You can move through the workbook at your own pace and go back to reviewideas that you didn’t completely understand the first time Each unit contains:

lesson that you are expected to learn

sections explain the content in detail

appear in bold face the first time they appear

in the text

Instructional

highlight significant points in the lesson

] Progress Checks – which do exactly what they say — check your

progress Appropriate questions arepresented at the end of each unit, or withinthe unit in some cases You will not be graded

on these by anyone else; they are to help youevaluate your progress Each set of questions

is followed by an Answer Key If you have anincorrect answer, we encourage you to reviewthe corresponding text and find out why youmade an error

In addition to these unit elements, the workbook includes:

in the workbook

workbook

Since this is a self-instruction workbook, your progress will not be supervised We

expect you to complete it to the best of your ability and at your own speed You are

ready to begin!

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Risk management is a necessary element in achieving Citibank's objectives Risk-takingactivities are intended to increase earnings However, they can result in a loss of revenue,and may even damage the bank's reputation It is important to understand the risks we takeand to manage them systematically In this unit, you will learn the major categories of riskthat affect our business and the common risk vocabulary that allows us to communicateabout risk

UNIT OBJECTIVES

When you complete this unit, you will be able to:

n Identify the major categories of risk in banking

n Identify specific types of risk which fall into each category

n Match some types of banking activities or products with their predominantrisk categories

MAJOR RISK CATEGORIES

A knowledge of the major risk categories and an ability to identify,assess, and control the risks that are inherent in transactions areessential prerequisites for developing an effective risk managementsystem In this unit, we will introduce the major categories of risk, thetypes of risk in each category, and certain risks that are inherent insome banking activities The risks are grouped as follows:

n Credit Risk

n Market Risk

n Other Major Risks

Figure 1.1 illustrates these risk categories with some of the specificrisks that are associated with each category This list does not includeall possible risks associated with the bank's business Other normalrisks found in every business activity include operations and

technology, legal, tax, and human resources These, too, must beidentified and managed by the responsible Line Manager

Figure 1.1: Major categories and sub-categories of risk

CREDIT RISK

Credit risk is the risk that financial obligations to Citibank will not

be paid on time and in full as expected or contracted, resulting in afinancial loss for the bank Credit risk is a customer-related riskbecause the dimension of the risk depends on the customer'swillingness and ability to fulfill all obligations to the bank Thereare six types of credit risk:

n Direct lending risk

n Contingent lending risk

n Issuer risk

n Counterparty pre-settlement risk

n Counterparty settlement risk

Lending risk is associated with extensions of credit and/or

credit-sensitive products, such as loans and overdrafts, where the bank bears thefull risk for the entire life of the transaction There are two types oflending risk: direct and contingent

Direct Lending Risk

Direct lending risk is the risk that actual customer obligations will

not be settled on time Direct lending risk occurs in products rangingfrom loans and overdrafts to credit cards and residential mortgages Itexists for the entire life of the transaction

Contingent Lending Risk

Contingent lending risk is the risk that potential customer

obligations will become actual obligations and will not be settled ontime Contingent lending risk occurs in such products as letters ofcredit, and guarantees It exists for the entire life of the transaction

Example Let's look at an example that illustrates contingent lending risk ABC, Inc.,

a government-owned oil company, contracts with LMN Builders, Inc toconstruct an oil refinery in that country As part of the contract, ABC

demands that LMN obtain a letter of credit from its bank with ABC asbeneficiary The letter of credit states that upon the first written demandfrom ABC indicating that work has not been performed according to thecontract, the bank will pay ABC Up to this point, the obligation is a

contingent risk for the bank – it only has to pay if ABC makes aclaim.Once the bank pays ABC, then the obligation becomes

a loan to LMN which LMN is expected to repay.Although LMN

indemnifies the bank against such payment, the bank has a direct lendingrisk that LMN will not pay

Issuer Risk

Associated with

underwriting and

distribution

Issuer risk occurs in underwriting and distribution activities when the

bank commits to purchase a security or other debt instrument from anissuer or seller and there is a risk that the instrument cannot be soldwithin a predetermined holding period to an investor or purchaser Ifthis happens, the bank as the holder of the instrument

is exposed to direct lending risk and unintended price risk.

Issuer risk is the risk that the market value of a security or other debtinstrument that the bank intends to hold for a short period of time maychange when the perceived or actual credit standing of the issuerchanges, thereby exposing the bank to a financial loss Issuer risk isinterrelated with price risk (See page 1-7)

For example, let's look at a situation that could occur in the US.

Suppose that BigShop needs financing, and Midtown Bank agrees tounderwrite a fixed-rate mortgage Midtown does not intend to hold themortgage on its books but, instead, plans to sell the mortgage within

30 days to investors.In this situation, Midtown first has price risk,which is the risk that interest rates will rise before the bank sells thebonds If interest rates rise,the value of the fixed-rate bonds will dropand Midtown will suffer the loss.Second, Midtown has credit risk,which is the risk that the perceived or actual credit standing ofBigShop will deteriorate before the bank sells the bonds If BigShop'scredit standing deteriorates, interest rates will rise only for BigShop.The effect on the value of those bonds and the P & L of Midtown Bankwill be the same as if interest rates in general had risen in the

Pre-settlement risk is the risk that a counterparty may default on a

contractual obligation to the bank before settlement date of thecontract Pre-settlement risk is measured in terms of the currenteconomic cost to replace the defaulted contract with anothercustomer (known as "current mark-to-market") plus the possibleincrease in the economic replacement cost due to future marketvolatility (known as the "maximum likely increase in value")

When a counterparty defaults on a contract obligation during thecontract before the settlement or maturity date, the bank must findanother counterparty at the current market rate The bank is exposed topossible adverse price fluctuations between the contract price and themarket price on the date of default If the prevailing market rate is less

As an example, let's assume that Bank XYZ needs to buy US dollarsforward 90 days at a rate of 1US$ = Yen 120 Forty-five days into thecontract, the seller informs Bank XYZ that she has declared

bankruptcy Bank XYZ must buy the dollars from a new seller at thecurrent market rate of 1US$ = Yen 130 The bank experiences a loss

of 10 Yen per US$ on the transaction

Pre-settlement risk belongs to the family of credit risk because theprimary consideration is the creditworthiness of the counterparty —the judgment of counterparty creditworthiness is a credit issue

However, the size, or level, of pre-settlement risk is calculated based

on the likely expected change in market prices Therefore, the

judgment of credit risk factors is a market risk issue.

Settlement risk occurs on the maturity date when the bank

simultaneously exchanges funds with a counterparty for the same valuedate and cannot verify that payment has been received until after thebank's side of the transaction has been paid or delivered In today'sinternational banking environment, the different time zones betweencountries make it difficult to achieve a simultaneous exchangebetween counterparties

The risk is that we deliver our side of the transaction but do notreceive delivery and, therefore, are exposed to direct lending risk Inthis situation, at least 100% of the principal amount is at risk The riskmay be larger than 100% if, in addition, there has been an adverseprice fluctuation for us between the contract price and the marketprice

Suppose Bank XYZ delivers the Yen at maturity of the forwardcontract Due to time zone differences between Japan, where theYen have to be paid, and New York, where the US dollars are to bereceived, Bank XYZ experiences a settlement risk (at least 100%)for a period of 12 hours longer than normal

In this case, the risk is more than 100% because the market price for1US$ has moved from 120 to 130 Yen before the contract is settled.

If the counterparty fails to deliver the dollars, Bank XYZ will have toreplace the dollars (100% of the principal) at the higher rate

Therefore, the risk is actually more than 100%

Clearing Risk

Clearing risk is the possibility that the bank may not be reimbursed

on the same value date for payments that are made on behalf ofcustomers Clearing risk occurs when the bank acts on a customer'sinstructions to transfer funds before being reimbursed

Summary — Credit Risk

Credit risk is a customer-focused risk related to a customer's

fulfillment of financial obligations to the bank The size of issuer risk

and pre-settlement risk is linked to market risk Likewise, credit riskincorporates, or is closely linked with many other risks which must berecognized and dimensioned

In contrast to credit risk management, which focuses on the customer,

market risk management focuses on market prices and liquidity In

the next section, we will discuss three market factors that give rise to

price risk We will also define the two types of liquidity risk.

The yield curve represents the relationship between interest rates

(yield) and time to maturity Interest rate fluctuations affect the value

of all interest rate-sensitive positions Some positions are more

sensitive to the level of interest rates and some are more sensitive to the differential between rates.*

n Changes in the level of the yield curve for a specific instrument

affect interest rate level sensitive positions.

n Changes in the spread between yield curves for two differentinstruments with the same maturity, or for two differentmaturities in the same instrument, affect interest rate

differential sensitive positions.

*For details on yield curve and interest rate level and interest rate

differential-sensitive positions, see the Market Risk Management

A net position is the difference between assets plus any unliquidated

purchases on one side and liabilities plus any unliquidated sales on theother side in a given commodity

Assets + unliquidated purchases

- Liabilities + unliquidated sales = Net Position

Net FX position A foreign currency net position is overbought when assets plus

unliquidated purchases in a currency exceed liabilities plusunliquidated sales in the same currency; a net position is oversoldwhen liabilities plus unliquidated sales exceed assets plus unliquidatedpurchases Net position risk is the risk that there will

be adverse fluctuations in currency values when we hold a netoverbought or net oversold position Currency fluctuations aretypically influenced by economic and/or political events in the world

Volatility in Options

Affects the value

of an option

Volatility in options is a market-focused risk associated with the

magnitude of expected changes in the market price of the "underlying"

to which the option relates Higher expected volatility increases thevalue of an option and lower expected volatility decreases the value of

an option

The model used to calculate an option premium requires fivevariables: strike price, market price, time to maturity, money marketinterest rate, and volatility of the price of the underlying The first fourvariables are known The only unknown variable is volatility, whichreflects the market's estimate of future movements in the price of theunderlying Since four variables are known and one (volatility) is notknown, we can see why volatility in options is an independent market

price and, therefore, trading options is trading volatility.

Technically, volatility is defined as the standard deviation of expectedchange in the price of the underlying expressed in percent per annum

In other words, volatility relates to the likely trading range of anoption's price given the uncertainty of price movements of theunderlying

Future estimated volatility may be derived from options-impliedvolatility, historical data on price movements, or reasonedmanagement judgment

Liquidity Risk

Liquidity risk is the risk that the bank may be unable to meet itsfinancial commitments to customers or other market participants.Liquidity exposures may arise in both funding and trading activities

Funding Liquidity Risk

Inability to

meet obligations

when due

Funding liquidity risk is the risk that funds will not be available to

meet financial commitments when they are contractually due

For example, Bank A borrows $1 million for 30 days from Bank B andlends it to Bank C for 90 days After 30 days, Bank A has to repay theborrowed funds to Bank B or borrow again for another 30- or 60-dayperiod Bank A's risk is that it will be unable to renew the 30-dayborrowing to match the remaining 60-day period of the loan to Bank Cand, therefore, will not have the available cash flow to repay the funds

to Bank B

The monitoring of funding liquidity also tracks the availablity of funds

to take advantage of attractive business opportunities

Trading Liquidity Risk

Inability to

liquidate a

position to meet

funding needs

Trading liquidity risk is the risk that the bank will not be able to

instantly liquidate price risk positions without changing market prices,attracting the attention of other market participants, or compromising

on counterparty quality The inability to liquidate

a position quickly may impair funding liquidity or cause losses insituations where we have a substantial price risk position that cannot

be liquidated before the market price changes

Market Risk in Credit-related Products

There are two businesses belonging to the family of credit risk inwhich the size of the risk is largely determined by changes in marketprices These two businesses are underwriting, which generates issuerrisk, and distant value date products (forwards, swaps, and purchasedoptions) which generate pre-settlement and settlement counterpartyrisk

Issuer Risk

Issuer risk in underwriting activities involves market risk in addition tocredit risk There is a risk that market prices will move against usbetween the time we agree to purchase and actually purchase an equity

or debt instrument There is also a risk that market prices will moveagainst us while we hold an instrument or between the time we agree

to sell and the time we actually deliver the instrument

Pre-settlement / Settlement Risk

As we said in the counterparty risk section, pre-settlement /settlement risk occurs when an adverse market rate change occursafter a distant date transaction has been agreed upon Specifically, weare at risk if the change in the market rate results in a situation wherethe contract rate is more favorable to us than the prevailing marketrate Since the change in the market rate causes the pre-settlement /

settlement risk, the determination of the size of this risk is a market

risk issue

In underwriting as well as distant-date trading, the approval of thecounterparty and the extent to which the bank wishes to extend credit

to such parties is exclusively a question of credit risk

Summary — Market Risk

Market risk is made up of two elements: price risk and liquidity risk.Price risk is the risk associated with changes in market factors thataffect the value of all positions These factors include interest rates,commodity prices, and volatility in options

Liquidity risk is the risk that Citibank will not be able to meet financialcommitments to customers or other market participants when they aredue There are two types of liquidity risk Funding liquidity risk is therisk that the bank will not have the funds available to fulfill its financialobligations Trading liquidity risk is the risk that the bank will beunable to liquidate assets or will have

to liquidate at a loss for funding purposes

Whenever market risk is assumed, the size of this risk must bedimensioned and related to the expected revenues in order to assure

a satisfactory risk / return ratio

Even though issuer risk and pre-settlement / settlement risk wereintroduced as credit risks, both types of risk have substantial marketrisk components — the size of these risks depends on changes inmarket prices

In addition to credit risk and market risk, other major risks associatedwith the bank's activities must be managed In the next section, we willdiscuss some of these risks

OTHER MAJOR RISKS

Other major risks that must be identified and managed include:

In the remainder of this unit, we will describe each of these riskcategories.

Equity Risk

Risk of fluctuation

in value of

equities

Equity risk occurs when the bank invests in, holds, or receives equity,

equity-like securities, or other junior securities in non-affiliatedentities These securities include instruments such as common shares,preferred shares, and related derivative instruments such as warrants,stock options, calls, and stock index futures

For example, Builders, Inc decides to issue shares of stock and asksBank XYZ to manage the underwriting of these shares Many sharesare sold to other investors, but Bank XYZ keeps a portion of them and,thus, becomes a shareholder in Builders, Inc If Builders does well, thevalue of the shares may increase; but if the company experiencesadverse business conditions, the value of the shares may decrease

XYZ, along with the other shareholders, is risking a fluctuation in thevalue of the stock

Country Risk Country risk is a broad risk category that includes political risk,

convertibility risk (also known as cross-border risk), and transfer risk

Political (Sovereign) Risk

Government

actions or

independent

events

Political risk is the risk that the actions of a sovereign government (such

as nationalization or expropriation) or independent events (such as war,riots, or civil commotion) may affect the ability of customers in thatcountry to meet their obligations to Citibank Nationalization orexpropriation risk exists when a government action deprives a borrower

of access to significant assets, or prevents the borrower from operatingall or part of its business

For example, when Citibank in Brazil advances local currency to atextile firm in Brazil, Citibank has credit risk  the risk that thetextile firm (borrower) will not generate sufficient funds to repay thedebt However, when Citibank in London advances pounds to the sametextile firm in Brazil, Citibank has an added risk Even if the Braziliantextile firm generates enough funds in local currency, there is still therisk that the Central Bank of Brazil may prevent the conversion oflocal currency into pounds to service the debt in London

Even if the Brazilian textile firm generates enough funds in localcurrency and can convert them into pounds, there is still the risk that theCentral Bank of Brazil may prevent the transfer of converted funds toLondon to service the claim.

Fiduciary Risk

Acting on

behalf of a

third party

Fiduciary risk occurs when the bank is charged with the responsibility

of acting as a trustee for any third party The risk is reduced by having

a trust agreement that clearly defines our duties and responsibilities andspecifies when we may be exposed to potential or real conflicts ofinterest

Whenever Citibank acts primarily for the benefit of a third party, it isacting in a fiduciary capacity For example, the bank may serve as aninvestment advisor or portfolio manager of an account In thatcapacity, it may be authorized to select the securities or otherproperties that should be purchased, sold, or retained Some of the riskfactors inherent in fiduciary responsibility include:

n Failure to establish a clear agreement in the documentation,which could result in the bank being charged with inappropriateconduct

n Failure to disclose all relevant information, which could result in

a client charging the bank with breach of fiduciary duty

n An actual or potential conflict between the bank's interest and itsfiduciary responsibility

n Failure to comply with applicable policies or laws

Documentation Risk

Unenforceable

documentary

evidence

Documentation risk is the risk that the documentary evidence on

which we depend to enforce our rights under contracts or transactionsmay not be complete, correct, or enforceable

For example, Bank XYZ grants a loan to Builders, Inc and asks Builders,Inc to sign a promissory note Mr Smith of Builders signs the note, but

he is not authorized by the company to do so The note becomesunenforceable, and the bank may not be able to use the documentation asproof of claim if Builders, Inc defaults on the loan

Disclosure Risk

Improper

information

reporting

Disclosure risk occurs when we act as an agent for other investors,

either as an underwriter or as an advisor on a transaction The bank

is required to disclose certain information, and the risk is that we:

n Disclose information that we either know or should have known

to be incorrect

n Do not disclose actual or potential conflicts of interest

n Do not disclose or delay in disclosing material information

n Disclose information without authorization from the client

n Fail to investigate and evaluate the borrower and the transaction

For example, suppose Builders, Inc., approaches Midtown Bank foranother loan Midtown Bank wishes to check Builders, Inc.'s

references, so it calls Bank XYZ and requests information regardingBuilders, Inc.'s account Bank XYZ confirms that Builders has been agood customer and reveals that they have a healthy deposit account of

$1,823,000 Unfortunately, Bank XYZ is not authorized to discloseBuilders, Inc.'s deposit account balance, and once again, Bank XYZ is

Legal and Regulatory Risk

Regulatory, civil,

or criminal

sanctions or

litigation

Legal and regulatory risk occurs whenever the bank, a related

corporate entity (such as a non-bank subsidiary or affiliate), atransaction, or a customer is subject to a change in exposure resultingfrom regulatory, civil or criminal sanctions, or litigation Strictcompliance with all relevant regulations is one of Citibank's corevalues and is essential to our reputation and success

When a transaction does not comply with all the applicable laws andregulations, the bank may face civil, criminal, and administrativeproceedings and may also be fined

For instance, suppose that Builders, Inc wishes to borrow $1,000,000

to finance a new construction project Bank XYZ agrees to do this anddraws up a contract for that amount However, Bank XYZ and Builders,Inc are located in a country which imposes a legal lending limit of5%, meaning that Bank XYZ cannot loan more than 5% of its capital toone customer The current capital of Bank XYZ is $10,000,000, so it

is legally allowed to loan Builders, Inc only $500,000 Exceeding the

legal lending limit may subject the bank to a sanction or fine

Systems Risk

Operational

aspects of a

product

Systems risk refers to those risks arising from the operational

aspects of the product, including systems which can be both externaland internal to the bank In many instances, these risks are associatedwith the use of technology

An example of an external system is a money transfer system Whenthe bank transfers funds by wire, it may use private internationalcommunications systems such as the Society for WorldwideInternational Financial Telecommunications (SWIFT) Whenever thebank's operations use these systems, there is a risk that a disruption ofservices may occur

"Internal systems" applies to the operational infrastructure 

data processing center, premises and facilities services, andtelecommunications network  managed by the bank If there is

a major failure in one institution, the impact may be felt in otherinstitutions For example, in 1991 there was a fire at a utilitysubstation in New York which caused interruption of services atCitibank, and at all other banks in New York, for three to five days

Summary — Other Major Risks

In this section, we identified some other major risks associated withdifferent types of banking activities

Equity risk is the risk that the value of equities will fluctuate

adversely

Political or sovereign risk results from government actions or

independent events in a country

Transfer or cross-border risk is the risk that funds either cannot

be converted into foreign currency funds or that converted fundscannot be moved past an exchange control border

Fiduciary risk arises from acting for the benefit of a third party Documentation risk is the risk that documentary evidence of a

transaction is incorrect, incomplete, or cannot be enforced

Disclosure risk arises from the bank's obligation to report

information when acting as an agent for other investors