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7/29/2019 Enterprise Bank ERM Basel II Proposal
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ENTERPRISE-WIDE RISK MANAGEMENT & BASEL II GAP
PROPOSAL
JANUARY, 2012
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BACKGROUND
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INTRODUCTION
The global economic crisis of the last two years has continued to challenge the way firms dobusiness, including how they anticipate and manage their risks and therefore the efficientdeployment and management of their capital. At the same time, global and local regulators havetaken a closer and tougher view on how they evaluate and oversee financial institutions in the wakeof high levels of operational and earnings volatilities.
There has therefore been an emergence of various regulatory reforms and the emergence of higher-level guidelines such as the recent Basel III.
It is in this regard that the bank is evaluating its current risk management framework with a view tofurther up-scaling it in line with Basel II requirements while embarking on bank-wide sensitization(Training) and automation of its risk management system. This will enable it achieve an enhancedmanagement of all the banks risk exposures and ensure increased financial stability and earningsgrowth, leading to a more effective actualization of the banks mandate.
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ENTERPRISE-WIDE RISKMANAGEMENT FRAMEWORK
(ERM) DESIGN & IMPLEMENTATION
PROJECT 1
BASEL II GAP ANALYSIS &
IMPLEMENTATION
PROJECT 2
PROJECTS
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ENTERPRISE-WIDE RISK MANAGEMENT FRAMEWORK (ERM)DESIGN & IMPLEMENTATION
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Enterprise-wide Risk Management is a process for identifying and prioritizing the critical risksfacing your organization, quantifying their impact on financial and strategic objectives, andimplementing financial and organizational solutions to address them.
1. Risk management is a systematic,critical risk-focusedactivity
2. Risk is quantified to makeinformed business decisions
3. Risk management is an integral part ofstrategic planning and budgeting
4. Pricing, capital allocation, performancemeasures consider potential risk as well as returns
5. Risk is not automatically avoided, butweighed against opportunity to optimize risk versus return
6. Risk mitigation/financing focuses on eventsand volatilities that could compromise financialand strategic objectives
OVERVIEW OF ERM
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Our ERM solution defines essential components, suggests a common language, and provides cleardirection and guidance for strong Enterprise-wide Risk Management. It reviews the existingoperations, enhances and installs the following framework components:
Strategic framework top-driven Risk Education and Culture Risk Philosophy and Appetite definition Risk Management Objectives
Organisational framework Board and Management Committees Risk Function structure, staffing, responsibilities Bank-wide linkages line, audit, Internal control, etc
Operational framework Risk Policies, Processes, Procedures
Analytical framework Risk Identification and listing Risk Metrics, Measurement and Management methodologies Linkage with Budgeting and Strategic Planning
Reporting framework
Reporting templates Responsibilities and frequency Technological framework Control and compliance framework
Internal supervisory framework Risk-based internal Audit self-assessment templates
OUR ERM FRAMEWORK
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It is expected that at the end of the project, the overall benefits should include the following:
Definition, formalization and communication bank-wide, of a top-driven, focused andconsistent risk philosophy and appetite, and the development of a sound risk culture.
Evolution of a robust ERM framework which helps identify, measure and manage allforms of risk facing the bank.
Ability to analyze business unit risks across the bank enabling better understanding andcomparison of risk across functions and business units. Improvement of capital efficiency
and cost savings through more effective management of internal resources and capital. Ability to align the banks corporate strategy with its risk tolerance level
Evolution of a risk performance measurement approach which provides the basis forsound business decision-making.
Compliance with the Central Bank of Nigerias risk framework and risk-based supervisionguidelines.
Implementing a framework which ensures effective overall capital management on aconsolidated basis. This includes appropriate structure covering credit, market.Operational and liquidity risks including policies, guidelines and procedures.
Develop appropriate risk measurement metrics and indicators recognizing the businessobjectives and competitive positioning
PROJECT BENEFITS
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PROJECT SCOPE
Business Risk ProfileAppreciation
Implementation RoadmapDevelopment
ERM FrameworkDesign
Situation Assessment
This involves an in-depth scanning of the internal business environment,regulatory requirements, business strategy/plans using our proprietaryintegrated Risk Assessment Tool IRATTM to determine the current andpotential risk universe
This is a thorough examination of the existing risk management frameworkand practices using our8-framework approach.It also involves best-practice benchmarking against global peer institutions.
Based on the outcome of the situation assessment, a best-fit enterprise-widerisk management framework is designed across our 8- frameworkapproach
In order to ensure ease of implementation, we work with the counterpartteams to evolve an implementation road map for the designed framework.
The scope of work under our ERM Framework design is as follows:
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The tasks to be performed under each broad activity are as follows:
Counterpart Team Formation
Work Plan Presentation and Amendment Work Stream Allocation and Briefing Project Inauguration Meeting and Steering Committee Formation
Strategic Plan Review - Current and Future Business Projection. Proof-of-Concept Session Identification of Core Activities - Business and Support Functions Risk Identification and Impact Analysis - IRATTM
Development of Risk Profile Report
Assessment of the existence and adequacy of current frameworks to support risk management.These are Strategic, Governance, Analytical, Operational (Process), Information Reporting andPerformance Management, Technological, Compliance and Control .This will be done through a thorough review of existing documentation and practices using desktop review and interviews with key stakeholders. -ERM Diagnostic
Current Policy Document Review This will be done to ascertain the relevance andcompleteness of existing polices in order to ensure risk identification, impact assessment,measurement and management . These must cover all identified risk areas - current and
projected. Use Policy Checklists - ERM/ Risk Policy PacksTM
Determination of benchmark parameters and institutions. Comparison of current risk frameworks with practices in benchmark institutions using
proprietary Risk Framework Evaluation Templates Scoring of current frameworks against benchmark institutions. Basis of scoring must be
agreed with the client and standardized.
Project Planning andOrganization
Business Case Analysis
- Risk Profiling
Current RiskManagement
Framework Assessment
Policy Framework
Evaluation
Best PracticeBenchmarking and
Gap Analysis
PROJECT METHODOLOGY AND ACTIVITIES
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The tasks to be performed under each broad activity are as follows:
Gap Report Writing And
Presentation
Framework Design
Development of
Implementation Roadmap
Production of Draft Gap Report Presentation of draft Gap Report to Counterpart Team, Steering Committee and Board Production of Final Draft Report recognizing comments from presentations
Design of frameworks to cover all identified core risks based on the Gap Report.This design cover Strategic, Governance, Analytical, Operational (Process), InformationReporting and Performance Management, Compliance and Control, and Technologicalframeworks.Provision of, as much as possible, the options to the design framework and an explanationof the rationale.
Presentation of draft design framework to Counterpart team, Steering Committee andBoard and collation of feedbacks/comments.
Submission of final design framework to the institution covering each of the identified riskareas
Development of implementation roadmap with counterparty team and itsfinalization
Provision of on & off site guidance to the counterpart team to generate a road map Project Closure
PROJECT METHODOLOGY AND ACTIVITIES
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PROJECT 2-BASEL II GAP & IMPLEMENTATION
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The Basel II Capital Accord is a reality for financial institutions in Nigeria and the global marketswith its strategic benefits for sound and safer business practices and controls, beyond thecompliance requirements.
The accord requires banks and related financial institutions to deploy detailed risk quantificationmethodologies and operating processes and make adequate capital provisioning for the risks theycarry. The Central Bank of Nigeria has also commenced plans to provide guidelines to the banks inNigeria in respect of their capital adequacy. This is to ensure that banks not only estimate their
earnings but also their risks and in turn set aside corresponding capital. The schema belowcaptures the framework of the accord:
OVERVIEW OF BASEL II
Recognizing the strategic benefits of the Basel II accord, the bank is willing to embark onimplementing its requirements. Some of the observed benefits of the Basel II Implementationproject are as captured in the next slide:
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PROJECT BENEFITS Basel II In keeping with the brand and corporate vision, the bank will meet international best practices andlocal regulatory expectations on Basel II.
The Basel II project will enhance the board and senior managements ability to understand howmuch capital flexibility exists to support the risk appetite of the bank.
An installed Basel II framework will enable the banks management understand capitalrequirements under different economic and stress scenarios and institutionalize the culture ofstress testing which is necessary for effective risk and earnings volatility management.
A Basel II framework builds and supports the linkage between the banks risk and capital and tiesperformance to both.
It strengthens the banks position to respond to the increasing focus on capital management and abetter appreciation of the firms risk profile and the capital implications of same.
While this will be an evolving perspective, it helps the banks ability to comprehensively evaluate
and document all risks and substantiate appropriate capital allocation to the supervisory authority.
Considering the amount of work done to date by the bank, the objective of this first leg of theproject is to get a clear evaluation of all additional work if any, that needs to be done to bring thebank into full compliance with Basel II requirements. Following this, there may then be a next leg tobridge observed gaps.
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SCOPE OF WORK
Basel II
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1.
DIAGNOSTICPHASE
a.
QuestionnaireAdministration
b.
Risk Management ITarchitecture
2
PROOF OFCONCEPT
a.
Basel II Workshop
b.
Basel II IT and DataArchitecture
Meetings
3
GAP ANALYSIS
a.
Basel II GapAnalysis
b.Recommendations,
Basel II Road Map
Design & ReportSubmission
POST
GAP ANALYSIS-
Mandate for FullBasel II Road Map
Implementation
SCOPE OF WORK
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METHODOLOGY
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# Task Description Timeline Deliverables
1 Risk
Management
Questionnaire
Distribution
i. A Request for Information paper will be
sent to the bank with dozens of relevant
questions for understanding:
Overall Credit Risk status in the bank
(rating models, IT systems and main data
entities, credit approval/denial processes,
etc )
Overall Market Risk status in the bank
(Risk factor data bases, VaR calculations,
limits policies, Market risk control
policies,)
3 week Duly filled
questionnaire
received from
respondents
METHODOLOGY1.Diagnostic Phase
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# Task Description Timeline Deliverables
1 Contd
Overall Operational Risks status in the
bank (Loss events data base availability,
internal procedures for identifyingOperational risks, KRI calculations,
frequency/severity assessment of
potential loss events, )
ii Risk Management IT architecture (core
banking system, existing risk management
systems, infrastructure, main data entity, )
METHODOLOGY
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# Task Description Timeline Deliverables
2 Workshop i. A joint 1 week workshop will be scheduled in
which we meet relevant business teams in the bank
(Retail division, Corporate division, Risk
Management division, Credit Cards division) and go
through answers given. In the meetings we will
discuss the Bank's vision for implementing Basel II
and Risk management best practice as well as
understand the current status at different areas of
activity.
1 week Information
about Basel
Framework,
Risks status
and risk
management
vision in THE
BANK
METHODOLOGY2.PROOF OF CONCEPT
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# Task Description Timeline Deliverables2 Workshop Contd.
ii. Conduct of meetings with IT staff for reviewing
IT and data architecture. In the meetings, we
will share our Basel II and Credit Scoring dataschemes which include the full data model
required for implementing Basel II on the
Standardized Approach and FIRB. During the
meetings we will seek to evaluate the
availability of main data entities, as described in
our data schemes, in THE BANK data
environment
METHODOLOGY
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# Task Description Timeline Deliverables
3 a.
Analysis of
meetings
information
i. Writing down Credit, Operational and
Marketing Risk status chapter in gap analysis
report, based on meetings with THE BANK
teams
ii. If necessary, contact relevant persons in the
bank (by phone) in order to clarify and get
further explanations about vague points.
iii. Send paper to THE BANK for approval
3 weeks Approved
current Risk
status
chapter in
gap analysis
report
METHODOLOGY3.Gap Analysis &
Reporting
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# Task Description Timeline Deliverables
b.
Recommenda
tion on
roadmap andactions
needed for
filling gaps
i. Writing down list of gaps between current
Risk status and the Bank's goals for
implementing Basel II
ii. Writing down recommended roadmap, work
plan and actions needed for filling gaps.
Send first draft to THE BANK for approval
3 weeks Draft of
whole gap
analysis
report
METHODOLOGY
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# Task Description Timeline Deliverables
c.
Presenting gap
analysis report
to THE BANKs
management
i. Meetings in THE BANK site with
management to present the gap analysis
results and roadmap for Basel II
implementation
ii. Taking comments from THE BANK teams
after gap analysis presentation
1 week Basel II gap
analysis
report
presentation
d.
Submission of
final report
i. Fine tuning of the gap analysis
ii. Sending THE BANK final report
1. week Final Basel II
gap analysis
report
METHODOLOGY
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Current Credit Risk status: portfolio, credit approval/denial processes, rating models
Current Credit Risk IT status (operational systems, data bases, overall data tables,analytical systems)
Gaps founded between current status and Basel II regulation
Roadmap, work plan and action items for performing Basel II :
By the standardized approach
By the FIRB approach Optional Data schemes (data field level) for performing :
Basel II standardized approach
PD modeling for retail & micro-business customers (FIRB)
PD modeling for mortgage customers (FIRB)
PD modeling for SME & corporate (FIRB)
Each data scheme includes several data tables containing around 120 fields (andconnections between the fields) needed to be collected in order to perform Basel II(Standardized/FIRB approach).
CREDIT RISK DELIVERABLES
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The Basel II Gap Analysis Report will contain the following:
CREDIT RISK
Banks goals in the field of Credit Risk portfolio reporting, Credit Scoring and Rating,
Preparations for possible Basel II regulation,
Current Credit Risk status in THE BANK (portfolio, credit approval/denial processes, rating
models)
Current Credit Risk IT status in THE BANK (operational systems, data bases, overall data tables,
analytical systems)MARKET RISKS
Banks goals in the field of Market, VaR calculation , preparations for possible Basel II regulation
Current Market Risk status in THE BANK
Current Market Risk IT status in THE BANK (operational systems, data bases, overall data tables,
analytical systems)
OPERATIONAL RISKS
Banks goals in the field of Operational risks, Key Risks Indicators, Preparations for possible Basel
II regulation
Current Operational Risk status in THE BANK
BASEL II GAP REPORT SUMMARY
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GAP ANALYSIS Gaps founded between current status and Bank's goals
Roadmap, work plan and action items for filling the gaps :
By the standardized approach
By the FIRB approach
Annex 1 Basel II regulations Background
Annex 2 - Data schemes (data field level) for performing :
Basel II standardized approach
PD modeling for retail & micro-business customers (FIRB)
REPORT SUMMARY
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PROJECTS Roadmap
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WORKSTREAMS YEAR 1 YEAR 2
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
ENTERPRISE-WIDE RISKMANAGEMENT CONSULTING 6 MTHS
BASEL II GAP ANALYSIS(Credit, Market & Operational Risks) 6 MTHS
BASEL II DESIGN/IMPLEMENTATION:
12 months
(Pricing subject to the outcome of gap
analysis)
ROADMAP
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OUR FOOTPRINTS
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We thank you for the opportunity to forward this proposal, and will be pleased todiscuss with you any further customization which may be required on ourmethodology, time frame and pricing (after an assessment of the actual scope) thatyou may desire.
We eagerly look forward to working with you on this mandate and commend yourdesire to further strengthen firm-wide Risk Management
CONCLUSION