a risk framework for banks

8/6/2019 A Risk Framework for Banks

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RISK MANAGEMENT IN A BANK RISK MANAGEMENT IN A BANK



Understanding risks in the bankUnderstanding risks in the bank

Establishing a framework to deal with risk is fundamental.Establishing a framework to deal with risk is fundamental.

In many cases, a significant cause of failure can be tiedIn many cases, a significant cause of failure can be tieddirectly to an incomplete or absent framework for managingdirectly to an incomplete or absent framework for managingrisk.risk.

Figure 1 below depicts a process for the development of aFigure 1 below depicts a process for the development of a

risk management frameworkrisk management framework..



The st eps identified are aimed at understanding t he risksThe st eps identified are aimed at understanding t he risksin t he business and t he importance or danger of in t he business and t he importance or danger of

each each -- knowing t his is a prerequisit e t o quantifying t he knowing t his is a prerequisit e t o quantifying t he risk appetit e of t he organization in t he cont ext of t he risk appetit e of t he organization in t he cont ext of t he business strat egy.business strat egy.

This blueprint f or risk can t hen be f ormally merged wit h This blueprint f or risk can t hen be f ormally merged wit h t he organizational strat egy.t he organizational strat egy.

The out come of t hese f our st eps can t hen be used t o The out come of t hese f our st eps can t hen be used t o

crystallise a governance and management framework f orcrystallise a governance and management framework f orrisk which inrisk which in--turn can be used t o fully developturn can be used t o fully develop

implementation and management plansimplementation and management plans



Know your businessKnow your business

Diff erent banks run diff erent risks and have diff erent risk profiles.Diff erent banks run diff erent risks and have diff erent risk profiles. Furt her, just because a bank uses t he same products or services does not Furt her, just because a bank uses t he same products or services does not

mean it has t he same risk needs.mean it has t he same risk needs. Size does matt er and one size does not fit allSize does matt er and one size does not fit all a proper diagnostic isa proper diagnostic is required f or each organization.required f or each organization.

For example, consider t wo commercial banks wit h a similarFor example, consider t wo commercial banks wit h a similar product portf olio operating in diff erent jurisdictions where capital marketsproduct portf olio operating in diff erent jurisdictions where capital markets

development is at diff erent stages.development is at diff erent stages. The limitations of t he less developed market will mean t hat like productsThe limitations of t he less developed market will mean t hat like products represent higher risk.represent higher risk. Similarly, cust omer profiles will be distinctly diff erent reflectingSimilarly, cust omer profiles will be distinctly diff erent reflecting

inconsist ent behaviours and resulting in diff erent default charact eristics.inconsist ent behaviours and resulting in diff erent default charact eristics. Such aspects not only have an impact on weighting t he importance of each Such aspects not only have an impact on weighting t he importance of each

risk type in t he portf olio, t hey also impact on t he framework, operationalrisk type in t he portf olio, t hey also impact on t he framework, operationaland infrastructure requirementsand infrastructure requirements



Analyse and rank the risks Analyse and rank the risks

Some risks are more difficult t o manage t han Some risks are more difficult t o manage t han ot hers and a process of assessing t he level andot hers and a process of assessing t he level andimportance t o each individual bank isimportance t o each individual bank isnecessary.necessary.

The same risks can represent a higher or lowerThe same risks can represent a higher or lowerexposure in diff erent organizations.exposure in diff erent organizations.

Anot her important aspect is t hat risks wit hin t he Anot her important aspect is t hat risks wit hin t he bank are int erbank are int er--relat ed and cannot be viewed in relat ed and cannot be viewed in

isolation isolation Understanding t hese relationships can assist in Understanding t hese relationships can assist in

t he identification of natural offsetst he identification of natural offsets



Decide how much risk should beDecide how much risk should be

takentaken Det ermining risk appetit e is difficult.Det ermining risk appetit e is difficult. It is bot h a quantitative and qualitative process and shouldIt is bot h a quantitative and qualitative process and should be undertaken considering; t he current operating environment, t he be undertaken considering; t he current operating environment, t he

organizations cashorganizations cash--flow; strat egy and earnings / balance sheet flow; strat egy and earnings / balance sheet capacity.capacity.

A bank should understand its business portf olio and t he likely A bank should understand its business portf olio and t he likelyimpact, under diff erent scenarios (including high stress), of impact, under diff erent scenarios (including high stress), of associat ed risks on earnings of each segment associat ed risks on earnings of each segment

The recent global crisis, which has brought a number of The recent global crisis, which has brought a number of organizations previously considered impregnable t o t heir knees, hasorganizations previously considered impregnable t o t heir knees, has

reinf orced t he significance of understanding how risk levels change reinf orced t he significance of understanding how risk levels change

and impact during diff erent operating environmentsand impact during diff erent operating environments



Make risk part of the bankMake risk part of the bank

fabric.fabric. Risk management is not a part time activity.Risk management is not a part time activity.

It is a dynamic process t hat must be underst ood andIt is a dynamic process t hat must be underst ood and

act ed on in virtually every part of t he organization.act ed on in virtually every part of t he organization.

The goal of creating a risk management culture is t o The goal of creating a risk management culture is t o creat e a situation where staff and management creat e a situation where staff and management instinctively look f or risks and consider t heir impactsinstinctively look f or risks and consider t heir impactswhen making eff ective decisions.when making eff ective decisions.

Management of risks is generally a highly fragment edManagement of risks is generally a highly fragment ed

process in most organizationsprocess in most organizations -- by involving every one in by involving every one in t he process it becomes a less difficult task.t he process it becomes a less difficult task.



Generi B nk Ri k M nagementGeneri Bank Ri k Management

rameworkFramework Risk Management Risk Management Risk Management

Economic Capital

Credit riskCredit assessment

Credit analysis

Underwriting

Portfolio analysis

and management

Market RiskTrading Risk

Interest Rate Risk and

Currency risk in the

Balance Sheet

Funding & LiquidityStructure, funding

and Liquidity management

Scenario/Stress Testing

Crisis and Contingency

planning

Operational Risk

RISK INFRASTRUCTURE

Organization

andResourcing

Risk Administration

Risk Management

System Risk Disclosure



The ank isk ManagementThe ank isk Management

FrameworkFramework GovernanceGovernance

A majority of banks of all sizes have set up A majority of banks of all sizes have set up

a governance structure t o span t he main a governance structure t o span t he main risks.risks.

The typical structure is based on aThe typical structure is based on adistribut ed risk function. This structure distribut ed risk function. This structure generally consists of: t hegenerally consists of: t he



The board of direct ors; various committ ees at The board of direct ors; various committ ees at board and management levels (depending on board and management levels (depending on t he scale and sophistication of t he bank)t he scale and sophistication of t he bank)

A centralised risk management function A centralised risk management function -- usuallyusuallyresponsible f or policy f ormulation and oversight ; responsible f or policy f ormulation and oversight ; and risk management functions locat ed in each and risk management functions locat ed in each business responsible f or t he day t o day oversight business responsible f or t he day t o day oversight of risks.of risks.



In a robust governance structure, a boardIn a robust governance structure, a boardshould f ormalise its responsibilities byshould f ormalise its responsibilities byestablishing aestablishing a

risk management committ ee Chart er detailing:risk management committ ee Chart er detailing: its purposeits purpose CompositionComposition meeting schedule /timetablemeeting schedule /timetable

agenda and approval requirementsagenda and approval requirements reporting requirementsreporting requirements Responsibilities generally f or each risk cat egoryResponsibilities generally f or each risk cat egory

in t he ent erprise.in t he ent erprise.



Risk Management StructureRisk Management Structure

Market RiskMarket Risk Market risk, describes t he sensitivity of t he value of positions t o Market risk, describes t he sensitivity of t he value of positions t o

changes in market prices and/or rat es, and requires a separat e changes in market prices and/or rat es, and requires a separat e framework f or oversight and management.framework f or oversight and management.

Diff erent met hods of modelling are used f or traded market riskDiff erent met hods of modelling are used f or traded market risk

versus nonversus non--traded risk.traded risk. Traded market risk is modelled and calculat ed using a Value at RiskTraded market risk is modelled and calculat ed using a Value at Risk

(VaR) met hodology.(VaR) met hodology. VaR facilitat es a number of functions in t he market risk area VaR facilitat es a number of functions in t he market risk area

including:including: generation of management inf ormation and oversight generation of management inf ormation and oversight

establishment of trading limits and control of trading operations; establishment of trading limits and control of trading operations; perf ormance evaluationperf ormance evaluation

Asset and resource allocation and regulat ory reporting and risk Asset and resource allocation and regulat ory reporting and riskoversight.oversight.



Market RiskMarket Risk

Recent market events have brought int o Recent market events have brought int o question t he validity of certain underlying question t he validity of certain underlying assumptions in t he VaR met hodology.assumptions in t he VaR met hodology.

For example, t he model assumes t hat positionsFor example, t he model assumes t hat positionscan be hedged or liquidat ed over a specifiedcan be hedged or liquidat ed over a specifiedtime horizon.time horizon.

The liquidity constraints in markets during t he The liquidity constraints in markets during t he

recent crisis invalidat ed t his assumptionrecent crisis invalidat ed t his assumption VaR VaR accuracy is questionable when dealing wit h accuracy is questionable when dealing wit h illiquid instruments.illiquid instruments.



Market riskMarket risk

Under t he Basel IImarket risk can be measured using diff ering Under t he Basel IImarket risk can be measured using diff ering approaches.approaches.

The more simplistic, Standardised Approach, is a f ormulaThe more simplistic, Standardised Approach, is a f ormula--basedbasedmodelmodel

The Int ernal Model Approach, requires ext ensive data collection,The Int ernal Model Approach, requires ext ensive data collection,

syst ems and quantitative expertise.syst ems and quantitative expertise. Capital requirements under t he Standardised Approach however,Capital requirements under t he Standardised Approach however,

are prospectively higher.are prospectively higher. Banks need t o carefully consider t he cost and benefits associat edBanks need t o carefully consider t he cost and benefits associat ed

wit h bot h approaches as t he Int ernal Model approach is time wit h bot h approaches as t he Int ernal Model approach is time consuming and expensive and provides, arguably, little incrementalconsuming and expensive and provides, arguably, little incremental

benefit f or a smaller and less complex organization.benefit f or a smaller and less complex organization. The same point is applicable t o credit and operational riskThe same point is applicable t o credit and operational risk

cat egoriescat egories



Credit RiskCredit Risk

While t here have been many reasons why banksWhile t here have been many reasons why bankshave faced difficulties hist orically, t he majorhave faced difficulties hist orically, t he majorcauses of serious banking problems are directlycauses of serious banking problems are directlyrelat ed t o credit standards f or borrowers andrelat ed t o credit standards f or borrowers andcount erparties.count erparties.

A credit risk framework f ocuses primarily on; A credit risk framework f ocuses primarily on;

t he measurement of credit risk;t he measurement of credit risk;

credit controls and risk administration, including credit controls and risk administration, including

monit oring compliance wit h credit risk limitsmonit oring compliance wit h credit risk limits Establishment of regulat ory / economic capitalEstablishment of regulat ory / economic capital

required t o support credit risk.required t o support credit risk.



Basel 11 provides an int ernal ratingsBasel 11 provides an int ernal ratingsbased approach (bot h Foundation andbased approach (bot h Foundation and

Advanced) a Standardised approach Advanced) a Standardised approach

Moving beyond t he Standardised approach Moving beyond t he Standardised approach requires heavy investment in datarequires heavy investment in data

sourcing and data quality, t he cost of sourcing and data quality, t he cost of which is arguably offset by t he reducedwhich is arguably offset by t he reducedrequirement f or capitalrequirement f or capital



LiquidityRiskLiquidityRisk The concept of liquidity is increasingly important in managing financial risk.The concept of liquidity is increasingly important in managing financial risk. It is driven by; t he structure and dept h of markets; volatility of market It is driven by; t he structure and dept h of markets; volatility of market

prices/rat es; t he presence of traders willing t o make markets and commit prices/rat es; t he presence of traders willing t o make markets and commit capital t o support trading; and, trading / leverage strat egies deployed.capital t o support trading; and, trading / leverage strat egies deployed.

It has hist orically been t hought of as associat ed wit h funding, however, it It has hist orically been t hought of as associat ed wit h funding, however, it can be separat ed int o t wo distinct risk types:can be separat ed int o t wo distinct risk types: Funding Liquidity RiskFunding Liquidity Risk Trading Liquidity Risk.Trading Liquidity Risk. In Sept ember 2008 t he BIS released a detailed guidance document on In Sept ember 2008 t he BIS released a detailed guidance document on

liquidity management liquidity management Principles f or Sound Principles f or Sound Liquidity Risk Management and Supervision4.Liquidity Risk Management and Supervision4.

The document provides a number of guidance principles around; The document provides a number of guidance principles around; governance; measurement and management ; public disclosure; and, t he governance; measurement and management ; public disclosure; and, t he role of supervisors.role of supervisors.

It is t he most comprehensive regulat ory/supervisory response on t he It is t he most comprehensive regulat ory/supervisory response on t he subject t o dat esubject t o dat e



Funding Liquidity RiskFunding Liquidity Risk This ref ers t o t he ability t o meet funding obligations by eit herThis ref ers t o t he ability t o meet funding obligations by eit her

financing t hrough sale of assets or by borrowing.financing t hrough sale of assets or by borrowing. The most poignant example is t he recent crisisThe most poignant example is t he recent crisis--driven drying up of driven drying up of

access t o debt securities markets globally which f orced governmentsaccess t o debt securities markets globally which f orced governments

in most jurisdictions t o provide massive window facilities t o market in most jurisdictions t o provide massive window facilities t o market participants.participants.

At t he strat egic level, most banks will manage funding liquidity risk At t he strat egic level, most banks will manage funding liquidity riskt hrough t he ALM process and t his is looked at in t he slides ont hrough t he ALM process and t his is looked at in t he slides on

ALM ALM In many smaller banks, however, it can be t he responsibility of t he In many smaller banks, however, it can be t he responsibility of t he

trading department t hat also has day t o day responsibility f ortrading department t hat also has day t o day responsibility f oroperationalising t he strat egy.operationalising t he strat egy.



Trading Liquidity RiskTrading Liquidity Risk This risk ref ers t o t he ability t o continually ent er int o market This risk ref ers t o t he ability t o continually ent er int o market

transactions and is also ref erred t o as market liquidity or asset transactions and is also ref erred t o as market liquidity or asset liquidity risk.liquidity risk.

A good example of t he impact of t his risk was demonstrat ed during A good example of t he impact of t his risk was demonstrat ed during

t he recent crisis when int erest rat e derivative spreads increasedt he recent crisis when int erest rat e derivative spreads increasedmarkedly wit h t he drying up of product availability in combination markedly wit h t he drying up of product availability in combination wit h t he ongoing need f or hedging transactions.wit h t he ongoing need f or hedging transactions.

It result ed in a dramatic increase in costs, t hreat ening economic It result ed in a dramatic increase in costs, t hreat ening economic viability.viability.

A central aspect during t he period was t he contagion eff ect which A central aspect during t he period was t he contagion eff ect which

impact ed on multiple product groupings and underlined t he need t o impact ed on multiple product groupings and underlined t he need t o fully understand t he risks associat ed wit h t he int errelat ed nature of fully understand t he risks associat ed wit h t he int errelat ed nature of financial service productsfinancial service products



Operational RiskOperational Risk

Under t he Basel II Accord, operational risk isUnder t he Basel II Accord, operational risk isdefined as ...t he risk of loss resulting fromdefined as ...t he risk of loss resulting from

inadequat e processes, people and syst ems orinadequat e processes, people and syst ems orfrom ext ernal events. from ext ernal events.

The Accord also recognises however t hat t he The Accord also recognises however t hat t he t erm operational risk can include diff erent t erm operational risk can include diff erent

meanings, and t heref ore permits banks t o use meanings, and t heref ore permits banks t o use t heir own definitions provided t he key elementst heir own definitions provided t he key elementsof t he Basel II definition areincluded.of t he Basel II definition areincluded.



While banks have always engaged in While banks have always engaged in operational risk management t he Basel IIoperational risk management t he Basel IIrelat ed rules introduce new dimensions t o relat ed rules introduce new dimensions t o t his practice in t he f orm of t his practice in t he f orm of

explicit capital requirementsexplicit capital requirements

corresponding changes in supervisorycorresponding changes in supervisoryoversight oversight



The management of operational risk requires syst ems capable of The management of operational risk requires syst ems capable of identifying, recording and quantifying operational failures t hat mayidentifying, recording and quantifying operational failures t hat maycause financial loss.cause financial loss.

The syst ems are essentially tracking processes t hat monit or t he The syst ems are essentially tracking processes t hat monit or t he behaviour and perf ormance of existing syst ems and processes. Tbehaviour and perf ormance of existing syst ems and processes. T

The essential elements includeThe essential elements include 1) t he ability t o track and monit or perf ormances of specified1) t he ability t o track and monit or perf ormances of specified operational processes and syst emsoperational processes and syst ems 2) maint enance of databases of operational loss experience2) maint enance of databases of operational loss experience Hist oryHist ory 3) capacity t o provide exception reporting or initiat e actions t o 3) capacity t o provide exception reporting or initiat e actions t o

enable int ervention t o reduce operational risksenable int ervention t o reduce operational risks



Asset and Liability Management Asset and Liability Management( ALM)( ALM)

Focus on some key ALM activitiesFocus on some key ALM activities

Successful ALM units creat e a properly alignedSuccessful ALM units creat e a properly alignedrisk and return management process.risk and return management process.

The right mix bet ween skills and risk appetit e The right mix bet ween skills and risk appetit e must be identified, expect ed out comes of must be identified, expect ed out comes of activities known and appropriat e metricsactivities known and appropriat e metricsestablished.established.

The approach adopt ed needs t o be aligned t o The approach adopt ed needs t o be aligned t o t he realities of t he market t he bank is operating t he realities of t he market t he bank is operating wit hin and t o its desired risk appetit ewit hin and t o its desired risk appetit e



Mismatch Management andMismatch Management andPerformance MeasurementPerformance Measurement

A bank needs t o decide whet her it wants t o take a relatively neutral A bank needs t o decide whet her it wants t o take a relatively neutralapproach t o ALM risks or isapproach t o ALM risks or is

prepared t o take a more aggressive approach and target higherprepared t o take a more aggressive approach and target higher

long t erm earnings and an increaselong t erm earnings and an increase in economic value. Irrespective of t he choice madein economic value. Irrespective of t he choice made A bank needs t o realise t hat t he right level of A bank needs t o realise t hat t he right level of skills and resources need t o be committ ed t o support t he function.skills and resources need t o be committ ed t o support t he function. Failure t o do t his can result in a poorly managed operation Failure t o do t his can result in a poorly managed operation

charact erised bycharact erised by volatility in; core earnings/marginvolatility in; core earnings/margin economic value,economic value, unpredictable economic resultsunpredictable economic results



Funds Transfer Pricing (FTPFunds Transfer Pricing (FTP

)) The funds transf er pricing syst em has become a fundamental ALMThe funds transf er pricing syst em has become a fundamental ALM

t ool in a bank.t ool in a bank. It creat es t he ability t o immunize business units from risk andIt creat es t he ability t o immunize business units from risk and

provides t he basis f or economic and product transparency.provides t he basis f or economic and product transparency.

The process of FTP is designed t o identify int erest margins andThe process of FTP is designed t o identify int erest margins andremove int erest rat e and funding or liquidity risk.remove int erest rat e and funding or liquidity risk.

Looking at it from t he business unit perspective, it eff ectively locksLooking at it from t he business unit perspective, it eff ectively locksin t he marginin t he margin

on loans and deposits by assigning a transf er rat e t hat reflects t he on loans and deposits by assigning a transf er rat e t hat reflects t he repricing and cash flow profile of each balance sheet it emrepricing and cash flow profile of each balance sheet it em it isit is

applied t o bot h assets and liabilities.applied t o bot h assets and liabilities. From t he ALM units perspective, it isolat es business perf ormance From t he ALM units perspective, it isolat es business perf ormance

int o discret e portf olios t hat can be assigned individualised metricsint o discret e portf olios t hat can be assigned individualised metricsand facilitat es t he centralisation and management of int erest rat e and facilitat es t he centralisation and management of int erest rat e mismat ches.mismat ches.



The met hods used by banks are generallyThe met hods used by banks are generallyconsist ent consist ent

FTP rat es are structured t o include bot h int erest FTP rat es are structured t o include bot h int erest rat e and funding liquidity risks wit h t he derivedrat e and funding liquidity risks wit h t he derivedtransf er yield curve construct ed t o include transf er yield curve construct ed t o include appropriat e premiums.appropriat e premiums.

Such premiums should capture all elementsSuch premiums should capture all elementsassociat ed wit h t he banks funding cost. Tassociat ed wit h t he banks funding cost. T

These should include t he cost of it ems such as; These should include t he cost of it ems such as; holding liquidity reserves; optionality costs,holding liquidity reserves; optionality costs,where prewhere pre--payment rights exist ; t erm funding payment rights exist ; t erm funding program costs; and, it ems such as basis risk.program costs; and, it ems such as basis risk.



Liquidity ManagementLiquidity Management

Like all areas of risk management, it isLike all areas of risk management, it isnecessary t o put a workable framework in place necessary t o put a workable framework in place t o manage liquidity risk.t o manage liquidity risk.

It needs t o look at t wo aspects: 1) Managing It needs t o look at t wo aspects: 1) Managing liquidity under t he business as usualliquidity under t he business as usual

scenario, 2) Managing liquidity under stressscenario, 2) Managing liquidity under stressconditions.conditions.

It also needs t o include a number of liquidityIt also needs t o include a number of liquidity

measurement t ools and establish limits against measurement t ools and establish limits against t hem. Some of t he t ools t hat have becomet hem. Some of t he t ools t hat have become industry standard are shown in t he next slidesindustry standard are shown in t he next slides



Selection of LiquiditySelection of LiquidityMeasurement ToolsMeasurement Tools

Liquidity Management Tool Description / AimLiquidity Management Tool Description / Aim

Static Funding GapStatic Funding Gap Defines t he short fall in maturing liabilities required t oDefines t he short fall in maturing liabilities required t oservice maturing assetsservice maturing assets it is usually calculat ed oit is usually calculat ed on an a

maturity bucket basis and is calculat ed as t he net asset maturity bucket basis and is calculat ed as t he net asset position over t otal liabilities.position over t otal liabilities.

Dynamic Cash Flow GapDynamic Cash Flow Gap This includes a measurement based on maturing assetsThis includes a measurement based on maturing assets

and liabilities plus assumed marketable asset liquidationand liabilities plus assumed marketable asset liquidationover a given period.over a given period.

Liquidity Asset RatiosLiquidity Asset Ratios This is t he ratio of liquid assets t o t otal liabilities wit hThis is t he ratio of liquid assets t o t otal liabilities wit hliquids defined t o include it ems such as cash and cashliquids defined t o include it ems such as cash and cashequivalents, trading account securities, repos investmentsequivalents, trading account securities, repos investmentsint o government securities, et cint o government securities, et c

Concentration RatiosConcentration Ratios This is an important ratio t hat reassures t he funding fromThis is an important ratio t hat reassures t he funding froma particular source compared t o assets /liabilities ora particular source compared t o assets /liabilities orcapital.capital.

Liquidity Stress MeasurementLiquidity Stress Measurement A number of ratios can be examined here looking at A number of ratios can be examined here looking at multiple low stress and high stress scenariosmultiple low stress and high stress scenarios



At t he governance level, boards need t o recognise liquidity risk as t he At t he governance level, boards need t o recognise liquidity risk as t he ultimat e killer.ultimat e killer.

This means a board needs t o clearly articulat e t he risk t olerance of t he This means a board needs t o clearly articulat e t he risk t olerance of t he organization and subject t he balance sheet t o regular scrutiny.organization and subject t he balance sheet t o regular scrutiny. Guiding principles need t o be included as part of t his process.Guiding principles need t o be included as part of t his process.The following 5 principles are valuable:The following 5 principles are valuable:1. Diversify sources and t erm of funding 1. Diversify sources and t erm of funding concentration and contagion were concentration and contagion were

t he killers in t het he killers in t herecent crisis.recent crisis.

2 . Identify, measure, monit or and control2 . Identify, measure, monit or and control it is still surprising t hat manyit is still surprising t hat manybanks do not fullybanks do not fullyunderstand t he composition of t heir balance sheet t o a sufficient level of understand t he composition of t heir balance sheet t o a sufficient level of detail t o allow f ordetail t o allow f ormanagement of t he risks.management of t he risks.

3. Understand t he int eraction bet ween liquidity and ot her risks3. Understand t he int eraction bet ween liquidity and ot her risks e.g. basise.g. basisriskrisk t he flow ont he flow onimpact of an event in one area can be devastating t o ot hers.impact of an event in one area can be devastating t o ot hers.

4 . Establish bot h tactical and strat egic liquidity management platf orms4 . Establish bot h tactical and strat egic liquidity management platf orms keep keep a f ocus on bot ha f ocus on bot ht he f orest and t he trees.t he f orest and t he trees.

5. Establish detailed contingency plans and stress t est under multiple 5. Establish detailed contingency plans and stress t est under multiple scenarios regularlyscenarios regularly



InfrastructureInfrastructure

The infrastructure underpinning riskThe infrastructure underpinning riskmanagement and ALM has many componentsmanagement and ALM has many componentsbut t he t wo t hat consist ently creat e issues f orbut t he t wo t hat consist ently creat e issues f or

Banks are:Banks are: t echnologyt echnology

people.people.

As banks increasingly f ocus on improving risk As banks increasingly f ocus on improving riskmanagement practices t he absolut e criticality of management practices t he absolut e criticality of t hese t wo areas must be addressedt hese t wo areas must be addressed



In ClosingIn Closing

A practical starting point is t o construct a framework f or risk A practical starting point is t o construct a framework f or riskmanagement considering t he detail of t he business activities t he management considering t he detail of t he business activities t he bank is involved in,bank is involved in,

Analysing and ranking t he risks involved in t he various businesses Analysing and ranking t he risks involved in t he various businessesand deciding how much risk t he bank should take.and deciding how much risk t he bank should take.

While t he headline cat egories in t he risk management frameworkWhile t he headline cat egories in t he risk management frameworkwill be similar f or all banks, t he needs in bot h analysis andwill be similar f or all banks, t he needs in bot h analysis andmanagement will vary considerably f or banks of diff erent sizes andmanagement will vary considerably f or banks of diff erent sizes andoperating in markets of diff erent stages of development.operating in markets of diff erent stages of development.

The program t o build eff ective risk management in a bank must be The program t o build eff ective risk management in a bank must be sponsored and overseen by t he highest levels of t he banksponsored and overseen by t he highest levels of t he bank

governance and oversight structures established and embedded in governance and oversight structures established and embedded in t he organizational fabric.t he organizational fabric.

This commitment needs t o be backed up wit h a range of additionalThis commitment needs t o be backed up wit h a range of additionalcommitments t o ensure budget, t echnology and people resourcescommitments t o ensure budget, t echnology and people resourcesare sufficient t o execut e t he implementation plansare sufficient t o execut e t he implementation plans

a risk framework for banks

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