This document summarizes a presentation on risk management in banking. It discusses various types of risk like operational risk, credit risk, and reputational risk. It provides examples of operational risks, outlines best practices for managing credit risk, and emphasizes the importance of reputation for banks. The document also discusses regulatory responses to risk management failures through international standards set by the Basel Committee on Banking Supervision.
Ethical stalking by Mark Williams. UpliftLive 2024
Nepal Banking Risk Management March 2015 for senior Rastraiya Banijya Bank employees
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Risk Management in Banking
Developed & Presented by:
William P. Kittredge, PhD
President
Cervelet Management & Strategy Consultants, LLC
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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.
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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.
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Success Depends Upon
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A positive corporate culture.
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Actively observed policies and procedures.
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Effective use of technology.
●
Independence of risk management
professionals.
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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
●
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Evolution of Risk Management
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Emerged as a discipline during the early
1990s.
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Used long before (1960s).
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Initially the term 'risk management' described
techniques for addressing insurable risks.
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Risk Management Yesterday
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Risk reduction through safety, quality control
and hazard education.
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Alternative risk financing, including self-
insurance and captive insurance.
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The purchase of traditional insurance
products.
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Use of derivatives to hedge or customize
market risk exposures.
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Risk Management Today
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Treats derivatives as a problem as much as a
solution.
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Focuses on reporting, oversight and
segregation of duties within the organization.
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Development of international standards –
technically voluntary
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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
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Uncertainty.
Change in market conditions that are
unpredictable and/or beyond the control of
the bank and/or its customers.
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Exposure.
Degree to which the bank's portfolio
composition is impacted by changes in
market conditions.
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Operational Risk
The risk of loss resulting from
inadequate internal processes or
the failure of internal processes,
people and systems, or from
external events.
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Operational Risks Include
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Internal Fraud.
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External Fraud.
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Employment Practices and Workplace Safety.
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Clients, Products and Business Practices.
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Operational Risks Include
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Damage to Physical Assets.
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Business Disruption and System Failures.
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Execution, Delivery and Process Management.
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Internal Fraud & Theft
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Unauthorized Activity.
Transactions not reported.
Transaction type unauthorized.
Mis-marking of position.
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Internal Fraud & Theft
Credit fraud/worthless deposits.
Theft/extortion/embezzlement/robbery.
Misappropriation of assets.
Forgery.
Account take-over/impersonation – e.g.
identify theft or hacking
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Employment Practices and Workplace Safety
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Safe Environment.
General liability (slips and falls).
Employee health and safety rules.
Workers’ compensation.
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Employment Practices and Workplace Safety
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Diversity and Discrimination
All discrimination types.
Harassment.
Equal Employment Opportunity (EEO) – frequently
part of international funding agreements.
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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.
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Clients, Products and Business Practices
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Suitability, Disclosure and Fiduciary.
Aggressive sales.
Inadequate product offerings.
Account churning.
Misuse of confidential information.
Lender liability.
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Clients, Products and Business Practices
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Improper Business or Market Practices .
Antitrust.
Improper trade/market practice.
Market manipulation.
Insider trading (on firm’s account).
Unlicensed activity.
Money laundering.
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Clients, Products and Business Practices
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Selection, Sponsorship and Exposure.
Failure to investigate client per guidelines.
Exceeding client exposure limits.
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Advisory Activities.
Disputes over performance or advisory activities.
PWC and 'happy talk' reporting.
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Damage to Physical Assets
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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)
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Business Disruption and System Failures
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Systems.
Hardware
Software.
Telecommunications.
Utility outage/disruptions.
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Execution, Delivery and Process Management
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Transaction Capture, Execution and Maintenance.
Miscommunication.
Data entry, maintenance or loading errors.
Missed deadline or responsibility.
Model/system misoperation.
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Execution, Delivery and Process Management
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Transaction Capture, Execution and Maintenance.
Accounting error/entity attribution error.
Other tasks subject to performance failure.
Record retention.
Documentation maintenance.
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Execution, Delivery and Process Management
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Transaction Capture, Execution and Maintenance.
Delivery failure.
Collateral management failure.
Reference data maintenance.
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Execution, Delivery and Process Management
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Monitoring and Reporting.
Failed mandatory reporting obligations.
Inaccurate external loss (loss incurred).
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Execution, Delivery and Process Management
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Customer Intake and Documentation.
Unapproved access given to accounts.
Incorrect client records (loss incurred).
Negligent loss or damage of client assets.
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Execution, Delivery and Process Management
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Customer/Client Account Management.
Unapproved access given to accounts.
Incorrect client records (loss incurred).
Negligent loss or damage of client assets.
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Execution, Delivery and Process Management
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Trade Counter-parties
Non-client counter-party performance failure.
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Vendors and Suppliers.
Outsourcing.
Vendor disputes.
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Operational Risk Checklist
Procedures and process.
Purchase of insurance.
Exiting certain businesses.
Capitalization of risks.
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Credit Risk
Risk due to an uncertainty in a
counter-party's ability to meet its
obligations in accordance with
agreed upon terms.
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Managing Credit Risk
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Establish an appropriate credit risk
environment.
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Operate under a sound credit-granting
process.
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Maintain an appropriate credit administration,
measurement and monitoring process.
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Ensure adequate controls over credit risk.
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Appropriate Credit Risk Environment
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Board of Directors should review credit risk
strategy periodically.
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Senior management should implement credit
risk strategy approved by the Board.
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Operate a Sound Credit Granting Process
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Criteria should include thorough
understanding of the borrower,
purpose/structure of credit and its source of
repayment.
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Establish overall credit limits at the level of
individual borrowers/connected counter-
parties
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Operate a Sound Credit Granting Process
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Have a clearly established process for
approving new credits/extension of existing
credits.
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Extension of credit must be made on an 'arm’s
length basis' – i.e. 'special deals' for 'special
people' spell trouble
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Maintain a Credit Administration,
Measurement and Monitoring Process
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Have in place a system for ongoing
administration of various risk-bearing
portfolios.
●
Develop an internal risk rating system for
managing credit risk.
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Maintain a Credit Administration,
Measurement and Monitoring Process
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Have an information system and analytical
techniques that enable management to
measure credit risk of on/off balance sheet
activities.
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System for monitoring overall composition and
quality of the credit portfolio.
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Consider future changes in economic
conditions when assessing individual credits.
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Ensure Adequate Controls Over Credit Risk
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System of independent, ongoing credit review.
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Credit granting function is properly handled
and credit exposures are within limits.
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System for managing problem credits.
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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.
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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).
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Benefits of Effective Reputation Management
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Improving relations with shareholders and
lowering the cost of capital.
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Creating a more favourable environment for
investment.
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Recruiting/retaining the best employees.
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Benefits of Effective Reputation Management
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Reducing barriers to development in new
markets.
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Securing premium prices for products.
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Minimizing the threat of litigation.
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Reputational Risk Management
The key to managing reputational risk is
sound risk management, coupled with
straightforward communication about the
problem the bank is facing.
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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
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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.
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True or False?
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Corporate reputation is one of the primary
assets of my bank.
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The risks involving a bank’s reputation have
increased significantly over the past five
years.
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It is impossible to quantify the impact of
reputational risks.
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Reputational risk is harder to manage than
other forms of risk.
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True or False?
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My bank is proactive in enhancing and
protecting its reputation.
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My bank usually thinks about its reputation
only when things go wrong.
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A well run bank doesn’t need to invest extra
resources into guarding against reputational
risk.
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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.
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Regulatory Responses - Goals
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Reduce bank secrecy to enforce anti-money
laundering and tax evasion
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Insider trading rules.
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Bank bribery act.
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Reduce conflicts of interest and other 'corrupt'
practices.
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Employs record retention and reporting
requirements.
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Bank for International Settlements
Basel Committee on Banking Supervision (BCBS)
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The Basel Committee on Banking Supervision
provides a forum for regular cooperation on banking
supervisory matters.
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Its objective is to enhance understanding of key
supervisory issues and improve the quality of banking
supervision worldwide.
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Bank for International Settlements
Basel 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.
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Regulatory Responses
Basel I (1988)
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Primarily focused on credit risk and appropriate risk
weighting of assets.
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Assets of banks were classified in five categories
according to credit risk, carrying risk weights of:
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0% (for example cash, bullion, home country debt
like Treasuries),
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20% (securitisations such as mortgage-backed
securities (MBS) with the highest AAA rating),
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Regulatory Responses
Basel I (1988)
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50% (municipal revenue bonds, residential
mortgages),
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100% (for example, most corporate debt), and
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No rating.
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Banks with an international presence are required to
hold capital equal to 8% of their risk-weighted assets
(RWA).
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Functionally, all banks have an international
presence.
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Regulatory Responses
Basel II (2004)
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Now effectively superseded by Basel III
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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.
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Regulatory Responses
Basel 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.
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Regulatory Responses
Basel III (2010)
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Basel III (2010) is a global regulatory standard on
bank capital adequacy, stress testing and market
liquidity risk.
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'Voluntary'
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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.
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But BSCS issues annual reports on progress.
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Regulatory Responses
Basel III (2010)
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Developed in response to the deficiencies in financial
regulation revealed by the financial crisis of 2007–08.
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Basel III is supposed to strengthen bank capital
requirements by increasing bank liquidity and
decreasing bank leverage.
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Regulatory Responses
Basel III (2010)
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Notification of the Bank of Thailand No. 54/2008
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Guideline for Calculation of Credit Risk for
Commercial Banks
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Follows precisely the Basel III guidelines
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Implemented in all Thailand banks under this order.
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Regulatory Responses
Basel III (2010)
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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.
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Regulatory Responses
Basel III (2010)
●
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.
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Siam Commercial Bank (SCB) and King Mongkut's
Institute of Technology Ladkrabang (KMITL) has
reached an agreement to settle the embezzlement
scandal.
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Regulatory Responses
Basel III (2010)
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An investigation has been launched by Nepal
authorities into claims that a number of citizens was
storing 'black money' in a Swiss bank account.
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Eight Nepali citizens are under investigation over the
5.5 billion rupee deposit ($USD 55 million).
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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.
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Failure of risk management.
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Regulatory Responses
What to Expect
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Increasingly aggressive enforcement.
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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
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When risk management is done
correctly you can sleep at night at
home.
This presentation available on
SlideShare at:
http://www.slideshare.net/
74. (c) Cervelet Consulting copyright 2015
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
75. (c) Cervelet Consulting copyright 2015
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