Does Risk Culture Matter Sebastian Fritz-MorgenthalProf Natalie Packham February 2016

2

The views expressed in the following material are the

authorrsquos and do not necessarily represent the views of

the Global Association of Risk Professionals (GARP)

its Membership or its Management

1copy Frankfurt School of Finance amp Management gGmbHcopy Frankfurt School of Finance amp Management gGmbH

Academic Programmes

Professional Programmes

Seminars

Executive Education

Corporate Programmes amp Services

Research

International Advisory Services

Dr Sebastian Fritz-Morgenthal Julia HellmuthProf Natalie Packham

Does Risk Culture matter

2copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

Fritz-Morgenthal Hellmuth Packham Does risk culture matter The relationship between risk culture indicators and stress test resultsJournal of Risk Management in Financial Institutions Vol 9 1 71ndash84 2016

3copy Frankfurt School of Finance amp Management gGmbH

In the aftermath of the 2008 financial crisis regulators and industry identified four major shortcomings of the existing financial system and its regulatory framework

1 the identification and measurement of risk has big gaps

2 the capital and liquidity of banks is too low

3 ailing institutions are non-resolvable and

4 risk governance and culture seem to be weak

INTRODUCTION (16)

Basel 3 EMIR

LCR NSFR CET1 MREL

BRRD

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

4copy Frankfurt School of Finance amp Management gGmbH

Informal Definition

I know it is good risk culture when I see it

ndash Seggregation of duties ndash Three Lines of Defense

ndash Sanctioning excessive risk taking

ndash Regulation of compensation

ndash Reversal of the burden of proof

The Financial Stability Board (FSB) published a framework for assessing risk culture from a supervisory perspective The FSB puts four areas into focus

1 top management

2 accountability

3 effective communication and challenge and

4 incentives

INTRODUCTION (26)

This refers to a statement by US Supreme Court Justice Potter Stewart from 1964 available at httpblogswsjcomlaw20070927the- origins-of-justice-stewarts-i-know-it-when-i- see-it (accessed 21st October 2015)

FSB (2014) lsquoGuidance on supervisory interaction with financial institutions on risk culturersquo Financial Stability Board Basel available

at httpwww financialstabilityboardorgpublicationsc_131118 pdf (accessed 21st October 2015)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

2

The views expressed in the following material are the

authorrsquos and do not necessarily represent the views of

the Global Association of Risk Professionals (GARP)

its Membership or its Management

1copy Frankfurt School of Finance amp Management gGmbHcopy Frankfurt School of Finance amp Management gGmbH

Academic Programmes

Professional Programmes

Seminars

Executive Education

Corporate Programmes amp Services

Research

International Advisory Services

Dr Sebastian Fritz-Morgenthal Julia HellmuthProf Natalie Packham

Does Risk Culture matter

2copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

Fritz-Morgenthal Hellmuth Packham Does risk culture matter The relationship between risk culture indicators and stress test resultsJournal of Risk Management in Financial Institutions Vol 9 1 71ndash84 2016

3copy Frankfurt School of Finance amp Management gGmbH

In the aftermath of the 2008 financial crisis regulators and industry identified four major shortcomings of the existing financial system and its regulatory framework

1 the identification and measurement of risk has big gaps

2 the capital and liquidity of banks is too low

3 ailing institutions are non-resolvable and

4 risk governance and culture seem to be weak

INTRODUCTION (16)

Basel 3 EMIR

LCR NSFR CET1 MREL

BRRD

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

4copy Frankfurt School of Finance amp Management gGmbH

Informal Definition

I know it is good risk culture when I see it

ndash Seggregation of duties ndash Three Lines of Defense

ndash Sanctioning excessive risk taking

ndash Regulation of compensation

ndash Reversal of the burden of proof

The Financial Stability Board (FSB) published a framework for assessing risk culture from a supervisory perspective The FSB puts four areas into focus

1 top management

2 accountability

3 effective communication and challenge and

4 incentives

INTRODUCTION (26)

This refers to a statement by US Supreme Court Justice Potter Stewart from 1964 available at httpblogswsjcomlaw20070927the- origins-of-justice-stewarts-i-know-it-when-i- see-it (accessed 21st October 2015)

FSB (2014) lsquoGuidance on supervisory interaction with financial institutions on risk culturersquo Financial Stability Board Basel available

at httpwww financialstabilityboardorgpublicationsc_131118 pdf (accessed 21st October 2015)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1copy Frankfurt School of Finance amp Management gGmbHcopy Frankfurt School of Finance amp Management gGmbH

Academic Programmes

Professional Programmes

Seminars

Executive Education

Corporate Programmes amp Services

Research

International Advisory Services

Dr Sebastian Fritz-Morgenthal Julia HellmuthProf Natalie Packham

Does Risk Culture matter

2copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

Fritz-Morgenthal Hellmuth Packham Does risk culture matter The relationship between risk culture indicators and stress test resultsJournal of Risk Management in Financial Institutions Vol 9 1 71ndash84 2016

3copy Frankfurt School of Finance amp Management gGmbH

In the aftermath of the 2008 financial crisis regulators and industry identified four major shortcomings of the existing financial system and its regulatory framework

1 the identification and measurement of risk has big gaps

2 the capital and liquidity of banks is too low

3 ailing institutions are non-resolvable and

4 risk governance and culture seem to be weak

INTRODUCTION (16)

Basel 3 EMIR

LCR NSFR CET1 MREL

BRRD

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

4copy Frankfurt School of Finance amp Management gGmbH

Informal Definition

I know it is good risk culture when I see it

ndash Seggregation of duties ndash Three Lines of Defense

ndash Sanctioning excessive risk taking

ndash Regulation of compensation

ndash Reversal of the burden of proof

The Financial Stability Board (FSB) published a framework for assessing risk culture from a supervisory perspective The FSB puts four areas into focus

1 top management

2 accountability

3 effective communication and challenge and

4 incentives

INTRODUCTION (26)

This refers to a statement by US Supreme Court Justice Potter Stewart from 1964 available at httpblogswsjcomlaw20070927the- origins-of-justice-stewarts-i-know-it-when-i- see-it (accessed 21st October 2015)

FSB (2014) lsquoGuidance on supervisory interaction with financial institutions on risk culturersquo Financial Stability Board Basel available

at httpwww financialstabilityboardorgpublicationsc_131118 pdf (accessed 21st October 2015)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

2copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

Fritz-Morgenthal Hellmuth Packham Does risk culture matter The relationship between risk culture indicators and stress test resultsJournal of Risk Management in Financial Institutions Vol 9 1 71ndash84 2016

3copy Frankfurt School of Finance amp Management gGmbH

In the aftermath of the 2008 financial crisis regulators and industry identified four major shortcomings of the existing financial system and its regulatory framework

1 the identification and measurement of risk has big gaps

2 the capital and liquidity of banks is too low

3 ailing institutions are non-resolvable and

4 risk governance and culture seem to be weak

INTRODUCTION (16)

Basel 3 EMIR

LCR NSFR CET1 MREL

BRRD

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

4copy Frankfurt School of Finance amp Management gGmbH

Informal Definition

I know it is good risk culture when I see it

ndash Seggregation of duties ndash Three Lines of Defense

ndash Sanctioning excessive risk taking

ndash Regulation of compensation

ndash Reversal of the burden of proof

The Financial Stability Board (FSB) published a framework for assessing risk culture from a supervisory perspective The FSB puts four areas into focus

1 top management

2 accountability

3 effective communication and challenge and

4 incentives

INTRODUCTION (26)

This refers to a statement by US Supreme Court Justice Potter Stewart from 1964 available at httpblogswsjcomlaw20070927the- origins-of-justice-stewarts-i-know-it-when-i- see-it (accessed 21st October 2015)

FSB (2014) lsquoGuidance on supervisory interaction with financial institutions on risk culturersquo Financial Stability Board Basel available

at httpwww financialstabilityboardorgpublicationsc_131118 pdf (accessed 21st October 2015)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

3copy Frankfurt School of Finance amp Management gGmbH

In the aftermath of the 2008 financial crisis regulators and industry identified four major shortcomings of the existing financial system and its regulatory framework

1 the identification and measurement of risk has big gaps

2 the capital and liquidity of banks is too low

3 ailing institutions are non-resolvable and

4 risk governance and culture seem to be weak

INTRODUCTION (16)

Basel 3 EMIR

LCR NSFR CET1 MREL

BRRD

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

4copy Frankfurt School of Finance amp Management gGmbH

Informal Definition

I know it is good risk culture when I see it

ndash Seggregation of duties ndash Three Lines of Defense

ndash Sanctioning excessive risk taking

ndash Regulation of compensation

ndash Reversal of the burden of proof

The Financial Stability Board (FSB) published a framework for assessing risk culture from a supervisory perspective The FSB puts four areas into focus

1 top management

2 accountability

3 effective communication and challenge and

4 incentives

INTRODUCTION (26)

This refers to a statement by US Supreme Court Justice Potter Stewart from 1964 available at httpblogswsjcomlaw20070927the- origins-of-justice-stewarts-i-know-it-when-i- see-it (accessed 21st October 2015)

FSB (2014) lsquoGuidance on supervisory interaction with financial institutions on risk culturersquo Financial Stability Board Basel available

at httpwww financialstabilityboardorgpublicationsc_131118 pdf (accessed 21st October 2015)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

4copy Frankfurt School of Finance amp Management gGmbH

Informal Definition

I know it is good risk culture when I see it

ndash Seggregation of duties ndash Three Lines of Defense

ndash Sanctioning excessive risk taking

ndash Regulation of compensation

ndash Reversal of the burden of proof

The Financial Stability Board (FSB) published a framework for assessing risk culture from a supervisory perspective The FSB puts four areas into focus

1 top management

2 accountability

3 effective communication and challenge and

4 incentives

INTRODUCTION (26)

This refers to a statement by US Supreme Court Justice Potter Stewart from 1964 available at httpblogswsjcomlaw20070927the- origins-of-justice-stewarts-i-know-it-when-i- see-it (accessed 21st October 2015)

FSB (2014) lsquoGuidance on supervisory interaction with financial institutions on risk culturersquo Financial Stability Board Basel available

at httpwww financialstabilityboardorgpublicationsc_131118 pdf (accessed 21st October 2015)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

5copy Frankfurt School of Finance amp Management gGmbH

INTRODUCTION (36)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

6copy Frankfurt School of Finance amp Management gGmbH

INTRODUCTION (46)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

7copy Frankfurt School of Finance amp Management gGmbH

INTRODUCTION (56)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

8copy Frankfurt School of Finance amp Management gGmbH

INTRODUCTION (66)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

9copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

10copy Frankfurt School of Finance amp Management gGmbH

bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia

bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results

bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone

bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset

bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports

DATA ndash 81 BANKS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

11copy Frankfurt School of Finance amp Management gGmbH

DATA ndash RISK CULTURE SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Category Main Characteristics

1 Regulatory

Requirements

Level of concordance with basic regulatory requirements with regard to risk

management

2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy

so that potential risks can be identified

3 Governance Categorizes if appropriate senior management to operate the business and an

adequate supervisory authority to govern the bank are in place

4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for

the quality of a bankrsquos risk culture

5 Employees Measures average completed training hours of employees and the employee

fluctuation

6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in

place and what different risks are considered as relevant for the specific bank

Also the handling of individual risks is taken into account

7 Reputation Asks if banks make a statement about their reputation and related risks Litigations

and their transparent disclosure are scored

8 Other Effects One-off effectsevents related to risk management and risk culture are considered

9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports

12copy Frankfurt School of Finance amp Management gGmbH

DATA ndash RISK CULTURE SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports

bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)

bull Box-whisker plots show interquartile rangein boxes

bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange

13copy Frankfurt School of Finance amp Management gGmbH

1 Net Profit respectively Total Loss divided by Total Assets

2 CET 1 Capital divided by Total Assets

3 Total Risk Exposure divided by Total Assets

4 CET1 Ratio

5 Leverage Ratio

6 NPE Ratio

7 Aggregated Adjustments Due to the Outcome of the AQR

8 AQR adjusted CET1 Ratio

9 Adjusted CET1 Ratio after Baseline Scenario

10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period

11 Adjusted CET1 Ratio after Adverse Scenario and

12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)

DATA ndash STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Stress test indicators (STIlsquos) derived from EBA data set

14copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

15copy Frankfurt School of Finance amp Management gGmbH

THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull What is the relationship between risk culture and stress test outcome

bull Does an institution will well-established risk culture perform well in stress test and vice versa

bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos

bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos

16copy Frankfurt School of Finance amp Management gGmbH

RCS = α

- β1 RWAAssets

+ β2 Leverage Ratio

THE MODELRISK CULTURE SCORE amp STRESS VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull On average

ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points

ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519

17copy Frankfurt School of Finance amp Management gGmbH

THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

STS = α + β1 Governance

+ β2 Other Effects

bull One grade highergovernance score corresponds to25-30 higherSTS

bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture

18copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

19copy Frankfurt School of Finance amp Management gGmbH

1 Risk Culture and Stress Test results are correlated

2 Two risk culture indicators show significant explanatory power of Stress test outcomes

1 Governance

2 Other Effects

3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score

1 RWA Assets

2 Leverage Ratio

4 Some more intuitive indicators do not have any explanatory power

1 Net Profit Assets NPE Ratio CET1 Ratio

2 Strategy Risk Strategy Reputation

Summary Encouraging results but more research is certainly needed

CONCLUSIONS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf

6copy Frankfurt School of Finance amp Management gGmbH

INTRODUCTION (46)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

7copy Frankfurt School of Finance amp Management gGmbH

INTRODUCTION (56)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

8copy Frankfurt School of Finance amp Management gGmbH

INTRODUCTION (66)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

9copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

10copy Frankfurt School of Finance amp Management gGmbH

bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia

bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results

bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone

bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset

bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports

DATA ndash 81 BANKS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

11copy Frankfurt School of Finance amp Management gGmbH

DATA ndash RISK CULTURE SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Category Main Characteristics

1 Regulatory

Requirements

Level of concordance with basic regulatory requirements with regard to risk

management

2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy

so that potential risks can be identified

3 Governance Categorizes if appropriate senior management to operate the business and an

adequate supervisory authority to govern the bank are in place

4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for

the quality of a bankrsquos risk culture

5 Employees Measures average completed training hours of employees and the employee

fluctuation

6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in

place and what different risks are considered as relevant for the specific bank

Also the handling of individual risks is taken into account

7 Reputation Asks if banks make a statement about their reputation and related risks Litigations

and their transparent disclosure are scored

8 Other Effects One-off effectsevents related to risk management and risk culture are considered

9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports

12copy Frankfurt School of Finance amp Management gGmbH

DATA ndash RISK CULTURE SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports

bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)

bull Box-whisker plots show interquartile rangein boxes

bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange

13copy Frankfurt School of Finance amp Management gGmbH

1 Net Profit respectively Total Loss divided by Total Assets

2 CET 1 Capital divided by Total Assets

3 Total Risk Exposure divided by Total Assets

4 CET1 Ratio

5 Leverage Ratio

6 NPE Ratio

7 Aggregated Adjustments Due to the Outcome of the AQR

8 AQR adjusted CET1 Ratio

9 Adjusted CET1 Ratio after Baseline Scenario

10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period

11 Adjusted CET1 Ratio after Adverse Scenario and

12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)

DATA ndash STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Stress test indicators (STIlsquos) derived from EBA data set

14copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

15copy Frankfurt School of Finance amp Management gGmbH

THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull What is the relationship between risk culture and stress test outcome

bull Does an institution will well-established risk culture perform well in stress test and vice versa

bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos

bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos

16copy Frankfurt School of Finance amp Management gGmbH

RCS = α

- β1 RWAAssets

+ β2 Leverage Ratio

THE MODELRISK CULTURE SCORE amp STRESS VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull On average

ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points

ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519

17copy Frankfurt School of Finance amp Management gGmbH

THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

STS = α + β1 Governance

+ β2 Other Effects

bull One grade highergovernance score corresponds to25-30 higherSTS

bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture

18copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

19copy Frankfurt School of Finance amp Management gGmbH

1 Risk Culture and Stress Test results are correlated

2 Two risk culture indicators show significant explanatory power of Stress test outcomes

1 Governance

2 Other Effects

3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score

1 RWA Assets

2 Leverage Ratio

4 Some more intuitive indicators do not have any explanatory power

1 Net Profit Assets NPE Ratio CET1 Ratio

2 Strategy Risk Strategy Reputation

Summary Encouraging results but more research is certainly needed

CONCLUSIONS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf

7copy Frankfurt School of Finance amp Management gGmbH

INTRODUCTION (56)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

8copy Frankfurt School of Finance amp Management gGmbH

INTRODUCTION (66)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

9copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

10copy Frankfurt School of Finance amp Management gGmbH

bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia

bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results

bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone

bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset

bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports

DATA ndash 81 BANKS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

11copy Frankfurt School of Finance amp Management gGmbH

DATA ndash RISK CULTURE SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Category Main Characteristics

1 Regulatory

Requirements

Level of concordance with basic regulatory requirements with regard to risk

management

2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy

so that potential risks can be identified

3 Governance Categorizes if appropriate senior management to operate the business and an

adequate supervisory authority to govern the bank are in place

4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for

the quality of a bankrsquos risk culture

5 Employees Measures average completed training hours of employees and the employee

fluctuation

6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in

place and what different risks are considered as relevant for the specific bank

Also the handling of individual risks is taken into account

7 Reputation Asks if banks make a statement about their reputation and related risks Litigations

and their transparent disclosure are scored

8 Other Effects One-off effectsevents related to risk management and risk culture are considered

9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports

12copy Frankfurt School of Finance amp Management gGmbH

DATA ndash RISK CULTURE SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports

bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)

bull Box-whisker plots show interquartile rangein boxes

bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange

13copy Frankfurt School of Finance amp Management gGmbH

1 Net Profit respectively Total Loss divided by Total Assets

2 CET 1 Capital divided by Total Assets

3 Total Risk Exposure divided by Total Assets

4 CET1 Ratio

5 Leverage Ratio

6 NPE Ratio

7 Aggregated Adjustments Due to the Outcome of the AQR

8 AQR adjusted CET1 Ratio

9 Adjusted CET1 Ratio after Baseline Scenario

10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period

11 Adjusted CET1 Ratio after Adverse Scenario and

12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)

DATA ndash STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Stress test indicators (STIlsquos) derived from EBA data set

14copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

15copy Frankfurt School of Finance amp Management gGmbH

THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull What is the relationship between risk culture and stress test outcome

bull Does an institution will well-established risk culture perform well in stress test and vice versa

bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos

bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos

16copy Frankfurt School of Finance amp Management gGmbH

RCS = α

- β1 RWAAssets

+ β2 Leverage Ratio

THE MODELRISK CULTURE SCORE amp STRESS VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull On average

ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points

ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519

17copy Frankfurt School of Finance amp Management gGmbH

THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

STS = α + β1 Governance

+ β2 Other Effects

bull One grade highergovernance score corresponds to25-30 higherSTS

bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture

18copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

19copy Frankfurt School of Finance amp Management gGmbH

1 Risk Culture and Stress Test results are correlated

2 Two risk culture indicators show significant explanatory power of Stress test outcomes

1 Governance

2 Other Effects

3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score

1 RWA Assets

2 Leverage Ratio

4 Some more intuitive indicators do not have any explanatory power

1 Net Profit Assets NPE Ratio CET1 Ratio

2 Strategy Risk Strategy Reputation

Summary Encouraging results but more research is certainly needed

CONCLUSIONS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf

8copy Frankfurt School of Finance amp Management gGmbH

INTRODUCTION (66)

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

9copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

10copy Frankfurt School of Finance amp Management gGmbH

bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia

bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results

bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone

bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset

bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports

DATA ndash 81 BANKS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

11copy Frankfurt School of Finance amp Management gGmbH

DATA ndash RISK CULTURE SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Category Main Characteristics

1 Regulatory

Requirements

Level of concordance with basic regulatory requirements with regard to risk

management

2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy

so that potential risks can be identified

3 Governance Categorizes if appropriate senior management to operate the business and an

adequate supervisory authority to govern the bank are in place

4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for

the quality of a bankrsquos risk culture

5 Employees Measures average completed training hours of employees and the employee

fluctuation

6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in

place and what different risks are considered as relevant for the specific bank

Also the handling of individual risks is taken into account

7 Reputation Asks if banks make a statement about their reputation and related risks Litigations

and their transparent disclosure are scored

8 Other Effects One-off effectsevents related to risk management and risk culture are considered

9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports

12copy Frankfurt School of Finance amp Management gGmbH

DATA ndash RISK CULTURE SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports

bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)

bull Box-whisker plots show interquartile rangein boxes

bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange

13copy Frankfurt School of Finance amp Management gGmbH

1 Net Profit respectively Total Loss divided by Total Assets

2 CET 1 Capital divided by Total Assets

3 Total Risk Exposure divided by Total Assets

4 CET1 Ratio

5 Leverage Ratio

6 NPE Ratio

7 Aggregated Adjustments Due to the Outcome of the AQR

8 AQR adjusted CET1 Ratio

9 Adjusted CET1 Ratio after Baseline Scenario

10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period

11 Adjusted CET1 Ratio after Adverse Scenario and

12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)

DATA ndash STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Stress test indicators (STIlsquos) derived from EBA data set

14copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

15copy Frankfurt School of Finance amp Management gGmbH

THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull What is the relationship between risk culture and stress test outcome

bull Does an institution will well-established risk culture perform well in stress test and vice versa

bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos

bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos

16copy Frankfurt School of Finance amp Management gGmbH

RCS = α

- β1 RWAAssets

+ β2 Leverage Ratio

THE MODELRISK CULTURE SCORE amp STRESS VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull On average

ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points

ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519

17copy Frankfurt School of Finance amp Management gGmbH

THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

STS = α + β1 Governance

+ β2 Other Effects

bull One grade highergovernance score corresponds to25-30 higherSTS

bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture

18copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

19copy Frankfurt School of Finance amp Management gGmbH

1 Risk Culture and Stress Test results are correlated

2 Two risk culture indicators show significant explanatory power of Stress test outcomes

1 Governance

2 Other Effects

3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score

1 RWA Assets

2 Leverage Ratio

4 Some more intuitive indicators do not have any explanatory power

1 Net Profit Assets NPE Ratio CET1 Ratio

2 Strategy Risk Strategy Reputation

Summary Encouraging results but more research is certainly needed

CONCLUSIONS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf

9copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

10copy Frankfurt School of Finance amp Management gGmbH

bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia

bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results

bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone

bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset

bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports

DATA ndash 81 BANKS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

11copy Frankfurt School of Finance amp Management gGmbH

DATA ndash RISK CULTURE SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Category Main Characteristics

1 Regulatory

Requirements

Level of concordance with basic regulatory requirements with regard to risk

management

2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy

so that potential risks can be identified

3 Governance Categorizes if appropriate senior management to operate the business and an

adequate supervisory authority to govern the bank are in place

4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for

the quality of a bankrsquos risk culture

5 Employees Measures average completed training hours of employees and the employee

fluctuation

6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in

place and what different risks are considered as relevant for the specific bank

Also the handling of individual risks is taken into account

7 Reputation Asks if banks make a statement about their reputation and related risks Litigations

and their transparent disclosure are scored

8 Other Effects One-off effectsevents related to risk management and risk culture are considered

9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports

12copy Frankfurt School of Finance amp Management gGmbH

DATA ndash RISK CULTURE SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports

bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)

bull Box-whisker plots show interquartile rangein boxes

bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange

13copy Frankfurt School of Finance amp Management gGmbH

1 Net Profit respectively Total Loss divided by Total Assets

2 CET 1 Capital divided by Total Assets

3 Total Risk Exposure divided by Total Assets

4 CET1 Ratio

5 Leverage Ratio

6 NPE Ratio

7 Aggregated Adjustments Due to the Outcome of the AQR

8 AQR adjusted CET1 Ratio

9 Adjusted CET1 Ratio after Baseline Scenario

10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period

11 Adjusted CET1 Ratio after Adverse Scenario and

12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)

DATA ndash STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Stress test indicators (STIlsquos) derived from EBA data set

14copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

15copy Frankfurt School of Finance amp Management gGmbH

THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull What is the relationship between risk culture and stress test outcome

bull Does an institution will well-established risk culture perform well in stress test and vice versa

bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos

bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos

16copy Frankfurt School of Finance amp Management gGmbH

RCS = α

- β1 RWAAssets

+ β2 Leverage Ratio

THE MODELRISK CULTURE SCORE amp STRESS VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull On average

ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points

ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519

17copy Frankfurt School of Finance amp Management gGmbH

THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

STS = α + β1 Governance

+ β2 Other Effects

bull One grade highergovernance score corresponds to25-30 higherSTS

bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture

18copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

19copy Frankfurt School of Finance amp Management gGmbH

1 Risk Culture and Stress Test results are correlated

2 Two risk culture indicators show significant explanatory power of Stress test outcomes

1 Governance

2 Other Effects

3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score

1 RWA Assets

2 Leverage Ratio

4 Some more intuitive indicators do not have any explanatory power

1 Net Profit Assets NPE Ratio CET1 Ratio

2 Strategy Risk Strategy Reputation

Summary Encouraging results but more research is certainly needed

CONCLUSIONS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf

10copy Frankfurt School of Finance amp Management gGmbH

bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia

bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results

bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone

bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset

bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports

DATA ndash 81 BANKS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

11copy Frankfurt School of Finance amp Management gGmbH

DATA ndash RISK CULTURE SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Category Main Characteristics

1 Regulatory

Requirements

Level of concordance with basic regulatory requirements with regard to risk

management

2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy

so that potential risks can be identified

3 Governance Categorizes if appropriate senior management to operate the business and an

adequate supervisory authority to govern the bank are in place

4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for

the quality of a bankrsquos risk culture

5 Employees Measures average completed training hours of employees and the employee

fluctuation

6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in

place and what different risks are considered as relevant for the specific bank

Also the handling of individual risks is taken into account

7 Reputation Asks if banks make a statement about their reputation and related risks Litigations

and their transparent disclosure are scored

8 Other Effects One-off effectsevents related to risk management and risk culture are considered

9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports

12copy Frankfurt School of Finance amp Management gGmbH

DATA ndash RISK CULTURE SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports

bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)

bull Box-whisker plots show interquartile rangein boxes

bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange

13copy Frankfurt School of Finance amp Management gGmbH

1 Net Profit respectively Total Loss divided by Total Assets

2 CET 1 Capital divided by Total Assets

3 Total Risk Exposure divided by Total Assets

4 CET1 Ratio

5 Leverage Ratio

6 NPE Ratio

7 Aggregated Adjustments Due to the Outcome of the AQR

8 AQR adjusted CET1 Ratio

9 Adjusted CET1 Ratio after Baseline Scenario

10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period

11 Adjusted CET1 Ratio after Adverse Scenario and

12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)

DATA ndash STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Stress test indicators (STIlsquos) derived from EBA data set

14copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

15copy Frankfurt School of Finance amp Management gGmbH

THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull What is the relationship between risk culture and stress test outcome

bull Does an institution will well-established risk culture perform well in stress test and vice versa

bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos

bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos

16copy Frankfurt School of Finance amp Management gGmbH

RCS = α

- β1 RWAAssets

+ β2 Leverage Ratio

THE MODELRISK CULTURE SCORE amp STRESS VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull On average

ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points

ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519

17copy Frankfurt School of Finance amp Management gGmbH

THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

STS = α + β1 Governance

+ β2 Other Effects

bull One grade highergovernance score corresponds to25-30 higherSTS

bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture

18copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

19copy Frankfurt School of Finance amp Management gGmbH

1 Risk Culture and Stress Test results are correlated

2 Two risk culture indicators show significant explanatory power of Stress test outcomes

1 Governance

2 Other Effects

3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score

1 RWA Assets

2 Leverage Ratio

4 Some more intuitive indicators do not have any explanatory power

1 Net Profit Assets NPE Ratio CET1 Ratio

2 Strategy Risk Strategy Reputation

Summary Encouraging results but more research is certainly needed

CONCLUSIONS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf

11copy Frankfurt School of Finance amp Management gGmbH

DATA ndash RISK CULTURE SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Category Main Characteristics

1 Regulatory

Requirements

Level of concordance with basic regulatory requirements with regard to risk

management

2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy

so that potential risks can be identified

3 Governance Categorizes if appropriate senior management to operate the business and an

adequate supervisory authority to govern the bank are in place

4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for

the quality of a bankrsquos risk culture

5 Employees Measures average completed training hours of employees and the employee

fluctuation

6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in

place and what different risks are considered as relevant for the specific bank

Also the handling of individual risks is taken into account

7 Reputation Asks if banks make a statement about their reputation and related risks Litigations

and their transparent disclosure are scored

8 Other Effects One-off effectsevents related to risk management and risk culture are considered

9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports

12copy Frankfurt School of Finance amp Management gGmbH

DATA ndash RISK CULTURE SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports

bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)

bull Box-whisker plots show interquartile rangein boxes

bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange

13copy Frankfurt School of Finance amp Management gGmbH

1 Net Profit respectively Total Loss divided by Total Assets

2 CET 1 Capital divided by Total Assets

3 Total Risk Exposure divided by Total Assets

4 CET1 Ratio

5 Leverage Ratio

6 NPE Ratio

7 Aggregated Adjustments Due to the Outcome of the AQR

8 AQR adjusted CET1 Ratio

9 Adjusted CET1 Ratio after Baseline Scenario

10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period

11 Adjusted CET1 Ratio after Adverse Scenario and

12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)

DATA ndash STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Stress test indicators (STIlsquos) derived from EBA data set

14copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

15copy Frankfurt School of Finance amp Management gGmbH

THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull What is the relationship between risk culture and stress test outcome

bull Does an institution will well-established risk culture perform well in stress test and vice versa

bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos

bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos

16copy Frankfurt School of Finance amp Management gGmbH

RCS = α

- β1 RWAAssets

+ β2 Leverage Ratio

THE MODELRISK CULTURE SCORE amp STRESS VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull On average

ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points

ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519

17copy Frankfurt School of Finance amp Management gGmbH

THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

STS = α + β1 Governance

+ β2 Other Effects

bull One grade highergovernance score corresponds to25-30 higherSTS

bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture

18copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

19copy Frankfurt School of Finance amp Management gGmbH

1 Risk Culture and Stress Test results are correlated

2 Two risk culture indicators show significant explanatory power of Stress test outcomes

1 Governance

2 Other Effects

3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score

1 RWA Assets

2 Leverage Ratio

4 Some more intuitive indicators do not have any explanatory power

1 Net Profit Assets NPE Ratio CET1 Ratio

2 Strategy Risk Strategy Reputation

Summary Encouraging results but more research is certainly needed

CONCLUSIONS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf

12copy Frankfurt School of Finance amp Management gGmbH

DATA ndash RISK CULTURE SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports

bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)

bull Box-whisker plots show interquartile rangein boxes

bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange

13copy Frankfurt School of Finance amp Management gGmbH

1 Net Profit respectively Total Loss divided by Total Assets

2 CET 1 Capital divided by Total Assets

3 Total Risk Exposure divided by Total Assets

4 CET1 Ratio

5 Leverage Ratio

6 NPE Ratio

7 Aggregated Adjustments Due to the Outcome of the AQR

8 AQR adjusted CET1 Ratio

9 Adjusted CET1 Ratio after Baseline Scenario

10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period

11 Adjusted CET1 Ratio after Adverse Scenario and

12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)

DATA ndash STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Stress test indicators (STIlsquos) derived from EBA data set

14copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

15copy Frankfurt School of Finance amp Management gGmbH

THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull What is the relationship between risk culture and stress test outcome

bull Does an institution will well-established risk culture perform well in stress test and vice versa

bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos

bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos

16copy Frankfurt School of Finance amp Management gGmbH

RCS = α

- β1 RWAAssets

+ β2 Leverage Ratio

THE MODELRISK CULTURE SCORE amp STRESS VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull On average

ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points

ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519

17copy Frankfurt School of Finance amp Management gGmbH

THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

STS = α + β1 Governance

+ β2 Other Effects

bull One grade highergovernance score corresponds to25-30 higherSTS

bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture

18copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

19copy Frankfurt School of Finance amp Management gGmbH

1 Risk Culture and Stress Test results are correlated

2 Two risk culture indicators show significant explanatory power of Stress test outcomes

1 Governance

2 Other Effects

3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score

1 RWA Assets

2 Leverage Ratio

4 Some more intuitive indicators do not have any explanatory power

1 Net Profit Assets NPE Ratio CET1 Ratio

2 Strategy Risk Strategy Reputation

Summary Encouraging results but more research is certainly needed

CONCLUSIONS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf

13copy Frankfurt School of Finance amp Management gGmbH

1 Net Profit respectively Total Loss divided by Total Assets

2 CET 1 Capital divided by Total Assets

3 Total Risk Exposure divided by Total Assets

4 CET1 Ratio

5 Leverage Ratio

6 NPE Ratio

7 Aggregated Adjustments Due to the Outcome of the AQR

8 AQR adjusted CET1 Ratio

9 Adjusted CET1 Ratio after Baseline Scenario

10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period

11 Adjusted CET1 Ratio after Adverse Scenario and

12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)

DATA ndash STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

Stress test indicators (STIlsquos) derived from EBA data set

14copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

15copy Frankfurt School of Finance amp Management gGmbH

THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull What is the relationship between risk culture and stress test outcome

bull Does an institution will well-established risk culture perform well in stress test and vice versa

bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos

bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos

16copy Frankfurt School of Finance amp Management gGmbH

RCS = α

- β1 RWAAssets

+ β2 Leverage Ratio

THE MODELRISK CULTURE SCORE amp STRESS VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull On average

ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points

ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519

17copy Frankfurt School of Finance amp Management gGmbH

THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

STS = α + β1 Governance

+ β2 Other Effects

bull One grade highergovernance score corresponds to25-30 higherSTS

bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture

18copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

19copy Frankfurt School of Finance amp Management gGmbH

1 Risk Culture and Stress Test results are correlated

2 Two risk culture indicators show significant explanatory power of Stress test outcomes

1 Governance

2 Other Effects

3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score

1 RWA Assets

2 Leverage Ratio

4 Some more intuitive indicators do not have any explanatory power

1 Net Profit Assets NPE Ratio CET1 Ratio

2 Strategy Risk Strategy Reputation

Summary Encouraging results but more research is certainly needed

CONCLUSIONS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf

14copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

15copy Frankfurt School of Finance amp Management gGmbH

THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull What is the relationship between risk culture and stress test outcome

bull Does an institution will well-established risk culture perform well in stress test and vice versa

bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos

bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos

16copy Frankfurt School of Finance amp Management gGmbH

RCS = α

- β1 RWAAssets

+ β2 Leverage Ratio

THE MODELRISK CULTURE SCORE amp STRESS VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull On average

ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points

ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519

17copy Frankfurt School of Finance amp Management gGmbH

THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

STS = α + β1 Governance

+ β2 Other Effects

bull One grade highergovernance score corresponds to25-30 higherSTS

bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture

18copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

19copy Frankfurt School of Finance amp Management gGmbH

1 Risk Culture and Stress Test results are correlated

2 Two risk culture indicators show significant explanatory power of Stress test outcomes

1 Governance

2 Other Effects

3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score

1 RWA Assets

2 Leverage Ratio

4 Some more intuitive indicators do not have any explanatory power

1 Net Profit Assets NPE Ratio CET1 Ratio

2 Strategy Risk Strategy Reputation

Summary Encouraging results but more research is certainly needed

CONCLUSIONS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf

15copy Frankfurt School of Finance amp Management gGmbH

THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull What is the relationship between risk culture and stress test outcome

bull Does an institution will well-established risk culture perform well in stress test and vice versa

bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos

bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos

16copy Frankfurt School of Finance amp Management gGmbH

RCS = α

- β1 RWAAssets

+ β2 Leverage Ratio

THE MODELRISK CULTURE SCORE amp STRESS VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull On average

ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points

ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519

17copy Frankfurt School of Finance amp Management gGmbH

THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

STS = α + β1 Governance

+ β2 Other Effects

bull One grade highergovernance score corresponds to25-30 higherSTS

bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture

18copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

19copy Frankfurt School of Finance amp Management gGmbH

1 Risk Culture and Stress Test results are correlated

2 Two risk culture indicators show significant explanatory power of Stress test outcomes

1 Governance

2 Other Effects

3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score

1 RWA Assets

2 Leverage Ratio

4 Some more intuitive indicators do not have any explanatory power

1 Net Profit Assets NPE Ratio CET1 Ratio

2 Strategy Risk Strategy Reputation

Summary Encouraging results but more research is certainly needed

CONCLUSIONS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf

16copy Frankfurt School of Finance amp Management gGmbH

RCS = α

- β1 RWAAssets

+ β2 Leverage Ratio

THE MODELRISK CULTURE SCORE amp STRESS VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

bull On average

ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points

ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519

17copy Frankfurt School of Finance amp Management gGmbH

THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

STS = α + β1 Governance

+ β2 Other Effects

bull One grade highergovernance score corresponds to25-30 higherSTS

bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture

18copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

19copy Frankfurt School of Finance amp Management gGmbH

1 Risk Culture and Stress Test results are correlated

2 Two risk culture indicators show significant explanatory power of Stress test outcomes

1 Governance

2 Other Effects

3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score

1 RWA Assets

2 Leverage Ratio

4 Some more intuitive indicators do not have any explanatory power

1 Net Profit Assets NPE Ratio CET1 Ratio

2 Strategy Risk Strategy Reputation

Summary Encouraging results but more research is certainly needed

CONCLUSIONS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf

17copy Frankfurt School of Finance amp Management gGmbH

THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

STS = α + β1 Governance

+ β2 Other Effects

bull One grade highergovernance score corresponds to25-30 higherSTS

bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture

18copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

19copy Frankfurt School of Finance amp Management gGmbH

1 Risk Culture and Stress Test results are correlated

2 Two risk culture indicators show significant explanatory power of Stress test outcomes

1 Governance

2 Other Effects

3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score

1 RWA Assets

2 Leverage Ratio

4 Some more intuitive indicators do not have any explanatory power

1 Net Profit Assets NPE Ratio CET1 Ratio

2 Strategy Risk Strategy Reputation

Summary Encouraging results but more research is certainly needed

CONCLUSIONS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf

18copy Frankfurt School of Finance amp Management gGmbH

OVERVIEW

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

1 Introduction

2 Data

3 The Model

4 Conclusions

19copy Frankfurt School of Finance amp Management gGmbH

1 Risk Culture and Stress Test results are correlated

2 Two risk culture indicators show significant explanatory power of Stress test outcomes

1 Governance

2 Other Effects

3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score

1 RWA Assets

2 Leverage Ratio

4 Some more intuitive indicators do not have any explanatory power

1 Net Profit Assets NPE Ratio CET1 Ratio

2 Strategy Risk Strategy Reputation

Summary Encouraging results but more research is certainly needed

CONCLUSIONS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf

19copy Frankfurt School of Finance amp Management gGmbH

1 Risk Culture and Stress Test results are correlated

2 Two risk culture indicators show significant explanatory power of Stress test outcomes

1 Governance

2 Other Effects

3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score

1 RWA Assets

2 Leverage Ratio

4 Some more intuitive indicators do not have any explanatory power

1 Net Profit Assets NPE Ratio CET1 Ratio

2 Strategy Risk Strategy Reputation

Summary Encouraging results but more research is certainly needed

CONCLUSIONS

GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf

C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg

Global Association ofRisk Professionals

111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210

2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630

wwwgarporg

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg

4 | copy 2014 Global Association of Risk Professionals All rights reserved

• GARPPresentationTemplate
• GARP Frankfurt Chapter Meeting 20160223 - Risk Culturepdf