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(c) Cervelet Consulting copyright 2015
Risk Management in Banking
Developed & Presented by:
William P. Kittredge, PhD
President
Cervelet Management & Strategy Consultants, LLC
(c) Cervelet Consulting copyright 2015
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.
(c) Cervelet Consulting copyright 2015
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.
(c) Cervelet Consulting copyright 2015
Success Depends Upon
●
A positive corporate culture.
●
Actively observed policies and procedures.
●
Effective use of technology.
●
Independence of risk management
professionals.
(c) Cervelet Consulting copyright 2015
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
●
(c) Cervelet Consulting copyright 2015
Evolution of Risk Management
●
Emerged as a discipline during the early
1990s.
●
Used long before (1960s).
●
Initially the term 'risk management' described
techniques for addressing insurable risks.
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Risk Management Yesterday
●
Risk reduction through safety, quality control
and hazard education.
●
Alternative risk financing, including self-
insurance and captive insurance.
●
The purchase of traditional insurance
products.
●
Use of derivatives to hedge or customize
market risk exposures.
(c) Cervelet Consulting copyright 2015
Risk Management Today
●
Treats derivatives as a problem as much as a
solution.
●
Focuses on reporting, oversight and
segregation of duties within the organization.
●
Development of international standards –
technically voluntary
(c) Cervelet Consulting copyright 2015
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.
(c) Cervelet Consulting copyright 2015
Risk is a Function of 2 Factors
●
Uncertainty.
Change in market conditions that are
unpredictable and/or beyond the control of
the bank and/or its customers.
●
Exposure.
Degree to which the bank's portfolio
composition is impacted by changes in
market conditions.
(c) Cervelet Consulting copyright 2015
Types of Risk
●
Operational.
●
Credit.
●
Reputational.
(c) Cervelet Consulting copyright 2015
Operational Risk
The risk of loss resulting from
inadequate internal processes or
the failure of internal processes,
people and systems, or from
external events.
(c) Cervelet Consulting copyright 2015
Operational Risks Include
●
Internal Fraud.
●
External Fraud.
●
Employment Practices and Workplace Safety.
●
Clients, Products and Business Practices.
(c) Cervelet Consulting copyright 2015
Operational Risks Include
●
Damage to Physical Assets.
●
Business Disruption and System Failures.
●
Execution, Delivery and Process Management.
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Internal Fraud & Theft
●
Unauthorized Activity.
Transactions not reported.
Transaction type unauthorized.
Mis-marking of position.
(c) Cervelet Consulting copyright 2015
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
(c) Cervelet Consulting copyright 2015
Internal Fraud & Theft
Bribes/kickbacks.
Insider trading.
Money laundering.
Willful blindness – i.e. deliberately ignoring
illicit activities.
(c) Cervelet Consulting copyright 2015
External Fraud & Theft
Theft/robbery.
Forgery.
Check kiting.
Identity theft.
Elder financial abuse.
(c) Cervelet Consulting copyright 2015
External Fraud & Theft
Systems Security.
Hacking damage & theft of money.
Theft of information (with monetary loss).
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Employment Practices and Workplace Safety
●
Employee Relations.
Compensation, benefit, termination issues.
Organized labour issues.
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Employment Practices and Workplace Safety
●
Safe Environment.
General liability (slips and falls).
Employee health and safety rules.
Workers’ compensation.
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Employment Practices and Workplace Safety
●
Diversity and Discrimination
All discrimination types.
Harassment.
Equal Employment Opportunity (EEO) – frequently
part of international funding agreements.
(c) Cervelet Consulting copyright 2015
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.

(c) Cervelet Consulting copyright 2015
Clients, Products and Business Practices
●
Suitability, Disclosure and Fiduciary.
Aggressive sales.
Inadequate product offerings.
Account churning.
Misuse of confidential information.
Lender liability.
(c) Cervelet Consulting copyright 2015
Clients, Products and Business Practices
●
Improper Business or Market Practices .
Antitrust.
Improper trade/market practice.
Market manipulation.
Insider trading (on firm’s account).
Unlicensed activity.
Money laundering.
(c) Cervelet Consulting copyright 2015
Clients, Products and Business Practices
●
Selection, Sponsorship and Exposure.
Failure to investigate client per guidelines.
Exceeding client exposure limits.
●
Advisory Activities.
Disputes over performance or advisory activities.
PWC and 'happy talk' reporting.
(c) Cervelet Consulting copyright 2015
Damage to Physical Assets
●
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)
(c) Cervelet Consulting copyright 2015
Business Disruption and System Failures
●
Systems.
Hardware
Software.
Telecommunications.
Utility outage/disruptions.
(c) Cervelet Consulting copyright 2015
Execution, Delivery and Process Management
●
Transaction Capture, Execution and Maintenance.
Miscommunication.
Data entry, maintenance or loading errors.
Missed deadline or responsibility.
Model/system misoperation.
(c) Cervelet Consulting copyright 2015
Execution, Delivery and Process Management
●
Transaction Capture, Execution and Maintenance.
Accounting error/entity attribution error.
Other tasks subject to performance failure.
Record retention.
Documentation maintenance.
(c) Cervelet Consulting copyright 2015
Execution, Delivery and Process Management
●
Transaction Capture, Execution and Maintenance.
Delivery failure.
Collateral management failure.
Reference data maintenance.
(c) Cervelet Consulting copyright 2015
Execution, Delivery and Process Management
●
Monitoring and Reporting.
Failed mandatory reporting obligations.
Inaccurate external loss (loss incurred).
(c) Cervelet Consulting copyright 2015
Execution, Delivery and Process Management
●
Customer Intake and Documentation.
Unapproved access given to accounts.
Incorrect client records (loss incurred).
Negligent loss or damage of client assets.
(c) Cervelet Consulting copyright 2015
Execution, Delivery and Process Management
●
Customer/Client Account Management.
Unapproved access given to accounts.
Incorrect client records (loss incurred).
Negligent loss or damage of client assets.
(c) Cervelet Consulting copyright 2015
Execution, Delivery and Process Management
●
Trade Counter-parties
Non-client counter-party performance failure.
●
Vendors and Suppliers.
Outsourcing.
Vendor disputes.
(c) Cervelet Consulting copyright 2015
Operational Risk Checklist
 Employee training.
 Close management oversight.
 Segregation of duties.
 Employee background checks.
(c) Cervelet Consulting copyright 2015
Operational Risk Checklist
 Procedures and process.
 Purchase of insurance.
 Exiting certain businesses.
 Capitalization of risks.
(c) Cervelet Consulting copyright 2015
Credit Risk
Risk due to an uncertainty in a
counter-party's ability to meet its
obligations in accordance with
agreed upon terms.
(c) Cervelet Consulting copyright 2015
Credit Risks Include:
●
Loans.
●
Acceptances.
●
Interbank transactions.
●
Trade financing.
●
FX transactions.
(c) Cervelet Consulting copyright 2015
Credit Risks Include:
●
Futures.
●
Swaps.
●
Equities.
●
Letters of credit.
●
Options.
(c) Cervelet Consulting copyright 2015
Managing Credit Risk
●
Establish an appropriate credit risk
environment.
●
Operate under a sound credit-granting
process.
●
Maintain an appropriate credit administration,
measurement and monitoring process.
●
Ensure adequate controls over credit risk.
(c) Cervelet Consulting copyright 2015
Appropriate Credit Risk Environment
●
Board of Directors should review credit risk
strategy periodically.
●
Senior management should implement credit
risk strategy approved by the Board.
(c) Cervelet Consulting copyright 2015
Operate a Sound Credit Granting Process
●
Criteria should include thorough
understanding of the borrower,
purpose/structure of credit and its source of
repayment.
●
Establish overall credit limits at the level of
individual borrowers/connected counter-
parties
(c) Cervelet Consulting copyright 2015
Operate a Sound Credit Granting Process
●
Have a clearly established process for
approving new credits/extension of existing
credits.
●
Extension of credit must be made on an 'arm’s
length basis' – i.e. 'special deals' for 'special
people' spell trouble
(c) Cervelet Consulting copyright 2015
Maintain a Credit Administration,
Measurement and Monitoring Process
●
Have in place a system for ongoing
administration of various risk-bearing
portfolios.
●
Develop an internal risk rating system for
managing credit risk.
(c) Cervelet Consulting copyright 2015
Maintain a Credit Administration,
Measurement and Monitoring Process
●
Have an information system and analytical
techniques that enable management to
measure credit risk of on/off balance sheet
activities.
●
System for monitoring overall composition and
quality of the credit portfolio.
●
Consider future changes in economic
conditions when assessing individual credits.
(c) Cervelet Consulting copyright 2015
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.
(c) Cervelet Consulting copyright 2015
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.
(c) Cervelet Consulting copyright 2015
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).
(c) Cervelet Consulting copyright 2015
Benefits of Effective Reputation Management
●
Improving relations with shareholders and
lowering the cost of capital.
●
Creating a more favourable environment for
investment.
●
Recruiting/retaining the best employees.
(c) Cervelet Consulting copyright 2015
Benefits of Effective Reputation Management
●
Reducing barriers to development in new
markets.
●
Securing premium prices for products.
●
Minimizing the threat of litigation.
(c) Cervelet Consulting copyright 2015
Reputational Risk Management
The key to managing reputational risk is
sound risk management, coupled with
straightforward communication about the
problem the bank is facing.
(c) Cervelet Consulting copyright 2015
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
(c) Cervelet Consulting copyright 2015
Reputational Risk Cases
●
Perrier – Toluene traces.
●
Exxon – Valdez spill.
●
Union Carbide – Bhopal, India.
●
Arthur Andersen – Enron shredding.
●
Firestone – Tires.
(c) Cervelet Consulting copyright 2015
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.
(c) Cervelet Consulting copyright 2015
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.
●
It is impossible to quantify the impact of
reputational risks.
●
Reputational risk is harder to manage than
other forms of risk.
(c) Cervelet Consulting copyright 2015
True or False?
●
My bank is proactive in enhancing and
protecting its reputation.
●
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.
(c) Cervelet Consulting copyright 2015
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.
(c) Cervelet Consulting copyright 2015
Regulatory Responses - Goals
●
Reduce bank secrecy to enforce anti-money
laundering and tax evasion
●
Insider trading rules.
●
Bank bribery act.
●
Reduce conflicts of interest and other 'corrupt'
practices.
●
Employs record retention and reporting
requirements.
(c) Cervelet Consulting copyright 2015
Bank for International Settlements
Basel Committee on Banking Supervision (BCBS)
●
The Basel Committee on Banking Supervision
provides a forum for regular cooperation on banking
supervisory matters.
●
Its objective is to enhance understanding of key
supervisory issues and improve the quality of banking
supervision worldwide.
(c) Cervelet Consulting copyright 2015
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.
(c) Cervelet Consulting copyright 2015
Regulatory Responses
Basel I (1988)
●
Primarily focused on credit risk and appropriate risk
weighting of assets.
●
Assets of banks were classified in five categories
according to credit risk, carrying risk weights of:
●
0% (for example cash, bullion, home country debt
like Treasuries),
●
20% (securitisations such as mortgage-backed
securities (MBS) with the highest AAA rating),
(c) Cervelet Consulting copyright 2015
Regulatory Responses
Basel I (1988)
●
50% (municipal revenue bonds, residential
mortgages),
●
100% (for example, most corporate debt), and
●
No rating.
●
Banks with an international presence are required to
hold capital equal to 8% of their risk-weighted assets
(RWA).
●
Functionally, all banks have an international
presence.
(c) Cervelet Consulting copyright 2015
Regulatory Responses
Basel II (2004)
●
Now effectively superseded by Basel III
●
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.
(c) Cervelet Consulting copyright 2015
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.
(c) Cervelet Consulting copyright 2015
Regulatory Responses
Basel III (2010)
●
Basel III (2010) is a global regulatory standard on
bank capital adequacy, stress testing and market
liquidity risk.
●
'Voluntary'
●
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.
●
But BSCS issues annual reports on progress.
●
(c) Cervelet Consulting copyright 2015
Regulatory Responses
Basel III (2010)
●
Developed in response to the deficiencies in financial
regulation revealed by the financial crisis of 2007–08.
●
Basel III is supposed to strengthen bank capital
requirements by increasing bank liquidity and
decreasing bank leverage.
(c) Cervelet Consulting copyright 2015
Regulatory Responses
Basel III (2010)
●
Notification of the Bank of Thailand No. 54/2008
●
Guideline for Calculation of Credit Risk for
Commercial Banks
●
Follows precisely the Basel III guidelines
●
Implemented in all Thailand banks under this order.
(c) Cervelet Consulting copyright 2015
Regulatory Responses
Basel III (2010)
●
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.
(c) Cervelet Consulting copyright 2015
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.
●
Siam Commercial Bank (SCB) and King Mongkut's
Institute of Technology Ladkrabang (KMITL) has
reached an agreement to settle the embezzlement
scandal.
(c) Cervelet Consulting copyright 2015
Regulatory Responses
Basel III (2010)
●
An investigation has been launched by Nepal
authorities into claims that a number of citizens was
storing 'black money' in a Swiss bank account.
●
Eight Nepali citizens are under investigation over the
5.5 billion rupee deposit ($USD 55 million).
●
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.
●
Failure of risk management.
(c) Cervelet Consulting copyright 2015
Regulatory Responses
What to Expect
●
Increasingly aggressive enforcement.
●
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
(c) Cervelet Consulting copyright 2015
When risk management is done
correctly you can sleep at night at
home.
This presentation available on
SlideShare at:
http://www.slideshare.net/
(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
(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

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Nepal Banking Risk Management March 2015 for senior Rastraiya Banijya Bank employees

  • 1. (c) Cervelet Consulting copyright 2015 Risk Management in Banking Developed & Presented by: William P. Kittredge, PhD President Cervelet Management & Strategy Consultants, LLC
  • 2. (c) Cervelet Consulting copyright 2015 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.
  • 3. (c) Cervelet Consulting copyright 2015 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.
  • 4. (c) Cervelet Consulting copyright 2015 Success Depends Upon ● A positive corporate culture. ● Actively observed policies and procedures. ● Effective use of technology. ● Independence of risk management professionals.
  • 5. (c) Cervelet Consulting copyright 2015 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 ●
  • 6. (c) Cervelet Consulting copyright 2015 Evolution of Risk Management ● Emerged as a discipline during the early 1990s. ● Used long before (1960s). ● Initially the term 'risk management' described techniques for addressing insurable risks.
  • 7. (c) Cervelet Consulting copyright 2015 Risk Management Yesterday ● Risk reduction through safety, quality control and hazard education. ● Alternative risk financing, including self- insurance and captive insurance. ● The purchase of traditional insurance products. ● Use of derivatives to hedge or customize market risk exposures.
  • 8. (c) Cervelet Consulting copyright 2015 Risk Management Today ● Treats derivatives as a problem as much as a solution. ● Focuses on reporting, oversight and segregation of duties within the organization. ● Development of international standards – technically voluntary
  • 9. (c) Cervelet Consulting copyright 2015 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.
  • 10. (c) Cervelet Consulting copyright 2015 Risk is a Function of 2 Factors ● Uncertainty. Change in market conditions that are unpredictable and/or beyond the control of the bank and/or its customers. ● Exposure. Degree to which the bank's portfolio composition is impacted by changes in market conditions.
  • 11. (c) Cervelet Consulting copyright 2015 Types of Risk ● Operational. ● Credit. ● Reputational.
  • 12. (c) Cervelet Consulting copyright 2015 Operational Risk The risk of loss resulting from inadequate internal processes or the failure of internal processes, people and systems, or from external events.
  • 13. (c) Cervelet Consulting copyright 2015 Operational Risks Include ● Internal Fraud. ● External Fraud. ● Employment Practices and Workplace Safety. ● Clients, Products and Business Practices.
  • 14. (c) Cervelet Consulting copyright 2015 Operational Risks Include ● Damage to Physical Assets. ● Business Disruption and System Failures. ● Execution, Delivery and Process Management.
  • 15. (c) Cervelet Consulting copyright 2015 Internal Fraud & Theft ● Unauthorized Activity. Transactions not reported. Transaction type unauthorized. Mis-marking of position.
  • 16. (c) Cervelet Consulting copyright 2015 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
  • 17. (c) Cervelet Consulting copyright 2015 Internal Fraud & Theft Bribes/kickbacks. Insider trading. Money laundering. Willful blindness – i.e. deliberately ignoring illicit activities.
  • 18. (c) Cervelet Consulting copyright 2015 External Fraud & Theft Theft/robbery. Forgery. Check kiting. Identity theft. Elder financial abuse.
  • 19. (c) Cervelet Consulting copyright 2015 External Fraud & Theft Systems Security. Hacking damage & theft of money. Theft of information (with monetary loss).
  • 20. (c) Cervelet Consulting copyright 2015 Employment Practices and Workplace Safety ● Employee Relations. Compensation, benefit, termination issues. Organized labour issues.
  • 21. (c) Cervelet Consulting copyright 2015 Employment Practices and Workplace Safety ● Safe Environment. General liability (slips and falls). Employee health and safety rules. Workers’ compensation.
  • 22. (c) Cervelet Consulting copyright 2015 Employment Practices and Workplace Safety ● Diversity and Discrimination All discrimination types. Harassment. Equal Employment Opportunity (EEO) – frequently part of international funding agreements.
  • 23. (c) Cervelet Consulting copyright 2015 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. 
  • 24. (c) Cervelet Consulting copyright 2015 Clients, Products and Business Practices ● Suitability, Disclosure and Fiduciary. Aggressive sales. Inadequate product offerings. Account churning. Misuse of confidential information. Lender liability.
  • 25. (c) Cervelet Consulting copyright 2015 Clients, Products and Business Practices ● Improper Business or Market Practices . Antitrust. Improper trade/market practice. Market manipulation. Insider trading (on firm’s account). Unlicensed activity. Money laundering.
  • 26. (c) Cervelet Consulting copyright 2015 Clients, Products and Business Practices ● Selection, Sponsorship and Exposure. Failure to investigate client per guidelines. Exceeding client exposure limits. ● Advisory Activities. Disputes over performance or advisory activities. PWC and 'happy talk' reporting.
  • 27. (c) Cervelet Consulting copyright 2015 Damage to Physical Assets ● 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)
  • 28. (c) Cervelet Consulting copyright 2015 Business Disruption and System Failures ● Systems. Hardware Software. Telecommunications. Utility outage/disruptions.
  • 29. (c) Cervelet Consulting copyright 2015 Execution, Delivery and Process Management ● Transaction Capture, Execution and Maintenance. Miscommunication. Data entry, maintenance or loading errors. Missed deadline or responsibility. Model/system misoperation.
  • 30. (c) Cervelet Consulting copyright 2015 Execution, Delivery and Process Management ● Transaction Capture, Execution and Maintenance. Accounting error/entity attribution error. Other tasks subject to performance failure. Record retention. Documentation maintenance.
  • 31. (c) Cervelet Consulting copyright 2015 Execution, Delivery and Process Management ● Transaction Capture, Execution and Maintenance. Delivery failure. Collateral management failure. Reference data maintenance.
  • 32. (c) Cervelet Consulting copyright 2015 Execution, Delivery and Process Management ● Monitoring and Reporting. Failed mandatory reporting obligations. Inaccurate external loss (loss incurred).
  • 33. (c) Cervelet Consulting copyright 2015 Execution, Delivery and Process Management ● Customer Intake and Documentation. Unapproved access given to accounts. Incorrect client records (loss incurred). Negligent loss or damage of client assets.
  • 34. (c) Cervelet Consulting copyright 2015 Execution, Delivery and Process Management ● Customer/Client Account Management. Unapproved access given to accounts. Incorrect client records (loss incurred). Negligent loss or damage of client assets.
  • 35. (c) Cervelet Consulting copyright 2015 Execution, Delivery and Process Management ● Trade Counter-parties Non-client counter-party performance failure. ● Vendors and Suppliers. Outsourcing. Vendor disputes.
  • 36. (c) Cervelet Consulting copyright 2015 Operational Risk Checklist  Employee training.  Close management oversight.  Segregation of duties.  Employee background checks.
  • 37. (c) Cervelet Consulting copyright 2015 Operational Risk Checklist  Procedures and process.  Purchase of insurance.  Exiting certain businesses.  Capitalization of risks.
  • 38. (c) Cervelet Consulting copyright 2015 Credit Risk Risk due to an uncertainty in a counter-party's ability to meet its obligations in accordance with agreed upon terms.
  • 39. (c) Cervelet Consulting copyright 2015 Credit Risks Include: ● Loans. ● Acceptances. ● Interbank transactions. ● Trade financing. ● FX transactions.
  • 40. (c) Cervelet Consulting copyright 2015 Credit Risks Include: ● Futures. ● Swaps. ● Equities. ● Letters of credit. ● Options.
  • 41. (c) Cervelet Consulting copyright 2015 Managing Credit Risk ● Establish an appropriate credit risk environment. ● Operate under a sound credit-granting process. ● Maintain an appropriate credit administration, measurement and monitoring process. ● Ensure adequate controls over credit risk.
  • 42. (c) Cervelet Consulting copyright 2015 Appropriate Credit Risk Environment ● Board of Directors should review credit risk strategy periodically. ● Senior management should implement credit risk strategy approved by the Board.
  • 43. (c) Cervelet Consulting copyright 2015 Operate a Sound Credit Granting Process ● Criteria should include thorough understanding of the borrower, purpose/structure of credit and its source of repayment. ● Establish overall credit limits at the level of individual borrowers/connected counter- parties
  • 44. (c) Cervelet Consulting copyright 2015 Operate a Sound Credit Granting Process ● Have a clearly established process for approving new credits/extension of existing credits. ● Extension of credit must be made on an 'arm’s length basis' – i.e. 'special deals' for 'special people' spell trouble
  • 45. (c) Cervelet Consulting copyright 2015 Maintain a Credit Administration, Measurement and Monitoring Process ● Have in place a system for ongoing administration of various risk-bearing portfolios. ● Develop an internal risk rating system for managing credit risk.
  • 46. (c) Cervelet Consulting copyright 2015 Maintain a Credit Administration, Measurement and Monitoring Process ● Have an information system and analytical techniques that enable management to measure credit risk of on/off balance sheet activities. ● System for monitoring overall composition and quality of the credit portfolio. ● Consider future changes in economic conditions when assessing individual credits.
  • 47. (c) Cervelet Consulting copyright 2015 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.
  • 48. (c) Cervelet Consulting copyright 2015 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.
  • 49. (c) Cervelet Consulting copyright 2015 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).
  • 50. (c) Cervelet Consulting copyright 2015 Benefits of Effective Reputation Management ● Improving relations with shareholders and lowering the cost of capital. ● Creating a more favourable environment for investment. ● Recruiting/retaining the best employees.
  • 51. (c) Cervelet Consulting copyright 2015 Benefits of Effective Reputation Management ● Reducing barriers to development in new markets. ● Securing premium prices for products. ● Minimizing the threat of litigation.
  • 52. (c) Cervelet Consulting copyright 2015 Reputational Risk Management The key to managing reputational risk is sound risk management, coupled with straightforward communication about the problem the bank is facing.
  • 53. (c) Cervelet Consulting copyright 2015 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
  • 54. (c) Cervelet Consulting copyright 2015 Reputational Risk Cases ● Perrier – Toluene traces. ● Exxon – Valdez spill. ● Union Carbide – Bhopal, India. ● Arthur Andersen – Enron shredding. ● Firestone – Tires.
  • 55. (c) Cervelet Consulting copyright 2015 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.
  • 56. (c) Cervelet Consulting copyright 2015 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. ● It is impossible to quantify the impact of reputational risks. ● Reputational risk is harder to manage than other forms of risk.
  • 57. (c) Cervelet Consulting copyright 2015 True or False? ● My bank is proactive in enhancing and protecting its reputation. ● 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.
  • 58. (c) Cervelet Consulting copyright 2015 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.
  • 59. (c) Cervelet Consulting copyright 2015 Regulatory Responses - Goals ● Reduce bank secrecy to enforce anti-money laundering and tax evasion ● Insider trading rules. ● Bank bribery act. ● Reduce conflicts of interest and other 'corrupt' practices. ● Employs record retention and reporting requirements.
  • 60. (c) Cervelet Consulting copyright 2015 Bank for International Settlements Basel Committee on Banking Supervision (BCBS) ● The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. ● Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide.
  • 61. (c) Cervelet Consulting copyright 2015 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.
  • 62. (c) Cervelet Consulting copyright 2015 Regulatory Responses Basel I (1988) ● Primarily focused on credit risk and appropriate risk weighting of assets. ● Assets of banks were classified in five categories according to credit risk, carrying risk weights of: ● 0% (for example cash, bullion, home country debt like Treasuries), ● 20% (securitisations such as mortgage-backed securities (MBS) with the highest AAA rating),
  • 63. (c) Cervelet Consulting copyright 2015 Regulatory Responses Basel I (1988) ● 50% (municipal revenue bonds, residential mortgages), ● 100% (for example, most corporate debt), and ● No rating. ● Banks with an international presence are required to hold capital equal to 8% of their risk-weighted assets (RWA). ● Functionally, all banks have an international presence.
  • 64. (c) Cervelet Consulting copyright 2015 Regulatory Responses Basel II (2004) ● Now effectively superseded by Basel III ● 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.
  • 65. (c) Cervelet Consulting copyright 2015 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.
  • 66. (c) Cervelet Consulting copyright 2015 Regulatory Responses Basel III (2010) ● Basel III (2010) is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk. ● 'Voluntary' ● 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. ● But BSCS issues annual reports on progress. ●
  • 67. (c) Cervelet Consulting copyright 2015 Regulatory Responses Basel III (2010) ● Developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. ● Basel III is supposed to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.
  • 68. (c) Cervelet Consulting copyright 2015 Regulatory Responses Basel III (2010) ● Notification of the Bank of Thailand No. 54/2008 ● Guideline for Calculation of Credit Risk for Commercial Banks ● Follows precisely the Basel III guidelines ● Implemented in all Thailand banks under this order.
  • 69. (c) Cervelet Consulting copyright 2015 Regulatory Responses Basel III (2010) ● 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.
  • 70. (c) Cervelet Consulting copyright 2015 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. ● Siam Commercial Bank (SCB) and King Mongkut's Institute of Technology Ladkrabang (KMITL) has reached an agreement to settle the embezzlement scandal.
  • 71. (c) Cervelet Consulting copyright 2015 Regulatory Responses Basel III (2010) ● An investigation has been launched by Nepal authorities into claims that a number of citizens was storing 'black money' in a Swiss bank account. ● Eight Nepali citizens are under investigation over the 5.5 billion rupee deposit ($USD 55 million). ● 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. ● Failure of risk management.
  • 72. (c) Cervelet Consulting copyright 2015 Regulatory Responses What to Expect ● Increasingly aggressive enforcement. ● 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
  • 73. (c) Cervelet Consulting copyright 2015 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