hsbc risk management for senior bankers steve troop deputy chief executive - hsbc turkey istanbul,...
TRANSCRIPT
HSBC
RISK MANAGEMENT FOR SENIOR BANKERS
Steve Troop
Deputy Chief Executive - HSBC Turkey
Istanbul, 20th November 2002
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What today’s presentation is not…
Technically-focused : ‘soft’ issues rather than the mechanics of risk management…..
Definitive : no-one can offer a set of ‘Answers’ : all I will do today is illustrate some - but by no means all - of the ‘Questions’…..
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Today’s Presentation
The role of senior management in risk management
Establishing sound risk management principles
Some thoughts on the application of
‘risk-management-in-the-round’
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1. Senior Management’s Role
Banking is the original ‘risk business’‘No-risk’ banking a contradiction in termsWe buy risk, we sell risk, we measure risk, we manage risk, we (or our subordinates) make ‘risk decisions’ all day and every day ……
If ‘risk’ is the essence of banking, it follows that the role of senior management is risk management …….
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1. Senior Management’s Role
Establishing a culture of risk management Strategy Core Values / the ‘conscience of the company’ConsistencyProvide focus
Seeing the big picture - ‘joined-up’ risk . management Collective Management at the top of the bank Picking the right team
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The Role of Senior Management(2)
Establishing a culture of risk management
Strategy Every bank should have one ! A bank’s strategy is, of itself, a statement
of risk appetite Review, revise , update ‘Test’ investment and risk decisions against
that strategy Communicate it internally
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The Role of Senior Management(3)
Core Values / the ‘conscience of the company’ Statement of principles Guidelines / handbooks as to staff conduct Role models : talk-the-walk / walk-the-talk Collective belief in the value of risk
management (If senior management don’t believe in it, why should anyone else ?)
Consistency Set ‘rules’ and then apply them Be seen to apply them
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Provide focus: Risk management as a tool to achieve efficiency,
productivity and profitability
Deployment of resources : link between risk, return, capital employed, strategy. Measurement and modelling is important though it is decision makers who create the difference…….
The Role of Senior Management(4)
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The Role of Senior Management(5)
Seeing the big picture : ‘joined-up’ risk management
Multiplicity of risks ; Credit Market : interest / exchange rate, re-
pricing, availability Operational / technical Compliance / legal Reputational
Complication : some of these risks compete / some offset……
How to pull them all together and ‘see’ the big picture ?
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The Role of Senior Management(6)
Collective management at the top of the bank ;
Is there a Top Team ? Is it a Team ? Does it communicate ?
Does it discuss risk management? If so, how often?
Shared approach to risk management / common view - or ‘someone else’s job ?’
How ‘honest’ is communication ? Do we encourage intuition / feelings ?
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Have we picked the ‘right team ? ’
Balance : mix of styles / perspectives Professional training, experience, CVs
The Role of Senior Management(7)
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Does our organisational structure facilitate appropriate risk management ?
Reporting lines : do these reflect the need for independence / objectivity ? …….or do we have the fox looking after the
hen house ?
The Role of Senior Management(8)
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Delegated authorities are essential to the effective operation of any large bank: are they ;
Unequivocal ? (As to value, limits, scope of activity, decision-making, etc) Clearly understood by those who hold those authorities ? Are excesses -of-authority identified quickly
(and by whom) ?
The Role of Senior Management(9)
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The Role of Senior Management(10)
Questions to ask - on a regular basis ;
Bonuses : do our strategies for variable compensation complement - or compete with - a ‘risk management culture’ ?
Recognition : do we promote / advance the careers of those who demonstrate a balanced approach to management (considered commercial judgment with an awareness of risk) ?
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Questions to ask - on a regular basis;
Roles & responsibilities : is risk management embedded in everyone’s Job Description - or is there a poachers-and-gamekeepers environment ? (‘Creative tension’ is inevitable and healthy : internal warfare is not)
Training : does the risk-management ethos inform / shape Training commitments and budgets ?
The Role of Senior Management(11)
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Questions to ask - on a regular basis;
Reputational risk : key role of senior management. What do we have in place to protect us from ‘banana skins’ that will embarrass us in front of regulators, our customers, our shareholders, our staff, the media and the general public ?
The Role of Senior Management(12)
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The Role of Senior Management(13)
More questions ;
Are we compliant with legislation ? Though at least as important……
Have we let compliance with legislation / regulation become a proxy for managing risks ? (Going-through-the-motions)
Do we shoot-the-messenger or are there channels / mechanisms through which more junior concerns can be listened to ?
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The Role of Senior Management(14)
(Yet) more questions ;
Do we learn from mistakes ? Formal, independent, objective review with recommendations ? (Are these followed up ?)
Is information flow timely ? (It took an estimated 45 seconds for nervous stimuli to get from the tail of the largest dinosaur to its brain - by which time, the predator had already eaten both hind legs ……….)
Top management meetings : shape and focus is important. Do we spend time explaining (arguing about?) what happened - or do we focus on what might/could / will happen in future ?
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2. Sound Risk Management Principles
Balance between risk / reward : we all claim to understand the basic principles of risk/ reward. Most of us focus on the reward……
Identifying future income associated with a particular investment / lending decision is straightforward : do we identify (quantify) worst-case risk ?
If we do, do we have house-limits on worst-case risks ?
(Put bluntly, how much are we prepared - or indeed, how much can we afford - to lose ?)
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Do we look at profitability on transactions / relationships / business-lines ?
Loss-leadership a fact of commercial life in competitive markets
Loss-leadership is a tactic - not a strategy….
Do we / can we measure loss-leadership ? Do we limit (time or value) how far we are prepared to go with loss-leadership at a bank-level ?
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Sound Risk Management Principles (2)
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Do we have a portfolio strategy ?
Have we limited activity / exposure to specific sectors ?
If we have, can we implement it ? (i.e. is the data accessible / is it recorded correctly ?)
Do we have ‘natural hedges’ ? Do these supply the ‘balance’ we need ?
If no, what hedging tools can we put in place ?
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Sound Risk Management Principles (3)
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Do we demonstrate resolve
How do we deal with policy exceptions ?
How many exceptions do we have ? (If a large number, do we really have a policy ?)
‘It’s all about execution’ ………
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Sound Risk Management Principles (4)
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Top Team involvement ;
Collective decisions (not just collective discussions)
Don’t be afraid to micro-manage / spot-check from time to time………
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Sound Risk Management Principles (5)
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3. Risk Management-in-the-round
A clear and obvious need to ‘bring it all together’ :
Executive Risk Committee ALCO EXCO IT Steering Committee Board Meetings Audit Reports Contingency Management
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3. Risk Management-in-the-round
Executive Risk Committee Risk Decree requirement Chaired by non-Executive Director &
Board Member (Minutes for Board) Quarterly reviews of risk management No business leadership participates Heads of Audit, Operations, Compliance,
Legal, Credit, Treasury Control/ Back Office, ICU.
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3. Risk Management-in-the-round
ALCO Weekly (more often as needed) Minuted Standard format : specific sections on limit
excesses (credit, treasury) Reviews pricing, funding, balance-sheet,
P&L, profitability Attended by both business leadership and
risk control functions.
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3. Risk Management-in-the-round
EXCO Monthly (more often as needed) Business leadership & top management
of the bank Minuted Reviews out put from Audit, ERC and
ALCO.
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3. Risk Management-in-the-round
IT Steering Committee Quarterly (more often as needed) Business leadership & top management of
the bank Minuted IT: material in any risk management
discussion plus inherent risks in IT itself IT’s central role as provider of numeric
tools for measurement and management of risk
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3. Risk Management-in-the-round
Role of Audit Reviews the adequacy / effectiveness of
risk controls Publishes formal reports &
recommendations addressed to ‘owners’ of businesses and processes.
Timely responses required / tracked to conclusion.
Formal reporting line to Audit in Head Office (London)
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3. Risk Management-in-the-round
Contingency Management Pre-identifcation of possible event /
systemic risks Modelling tools / ‘early warning’ signals Business Resumption / Disaster Recovery
Plans (Test them………)
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SUMMARY
Risk management is the very essence of top management’s role and its principal responsibility
Top management set the tone for risk management / risk consciousness at any institution……
Risks are interdependent : top management’s job is to see ‘The Big Picture’……
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CONCLUSION
No ‘Right Answer’.. …
An evolutionary process : complacency the greatest threat
Asking ‘difficult’ Questions - and constant refinement of the Answers - is the most valuable thing any senior manager can and should be doing…..
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THANKYOU FOR LISTENING.
ANY QUESTIONS ?
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