training on risk management and analytical...

Training on Risk Management and

Analytical Instruments

Recommendation of Capacity Building Assistance

for the National Bank of Ukraine

Werner Ehlers, Senior Consultant

Chrístoph Schroer, GIZ Senior Advisor

29/10/2015

Agenda

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I. GIZ, an International Technical Advisor

II. Capacity Building Assistance on Basics of Risk Management and

Banking Supervision

• General Introduction into Risk Management

• Introduction into FI‘s Balance Sheet and P&L Analysis

III. CAMEL(S) as a Tool of Risk Management Analysis

• Introduction and Application of the CAMELS Methodology

• CAMELS Scoring System

Agenda continued

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IV. From Theory to Practice

• Practical Central Bank Experience on Supervision ,

• Input from an EU Centralbank

• Input from Deutsche Bundesbank

• Input from BaFin, the German Supervisory Body of Financial

Institutions

Purpose: GIZ is a federally owned enterprise to support sustainable development worldwide

Worldwide: GIZ employs approximately 17,000 staff members worldwide, is active in 130 countries with offices in 87 countriesand has an annual turnover of € 2bn.

Main clients: GIZ operates on behalf of various German Federal Ministries, mainly the Ministry for EconomicCooperation and Development, for the European Commission as well as for the Private Sector

German International Cooperation (GIZ)

GIZ Financial Sector Development (FSD)

follows an holistic approach, …

Financial Institution

Building

Micro level

Enhancement of the

Financial Infrastructure

Central Bank Regulation

and Supervision

Macro level Meso level

Financial sector regulation, implementing international standards

Risk Management

Central bank policy assistance

Central bank advisory

Capital market development

Improvement of the institutional framework

Microfinance networks

Training institutions

Financial consultancy services

Development of credit bureaus

Macro Level

Meso Level

Micro Level Establishing and assisting microfinance institutions

Capacity Development in Agricultural Finance

Downscaling of formal banks for SME finance

Linkage Banking (NGO-FFI)

Technology strategies, e.g. in payment systems

Reforming public development banks

intervenes on three levels…

MicrofinanceAgricultural and

SME Finance

and is active with five products

Financial Sector

Stability

Insurance Green

Finance

MicrofinanceRural, SME and

Agricultural Finance

Financial Sector

Stability & Development(Micro) Insurance Green Finance

FSD product overview

GIZ FSD WZ Abu Dhabi, 10.12.2013

Private SectorInvestment

Green Microfinance

ProductDevelopment

SupportingInfrastructiue

Associations & Training Center

ResponsibleFinance, Financial

Literacy

Regulation, Supervision

SavingsMobilisation &

Products

Islamic Banking

Green Financial Sector Policy

Insurance Regulation & Supervision

Consumer Protection

FinancingModels Energy

Efficiency, Renewable

Energy

Access to Finance in Rural Areas

Banking beyondBranches, New Technologies

SME Finance

AgriculturalFinance & Value

Chains

Weather & AgriculturalInsurance

Financial Market Infrastructure

Capital MarketsDevelopment

Financial SectorRegulation & Supervision

Monetary Policy^

Public Finance

Microfinance

Agricultural Finance/SME

Insurance

Financial Sector Stability

Africa

Making

Finance Work for Africa

• Promoting inclusive financial

systems

• Central interface to brings

together banks, governments,

donors and MFIs

Vietnam

Central bank

advisory

• Monetary policy

• Risk Managment

• Forecasting

India

Microfinance and rural

finance

• NABARD Linkage Banking,

the world‘s largest

microfinance program

• reform of the credit

cooperative structure

Global

Alliance for Financial

Inclusion

• Global alliance of over 85

countries to strengthen

financial access

• Exchange platform for

south- south dialogue

China

Central bank advisory Services

• Capital market development

• Transforming Chinas post

bank into a modern

intermediary

GIZ FSD activities currently comprise of 52 programs worldwide

Global

Access to Insurance

Initiative

facilitating dialogue and

good practice with

regulators and other

stakeholders

Algeria

Microinsurance for Young

Entrepreneurs

• Income maintenance via

microinsurance

Tunisia

Promotion of the

Microfinance Sector

• Establishing a

supervisory authority

http://www.afi-global.net/index.htm

http://www.afi-global.net/index.htm

Capacity Building Assistance on

Risk Management and Banking Supervision

Taking risk can be

explicitly desired as part

of an institution’s

strategy (i.e. risk as a

business opportunity)

Risk is usually

associated with

something negative

Outcome must

be relevantto me

Uncertaintyabout future

outcomes Probabilities and

volatility (deviations around an expected

outcome)

What do you associate with the term Risk?

Risk is relative!: Everyone has a different level of risk appetite and risk tolerance

Risk attitude typically

depends on the

nature and the size

of the stakes.

FI Network/ Associations

Reinforce & complementproviders‘ efforts; can support drawing peer

comparisons

Corporate & private clients

Safety of their deposits

Financial Regulators

Stability concerns (e.g. risk concentrations), contagion

effects, etc.

Risks

Donor agencies

Recapitalize or shut down operations

Investors/lenders/share-holders

Should be concerned about a FI‘s riskprofile

Actors with a strong interest in sound Risk Management

FIs themselves

Safeguard their assets and to distinguish adequate

risk-return profiles

Insurance companies

To evaluate risks and tocalculate premiums in accordance with the

underlying risk

Risk Categories

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• Credit Risk

• Operational Risk

• Liquidity Risk

• Interest Rate Risk

• Foreign Exchange Rate Risk

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Financial Analysis

Financial Status

Analysis

Profit & Loss

Analysis

Analysis of

Assets &

Liabilities

Structure

Capital

Structure

Analysis

Analysis of

horizontal

balance sheet

structure

Cash flow-oriented

Analysis of

financial situation

Analysis of

Earning

Sources

Profitability

Analysis

Cost

Structure

Analysis

29.10.2015

Components of Financial & Economic Analysis

Current economic situation

Financial performance Financial situation Financial status

Profitability Financial stability

Profitability analysis Financial analysis

Financial statement analysis

What is the actual

economic situation?

What is the earning power

of the company?Is the company

financially stable?

Objectives of Financial Analysts

29.10.2015

Limitations of Financial & Economic Analysis

Limitations of Financial & Economic

analysis

Due to the very

nature of

accounting and

reporting

Due to special

commercial

laws &

regulations

Due to

discretional

accounting

policies

Due to lacking

knowledge of

cause-and-

effect

relationships

Regulatory Framework of Risk Management in Banks

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• Guidelines on min. capital amount that a FI should hold to protect it against losses w/out

business failure

• The level of capital will be a function of not only the relative size of the institution’s portfolio

but also the relative risk of its assets. • The regulatory capital calculation is covered by Pillar I of the Basel II framework

The Basel Committee on Banking Supervision provides a forum for regular cooperation on

banking supervisory matters. Main objective is to enhance understanding of key supervisory issues

and improve the quality of banking supervision worldwide

The Basel Accords is a comprehensive set of reform measures, developed by BCBS, with the

objective to:

(i) improve the banking sector's ability to absorb shocks arising from financial and economic

stress, whatever the source

(ii) improve risk management and governance

(iii) strengthen banks' transparency and disclosures.

29.10.2015

Overview of Basel II Min. Capital Requirements

Total eligible regulatory capital of at least 8% against risk-weighted assets

Basel III

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Pillar 1

Standardized Risk Calculation

• Changes:

• Raised capital charges

• New:

• Liquidity LCR and NSFR

• Leverage ratio

• Capital structure and buffers

Pillar 2

Supervisory Review Process

• Changes:

• Enhance firm wide stress testing

• New :

• Liquidity risk, including idiosyncratic and market wide risk

• Reverse stress testing and contingency planning

Pillar 3

Public Disclosure Reporting

• Changes:

• Enhanced disclosures for capital

• New :

• Increase frequency and auditability of Pillar 3 reporting

• Reverse stress testing and contingency planning

• Disclosure for securitization

Pillar 1• Credit risk

• Market risk

• Liquidity risk

• Operational risk

• Forward looking capital

structure and buffers

Pillar 2• Interest rate risk in the

banking book

• Economic capital

modelling

• Integrated stress-testing

• Contingency planning

Pillar 3• Integrated management

reporting

• Standard Pillar 3 reports

• Fully auditable data

process

Basel III Transition Period

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CAMEL(S)*this presentation on CAMEL is mainly based on the CAMEL Self-Rating Manual by the GIZ SEDIN Programme

Module Objectives

• Identify the six CAMELS components used to evaluate a bank’s

performance

• Describe how the “composite” CAMELS rating is established

• Apply the evaluative factors used to establish the CAMELS component

ratings

CAMEL(S) Components

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• C = Capital

• A = Asset Quality

• M = Management

• E = Earnings

• L = Liquidity

• S = Sensitivity to Market Risk

Test administration and required documents

29/10/2015

Typically, you can use three types of resources to complete a CAMEL

rating:

1) Monthly Central Bank returns

2) Audited accounts

3) Internal Accounting Information

4 possible scores – Sound, Satisfactory, Marginal, Unsound

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IV. From Theory to Practice

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GIZ provides technical assistance to Central Banks worldwide and works

closely together with German and International Financial Institutions and

Regulators

I. Deutsche Bundesbank – the Central Bank of the Federal Republic of

Germany

II. BaFin – the German Supervisory Body for Financial Institutions,

Insurance Companies and Securities Trading

III. ECB – the European Central Bank

Deutsche Bundesbank

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• The Deutsche Bundesbank is the central bank of the Federal Republic

of Germany. Eurosystem monetary policy is the Bundesbank’s core

business area. Other core business areas include the financial and

monetary system, banking supervision, cashless payments and cash

operations.

BaFin

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• The Federal Financial Supervisory Authority (BaFin) brings together

under one roof the supervision of banks and financial services

providers, insurance undertakings and securities trading. It is an

autonomous public-law institution and is subject to the legal and

technical oversight of the Federal Ministry of Finance. It is funded by

fees and contributions from the institutions and undertakings under its

supervision.

European Central Bank

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The ECB is the central bank for Europe's single currency, the euro. The

ECB’s main task is to maintain the euro's purchasing power and thus price

stability in the euro area. The euro area comprises the 19 European Union

countries that have introduced the euro since 1999.

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