the new global wide risk regulation & its impact on banks risk management practices
DESCRIPTION
TRANSCRIPT
The New Global Industry-wide Risk Regulation and its Impact on Bank’s
Risk Management Practices
Eneni Oduwole IBM/TWC Risk Seminar Event
June 20th, 2013Oriental Hotel, Lagos
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Preamble The financial crisis of 2007 – 2008 has been classified as the worst financial crisis experienced since the Great Depression of the 1930s It resulted in the total collapse of large financial institutions, the bailout of banks by Federal Governments globally, and downturns in stock markets around the world Housing markets in many economies were affected, resulting in evictions and foreclosures It also resulted in failure of many Corporate and SME businesses, and inadvertent persisting unemployment Individuals experienced decline or erosion of personal wealth that resulted in a downturn in economic activity globally
This crisis occasioned the panicky and high frequency of regulatory reforms that has occurred in the last 5 years
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Compounding Factors Layered Complexity
Geometric balance sheet and income growth
Stringent investment in Technology
Limited knowledge of product complexities
Exportation of sharp practices to other jurisdictions
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Badly Hit Organizations
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Outcome As a result, Governments responded by making regulatory
changes that were spontaneous and reactive to current market situations. Usually, stipulations made, were thought to: Impact the business model and strategy of firms Increase Infrastructural requirements of organizations Require a long time frame for full appreciation of
benefits Be complex for implementation in some cases
The cost outlay required for regulatory compliance also increased
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Outcome (cont’d) The replacement by Financial institutions of prudence,
conservatism and common sense with complex statistical models, products and high risking needed prompt redress
Regulatory changes aimed at curbing this new habit by putting in place strict regulatory guidelines even if policymakers also suffered dearth of skills to address the challenges faced players in the industry
Result:
Undulating high frequency of policy changes and reversals creating an environment tagged by Accenture as one of ‘Permanent Volatility’
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Manage effectively the Probability of failure by preventing / reducing failures in financial markets
Ensure that the Severity of failure is minimized and
controlled to avoid firm – industry – systemic failures
Regulatory Objectives
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Loads of it . . .
Eneni Oduwole – June 2013
Trends of Regulatory Reforms reported by KPMG in Feb. 2013
2010 2011 2012 2010 2011 2012 2010 2011 20121 Capital Index2 Liquidity3 Systemic Risk4 Supervision Pressure Rating5 Governance High Pressure6 Renumeration Considerable Pressure7 Customer Treatment Adequate Pressure8 Traded Markets Minimal Pressure9 Accounting Disclosure Low Pressure
10 Financial Crime & Tax
THE PRESSURE OF REGULATORY REFORMS: 2010 - 2012
ReformS/N
EMEA - Europe/Middle East/Africa
EMEA USA ASIA-PACIFIC
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Challenges for Industry Players• Confusion about business strategy to adopt
• Uncertainty of regulatory direction in the short, medium and long term
• Hike in cost of regulatory compliance
• Increased need for data completeness and integrity
• Scarcity of skills
• Increased investment in infrastructure
• Reduced revenue
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
SolutionTo ensure that there was no threat to the continued existence and viability of the financial services industry, firms decided on having effectively run internal structures that regulate risk taking and due diligence by entrenching the discipline of:
RISK MANAGEMENT
Organizations metamorphosed from a value preserving/defensive outlook to Risk Management to a value creating/progressive outlook that made proper RISK MANAGEMENT integral to the decision making process
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Evolution of Risk Management
From a quantitative function saddled with the
‘measurement of risk’
A proactive role that identifies, assesses, controls, monitors
and reports likely risk exposures even at the behest
of the business and regulatory environment
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Risk Management ProcessKey Internal Drivers: Leadership owned and monitored Owned and implemented by All Knowledge/fact based Futuristic in outlook Proactive enablement for decision making processed Eased data generation Data integrity and completeness Skilled workforce Value creation based
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Key External Drivers Strength and Quality of
Regulatory Supervision Frequency of changes to
Guidelines
Competence of Policy Makers
Global trends
Access to information
Risk Management Process (cont’d)
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Risk Culture Trends
Source: www.ey.com
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Global Pulse of Risk Management
“The focus on risk regulation is now top of the list of risk management issues, a tsunami of
regulations is washing over these firms at the moment”
Laurence Wormald, Head of Research, SunGardArticle - Risk Managers fear impact of regulation
Financial Times, April 07 ,2013
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
The Future of Risk ManagementCreate + Protect + Sustain Stakeholder Value
Continuously assess strategy and business models in alignment with the long term goals of the organization, for likely exposure to financial, reputational or regulatory risk
Manage risk holistically Institutionalize good governance, structures, processes,
controls, and standards Develop and deploy tools for effective risk management Invest in ICT Continuously evaluate risk taking against the risk appetite
of the organization Develop simple processes and products Conduct environmental scanning periodically to pre-empt
regulatory direction
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Challenges for Risk Management vis-à-vis Regulatory Reforms
Buy-in of Leadership Higher Capital requirements and liquidity buffers High rate of model/procedural obsolesce Exit from some profitable but non-core business Sale of assets/businesses to increase capital Compliance with varied cross-border regulatory guidelines Dearth of skilled labour in managing increased risk Optimal alignment of Risk-taking with the Risk Appetites of
organizations Need for greater/higher business integrity Maintaining a holistic approach and commitment to risk
management Sustaining an integrated approach to Compliance – Risk –
Strategy Management
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Way Forward Increased Investment and Capacity building in:
- Human Resources- Systems and Tools for efficient data generation, processing and reporting- Industry/Market/Environmental scanning procedures
Periodic Stress Testing that is also based macro-economic indices
Clearly defined roles and responsibilities for Corporate Governance, and Risk Appetite setting and Monitoring
Effective Liquidity and Capital Management
Increased collaboration by organizations to build capacity and set the tone for regulatory guidance
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
The Outlook for Risk Management?
Great!
The future is in our hands…
Eneni Oduwole – June 2013Eneni Oduwole – June 2013
Questions and Comments pls. . .
