Unformatted text preview: 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. Page 2 Risk Has Two Components Uncertainty. Exposure. Page 3 Types of Risk Operational. Credit. Reputational. Page 4 Operational Risk
The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Page 5 Operational Risks Include Internal Fraud. External Fraud. Employment Practices and Workplace Safety. Clients, Products and Business Practices. Damage to Physical Assets. Business Disruption and System Failures. Execution, Delivery and Process Management.
Page 6 Internal Fraud Unauthorized Activity. Transactions not reported. Transaction type unauthorized. Mismarking of position. Theft and Fraud. Fraud/credit fraud/worthless deposits. Theft/extortion/embezzlement/robbery. Misappropriation of assets. Forgery. Account takeover/impersonation. Bribes/kickbacks. Insider trading. Money laundering. Willful blindness. Page 7 External Fraud Theft and Fraud. Theft/robbery. Forgery. Check kiting. Identity theft. Elder financial abuse. Systems Security. Hacking damage. Theft of information (with monetary loss).
Page 8 Employee Relations. Employment Practices and Workplace Safety
Compensation, benefit, termination issues. Organized labor issues. General liability (slips and falls). Employee health and safety rules. Workers' compensation. All discrimination types. Harassment. Equal Employment Opportunity (EEO).
Page 9 Safe Environment. Diversity and Discrimination. Clients, Products and Business Practices Suitability, Disclosure and Fiduciary. Suitability/disclosure issues. Breach of privacy. Aggressive sales. Fiduciary breaches/guideline violations. Retail consumer disclosure violations. Inadequate product offerings. Account churning. Lender liability. Misuse of confidential information. Page 10 Improper Business or Market Practices . Antitrust. Improper trade/market practice. Market manipulation. Unlicensed activity. Money laundering. Insider trading (on firm's account). Clients, Products and Business Practices (CONTINUED) Page 11 Selection, Sponsorship and Exposure. Exceeding client exposure limits. Clients, Products and Business Practices (CONTINUED) Failure to investigate client per guidelines. Advisory Activities. Disputes over performance or advisory activities. Page 12 Damage to Physical Assets Disasters and Other Events. Natural disaster losses. Human losses from external sources (terrorism, vandalism). Page 13 Business Disruption and System Failures Systems. Hardware. Software. Telecommunications. Utility outage/disruptions. Page 14 Transaction Capture, Execution and Maintenance. Execution, Delivery and Process Management 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. Page 15 Monitoring and Reporting. Execution, Delivery and Process Management (CONTINUED) 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. Page 16 Customer/Client Account Management. Unapproved access given to accounts. Incorrect client records (loss incurred). Execution, Delivery and Process Management (CONTINUED) Negligent loss or damage of client assets. Trade Counterparties. Nonclient counterparty misperformance. Outsourcing. Vendors and Suppliers. Vendor disputes. Page 17 Operational Risk Checklist Employee training. Close management oversight. Segregation of duties. Employee background checks. Procedures and process. Purchase of insurance. Exiting certain businesses. Capitalization of risks.
Page 18 Credit Risk
Risk due to an uncertainty in a counterparty's ability to meet its obligations in accordance with agreed upon terms. Page 19 Credit Risks Include: Loans. Acceptances. Interbank transactions. Trade financing. FX transactions. Futures. Swaps. Equities. Letters of credit. Options.
Page 20 Establish an appropriate credit risk environment. Operate under a sound creditgranting process. Maintain an appropriate credit administration, Sound Practices for Managing Credit Risk measurement and monitoring process. Ensure adequate controls over credit risk. Page 21 Board of Directors should review credit risk strategy Establish an Appropriate Credit Risk Environment periodically. Senior management should implement credit risk strategy approved by the Board. Page 22 Criteria should include thorough understanding of Operate Under a Sound Credit Granting Process the borrower, purpose/structure of credit and its source of repayment. borrowers/connected counterparties. Establish overall credit limits at the level of individual Have a clearly established process for approving new credits/extension of existing credits. length basis. Extension of credit must be made on an arm's Page 23 Have in place a system for ongoing administration of Maintain a Credit Administration, Measurement and Monitoring Process various riskbearing portfolios. credit risk. Develop an internal risk rating system for managing Have an information system and analytical techniques that enable management to measure credit risk of on/off balance sheet activities. Page 24 System for monitoring overall composition and Maintain a Credit Administration, Measurement and Monitoring Process (CONTINUED)
quality of the credit portfolio. Consider future changes in economic conditions when assessing individual credits. Page 25 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. Page 26 Credit Risk Checklist Stringent credit standards for borrowers and counterparties. 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 counterparties. Page 27 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. Page 28 Improving relations with shareholders. Benefits of Effective Reputation Management Creating a more favorable environment for investment. Recruiting/retaining the best employees. Reducing barriers to development in new markets. Securing premium prices for products. Minimizing threats of litigation.
Page 29 The key to managing reputational risk is sound risk management, coupled with straightforward communication about the problem the bank is facing. Page 30 Reestablishing a firm's reputation takes a long time. Page 31 Reputational Risk Cases Perrier Toluene traces. Exxon Valdez spill. Union Carbide Bhopal, India. Arthur Andersen Enron shredding. Firestone Tires. Page 32 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 labor practices are set publically. Relationships and trust with pressure groups and other potential critics are established.
Page 33 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. forms of risk. reputation. Reputational risk is harder to manage than other My bank is proactive in enhancing and protecting its Page 34 True or False? It is impossible to quantify the impact of reputational risks. 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. Page 35 Risk Management
Risk management is the process of monitoring and addressing the potential for loss. Page 36 Evolution of Risk Management Emerged as a discipline during the early 1990s. Used long before (1960s). Typically used to describe techniques for addressing insurable risks. Page 37 "Old" Risk Management Risk reduction through safety, quality control and hazard education. Alternative risk financing, including selfinsurance and captive insurance. The purchase of traditional insurance products. Use of derivatives to hedge or customize market risk exposures. Page 38 "New" Risk Management Treats derivatives as a problem as much as a solution. Focuses on reporting, oversight and segregation of duties within the organization. Page 39 By the Mid1990s Regulatory initiatives. Concerns about derivatives. Release of RiskMetrics. Published losses. Page 40 Enron's Experience with Risk Management Maintained a risk management function. Lines of reporting were reasonably independent. Marktomarket valuations were subject to adjustments by management. Few career risk managers. Fluid workforce. Employees constantly looking for next transfer.
Page 41 Regulatory Responses from the Financial Services Community
Basel II. SarbanesOxley Act of 2002. GraamLeachBliley Act. Bank Secrecy Act/AntiMoney Laundering. Insider Trading Rules. Bank Bribery Act. Fair and Accurate Credit Transactions Act (FACTA) Fair Lending Federal Conflicts of Interest Statutes. Various record retention and reporting requirements.
Page 42 Success Depends Upon A positive corporate culture. Actively observed policies and procedures. Effective use of technology. Independence of risk management professionals. Page 43 When risk management is done correctly you CAN sleep at night! Page 44 Our Pledge
Thank you for your interest in The Edcomm Group Banker`s Academy. We are the #1 financial services training company in the world for three reasons: Our Expertise We have been proudly serving the global financial community for over 20 years. Our Products The breadth and depth of our products assures you that we will provide you with a solution that meets your business needs. Our Service The excellent service we provide demonstrates that we are your partner. We are so committed to our clients that we offer a complete moneyback quality guarantee. Dr. Linda Eagle Founder & President The Edcomm Group Banker's Academy +1 212 631 9400 +1 917 318 6650 [email protected]
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- Spring '10
- Management, Operational risk