nepal banking risk management march 2015 for senior rastraiya banijya bank employees

(c) Cervelet Consulting copyright 2015

Risk Management in Banking

Developed & Presented by:

William P. Kittredge, PhD President

Cervelet Management & Strategy Consultants, LLC


An Introduction to Risk

Risk Management is the process of measuring or assessing the actual or potential dangers of a particular situation.

"A reluctance to face up immediately to bad news is what turned a problem at Salomon from one that could have easily been disposed of into one that almost caused the demise of a firm with 8,000 employees," Warren Buffet.

http://www.bankersacademy.com/free_tutorials.php?BOL_FCRM_PPT


Success Depends Upon

A positive corporate culture.

Actively observed policies and procedures.

Effective use of technology.

Independence of risk management professionals.



History

1971 breakdown of Bretton Woods

1994 Mexico peso crisis

1997 Asian currency crisis

1998 collapse of LTCM – Black-Sholes

2008 collapse of Bear Stearns, Lehman Brothers,

2014 King Mongol Institute technology financial scandal

2015 Nepal banks involved in HSBC scandal


Evolution of Risk Management

Emerged as a discipline during the early 1990s.

Used long before (1960s).

Initially the term 'risk management' described techniques for addressing insurable risks.


Risk Management Yesterday Risk reduction through safety, quality control

and hazard education.

Alternative risk financing, including self-insurance and captive insurance.

The purchase of traditional insurance products.

Use of derivatives to hedge or customize market risk exposures.


Risk Management Today

Treats derivatives as a problem as much as a solution.

Focuses on reporting, oversight and segregation of duties within the organization.

Development of international standards – technically voluntary


Enron's Experience with Risk Management

Maintained a risk management function.

Lines of reporting reasonably independent.

Mark-to-market valuations were subject to adjustments by management.

Few career risk managers.

Fluid workforce.

Employees always looking for next promotion.

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Risk is a Function of 2 Factors

Uncertainty.Change in market conditions that are

unpredictable and/or beyond the control of the bank and/or its customers.

Exposure.Degree to which the bank's portfolio

composition is impacted by changes in market conditions.


Types of Risk

Operational.

Credit.

Reputational.


Operational Risk

The risk of loss resulting from inadequate internal processes or the failure of internal processes, people and systems, or from external events.


Operational Risks Include

Internal Fraud.

External Fraud.

Employment Practices and Workplace Safety.

Clients, Products and Business Practices.


Operational Risks Include

Damage to Physical Assets.

Business Disruption and System Failures.

Execution, Delivery and Process Management.


Internal Fraud & Theft

Unauthorized Activity.

Transactions not reported.

Transaction type unauthorized.

Mis-marking of position.



Credit fraud/worthless deposits.

Theft/extortion/embezzlement/robbery.

Misappropriation of assets.

Forgery.

Account take-over/impersonation – e.g. identify theft or hacking



Bribes/kickbacks.

Insider trading.

Money laundering.

Willful blindness – i.e. deliberately ignoring illicit activities.


External Fraud & Theft

Theft/robbery.

Forgery.

Check kiting.

Identity theft.

Elder financial abuse.


External Fraud & Theft

Systems Security.

Hacking damage & theft of money.

Theft of information (with monetary loss).


Employment Practices and Workplace Safety

Employee Relations.

Compensation, benefit, termination issues.

Organized labour issues.



Safe Environment.

General liability (slips and falls).

Employee health and safety rules.

Workers’ compensation.



Diversity and Discrimination

All discrimination types.

Harassment.

Equal Employment Opportunity (EEO) – frequently part of international funding agreements.


Clients, Products and Business Practices Suitability, Disclosure and Fiduciary.

Fiduciary breaches/guideline violations.

Suitability/disclosure issues.

Retail consumer disclosure violations.

Breach of privacy.

Aggressive sales.


Clients, Products and Business Practices

Suitability, Disclosure and Fiduciary.

Aggressive sales.

Inadequate product offerings.

Account churning.

Misuse of confidential information.

Lender liability.



Improper Business or Market Practices .Antitrust. Improper trade/market practice.Market manipulation. Insider trading (on firm’s account).Unlicensed activity.Money laundering.



Selection, Sponsorship and Exposure.Failure to investigate client per guidelines.Exceeding client exposure limits.

Advisory Activities.Disputes over performance or advisory activities.PWC and 'happy talk' reporting.


Damage to Physical Assets

Disasters and Other Events.

Natural disaster losses.

Human cause losses from external sources (terrorism, vandalism).

Human cause losses from internal sources (sabotage, work slow down)


Business Disruption and System Failures

Systems.

Hardware

Software.

Telecommunications.

Utility outage/disruptions.


Execution, Delivery and Process Management

Transaction Capture, Execution and Maintenance.

Miscommunication.

Data entry, maintenance or loading errors.

Missed deadline or responsibility.

Model/system misoperation.




Accounting error/entity attribution error.

Other tasks subject to performance failure.

Record retention.

Documentation maintenance.




Delivery failure.

Collateral management failure.

Reference data maintenance.



Monitoring and Reporting.

Failed mandatory reporting obligations.

Inaccurate external loss (loss incurred).



Customer Intake and Documentation.

Unapproved access given to accounts.

Incorrect client records (loss incurred).

Negligent loss or damage of client assets.



Customer/Client Account Management.

Unapproved access given to accounts.

Incorrect client records (loss incurred).

Negligent loss or damage of client assets.



Trade Counter-partiesNon-client counter-party performance failure.

Vendors and Suppliers.

Outsourcing.

Vendor disputes.


Operational Risk Checklist

Employee training.

Close management oversight.

Segregation of duties.

Employee background checks.


Operational Risk Checklist

Procedures and process.

Purchase of insurance.

Exiting certain businesses.

Capitalization of risks.


Credit Risk

Risk due to an uncertainty in a counter-party's ability to meet its obligations in accordance with agreed upon terms.


Credit Risks Include:

Loans. Acceptances. Interbank transactions. Trade financing. FX transactions.


Credit Risks Include:

Futures. Swaps. Equities. Letters of credit. Options.


Managing Credit Risk

Establish an appropriate credit risk environment.

Operate under a sound credit-granting process.

Maintain an appropriate credit administration, measurement and monitoring process.

Ensure adequate controls over credit risk.


Appropriate Credit Risk Environment

Board of Directors should review credit risk strategy periodically.

Senior management should implement credit risk strategy approved by the Board.


Operate a Sound Credit Granting Process

Criteria should include thorough understanding of the borrower, purpose/structure of credit and its source of repayment.

Establish overall credit limits at the level of individual borrowers/connected counter-parties


Operate a Sound Credit Granting Process

Have a clearly established process for approving new credits/extension of existing credits.

Extension of credit must be made on an 'arm’s length basis' – i.e. 'special deals' for 'special people' spell trouble


Maintain a Credit Administration, Measurement and Monitoring Process

Have in place a system for ongoing administration of various risk-bearing portfolios.

Develop an internal risk rating system for managing credit risk.


Maintain a Credit Administration, Measurement and Monitoring Process

Have an information system and analytical techniques that enable management to measure credit risk of on/off balance sheet activities.

System for monitoring overall composition and quality of the credit portfolio.

Consider future changes in economic conditions when assessing individual credits.


Ensure Adequate Controls Over Credit Risk

System of independent, ongoing credit review.

Credit granting function is properly handled and credit exposures are within limits.

System for managing problem credits.


Credit Risk Checklist

Stringent credit standards for borrowers and counter-parties

Strict portfolio risk management.

Constant focus on changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank’s counter-parties.

http://www.bankersacademy.com/riskmanagement.php?BOL_FCRM_PPT


Reputational Risk

The potential that negative publicity, whether true or not, will result in loss of customers, especially large international corporate clients, producing a decrease in revenues and/or an increase in costs, including capital costs (e.g. drop in stock price or bond rating).


Benefits of Effective Reputation Management

Improving relations with shareholders and lowering the cost of capital.

Creating a more favourable environment for investment.

Recruiting/retaining the best employees.


Benefits of Effective Reputation Management

Reducing barriers to development in new markets.

Securing premium prices for products.

Minimizing the threat of litigation.


Reputational Risk Management

The key to managing reputational risk is sound risk management, coupled with

straightforward communication about the problem the bank is facing.



Reputational Risk Management

Re-establishing a firm’s reputation takes a long time.

"We can afford to lose money — even a lot of money. But we can't afford to lose reputation — even a shred of reputation." Warren Buffet


Reputational Risk Cases

Perrier – Toluene traces.

Exxon – Valdez spill.

Union Carbide – Bhopal, India.

Arthur Andersen – Enron shredding.

Firestone – Tires.


Reputational Risk Checklist

Processes for crisis management are planned and documented.

External perceptions of the bank are regularly measured.

Reputational threats are systematically tracked.

Employees are trained to identify and manage reputational risks.

Standards on environmental, human rights and labour practices are set publicly.

Relationships and trust with pressure groups and other potential critics are established.


True or False? Corporate reputation is one of the primary

assets of my bank.

The risks involving a bank’s reputation have increased significantly over the past five years.

It is impossible to quantify the impact of reputational risks.

Reputational risk is harder to manage than other forms of risk.


True or False?

My bank is proactive in enhancing and protecting its reputation.

My bank usually thinks about its reputation only when things go wrong.

A well run bank doesn’t need to invest extra resources into guarding against reputational risk.


Global Impacts of Risk Management Failures

The examples given earlier and others reflect a growing awareness that the inter-linkages driven by globalization make bank risk management an international issue.

The response has become increasingly globalized as nations come to the realization that international standards are needed to mitigate risk and support best practices.


Regulatory Responses - Goals

Reduce bank secrecy to enforce anti-money laundering and tax evasion

Insider trading rules. Bank bribery act. Reduce conflicts of interest and other 'corrupt'

practices. Employs record retention and reporting

requirements.


Bank for International SettlementsBasel Committee on Banking Supervision (BCBS)

The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters.

Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide.


Bank for International SettlementsBasel Committee on Banking Supervision (BCBS) The Committee's members come from Argentina,

Australia, Belgium, Brazil, Canada, China, European Union, France, Germany, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.

The present Chairman of the Committee is Mr Stefan Ingves, Governor of Sveriges Riksbank.


Regulatory ResponsesBasel I (1988)

Primarily focused on credit risk and appropriate risk weighting of assets.

Assets of banks were classified in five categories according to credit risk, carrying risk weights of:

0% (for example cash, bullion, home country debt like Treasuries),

20% (securitisations such as mortgage-backed securities (MBS) with the highest AAA rating),


Regulatory ResponsesBasel I (1988)

50% (municipal revenue bonds, residential mortgages),

100% (for example, most corporate debt), and No rating. Banks with an international presence are required to

hold capital equal to 8% of their risk-weighted assets (RWA).

Functionally, all banks have an international presence.


Regulatory ResponsesBasel II (2004)

Now effectively superseded by Basel III Intended to create an international standard for

banking regulators to control how much capital banks need to put aside to guard against the types of financial and operational risks banks (and the whole economy) face.

Management requirements designed to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending and investment practices.


Regulatory ResponsesBasel II (2004)

Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability

'Economic stability' refers to national and international economic stability, creating a global interest in the affairs of individual nation's banking systems.


Regulatory ResponsesBasel III (2010)

Basel III (2010) is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk.

'Voluntary' Scheduled to be introduced from 2013 until 2015;

however, changes from 1 April 2013 extended implementation until 31 March 2018 and again extended to 31 March 2019.

But BSCS issues annual reports on progress.



Developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08.

Basel III is supposed to strengthen bank capital

requirements by increasing bank liquidity and decreasing bank leverage.



Notification of the Bank of Thailand No. 54/2008 Guideline for Calculation of Credit Risk for

Commercial Banks Follows precisely the Basel III guidelines Implemented in all Thailand banks under this order.



Bangkok Bank implementation supports Basel III and Bank of Thailand requirements.

My bank and it strictly complies with, for instance, the US foreign accounts reporting requirements, consistent with Basel III.



Thai Anti-Money Laundering Office (Amlo) found huge embezzlement at King Mongkut's Institute of Technology Ladkrabang campus (KMITL) involving 1.66 billion baht of siphoned funds.

The financial scandal exploded with the arrest of the university’s senior financial officer and a former bank branch manager.

Siam Commercial Bank (SCB) and King Mongkut's Institute of Technology Ladkrabang (KMITL) has reached an agreement to settle the embezzlement scandal.



An investigation has been launched by Nepal authorities into claims that a number of citizens was storing 'black money' in a Swiss bank account.

Eight Nepali citizens are under investigation over the 5.5 billion rupee deposit ($USD 55 million).

Nepal's central bank, the Nepal Rastra Bank, is one of a number of government authorities participating in the probe. The others are the Finance Ministry, and the Ministry of Foreign Affairs.

Failure of risk management.


Regulatory ResponsesWhat to Expect

Increasingly aggressive enforcement. Increasingly strict punishments

PWC Tesco (UK) & British American Tobacco

fined $25 million and a two-year ban

Linkages to drug & terrorist funding and/or allegations of same

Governments increasing interest in international taxation enforcement


When risk management is donecorrectly you can sleep at night at home.

This presentation available on SlideShare at: http://www.slideshare.net/


Developed and Presented by William P. Kittredge, President

Cervelet Management & Strategy Consultants, LLC.Bangkok Islamabad London Seattle Singapore

www.cerveletconsulting.com

Facebook: Cervelet | Management & Strategy Consultants

http://www.cerveletconsulting.com/


References Aggarwal, Raj, "The Translation Problem in International

Accounting: Insights for Financial Management. "Management International Review 15 (Nos. 2-3, 1975): 67-79.

Bank for International Settlements “Developments in credit risk management across sectors: current practices and recommendations” , February 2015 ISBN 978-92-9197-047-6 (online) available on the BIS website (www.bis.org)

Big News Network (online) “Nepal caught up in HSBC Geneva bank scandal” 15 February 2015. accessed: 4 March 2015 from: http://www.bignewsnetwork.com/index.php/sid/230293231

World Bank Group “Measuring Corruption Risk using ‘Big’ Public Procurement Data in Central & Eastern Europe” , 2014

http://www.bis.org/

http://www.bignewsnetwork.com/index.php/sid/230293231

nepal banking risk management march 2015 for senior rastraiya banijya bank employees

Business

risk risk management

risk management function

banking risk management

term risk management

risk of loss

market risk exposures

types of risk operational

process management