Petrash Capital ERM Diagnostic2010

Enterprise Risk Management Solutions to manage risk and drive performanceDiagnostic to improve ERM, process & core

Francis Petrash, Steven Klingbeil & Benjamin Privitt March 2011

Enterprise Risk Management Context

2

In his March 2006 speech to the Independent Community Bankers of America, Federal Reserve Chairman, Ben Bernanke said:

“The rapid growth in commercial real estate exposures relative to capital and assets raises the possibility that risk-management practices in community banks may not have kept pace with growing concentrations and may be due for upgrades in oversight, policies, information systems and stress testing.”

CONFIDENTIAL Petrash Capital, LLC

Sources: Independent Community Bankers of America National Convention and Techworld, Las Vegas, Nevada, March 8, 2006

2

Enterprise Risk Management Context

3

"Enterprise risk management is an issue we're all going to have to face," says Richard L. Harbaugh, president and CEO of the $150 million Equitable Federal Savings Bank in Grand Island, Nebraska. "It's there right now. It's a matter of segregating the risks and specifically identifying them. It's problematic because we don't know all we have to look at yet."

CONFIDENTIAL Petrash Capital, LLC

Source: The RMA Journal, November 2002

3

Enterprise Risk Management Context: Exposures for Bank Managers

4

  Undefined boundaries, thresholds and tolerances for risk   Invisible or siloed threats   Ad hoc remedies specific to each department   Exposure to complex risk and fraud at transaction level

without sufficient procedures   Need for improved data warehousing and analysis

beyond what existing capabilities   Reactive management and late visibility of threats   Responsibility for ERM undefined   Regulatory compliance-driven reporting

CONFIDENTIAL Petrash Capital, LLC 4

Enterprise Risk Management Context: Value of ERM to Banks

5

Unified ERM vision: A focused organization inspires staff, streamlines operations and products, and improves brand.

Risk visibility: Improved visibility across enterprise identifies current risks and safeguards against emergent exposures.

Alignment of strategies: Risk management with appropriate controls that are supported and documented by performance data.

Core banking system: Improved tools ensure data integrity and produce dashboards to drive performance management.

Data-driven foresight: Management tools to gain competitive advantage with unique analysis of internal and external data.

Chain of authority: Integration of ERM responsibility throughout every unit for improved risk management.

Performance-driven reporting: A performance mentality that incorporates sound risk management to increase value to clients and stakeholders.


Enterprise Risk Management Improving ERM, Process, & Core

6 CONFIDENTIAL Petrash Capital, LLC

Legacy Core New Core

ERM

Core

Diagnostic Findings Tools ERM Improvements

6

Enterprise Risk Management ERM Diagnostic Overview

7

 Risk Model: How does your bank define ERM?  Data: How can data be used to express a

performance mentality?  Reporting: How can reports support managing

product risk across lines of business?  Growth: What processes are appropriate to

support your bank’s goals?   Implementation: What areas of operations and

customer service are key to improving ERM?   Identity & Culture: How is your bank’s identity

and culture reflected in its approach to ERM? CONFIDENTIAL Petrash Capital, LLC 7


8

Risk Model •  Develop robust economic capital model •  Establish controls for loss in each business unit •  Define exposures across mix of industries/borrowers •  Perform rigorous stress testing with evolving criteria Data •  Identify appropriate internal and external data sources •  Create and implement processes for transparency and quality •  Establish performance goals to drive beyond regulatory

compliance •  Combine internal and external data for composite baseline of

loss history



9

Growth •  Define your bank’s growth strategy and roadmap •  Manage growth with scalable reporting •  Establish criteria for risk limits and value creation •  Challenge assumptions with objective data Reporting •  Produce electronic reports with dashboards and interactive

detail for individual users to explore •  Develop criteria for early warning system (i.e. risks across

lines of business when market conditions change) •  Core information supported by variable reports •  Incorporate a range of data to drive performance

improvements



10

Implementation •  Identify current gaps in operations and set timeline for process/

staffing/tech resolution •  Review organization chart revisions and clarify lines of authority

Identity & Culture •  Establish common ERM lexicon •  Engage company stakeholders to define your bank’s identity and

culture


Enterprise Risk Management ERM Diagnostic Tasks

11 CONFIDENTIAL Petrash Capital, LLC 11

Data Collection and Scope

Data Analysis

Data and Report Model

Testing and Implementation

•  On-site data gathering, organizational structure, reporting and information structure •  Team-building and input from Operations and Risk Leaders •  Interviews •  Confirmation of commitment

•  Operational flow charts •  Operation measurement •  Fraud detection and investigations •  Compensation or legal settlements •  Extraordinary production events •  Unique bank transactions or instruments

•  Definition and refinement of data • Creation of prototype Risk Data Model •  Process and flow for daily/weekly/ quarterly review •  Input to ERM •  External veracity and third-party review •  Dashboard/ scorecard format

•  Testing criteria •  Stress tests •  Scenario analysis •  Reporting flow •  Implementation

Enterprise Risk Management Proprietary Methods


Modeling • Scenario Analysis • Economic Capital Model Validation

Dashboards • Key Risk Indices • Credit Risk Performance • Operational Risk Metrics • Liquidity Risk & Economic Capital Measurement

Controls • Loss Data Analysis • Loss Distribution • Risk Control Self- Assessment • Loan Mitigation Processes & Action Plans • Internal Capital Adequacy Assessment

Enterprise Risk Management ERM Project Scope


Task Timing* Deliverable Stakeholder Interviews Week 1: 1-3 days

(interviews) Week 2: 3-5 days (synthesis)

Report of ERM needs, goals, and strategy from bank leadership

Baseline ERM Reporting Review

Week 1: 3-5 days Gap analysis performed Credit/Market/Liquidity/Ops risks identified

Baseline Operations/ERM Process Review

Week 2: 3-5 days Examination of ERM reporting structure with proposed improvements

Findings Report Week 2: 3 days Presentation of recommended ERM improvements

* Estimated timing--contingent on client availability and delivery of materials.

Enterprise Risk Management Petrash Capital Team Members

14

Francis Petrash, Partner, provided project management, technology advisory and product implementation to major US and foreign companies as Partner of Petrash Capital LLC, capital funding corporation. Over the last 25 years, he has provided consulting services and risk advisory to Fidelity Management Trust Company, Merrill Lynch, Citigroup, eTrade, Knight Trading, Prudential Asset Management, and Bass Family Holdings.

Steven Klingbeil, Principal, has significant expertise in Human Resources and Finance across a wide variety of industries with early 19 years of strategic and process redesign consulting to a variety of companies. He has a passion for and significant experience in Training and Development. He has always had a special focus on developing performance measures for all parts of client organizations.

Nick Barcia, Ph.D., Principal, has over 20 years industry and consulting experience managing business, market, credit, financial, operations, systems and energy risk at major institutions. A subject matter expert in risk management, capital markets and derivatives, he has also provided litigation support to the SEC and the U.S. Attorneyʼs Office on trading and securities fraud. Nick has held positions such as head of risk management at a major investment bank, risk manager for foreign exchange and hedging. He has also held senior positions at Merrill Lynch, Kidder Peabody and CIBC.

Benjamin Privitt, Principal, is an experienced organizational specialist and ERM project leader who combines internal and consulting resources into a cohesive risk improvement team. Benjamin was project leader and team member at engagements for major Fortune 1000 companies, including Hewlett-Packard and Williams-Sonoma.


Website Blog Twitter PetrashCapital.com perspectives.PetrashCapital.com @PetrashERM

Petrash Capital, LLC 510.290.2703

Documents

Petrash Capital ERM Diagnostic2010