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7/24/2019 Risk Based Supervision Training Grenada TA GARFIN Sept 8 - 11,2014
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GRENADA AUTHORITY FOR THE REGULATION OFFINANCIAL INSTITUTIONS
GARFIN
TECHNICAL ASSISTANCE MISSION
GEORGETOWN, GRENADA
COURTNEY CHRISTIE-VEITCHFINANCIAL SECTOR SUPERVISOR, CARTAC
SEPTEMBER 8 - 11, 2014
Ris-!"s#$ S%'(isi)*
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Presentation Outline
Background
Significant Activities
Materiality
Inherent risks
Quality of Risk ManagementResidual Risk
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Presentation Outline
Direction of Risk
Caital Assessment
!arnings Assessment
"i#uidity Assessment
Comosite Rating
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Background$ Role of Prudential Suervision
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'he !ssence of Risk 'aking
Experience taught me a fewthings. One is to listen to your
gut, no matter how goodsomething sounds on paper.The second is that you'regenerally better off stickingwith what you know. And the
third is that sometimes yourbest inestments are the onesyou don't make() Donald'rum
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Rationale for Risk*+ased Aroach
Resources are not infinite , allocation of scarceresources
Mechanism to rioriti-e &ork,on*sites . focus
efforts on greatest risks/ocus on risks to institution0s aims and o+1ectives
Basis for 1ustifying aroach2 action and decision
Documented and consistent aroach to riskmanagement
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Risk Management Stages
Decisionto +e Risk*
+ased
Set RiskConte3t
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S"+i)'s 201. A**%"/ R#&)'
Ste 4$ Identifying Significant Activities
Our 'eam delivered net rofits of 56(7 +illion2
&hich is 89 a+ove :;4: and our fourteenth
consecutive year of rofit gro&th( Revenues &ere
5e rovided 54?(8? +illion of insurance and
annuity +enefits to our customers and their
families in :;47( In addition2 &e managed the
@!ASO and @PASO health +usiness on +ehalf of
the @overnment of amaica and the largest ool
of ension funds in amaica( 'hese are ma1or
+usinesses from &hich &e ay out another
almost 54; +illion annually( Our investment
funds outerformed their resective +enchmarks
for the most art and some &ere the +est
erformers in their asset class)(!eft" #r. The
$on. %.#. &illiams, hairman %ight" %ichard
O. (yles, )resident * EO
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Ste I$ Identifying Significant Activities
"ine of +usiness
Business units
!nterrise &ide rocess e(g( information technology
Activities can +e identified from$ Organi-ation structure
Strategic lans
Oerational and Business lans
Caital allocations2
/inancial reorting internal,e3ternal
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Ste I$ Identifying Significant Activities
>hat are the lines of +usiness,+usinessunits in an insurance firmE
>hat are the lines of +usiness , +usinessunits in a credit unionE
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Ste I$ Identifying Significant Activities
'yes of Insurance "ife insuranceF Gon*life insuranceF Reinsurance
!(g( Activities , "ines of Business , Business Hnits Insurance
Annuity
Hnder&riting
Claims
Investment
%ealth +usiness Pension /unds Management
Premium
Related Party 'ransactions
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Ste I$ Identifying Significant Activities
!(g Activities , lines of +usiness , +usiness units ina credit unionE "oans
Investments
Cash and lacements
Deosits , share , savings
Related Party 'ransactions
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Ste II$ Determining Materiality
Assets generated +y the activity relative to total assetsi-e
Revenue generated +y activity in relation to total
revenueGet income +efore ta3,total net income +efore ta3
Risk &eighted assets generated +y activity , totalR>A
Caital allocation , total caital
Strategic imortance
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Ste III$ Assess Inherent Risks
Inherent risk is risk &hich cannot +esegregated from the activity( It is intrinsic toan activity and arises from e3osure to and
uncertainty from otential future events(Inherent risks are evaluated +y consideringthe degree of ro+a+ility and the otential
si-e of an adverse imact on an institutionscaital2 li#uidity or earnings(
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Inherent Risk Assessment
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Inherent Risk /rame&ork * 'raditional
Busi
ness(!
nviron
Oer
ating
(
!nviron
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Inherent Risk /rame&ork * Revised
Busi
ness(!
nviron
Oer
ating
(
!nviron
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Inherent Risk Rating
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Inherent Risk Rating
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Inherent Risk Rating * CAM!"S
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Inherent Risk Rating * CARAM!"S
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Asset Quality Assessment
Soundness of risk identification ractices2credit under&riting standards and creditadministration ractices Credit Risk
"evel2 distri+ution2 severity and trend ofro+lem2 classified2 non accrual2restructured2 delin#uent andnonerforming assets on and off +alancesheet Credit Risk
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Asset Quality Assessment
Ade#uacy of allo&ances for loans andlease losses and other valuationreserves
Credit risks arising from or induced +yoff*+alance sheet transactions2 e(g(
unfunded commitments2 creditderivatives2 commercial and stand+yletters of credit and lines of credit(
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Asset Quality Assessment
Diversification and #uality of the loanand investment
!3tent of securities under&ritingactivities and e3osures tocounterarties in trading activities
!3istence of asset concentration
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Asset Quality Assessment
A+ility of management to roerlyadminister its assets2 including timelyidentification and collection of ro+lemassets
Ade#uacy of internal controls and
management information systemsJolume and nature of credit
documentation e3cetion(
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Asset Quality Assessment
Prudent investment ortfolioE CR
Ade#uate sread of investments among asset tyesand counter arties CR
Investment olicy in lace to ensure ongoingrudency of investment ortfolio CR
Investment consistent &ith olicy CR
Investment administered in a rudent mannerOR
Mi3 of investment assets in line &ith deosit andinsurance fund re#uirements "RR
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Asset Quality Rating
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Asset Quality Rating
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Sensitivity to Market Risk Assessment
Sensitivity of earnings or the economicvalue of caital to adverse changes ininterest rate2 foreign e3change rates2
commodity rices or e#uity rices'he a+ility of management to identify2
measure2 monitor and control e3osure to
market risk given the si-e2 comle3ity andrisk rofile of the /I
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Sensitivity to Market Risk Assessment
'he nature and comle3ity of interest raterisk e3osure arising from non tradingositions
'he nature and comle3ity of market riske3osure arising from trading2 assetmanagement activities and foreign e3change
oerations
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Sensitivity to Market Risk Rating
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Sensitivity to Market Risk Rating
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Sensitivity to Market Risk Rating
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Sensitivity to Market Risk Rating
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Sensitivity to Market Risk Rating
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Reutational Risk Assessment
Cororate @overnance
Management integrity
Staff cometence , suortCororate culture
Risk management and controlenvironment
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Reutational Risk Assessment
/inancial Soundness , Business via+ility
Business ractices
Customer satisfaction"egal , regulatory comliance
Contagion risk , rumors
Crisis management
Disclosure and transarency
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Reutational Risk Rating
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Reutational Risk Rating
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Reutational Risk Rating
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Reutational Risk Rating
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Reutational Risk Rating
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Concentration Risk Assessment
C)*#*'"i)* 'is can arise from unevendistri+ution of e3osures or loan to its+orro&ers( Such a risk is called Game
Concentration risk( Another tye is SectoralConcentration risk &hich can arise fromuneven distri+ution of e3osures to
articular sectors2 regions2 industries orroducts(
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Concentration Risk Assessment
@eograhic concentration
Single name
Related arty
Balance sheet
Business , Product line
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Oerational Risk Assessment
O'"i)*"/ 'isis Kthe risk of achange in value caused +y the fact thatactual losses2 incurred for inade#uateor failed internal rocesses2 eole andsystems2 or from e3ternal eventsincluding legal risk2 differ from thee3ected lossesK( Basel Definition
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Oerational Risk Assessment
Internal /raud * misaroriation of assets2 ta3 evasion2 intentionalmismarking of ositions2 +ri+ery
!3ternal /raud* theft of information2 hacking damage2 third*arty theftand forgery
!mloyment Practices and >orklace Safety * discrimination2 &orkers
comensation2 emloyee health and safety
Clients2 Products2 L Business Practice* market maniulation2 antitrust2imroer trade2 roduct defects2 fiduciary +reaches2 account churning
Damage to Physical Assets * natural disasters2 terrorism2 vandalism
Business Disrution L Systems /ailures * utility disrutions2 soft&arefailures2 hard&are failures
!3ecution2 Delivery2 L Process Management * data entry errors2accounting errors2 failed mandatory reorting2 negligent loss of clientassets
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Strategic Risk Assessment
S'"#+i Ris is the risk of current orrosective imact on the financialinstitutions earnings2 caital2 reutation
or standing arising from change in theenvironment and from adverse strategicdecisions2 imroer imlementation of
decisions or lack of resonsiveness toindustry2 economic or technologicalchanges(
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Strategic Risk Assessment
/our ey !lements$
Strategic Planning
Alignment and change managementImlementation and monitoring
Performance evaluation and feed+ack
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Strategic Risk Assessment
Comati+ility or suita+ility of theinstitutions goals and o+1ectivesconsistent &ith * cororate vision2 values2
culture2 +usiness direction2 risk tolerance/inancial o+1ectives consistent &ith
strategic goals
Strategic decisions are rudent relative tosi-e and comle3ity
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Strategic Risk Assessment
Resonsiveness to changes inenvironment
Ade#uacy of resources in carrying outstrategic decisions
Imlementation of strategic decisions
Imact of strategic decisions
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Reinsurance Risk Assessment
/inancial soundness of insurers reinsurance comaniesCredit Risk
Ade#uacy of diversification of ceded remiums amongreinsurance comanies Credit Risk
Aroriateness of insurers reinsurance strategyHnder&riting,"ia+ility Risk
Ade#uacy of Insurers rotection against catastrohiceventsHnder&riting,"ia+ility Risk
Aroriateness of insurers reinsurance contractsOerational Risk
Aroriateness of the administration of reinsurancerelationshis +y the insurer Oerational Risk
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Actuarial "ia+ility Risk Assessment
Insurers lia+ility aroriatelyestimated and reorted
Product Design Risk
Are regulatory re#uirements +eing met+y Insurer regarding technical
rovisions "egal,Regulatory Risk
Self Dealing and Related Parties Risk
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Self Dealing and Related Parties RiskAssessment
Process in lace to revie& related artytransactions Oerational Risk
Related arties dealings in accordance&ith ethical standards Reutation Risk
>ritten code of ethics olicy in lace
for emloyees Reutation RiskSignificant related arty revenue2
e3enses2 assets or lia+ilitiesE
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Proosed Risk Assessment System . Inherent Risks
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@rou !3ercise N :
4( Hsing a scale of 4 . ? 4 Strong and ? CriticallyDeficient2 develo a risk scoring definition matri3 for thefollo&ing inherent risks$ @rou A
Strategic Risk
Oerational Risk Concentration Risk
:( :( Hsing a scale of 4 . ? 4 Strong and ? CriticallyDeficient2 develo a risk scoring definition matri3 for the
follo&ing inherent risks$ @rou B Reinsurance
Actuarial lia+ilities
Self dealing and related arties
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@rou !3ercise N 7
4(Identify the inherent risks in each of thesignificant activities and score on the scale of 4 . ?for each suervised entity credit unions and
insurance comanies(
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Quality of Risk Management and Oversight
Oerational ManagementComliance /unction
Internal Audit , Suervisory Committee /unction
!3ternal Audit /unctionRisk Management /unction
Senior Management
Board Oversight
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Quality of Risk Management Assessment
Oerational management Day to day management of significant activities
Ade#uate and aroriate for nature2 si-e and comle3ityof the financial institution
Sufficient and effective in managing and mitigating keyrisks
Policies
rocesses Control systems
Staff levels and e3erience
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Quality of Risk Management Assessment
Board Oversight Jary +ased on si-e2 structure and comle3ity of institutions
Institutions re#uired to have in lace an effective +oard ofdirectors and senior management
Board agree risk aetite e(g( aggressive or conservative Board of directors ultimately accounta+le for management and
oversight of the institution
Business lan in lace and aroriate . deosit,savings
gro&th or remium gro&th too aggressiveE Deending on si-e2 +oard may delegate some oversight
resonsi+ilities to +oard su+*committees e(g(( audit2 riskmanagement and human resource
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Quality of Risk Management Assessment
Senior Management OversightDeending on si-e2 senior management may
delegate some oversight resonsi+ilities to other
oversight functions$ Risk management
Suervisory Committee,Internal Audit
Comliance
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Quality of Risk Management Assessment
"evel and #uality of oversight andsuort of all institution activities +y the+oard of directors and management
'he a+ility of the +oard of directors andmanagement2 in their resective roles tolan for2 and resond to risks that may
arise from changing +usiness conditionsor the initiation of ne& activities orroducts
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Quality of Risk Management Assessment
Ade#uacy of2 and comliance &itharoriate internal olicies andcontrols addressing oerations andrisks of significant activities
Accuracy2 timeliness and effectiveness
of management information and riskmonitoring systems aroriate for the/Is si-e2 comle3ity and risk rofile(
Quality of Risk Management Assessment
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Quality of Risk Management AssessmentAudit and Internal Controls
Comliance &ith la&s and regulationsResonsiveness to recommendations
from auditors and suervisory authorities
Management deth and succession
!3tent that +oard of directors or
management is affected +y2 or susceti+leto2 dominant influence or concentrationof authority(
Quality of Risk Management Assessment
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Quality of Risk Management AssessmentAudit and Internal Controls
Reasona+leness of comensation olicies andavoidance of self dealing
Demonstrated &illingness to serve the legitimate
/I needs of the communityClaims aid +y insurer in a fair and timely
manner
Insurer comliant &ith market conductre#uirements
'he overall erformance of the institution and itsrisk rofile
l f k
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Quality of Risk Management Rating
li f i k i
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Quality of Risk Management Rating
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Quality of Risk Management Assessment
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Quality of Risk Management Assessment
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Residual Risk Assessment
%o& key risks are managed in eachsignificant activity . oerational management
!ffectiveness of oversight functions @overnance , Board Internal audit , Internal controls
Comliance
!ach key inherent risk is consideredsearately for each significant activity
Determine aggregate residual risk
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Residual Risk Rating
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Residual Risk Rating
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Residual Risk Assessment
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Direction of Risk
Sta+le
Risk Imact
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Caital Ade#uacy Assessment
"evel and #uality of caitalOverall financial condition
Managements a+ility to addressemerging caital needs
Gature2 trend and volume of ro+lem
assets and ade#uacy of rovision forloans and investment losses andade#uacy of other reserves
Risk Imact
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Caital Ade#uacy Assessment
Sufficient caital relative to lia+ilitiesand volumes of +usiness
Aroriateness of tye of caital
In comliance &ith share caital2solvency margin2 deosit and fund
re#uirements as set out in la& and regs(
Risk Imact
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Caital Ade#uacy Assessment
Off +alance risk e3osures@ro&th rosects and ast e3eriences
in managing gro&th
Balance sheet comosition2 natureamount of intangi+le assets2
concentration risks2 market risks2 risksin non traditional activities
Access to caital
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Caital Ade#uacy Rating
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Caital Ade#uacy Rating
Risk Imact
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!arnings Risk Assessment
"evels of earnings including trends and sta+ility ,#uality of earnings sources
!arnings track record to augment caital
A+ility to rovide for ade#uate caital throughretained earnings
Go reatriation of rofits , ayments of dividends+efore full comliance &ith Acts(
"evel of e3enses in relation to oerations
Hnder&riting revenues relative to incurred claimsroduct design and under&riting risks
Risk Imact
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!arnings Risk Assessment
Ade#uacy of the +udgeting systems2forecasting rocesses2 managementinformation systems
Ade#uacy of rovisions to maintain theallo&ance for loan and lease losses andother valuation allo&ance
'he earnings e3osure to market risk2such as interest rate2 foreign e3change andrice risks
!arnings Risk Rating
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!arnings Risk Rating
!arnings Risk Rating
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!arnings Risk Rating
Risk Imact
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"i#uidity Risk Assessment
Availa+ility of assets readily converti+le to cash&ithout undue loss
Access to money markets and other sources of funding
"evel of diversification of funding sources2 +oth onand off*+alance sheet
'he degree of reliance on short*term2 volatile sourcesof funds2 including +orro&ings and +rokered deosits2
to fund longer term assetsAroriate matching of assets and lia+ilities
"evel of / assets relative to lia+ilities
Risk Imact
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"i#uidity Risk Assessment
'he trend and sta+ility of deosits , li#uid assets>ritten olicies in lace for interest rate2 / and
li#uidity risks
'he a+ility to securiti-e and sell certain ools ofassets
'he caa+ility of management to roerly identify2measure2 monitor and control institutions li#uidity
osition2 including the effectiveness of fundsmanagement strategies2 li#uidity olicies2management information systems2 and contingencyfunding lans
"i#uidity Risk Rating
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"i#uidity Risk Rating
"i#uidity Risk Rating
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"i#uidity Risk Rating
Comosite Risk Assessment
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Comosite Risk Assessment
/ k f Ri k + d S i i
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/rame&ork for Risk*+ased Suervision
CORBASC!"S CAM!"S,CARAM!"S
/rame&ork for Risk*+ased Suervision
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CORBASC!"
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Thank you+Any uestions-