A Comparative Analysis Among Indian Commercial Banks (Public & Private) and a Foreign Bank Using Var (Value-At-Risk) Model

Abstract

This research paper tries to assess the various types of risks prevalent in the banking sector using VaR (Value-at-Risk) model – a Risk assessment tool. As Value – at- Risk measures the probability that an asset is valued below a certain value during a particular time, a probabilistic approach is used to find the profitability. A comparative analysis is performed among the sample banks. Both the conventional methods and the new methods are used to evaluate the risk profile of the banks. The likelihood of occurrence of a particular value for an asset gives us the magnitude of risk involved in the corresponding asset of the bank. The VaR values which depend on market rates which are calculated for portfolios of various banks thus enabling us to differentiate various risk management practices prevalent among Indian Banks and a Foreign Bank. Factors which help in mitigating the risk are analyzed and their tolerance levels are put forth. Depending upon the confidence levels and considering worst case scenarios, financial institutions like banks are in constant search of tools to assess risk, which they might face in near future and to efficiently manage risk. This paper also provides an insight into the emerging risk management practices in the banking sector.

Keywords: Risk Management, Market Risk, VaR, Risk Assessment, Banking Sector, Banks, Risk, Diversifiable Risk, Non-Diversifiable Risk, The Great Depression

JEL Classification: M00,M1,C00,C1,C2,C3,C4,E00,E3,E4,E5,E65,F30