Transcript Risk Management in Banking

Risk Management in Banking
Page 1
An Introduction to Risk
Risk Management is the process of
measuring or assessing the actual or
potential dangers of a particular
situation.
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Risk Has Two Components
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Uncertainty.
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Exposure.
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Types of Risk
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Operational.
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Credit.
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Reputational.
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Operational Risk
The risk of loss resulting from
inadequate or failed internal processes,
people and systems, or from external
events.
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Operational Risks Include
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Internal Fraud.
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External Fraud.
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Employment Practices and Workplace Safety.
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Clients, Products and Business Practices.
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Damage to Physical Assets.
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Business Disruption and System Failures.
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Execution, Delivery and Process Management.
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Internal Fraud
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Unauthorized Activity.
Transactions not reported.
 Transaction type unauthorized.
 Mismarking of position.
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Theft and Fraud.
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Fraud/credit fraud/worthless deposits.
Theft/extortion/embezzlement/robbery.
Misappropriation of assets.
Forgery.
Account take-over/impersonation.
Bribes/kickbacks.
Insider trading.
Money laundering.
Willful blindness.
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External Fraud
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Theft and Fraud.
Theft/robbery.
 Forgery.
 Check kiting.
 Identity theft.
 Elder financial abuse.
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Systems Security.
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Hacking damage.
Theft of information (with monetary loss).
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Employment Practices and Workplace Safety
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Employee Relations.
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Safe Environment.
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Compensation, benefit, termination issues.
Organized labor issues.
General liability (slips and falls).
Employee health and safety rules.
Workers’ compensation.
Diversity and Discrimination.
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All discrimination types.
Harassment.
Equal Employment Opportunity (EEO).
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Clients, Products and Business Practices
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Suitability, Disclosure and Fiduciary.
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Fiduciary breaches/guideline violations.
Suitability/disclosure issues.
Retail consumer disclosure violations.
Breach of privacy.
Aggressive sales.
Inadequate product offerings.
Account churning.
Misuse of confidential information.
Lender liability.
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Clients, Products and Business Practices (CONTINUED)
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Improper Business or Market Practices .
Antitrust.
 Improper trade/market practice.
 Market manipulation.
 Insider trading (on firm’s account).
 Unlicensed activity.
 Money laundering.
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Clients, Products and Business Practices (CONTINUED)
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Selection, Sponsorship and Exposure.
Failure to investigate client per guidelines.
 Exceeding client exposure limits.
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Advisory Activities.
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Disputes over performance or advisory activities.
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Damage to Physical Assets
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Disasters and Other Events.
Natural disaster losses.
 Human losses from external sources (terrorism,
vandalism).
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Business Disruption and System Failures
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Systems.
Hardware.
 Software.
 Telecommunications.
 Utility outage/disruptions.
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Execution, Delivery and Process
Management
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Transaction Capture, Execution and Maintenance.
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Miscommunication.
Data entry, maintenance or loading errors.
Missed deadline or responsibility.
Model/system misoperation.
Accounting error/entity attribution error.
Other task misperformance.
Record retention.
Documentation maintenance.
Delivery failure.
Collateral management failure.
Reference data maintenance.
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Execution, Delivery and Process
Management (CONTINUED)
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Monitoring and Reporting.
Failed mandatory reporting obligations.
 Inaccurate external loss (loss incurred).
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Customer Intake and Documentation.
Unapproved access given to accounts.
 Incorrect client records (loss incurred).
 Negligent loss or damage of client assets.
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Execution, Delivery and Process
Management (CONTINUED)
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Customer/Client Account Management.
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Trade Counterparties.
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Unapproved access given to accounts.
Incorrect client records (loss incurred).
Negligent loss or damage of client assets.
Non-client counterparty misperformance.
Vendors and Suppliers.
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Outsourcing.
Vendor disputes.
Page 17
Operational Risk Checklist
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Employee training.
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Close management oversight.
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Segregation of duties.
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Employee background checks.
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Procedures and process.
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Purchase of insurance.
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Exiting certain businesses.
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Capitalization of risks.
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Credit Risk
Risk due to an uncertainty in a
counterparty’s ability to meet its
obligations in accordance with agreed
upon terms.
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Credit Risks Include:
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Loans.
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Acceptances.
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Interbank transactions.
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Trade financing.
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FX transactions.
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Futures.
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Swaps.
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Equities.
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Letters of credit.
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Options.
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Sound Practices for Managing
Credit Risk
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Establish an appropriate credit risk environment.
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Operate under a sound credit-granting process.
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Maintain an appropriate credit administration,
measurement and monitoring process.
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Ensure adequate controls over credit risk.
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Establish an Appropriate Credit Risk
Environment
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Board of Directors should review credit risk strategy
periodically.
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Senior management should implement credit risk
strategy approved by the Board.
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Operate Under a Sound Credit Granting
Process
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Criteria should include thorough understanding of
the borrower, purpose/structure of credit and its
source of repayment.
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Establish overall credit limits at the level of
individual borrowers/connected counterparties.
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Have a clearly established process for approving
new credits/extension of existing credits.
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Extension of credit must be made on an arm’s
length basis.
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Maintain a Credit Administration,
Measurement and Monitoring Process
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Have in place a system for ongoing administration of
various risk-bearing portfolios.
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Develop an internal risk rating system for managing
credit risk.
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Have an information system and analytical
techniques that enable management to measure
credit risk of on/off balance sheet activities.
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Maintain a Credit Administration, Measurement
and Monitoring Process (CONTINUED)
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System for monitoring overall composition and
quality of the credit portfolio.
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Consider future changes in economic conditions
when assessing individual credits.
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Ensure Adequate Controls Over Credit Risk
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System of independent, ongoing credit review.
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Credit granting function is properly handled and
credit exposures are within limits.
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System for managing problem credits.
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Credit Risk Checklist
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Stringent credit standards for borrowers and
counterparties.
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Strict portfolio risk management.
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Constant focus on changes in economic or other
circumstances that can lead to a deterioration in the
credit standing of a bank’s counterparties.
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Reputational Risk
Reputational risk is the potential that
negative publicity, whether true or not, will
result in loss of customers, severing of
corporate affiliations, decrease in revenues
and increase in costs.
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Benefits of Effective Reputation
Management
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Improving relations with shareholders.
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Creating a more favorable environment for
investment.
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Recruiting/retaining the best employees.
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Reducing barriers to development in new markets.
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Securing premium prices for products.
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Minimizing threats of litigation.
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The key to managing reputational risk is
sound risk management, coupled with
straightforward communication about the
problem the bank is facing.
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Re-establishing a firm’s
reputation takes a long time.
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Reputational Risk Cases
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Perrier – Toluene traces.
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Exxon – Valdez spill.
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Union Carbide – Bhopal, India.
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Arthur Andersen – Enron shredding.
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Firestone – Tires.
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Reputational Risk Checklist
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Processes for crisis management are planned and
documented.
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External perceptions of the bank are regularly measured.
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Reputational threats are systematically tracked.
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Employees are trained to identify and manage reputational
risks.
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Standards on environmental, human rights and labor practices
are set publically.
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Relationships and trust with pressure groups and other
potential critics are established.
Page 33
True or False?
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Corporate reputation is one of the primary assets of
my bank.
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The risks involving a bank’s reputation have
increased significantly over the past five years.
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Reputational risk is harder to manage than other
forms of risk.
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My bank is proactive in enhancing and protecting its
reputation.
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True or False?
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It is impossible to quantify the impact of
reputational risks.
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My bank usually thinks about its reputation only
when things go wrong.
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A well run bank doesn’t need to invest extra
resources into guarding against reputational risk.
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Risk Management
Risk management is the process of
monitoring and addressing the
potential for loss.
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Evolution of Risk Management
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Emerged as a discipline during the early 1990s.
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Used long before (1960s).
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Typically used to describe techniques for addressing
insurable risks.
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“Old” Risk Management
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Risk reduction through safety, quality control and
hazard education.
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Alternative risk financing, including self-insurance
and captive insurance.
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The purchase of traditional insurance products.
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Use of derivatives to hedge or customize market risk
exposures.
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“New” Risk Management
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Treats derivatives as a problem as much as a
solution.
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Focuses on reporting, oversight and segregation of
duties within the organization.
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By the Mid-1990s
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Regulatory initiatives.
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Concerns about derivatives.
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Release of RiskMetrics.
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Published losses.
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Enron’s Experience with Risk Management
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Maintained a risk management function.
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Lines of reporting were reasonably independent.
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Mark-to-market valuations were subject to
adjustments by management.
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Few career risk managers.
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Fluid workforce.
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Employees constantly looking for next transfer.
Page 41
Regulatory Responses from the Financial
Services Community
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Basel II.
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Sarbanes-Oxley Act of 2002.
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Graam-Leach-Bliley Act.
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Bank Secrecy Act/Anti-Money Laundering.
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Insider Trading Rules.
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Bank Bribery Act.
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Fair and Accurate Credit Transactions Act (FACTA)
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Fair Lending
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Federal Conflicts of Interest Statutes.
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Various record retention and reporting requirements.
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Success Depends Upon
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A positive corporate culture.
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Actively observed policies and procedures.
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Effective use of technology.
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Independence of risk management professionals.
Page 43
When risk management is done
correctly you CAN sleep at night!
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Our Pledge
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