Operational Risk Management (ORM) and Financial Crises

Explore global economic crises through liquidity risk management, stress testing, and operational risk management with Basel III liquidity coverage, linking events from the Great Depression to the 2007-08 crisis.

Explore how oil shocks in the 70s sparked stagflation and financial crises, followed by the dotcom bubble, the 2007–08 subprime meltdown, and Greece’s debt crises and bailouts.

Explore the Great Depression of 1929, tracing the stock market crash from Black Thursday to Black Tuesday, and the global declines in unemployment, GDP, trade, and production.

Explore how the Federal Reserve's tight monetary policy reduced money supply, sparked a dollar run, and led to bank failures, with Roosevelt's New Deal creating the FDIC and SEC.

Trace the great depression of 1929 through a photo essay of the stock market crash, bank closures, unemployment, veterans' bonus protests, and migrant farming and pea camps.

Explain how the 2008 crisis emerged from a subprime mortgage bubble, lax due diligence, and securitization by Fannie Mae and Freddie Mac, creating moral hazard and off balance sheet risk.

Examine how mortgage pools form mortgage-backed securities and collateralized debt obligations, backed by insurance and credit default swaps, with investors repaid through tranches and an SPV structure.

Explain how credit default swaps transfer credit exposure on reference bonds, detailing protection buyer and seller roles, premium payments, default events, and valuation using survival and default probabilities.

Traces how subprime lending and securitization sparked the 2008 credit crunch, collapsed housing values, and bank losses, including Lehman Brothers' collapse and key mergers.

The credit crunch toppled institutions like Washington Mutual and AIG, triggering $3.4 trillion real estate and $7.5 trillion stock losses, 5.5 million jobs lost, and $73 billion in TARP costs.

The US government's Emergency Economic Stabilization Act of 2008 bailed out the financial system by purchasing distressed assets and funding banks, while boosting risk governance and due diligence.

Define liquidity risk as the inability to meet short-term obligations due to illiquid assets, and outline assessment through the business model, funding mix, maturity mismatch, external factors, and counterparty risk.

Explains liquidity management by balancing core deposits and wholesale funding, outlining funding sources—retail deposits, repos, CDs, and equity—and stressing accurate projections to meet withdrawals.

Explore liquidity sources like cash, readily marketable securities, repos, lines of credit, and commercial papers, and assess collateralized loans with margin and credit-rating considerations under Basel principles.

Establish ongoing measurement of net funding requirements, conduct scenario analysis and stress testing, and ensure market access, contingency planning, foreign currency liquidity, internal controls, public disclosure, and supervisory oversight.

Analyze how stress testing measures banks' ability to survive liquidity shocks and solvency risks, using scenarios of illiquid assets, funding withdrawals, margin calls, and central bank support.

Identify early warning liquidity indicators such as rapid asset growth with volatile liabilities and funding mismatches, and outline internal reports, stress tests, and regulator disclosures.

Explore the liquidity coverage ratio (LCR) under Basel III, ensuring high quality liquid assets cover 30-day net cash outflows with level 1, 2A, and 2B assets and haircuts.

Learn how to compute the liquidity coverage ratio (LCR) by sizing HQLA from level two assets and evaluating cumulative stressed outflows and inflows with a maturity mismatch add-on.

Learn how the net stable funding ratio under Basel III measures available stable funding against required stable funding, including off-balance sheet exposures, funding tenor, and counterparty types.

Explain how available stable funding is weighted under nsrf by maturity. Outline the 100% to 0% esf brackets and key components driving each, including long-term capital and short-term funding.

Explain how the RSF in NSFR assigns stable funding factors from 0% for cash to 100% for illiquid and encumbered assets, and how OBS covers off-balance sheet exposures.

The organization coordinates balance sheet liquidity through the asset-liability management unit and treasury, integrating data, scenarios, and governance to manage risk and reporting under Basel three standards.

Summarize the module's sweep from financial and global economic crises to the 2008 subprime episode, and outline liquidity risk, Basel III principles, stress testing, and LCR calculations.

Explore the fundamentals of corporate governance in US and UK markets, covering key stakeholders, the four P's, governance culture and ethics, and regulatory frameworks like Sox and BCBS.

Explain corporate governance as a system aligning board leadership and stakeholders—shareholders, customers, employees, suppliers, lenders, government—with transparency, accountability, and strong internal controls.

Explore the four p's of corporate governance—people, purpose, process, and performance—and how they shape risk management, compliance, and value creation in global markets.

Explore how different shareholders—from small to institutional and private equity—shape corporate governance, and how federal and state laws, the SEC, and Sarbanes-Oxley regulate US corporations.

Explore how the us corporate governance system relies on the sec enforcement, nyse and nasdaq listing standards, and gatekeepers, including reforms like the socks act, to prevent fraud.

Explore corporate governance failures through the Enron scandal, including hidden debt, aggressive revenue recognition, and mark-to-market accounting. Learn how weak oversight and unethical practices led to bankruptcy.

Enron used mark-to-market accounting and shell entities to inflate profits and mislead investors. Worldcom and Tyco showed similar governance failures, audit flaws, and bankruptcies.

Assess how weak internal controls and aggressive accounting fueled major frauds like Enron, Worldcom, and Tyco, and explore the fraud triangle and key regulations including Basel, Sox, Dodd-Frank, and COSO.

Explore the BCBS Basel Committee on Banking Supervision's 13 principles for sound governance, detailing board responsibility, governance framework, culture, risk appetite, and the three lines of defense.

Ensure the board's composition is independent and diverse, with qualified members and rigorous selection, induction, training, and audit committee oversight of governance, risk, financial reporting.

Establish robust governance of group structures by aligning risk appetite, capital and liquidity oversight, and conflicts of interest across parent and subsidiary boards.

Explore how the chief risk officer leads an independent risk management function to identify, assess, and monitor material and emerging risks, aligning risk appetite with capital and liquidity needs.

Examine how the Sarbanes-Oxley act strengthens audit committees and internal controls, raises officer liability, and tightens disclosure to improve governance. Analyze the Dodd-Frank measures on proxy access and say-on-pay.

Dodd-Frank introduces pay ratio disclosure, board leadership disclosures, broker discretionary voting restrictions, and shareholder say on pay, linking compensation to performance and mandating clawbacks.

Explore the UK corporate governance code, its comply-or-explain framework, and how leadership, risk management, remuneration, and shareholder dialogue uphold board effectiveness and long-term value.

Conclude by summarizing corporate governance meaning, principles, and stakeholder roles; examine directors, strategy, and regulations from the Sarbanes-Oxley Act, Dodd-Frank, Coso, Basel, to the UK governance code.

Explore how companies raise capital via debt and equity, focusing on IPOs and follow-on offerings, IPO benefits, and valuation techniques (DCF, EV/EBITDA, comparables, VC method) with Excel modeling.

Compare debt financing and equity to show when loans or debt securities suit a business, and outline tax benefits and control retention versus dilution and higher equity costs.

Understand the initial public offering, or IPO, where a company sells shares in the open market to raise capital, guided by underwriters, roadshows, and regulatory disclosure from filing to listing.

Learn why companies go public to raise cash, gain credibility, and improve liquidity. Explore valuation methods such as dcf, ev/ebitda, and comparables, and how demand and growth drive ipo values.

Valuing an IPO using discounted cash flow, EV/EBITDA, and P/E comparables, the XYZ coffee brand's 2015 base assumptions drive outlet-based projections.

Assess IPO assumptions under operational risk management by projecting growth, capex funding, working capital, depreciation, taxes, and valuation to forecast cash flows and financing needs.

Learn to model the profit and loss statement (PNL) with income, revenue, and other operating income, project EBITDA, and apply expense ratios for manufacturing, G&A, and selling.

explain depreciation in pnl by applying the straight-line method to machinery and equipment and furniture, compare ebit and ebitda, and detail gross block and accumulated depreciation.

Explains depreciation and amortization calculations across gross block and net block, detailing slm and wdv methods, asset-wise totals, and the impact on ebit.

Calculate equal 10-year loan repayments and interest using average balances, then assess working capital dynamics, debtors, inventory, and zero interest on working capital, noting IPO proceeds used for repayment.

Compute current tax and mat credit from gross total income built from ebitda and depreciation adjustments, and assess deferred tax from timing differences.

Understand the cash flow statement with three components: operating, investing, and financing, and learn how depreciation, working capital changes, and deferred taxes affect cash.

Assemble and link balance sheet elements, combining shareholder funds, non-current and current liabilities with fixed and current assets, including capital work in progress and goodwill on consolidation.

Learn to perform DCF valuation for IPOs by deriving free cash flows to equity from the profit and loss statement and balance sheet, applying CAPM-based discounting, and examining gearing ratios.

Explore EBITDA and EV/EBITDA and PE valuations for IPOs using peak and average EBITDA, comparable peer multiples, and discounting to derive market value.

Explore the venture capital method before an IPO, showing how investor stakes are calculated across rounds using assumptions, forecasted earnings, a P/E ratio, and present and future value.

Explore follow-on public offers (fpos), including dilutive and non-dilutive types, their impact on shares outstanding and price, and the role of underwriters and the greenshoe option.

Explain ipo fees and expenses, including sec registration and Nasdaq listing costs. Model issuer assumptions, options, fully diluted shares, proforma shares, price bands, and valuations.

Analyze debt and equity trade-offs and define an optimal capital structure that minimizes cost of capital and maximizes returns, including IPO fundamentals and valuation methods like DCF and EV/EBITDA.

Examine the Dodd-Frank Act, Wall Street Reform and Consumer Protection Act, tracing its 2010 response to 2008 crisis and its aims to protect consumers and end too big to fail.

Examine how the Volcker Rule, a Dodd-Frank provision, separates commercial and investment banking, prohibits proprietary trading, and limits fund ownership to 3% of total ownership or tier one capital.

Explore prime brokerage for hedge funds and institutions, asset-backed securities basics, affiliate conflicts and hedging exceptions, plus an intro to swaps and OTC derivatives regulation.

Explore how the Dodd-Frank act classifies swaps into non-security and security-based categories, and how credit default swaps, interest rate swaps, and total return swaps function and are regulated.

Explain currency and commodity swaps for hedging forex and material price risk, cover options like puts and calls, and review Dodd-Frank regulation including security based swaps.

Clarify swaps regulation by assigning non-security based swaps to the CFTC and securities-based swaps to the SEC under title seven. Strengthen post-crisis oversight through Dodd-Frank.

Explore how Dodd-Frank regulates swap markets, including the pushout rule, capital and margin requirements, and how swap dealers and major participants are defined.

Explore the Dodd-Frank act's title vii regime for swaps, covering registration, capital and margin requirements, mandatory clearing, and the roles of the CFTC and the SEC.

Covers Title VII requirements for swap dealers and major participants, including mandatory reporting, record-keeping, risk management procedures, conflict of interest policies, and real-time public data and business conduct standards.

Trace the securitization process from originators to SPV trusts and investors, highlighting subprime loans, credit ratings, servicers, and Dodd-Frank reforms.

Dodd-Frank reforms strengthen securitization by requiring originators to retain 5% of credit risk, with flexible vertical, horizontal, or representative sample options, plus hedging limits and GSE exemptions.

Explore how the Dodd-Frank Act strengthens regulation of credit rating agencies, introduces SEC oversight, governance reforms, transparency in rating methodologies, conflict-of-interest controls, and whistleblower protections to curb rating shopping.

Dodd-Frank ends the exemption for rating agencies, exposing them to liability for credit ratings in registration statements, and requires investors to conduct independent due diligence beyond ratings.

Learn Basel III capital and leverage, including tier one and tier two, risk weighted assets, and the four vital parameters: capital, leverage, funding, liquidity, and systemic risk, plus Dodd-Frank.

A numerical example demonstrates how risk weighted exposures determine the capital adequacy ratio under Basel III and Dodd-Frank, and how leverage and bank comparisons illustrate capital adequacy in practice.

Identify how regulators designate globally systemically important financial institutions and implement enhanced capital rules to deter bailouts and reduce moral hazard.

Explore how enhanced prudential standards, stress testing, and living wills deter too big to fail by enabling orderly resolution and reducing moral hazard under the Dodd-Frank Act.

Learn how the Dodd-Frank act regulates private equity and hedge funds, requiring SEC registration for advisers with more than $150 million AUM, reporting, and SEC-CFTC oversight to monitor systemic risk.

Explore how the Dodd-Frank act strengthens governance and executive compensation to deter fraud, covering proxy access, say-on-pay, pay ratio disclosure, and independent compensation committees.

explore how the Dodd-Frank Act tightens executive compensation governance with independent committees, consultant oversight, pay-for-performance disclosures, clawbacks, hedging restrictions, and say-on-pay and golden parachute voting transparency, and whistleblower protections.

Examines the limitations and criticisms of the Dodd-Frank act, highlighting rising lending costs, stringent compliance, and regulatory burdens, and discusses future prospects including the Choice Act.

Explore the self-test on Dodd-Frank rules, including the Volcker Rule, CFTC oversight of non-security based swaps, and 5% credit risk retention.

Explore intercompany transactions under IFRS, including downstream, upstream, and lateral sales; learn how to identify subsidiaries, associates, and joint ventures, and apply consolidation adjustments to eliminate unrealized profits.

Explore the meanings and treatment of intercompany transactions, including downstream, upstream, and lateral transfers, and learn how to eliminate intercompany profits in consolidation.

Explains how downstream and upstream sales between a parent and subsidiary affect entries, unrealized profit, and consolidation, including removing intercompany profits and accounting for non-controlling interest.

Explore how downstream and upstream sales between parent and subsidiaries drive consolidation, unrealized profit elimination, and noncontrolling interest allocation in inventory.

Illustrate consolidating with an associate under the equity method when significant influence exists, recognizing intercompany profit, investment as an asset, and dividends as returns.

Explain how unrealized profit from associates and joint ventures is reversed to the investor’s share under IAS 28 using the equity method, affecting the consolidated PNL and investment accounts.

This example shows a parent selling a depreciable asset to a subsidiary, reversing unrealized profit through depreciation and carrying amount adjustments in consolidation.

Explain how to eliminate unrealized intercompany profits and balances in the consolidation of a depreciable asset sale, covering upstream and downstream transactions and investor's shares.

Examine unrealised sale losses in intercompany transactions, detailing downstream and upstream effects on consolidation, inventory and P&L, including non-controlling interest and associate considerations under IFRS.

Explore lateral intercompany transactions within a group, detailing how upstream consolidation reverses subsidiary profits on intercompany sales and adjusts inventory and non-controlling interest.

Explore lateral transactions in consolidation, including reversing inventory and purchases and recording consolidated entries. Apply the equity method for associates and ventures to adjust unrealized profits and investor shares.

Identify the parties and downstream or upstream relationships to achieve true and fair consolidation. Leverage automated intercompany reconciliation to reduce errors and address currency and tax implications.

Explore IFRS-based intercompany transactions across downstream, upstream, and lateral transfers among subsidiaries, associates, and joint ventures. Learn about consolidation entries, elimination effects, unrealized losses, and practical checks in multinational groups.