HSBC

RISK MANAGEMENT FOR SENIOR BANKERS

Steve Troop

Deputy Chief Executive - HSBC Turkey

Istanbul, 20th November 2002

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What today’s presentation is not…

Technically-focused : ‘soft’ issues rather than the mechanics of risk management…..

Definitive : no-one can offer a set of ‘Answers’ : all I will do today is illustrate some - but by no means all - of the ‘Questions’…..

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Today’s Presentation

The role of senior management in risk management

Establishing sound risk management principles

Some thoughts on the application of

‘risk-management-in-the-round’

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1. Senior Management’s Role

Banking is the original ‘risk business’‘No-risk’ banking a contradiction in termsWe buy risk, we sell risk, we measure risk, we manage risk, we (or our subordinates) make ‘risk decisions’ all day and every day ……

If ‘risk’ is the essence of banking, it follows that the role of senior management is risk management …….

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1. Senior Management’s Role

Establishing a culture of risk management Strategy Core Values / the ‘conscience of the company’ConsistencyProvide focus

Seeing the big picture - ‘joined-up’ risk . management Collective Management at the top of the bank Picking the right team

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The Role of Senior Management(2)

Establishing a culture of risk management

Strategy Every bank should have one ! A bank’s strategy is, of itself, a statement

of risk appetite Review, revise , update ‘Test’ investment and risk decisions against

that strategy Communicate it internally

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The Role of Senior Management(3)

Core Values / the ‘conscience of the company’ Statement of principles Guidelines / handbooks as to staff conduct Role models : talk-the-walk / walk-the-talk Collective belief in the value of risk

management (If senior management don’t believe in it, why should anyone else ?)

Consistency Set ‘rules’ and then apply them Be seen to apply them

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Provide focus: Risk management as a tool to achieve efficiency,

productivity and profitability

Deployment of resources : link between risk, return, capital employed, strategy. Measurement and modelling is important though it is decision makers who create the difference…….

The Role of Senior Management(4)

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The Role of Senior Management(5)

Seeing the big picture : ‘joined-up’ risk management

Multiplicity of risks ; Credit Market : interest / exchange rate, re-

pricing, availability Operational / technical Compliance / legal Reputational

Complication : some of these risks compete / some offset……

How to pull them all together and ‘see’ the big picture ?

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The Role of Senior Management(6)

Collective management at the top of the bank ;

Is there a Top Team ? Is it a Team ? Does it communicate ?

Does it discuss risk management? If so, how often?

Shared approach to risk management / common view - or ‘someone else’s job ?’

How ‘honest’ is communication ? Do we encourage intuition / feelings ?

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Have we picked the ‘right team ? ’

Balance : mix of styles / perspectives Professional training, experience, CVs

The Role of Senior Management(7)

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Does our organisational structure facilitate appropriate risk management ?

Reporting lines : do these reflect the need for independence / objectivity ? …….or do we have the fox looking after the

hen house ?

The Role of Senior Management(8)

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Delegated authorities are essential to the effective operation of any large bank: are they ;

Unequivocal ? (As to value, limits, scope of activity, decision-making, etc) Clearly understood by those who hold those authorities ? Are excesses -of-authority identified quickly

(and by whom) ?

The Role of Senior Management(9)

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The Role of Senior Management(10)

Questions to ask - on a regular basis ;

Bonuses : do our strategies for variable compensation complement - or compete with - a ‘risk management culture’ ?

Recognition : do we promote / advance the careers of those who demonstrate a balanced approach to management (considered commercial judgment with an awareness of risk) ?

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Questions to ask - on a regular basis;

Roles & responsibilities : is risk management embedded in everyone’s Job Description - or is there a poachers-and-gamekeepers environment ? (‘Creative tension’ is inevitable and healthy : internal warfare is not)

Training : does the risk-management ethos inform / shape Training commitments and budgets ?

The Role of Senior Management(11)

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Questions to ask - on a regular basis;

Reputational risk : key role of senior management. What do we have in place to protect us from ‘banana skins’ that will embarrass us in front of regulators, our customers, our shareholders, our staff, the media and the general public ?

The Role of Senior Management(12)

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The Role of Senior Management(13)

More questions ;

Are we compliant with legislation ? Though at least as important……

Have we let compliance with legislation / regulation become a proxy for managing risks ? (Going-through-the-motions)

Do we shoot-the-messenger or are there channels / mechanisms through which more junior concerns can be listened to ?

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The Role of Senior Management(14)

(Yet) more questions ;

Do we learn from mistakes ? Formal, independent, objective review with recommendations ? (Are these followed up ?)

Is information flow timely ? (It took an estimated 45 seconds for nervous stimuli to get from the tail of the largest dinosaur to its brain - by which time, the predator had already eaten both hind legs ……….)

Top management meetings : shape and focus is important. Do we spend time explaining (arguing about?) what happened - or do we focus on what might/could / will happen in future ?

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2. Sound Risk Management Principles

Balance between risk / reward : we all claim to understand the basic principles of risk/ reward. Most of us focus on the reward……

Identifying future income associated with a particular investment / lending decision is straightforward : do we identify (quantify) worst-case risk ?

If we do, do we have house-limits on worst-case risks ?

(Put bluntly, how much are we prepared - or indeed, how much can we afford - to lose ?)

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Do we look at profitability on transactions / relationships / business-lines ?

Loss-leadership a fact of commercial life in competitive markets

Loss-leadership is a tactic - not a strategy….

Do we / can we measure loss-leadership ? Do we limit (time or value) how far we are prepared to go with loss-leadership at a bank-level ?

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Sound Risk Management Principles (2)

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Do we have a portfolio strategy ?

Have we limited activity / exposure to specific sectors ?

If we have, can we implement it ? (i.e. is the data accessible / is it recorded correctly ?)

Do we have ‘natural hedges’ ? Do these supply the ‘balance’ we need ?

If no, what hedging tools can we put in place ?

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Sound Risk Management Principles (3)

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Do we demonstrate resolve

How do we deal with policy exceptions ?

How many exceptions do we have ? (If a large number, do we really have a policy ?)

‘It’s all about execution’ ………

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Sound Risk Management Principles (4)

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Top Team involvement ;

Collective decisions (not just collective discussions)

Don’t be afraid to micro-manage / spot-check from time to time………

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Sound Risk Management Principles (5)

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3. Risk Management-in-the-round

A clear and obvious need to ‘bring it all together’ :

Executive Risk Committee ALCO EXCO IT Steering Committee Board Meetings Audit Reports Contingency Management

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3. Risk Management-in-the-round

Executive Risk Committee Risk Decree requirement Chaired by non-Executive Director &

Board Member (Minutes for Board) Quarterly reviews of risk management No business leadership participates Heads of Audit, Operations, Compliance,

Legal, Credit, Treasury Control/ Back Office, ICU.

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3. Risk Management-in-the-round

ALCO Weekly (more often as needed) Minuted Standard format : specific sections on limit

excesses (credit, treasury) Reviews pricing, funding, balance-sheet,

P&L, profitability Attended by both business leadership and

risk control functions.

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3. Risk Management-in-the-round

EXCO Monthly (more often as needed) Business leadership & top management

of the bank Minuted Reviews out put from Audit, ERC and

ALCO.

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3. Risk Management-in-the-round

IT Steering Committee Quarterly (more often as needed) Business leadership & top management of

the bank Minuted IT: material in any risk management

discussion plus inherent risks in IT itself IT’s central role as provider of numeric

tools for measurement and management of risk

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3. Risk Management-in-the-round

Role of Audit Reviews the adequacy / effectiveness of

risk controls Publishes formal reports &

recommendations addressed to ‘owners’ of businesses and processes.

Timely responses required / tracked to conclusion.

Formal reporting line to Audit in Head Office (London)

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3. Risk Management-in-the-round

Contingency Management Pre-identifcation of possible event /

systemic risks Modelling tools / ‘early warning’ signals Business Resumption / Disaster Recovery

Plans (Test them………)

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SUMMARY

Risk management is the very essence of top management’s role and its principal responsibility

Top management set the tone for risk management / risk consciousness at any institution……

Risks are interdependent : top management’s job is to see ‘The Big Picture’……

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CONCLUSION

No ‘Right Answer’.. …

An evolutionary process : complacency the greatest threat

Asking ‘difficult’ Questions - and constant refinement of the Answers - is the most valuable thing any senior manager can and should be doing…..

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THANKYOU FOR LISTENING.

ANY QUESTIONS ?

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