RISK MANAGEMENT

Instructional goals for a Financial Risk Management in Banking course aim to equip students with the knowledge and skills to identify, measure, manage, and control the various financial and non-financial risks that banks face in a rapidly evolving regulatory and environmental landscape. 1. Understand the Nature of Financial and Non-Financial Risks in Banking Define and distinguish key types of risk: credit risk, market risk, liquidity risk, operational risk, interest rate risk, and ESG risks. Understand environmental, social, and governance (ESG) risk drivers, including reputational risk, transition risk, and physical climate risk. Assess how these risks impact a bank’s profitability, solvency, and long-term sustainability. 2. Apply Risk Measurement Techniques Learn how to calculate and interpret key risk metrics: Value-at-Risk (VaR), Expected Shortfall, Credit VaR, duration, convexity, and other sensitivity indicators. Use quantitative models to measure exposure to different types of financial risk. Analyze historical data, forward-looking scenarios, and climate-adjusted stress scenarios. Understand the methodologies for climate risk quantification, such as scenario-based analysis from NGFS. 3. Evaluate and Implement Risk Mitigation Strategies Assess the use of derivatives (swaps, options, futures) and securitization for risk transfer. Understand asset-liability management (ALM) practices and interest rate risk hedging. Explore portfolio diversification, credit limits, and collateral management. Examine ESG integration strategies (e.g., exclusion lists, ESG scoring, sustainability-linked lending policies). Understand how banks mitigate physical and transition climate risks through portfolio rebalancing and strategic planning. 4. Understand the Regulatory Environment Learn about the Basel Accords (Basel II, III, and IV) and capital adequacy requirements. Analyze how regulatory frameworks influence risk-taking, capital planning, and liquidity management. Understand the role of ICAAP and ILAAP processes, supervisory review (SREP), and regulatory stress testing. Study the emerging regulatory expectations on climate risk management and ESG disclosures (e.g., EBA Guidelines, ECB climate stress tests, CSRD requirements). 5. Develop Skills for Risk-Based Decision Making Interpret risk-adjusted performance metrics: RAROC, economic capital, and similar measures. Make informed decisions under uncertainty and within regulatory, market, and policy constraints. Evaluate the risk–return tradeoff of various banking activities, including sustainable finance products. Understand how ESG factors influence long-term risk-adjusted profitability and strategic decisions. 6. Analyze Real-World Cases and Failures Study examples of banking crises and major risk management failures (e.g., Barings, Lehman Brothers, Credit Suisse). Understand how weak risk governance and poor risk culture can lead to systemic issues. Analyze case studies on climate-related financial losses (e.g., natural disaster impacts, stranded assets). 7. Communicate Risk Insights Effectively Learn to prepare risk reports for different audiences (risk committees, boards, regulators). Communicate complex financial and ESG risk concepts clearly to technical and non-technical stakeholders. Develop effective communication of scenario analyses and climate stress test results

Students are expected to possess foundational knowledge in the following areas: 1. Economics and Finance 2. Accounting 3. Probability and Statistics 4. Mathematics 5. Basic Quantitative Finance 6. Computer Skills (Microsoft Excel; programming skills are desirable but not required)

By the end of the course, students should be able to: Understand the approach to risk management through risk identification, measurement, control, and management. Demonstrate knowledge of the range of financial institutions’ risks, including market, credit, operational, liquidity, interest rate risks of the banking book, and emerging risks such as ESG and climate-related risks. Explain the role of risk management in ensuring banking stability and performance. Understand how international regulation, particularly the Basel Accords, affects the management of these risks. Apply quantitative techniques to measure risk, including Value at Risk (VaR), Expected Shortfall, credit scoring, and duration analysis. Analyze risk exposures in a bank’s balance sheet using real-world data and financial models. Evaluate the impact of regulatory capital requirements on bank behavior and risk-taking. Interpret the results of stress tests and scenario analysis for capital and liquidity planning, including climate-sensitive scenarios where relevant. Develop a coherent risk management report that integrates quantitative findings and strategic recommendations. Use financial tools (e.g., Excel, R, or Python) to model and present risk metrics. Communicate complex risk assessments effectively to stakeholders with varying levels of technical knowledge. Demonstrate critical thinking when evaluating real-world case studies of financial crises and institutional failures

This course covers the fundamentals of risk management, combining theory and practice in line with the latest regulations and current industry best practices. The objective is to develop an adequate understanding of financial risk and the regulatory environment in which financial institutions operate, including emerging challenges such as ESG and climate-related risks. The course has been carefully designed to provide a clear and concise explanation of complex concepts. Its primary goal is to introduce students to the fundamentals and core principles of risk management and prepare them to support risk management projects and initiatives. A strong emphasis is placed on practical applications, bringing real-world insights into the academic environment to enrich the learning experience. In summary, the course equips students with the essential skills needed to navigate the field of risk management and to explore related areas independently. However, it is important to note that this is not an advanced risk management course. The course is divided into four parts: Part 1: Foundations Part 2: Risk Regulation Part 3: Quantitative Methods Part 4: Risk Models

Reference materials will be uploaded to the Luiss Learn platform before each lesson. Each reading will include learning text, expected outcomes, examples, end-of-reading questions (EORQs) and solutions to help you understand and master the material. The exercises are designed to demonstrate practical applications and reinforce your understanding of the concepts presented. Exams will cover all topics discussed in class, including slides, EORQs and their solutions, exercises, and any additional materials unless specified as optional. If you need a reference book, we recommend “Risk Management and Financial Institutions”, sixth edition by John C. Hull.

Theoretical lessons, exercises, guest speakers, project works

Written exam (theory and practice) and project work

Exam grade and degree starting grade