risk management a current challenge in banking - presentation

7/28/2019 Risk Management a Current Challenge in Banking - Presentation

1/43

Risk Management

a current challenge in

BankingPriam Kasturiratna

kastur i@sampath. lk

4th Annual Conference on Information Technology Governance

18th& 19thSeptember 2008, Colom bo Sri Lanka
mailto:[email protected]:[email protected]


2/43

Risk Management

a current challenge in Banking

Changes taking place

in the Banking and Financial

Services Industry

Challenges to Bankssetting-up

Risk Management frameworks


3/43

Technology

Risk Based Laws &Regulations

Factors Driving Banking and Financial

Service Industry

Standardisation

Financial ServiceInnovations

Competition

Climate Change

& Global Warming

Volatility in Energy& Commodity Markets

Country SpecificConditions

Changing Social &Behavioural Patterns

Emerging Risk Types


4/43

Risk Based Laws and Regulations

Worldwide

Basel II

Anti Money Laundering (AML) and Know Your Customer (KYC) Sarbanes Oxley Act

Sri Lanka

Prevention of Money Laundering Act, No. 5 of 2006

Financial Transactions Reporting Act, No. 6 of 2006

Companies Act, No. 07 of 2007 Directions, circulars and guidelines issued by Central Bank of Sri Lanka,

including Basel II compliance directives.

Laws and Regulations act as a key driver shaping the Banking industry,while generating more complexity in operations as well as in Managing Risk


5/43

Technology

Dr John Lee identifies six major drivers behind Technology Investments in

Banking and Financial Services industry.

Dynamic IT Transformation

Support Organic Growth

Developing new and IT enabled revenues

Defend Revenue sources

Cost Optimisation Industrialised Banking

Technology has been at the foundation of the rapid growth and innovationsin Financial Services since 1980s

Introduction of Technology Changes Processes, Opens up new risk exposures

inherent with the technologies adopted


6/43

Standardisation of Controls and

Business Mechanisms

1. Regulatory cooperation among Governments,

Professional bodies, and International organisations.

2. Cross border Laws and regulations like Basel II, AML

Compliance, Know Your Customer regulations, Laws on

Electronic Commerce, Sarbanes Oxley etc.

3. Banks/Financial Service providers adapting to systems(software/hardware) offered by major global systems

service providers.

Three drivers silently operating to standardise the way Banking is

conducted.


7/43

Financial Service Innovations

Changing customer needs/wants

Changing technologies

Thinning market share and profitability

Why Innovations are coming up in Banking/Financial

Services?

Bankers have emulated many non traditional

concepts into the business, and accept higher risk

levels to generate returns that keep their

stakeholders happy.

Ability to adapt to changing needs of its clientele,

and continuous innovation have become core

competencies of the industry.


8/43


E-commerce/Mobile technologies Propelled by Changing lifestyles

Most aggressively promoted retail product group

Wealth Management and Retail Investing Services Rising number of high net worth clients

Increasing savings levels of middle/upper middle income

earners

Ageing population investing retirement benefits/savings.


9/43


Islamic Banking Singaporean and Malaysian initiatives in progress to

establish Islamic Banking

Islamic Financial Services Board of Malaysia has developed

a framework for capital treatment of Islamic products &regulatory convergence with Basel II

The swift pace of economic development of Middle Easternand other predominantly Muslim countries, combined withstrong commodity exports from many of these nations, hasfuelled demand for the development of a raft of fundinginstruments and investment products that comply withIslamic Sharia law. Monetary Authority of Singaporeestimates that global Islamic Financing market is worthUSD 300 billion, and growing at a rate of 15% every

year Pamela Tang


10/43

Competition among Service Providers

Competition from Non traditional financial serviceproviders Trying to attract clients from traditional banking

institutions

Telecommunications Retailing

Real Estate

Automotive

Plantation sector companies have come out with many alternative

financial service products with appeal.

Not bound by regulations applicable to banks

Usually gives more benefits to clients

Higher margins compared to Banks


11/43

Competition among Service Providers

Competition has affected Profitability of the industry Outsourcing has reduced this burden a little bit, but at the same time

exposing the banks to higher levels of operational risk.

Locally operating Banks are threatened

Market entry by Global Banks

Global players in the market offer branded products across thegeographical boundaries

More demand cross border services from growing financial needs beyondlocal boundaries

With respect to increasing globalisation, what weve seen here in Australia

with the recent arrival of private equity into Australia is the way the market canbe changed by a global rather than a local trend. Australian banks arent very

big in global terms. So what is not a challenge for risk professionals worldwide

is a challenge for risk professionals in Australian banks

Michael Hamar, Group chief risk officer, National Australia Bank


12/43

Volatility in Energy and Commodity

Markets Food & energy crisis

Increased Cost of Living

High impact to middle/lower income groups

Increased Operational expenses for Banks & allother organisations

increasing operational expenses of banks will directly

affect bottom lines

increased credit risk due to contraction of borrowers

repaying power


13/43

Climate Change and Global Warming

Climate change will causeenormous extra costs for

Germany in the future. Incase the global meantemperature rises up to 4.5

degrees Celsius by 2100 -as predicted by the latestIPCC report, in case nomeasures are taken - the

German economy mightface an additional burden ofup to 800 billion Euros by2050.

German Institute for Economic Research (DIW)

The UK Financial ServicesAuthority has cited climate

change as presenting aconsiderable risk to thefinancial services sector inits annual Financial Risk

Outlook report


14/43

Country Specific ConditionsSri Lanka

Higher Market Risk - Volatility of interest and exchange rates Inflation Rates over 20%

Unstable political situation in the north and east

restricts healthy business growth

poses security threats to every type of venture

Could affect Credit, Operational and Market Risk of banks Need for strong Business Continuity Plans has become more critical

Higher Anti Money Laundering & Terrorist Financing Risk (ForeignRemittances, top earner for the country)

Pending issues in the country

GSP plus

Rising cost of living

Issues in transportation, power etc.

Stagnating land & housing markets

Changes in educational system

Restrictions in some of the overseas job markets


15/43

Changing Social and Behavioural Patterns

25 years back and TODAY Response to a criminal or terrorist activity

Bank authorising a transaction on the strength of an email.

PC to PC free calls to a foreign country

Epidemics, hunger and poverty loosing their place as

major threats to human life

Food and water contamination - a silent killer

Stress, Mental and physical health issues are common mans

topics

Home Office balanced

stress-less job

Busy Executive with six figure income

Increased

Cross border activities

White Collar

Crimes

Bribery,

Corruption

Hackers Email, Chat


16/43

Emerging Risk Types

Operational Risk Business ContinuityPlanning

AntiM

oneyL

aundering

Arms and drug trade

Human trafficking

Bribery and corruption

Counterparty failures

Corporate Frauds

Reputation Management


17/43


18/43

Technology

Risk Based Laws &Regulations

Factors Driving Banking and Financial

Service Industry

Standardisation


Competition

Climate Change

& Global Warming

Volatility in Energy& Commodity Markets

Country SpecificConditions


Emerging Risk Types


19/43

Risk Management

Current

Challenges in the Industry


20/43

The Challenges

Increased Responsibilities

& Involvement from Board of Directors

Top Management

Commitment and Support

Setting-up Organisational Structures

HR aspects of Risk Management

Collecting Data &

Managing Data Quality

Business Manager & Risk Manager

Integrating Risk Management

into Business

Training to maintain

Risk Management Capabilities

Risk Management and ICT

Auditing Risk Frameworks


21/43

The Challenges

From the day the board of directors and topmanagement becomes seriously committed to

Risk Management,Board of directors, Top management andeveryone else will look forward to RiskManagers response, and assistance in

performing their functions.

YES, Managing Risk is a key concern for us. BUT WHOWILL BEAR THE ADDITIONAL COST OF IT

It takes two minutes more, to open an account under NewRisk Control Procedure. Customers are not happy, it takeslonger to finish days work !@#$%^&*(!


22/43

Getting Top Management Commitment and

Support Risk Management affects all employees, all processes across the bank

Therefore it is unlikely to be successful without sponsorship from the top

Receiving good level of sponsorship could take a number of months andsometimes years

Starting from commitment to high level of corporategovernance, top management sponsorship shall extend totreating Risk Management as a serious aspect positivelycontributing to the organisationDemonstrating their commitment openly

Working with Risk Manager to implement Risk Managementwithin the bank

Accepting the ultimate responsibility for Risk Managementwithin the bank.

Allocation of sufficient Resources


23/43

Getting Top Management Commitment and

Support

Senior management buy-in is definitely

required. It is a necessity, but not sufficientcondition. In addition there should be buy-in

from individual departments and individualbusiness heads. It is a complex area, because

it looks at human behaviour- it is really a

juxtaposition of human behaviour and riskmanagement

Ravi Varadachari


24/43

Increased Responsibilities and

Involvement from Board of Directors Directive on Corporate Governance (No 11 of 2007)

Appoint a Board Level Sub Committee on Risk Management

Develop Risk Management expertise within the board

Ensure that Risk Management framework is on a sound footing

All officers are updated with current changes in the bankingindustry worldwide.

Companies Act 6 of 2007 Establishes joint & personal liability of directors for ensuing risk is

managed in a sound manner

Directors will be responsible, and increasinglyinvolved in directing top management to makingsure that the organisation & directors themselves

are protected against risks & liabilities.


25/43

Setting-up Organisational Structures

Independent Lines of Defence

Reporting lines and proceduresProper Delegation of Risk Decision Making Authority

Placement of Risk Managers at appropriate hierarchical level

Regulators are increasingly seeking formal internal control assurances from regulated

entities. Organisations should formally assess their risk and controls on an ongoing

basis. At least once a year, management within each of the three lines of defence

should formally attest or provide assurance on the capability maturity of the enterprise

risk management framework as it relates to risks within their scope of authority

Mario Micallef

Business Units

Risk Management

Top Management

Risk Management Committees

Board of Directors

InternalAudit

ExternalAudit

1 32


26/43

Managing HR for Risk Management

Do we have sufficient number of competent RiskManagers to cater to all banks?

Risk Managers may be reluctant to accept the

standardised remuneration packages offered by traditionalbanks

Not many banks are ready to offer premium pay levels toRisk Managers

Risk Managers leaving for better prospects is common.

In much worst scenarios, some banks may find that theheadhunted Risk Manager does not perform to theexpectations

Getting the correct person for the job


27/43

Finding Data Analysis, Documentation and

Communication Skills

Most sought after skills

Problem analysis Good use of econometrics

Technical Writing & Documentation skills

Communication/public relations skills

What Bad analysis could do

create more risk

bad documentation could misinterpret the risk

end up in a trash bin with disrespect.


28/43

Assessing a prospective Risk Manager

Clear cut benchmarks or Industry Certifications ????

What could be of use Financial Risk Management

Information Security

Business Continuity Planning

Project Management

Undergraduate and Masters Level qualifications are some of the useful benchmarks.

What experience is necessary or could help? Banking

Auditing

Information Technology

Project Management

Econometrics

Statistical Data analysis

Legal, Technical Writing

Organisational Re-structuring

When it comes to selections,irrespective whether it is Credit, Market,

Operational Risk, or Anti MoneyLaundering Compliance, banks use acombination of existing qualifications,career history, and a substantial amountof guesswork to assess suitability of anindividual for a Risk Managementposition.


29/43

Retaining Good Risk Managers, Job

Satisfaction and Remuneration

Career/Workplace Challenges faced by RiskManagers

Improper hierarchical placement of the Risk Manager -

Conflicting interests

Risk Manager not having sufficient authority and independency Being overruled by the superiors lacking understanding on risk

principals or conflict of interest

Lack of Senior Management Sponsorship

Risk Manager could be taken as a threat by peers/superiors

Managing internal resistance.

Feeling that they are underpaid in the local market

Lack of training and development opportunities

Career path problems


30/43


Satisfaction and Remuneration

What determines Remuneration for Sri Lankan RiskManagers

Decision makers understanding on the contribution

from a Risk Manager towards business success

General pay levels of the organisation

Whether there is a strong lobby of Risk Managers in

the market

The bargaining power of the prospective individualIncreased demand for experienced (Risk and Compliance) staff has pushed upsalaries significantly. There has been a year on year increase for complianceprofessionals, particularly at the junior end, which has seen a 25-30% increasein the basic salary. Temporary staff can earn upwards of 300 Sterling Pounds aday.

Victoria Pennington


31/43


Satisfaction and Remuneration Building long run Risk Expertise

Core banking

Lending

Treasury

Investments

Econometrics

Social sciences

Technical Writing

Information & CommunicationTechnology

Card Business

ecommerce

Legal

Project Management

Auditing

Information Security

Business Process Re-Engineering

A banks board ofdirectors and topmanagementneeds to display

& act with theirstrategic vision,foresight, andlong rangeplanning

capabilities forbuilding a strongRisk ManagementTeam over anumber of years.


32/43

Collecting Data & Managing Data Quality

Risk Management relies heavily on unearthing trends or possibilities through econometrics

large volumes of organised and dependable data

pertaining to events over a number of years are a necessity for reliable results

Historical data becomes a critical success factor once a bank completessetting up its basic Risk Management framework and wants to move up

towards advanced Risk Management approaches with regulator approval.

Banks need to recognise this early, and start data cleansing and collectionwithout delay.

Whether available data is usable for a particular model or system

evaluate what systems or mechanisms that they are going to use for data analysis Data requirements may vary according to the future plans

Data cleansing will also need taking important actions/decisions, modeltesting with available data, expertise to interpret the results and refine datacollection process.


33/43

Collecting Data & Managing Data Quality

As per Global Data Management Survey of Australian, US andUK companies, it was highlighted that,

A high proportion of respondents are not verycomfortable in the quality of their data

Most organisations still view data qualitymanagement as an IT issue, rather than an issue forsenior management, the managing director or corporate board

Confidence in shared (industry) data from third

parties has eroded

Therefore, it is necessary to recognise the

challenges early, plan ahead, and act early.


34/43

Integrating Risk Management Tasks into

Business

Incorporate Risk Management Components in to Policies

Standards

Procedures

Guidelines

Support of board of directors, top management, operations, humanresources, and training

broad knowledge of the existing business processes

knowledge of Risk Management

substantial efforts in planning, documentation, and training

The initial years on this process will be more of managing a projectthan risk management. It would take a few years to complete theprocess, and to obtain organisation wide support for new way of

conducting daily business functions.


35/43

Business Manager vs. Risk Manager

How does a Risk Manager Add Value to businessprocesses ?

Risk Management adds control tasks into the business

process lifecycles.

Processes become longer and time consuming

May need more resources

Customer delays could occur

Training may be needed


36/43

Business Manager vs. Risk Manager

Add Value to Business vs. hampering business Success of the Risk Manager depends in getting buy-in

from the other stakeholders

Depends identifying thin margin between support &

obstruction

Clear communication of expected business benefits

Public relations and communication are not just

preferred skills, they are core competencies of any goodRisk Manager.

Risk Managers true function would be to add businessvalue by ensuring higher predictability of businessoutcomes. Both Risk Managers and Business Managers

need to assist each other in a successful business.


37/43

Training to maintain Risk

Management Capabilities

Periodic Training is crucial for Risk Managers, Board of Directors and top management

Constant update knowledge on worldwide developments in anumber of fields Banking industry

Overall business environment Technical developments/ICT

New risk types

Financial, Economic, technical & Social, etc etc Trends

What could be risk training, continuous knowledgemaintenance ? Theoretical knowledge development

Exposure to the industry practices, counterparties

Knowledge sharing and exposure among local and global

counterparts

k d T


38/43


ICT is a vital factor that influences everything in banking

The volume and nature of transaction monitoring and analysisneeded cannot be done without ICT

It is impossible to keep up with the worldwide developments inRisk Management without ICT support

From an organisational perspective, every bank must evaluate their ITsystem needs for Risk Management from early days of planning.

Many local banks have chosen not to become the first movers ininvesting on IT systems. Whilst there is some validity in this approach,it could be a mistake not to prepare, as one day every bank will find itimpossible to move on to advanced approaches in Risk Managementwithout IT systems.

A di i i k k


39/43


Internal and Systems Auditors, as an independent lineof defence could contribute immensely to identify

loopholes not detected by Risk Managers.

Audits, a Regulatory Requirement & a Best Practise.

1. Gaining a formal understanding of the key process & companyobjectives that may affect the operations of the process.

2. Brainstorming risk scenarios before identifying process risks

3. Identifying managements risk tolerance levels for variousprocess risks

4. Assessing the risk infrastructure to evaluate the sustainabilityof the existing risk management activities.

Paul J Sobel

Key Steps in formulation a Risk Audit Programme

A di i Ri k F k


40/43


Banks face two key challenges in the initialphase

1. Engaging an auditor with

Banking

Systems literacy

Exposure to Risk Management, Anti Money Laundering &

Business Continuity Planning

2. Rearranging existing Internal Audit framework into

Risk Audits

Auditing the banks Risk Framework is not to be taken lightly,

it is urgent, and a must for true progress.

Ri k M


41/43

Risk Management

a current challenge in BankingWhat drives present & future

of

Banking and Financial

Services Industry

Challenges faced by Banks

setting-up

Risk Management frameworks

Technology

Risk Based Laws &

Regulations

Standardisation


Competition

Climate Change

& Global Warming

Volatility in Energy

& Commodity Markets

Country Specific

Conditions


Emerging Risk Types

Increased Responsibilities

& Involvement from BOD

Top Management

Commitment and Support

Setting-up Structures

HR aspects

Collecting Data &Managing Data Quality

Business & Risk Managers

Integrating Risk Management

into Business

Training



C l i h Obj i


42/43

Conclusionsthe Objective

What drives Banking industry & RiskManagement

Underlying challenges in implementing Risk

Management Frameworks The Objective

Understand & appreciate the ground realities in RiskManagement & be prepared for expected challenges

Realise the areas where involvement of the completeorganisation, proactive action and top level vision is needed,

Initiate a healthy discussion as to how Sri Lankan Bankscould manage Risk in a better, structured manner


43/43

Thank you

risk management a current challenge in banking - presentation

Documents