RISK MANAGEMENT IN BANKING By Marine Vinais & Burrhus Babadoudou

SUMMARY

Conclusion Credit Risk Operational

Risk Introduction

INTRODUCTION

Risk Management

Definition

Components

• Uncertainty

• Exposure

Types of risks

• Operational

• Credit

• Reputational

OPERATIONAL RISK

The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.

Fraud.

Employment Practices and Workplace Safety.

Clients, Products and Business Practices.

Damage to Physical Assets.

Business Disruption and System Failures.

Execution, Delivery and Process Management.

FRAUD

Internal Fraud

Unauthorized Activity.

• Transactions not reported/unauthorized.

Theft and Fraud.

• Credit fraud

External Fraud

Theft and Fraud.

• Money laundering

• Accounts take over

• Identity theft.

Systems Security.

• Hacking damage

EMPLOYMENT PRACTICES AND WORKPLACE SAFETY

Employee Relations

• Compensation, benefit, termination issues

• Organized labor issues

Safe Environment

General liability (slips and falls)

• Employee health and safety rules

• Workers’ compensation

Diversity and Discrimination

CLIENTS, PRODUCTS

AND BUSINESS PRACTICES

• Breach of privacy

• Misuse of confidential information

Suitability, Disclosure and Fiduciary.

• Antitrust.

• Unlicensed activity.

• Improper trade/market practice.

Improper Business or Market Practices .

• Failure to investigate client per guidelines.

• Exceeding client exposure limits.

Selection, Sponsorship and Exposure.

• Disputes over performance or advisory activities. Advisory Activities.

DAMAGE TO PHYSICAL ASSETS

Natural disaster losses.

Human losses from

external sources

(terrorism, vandalism).

Disasters and Other Events.

BUSINESS DISRUPTION

AND SYSTEM FAILURES

Hardware Software. Telecommunica-

tions. Utility

outage/disruptions.

EXECUTION, DELIVERY

AND PROCESS MANAGEMENT

• Accounting error/entity attribution error.

Transaction Capture, Execution and Maintenance.

• Failed mandatory reporting obligations.

Monitoring and Reporting.

• Non-client counterparty misperformance.

Trade Counterparties.

• Outsourcing.

Vendors and Suppliers.

SOLUTIONS

Employee training and background checks

Close management oversight.

Segregation of duties.

Procedures and process.

Purchase of insurance.

Exiting certain businesses.

VISUAL

55

80

57

40

0

20

40

60

80

100

Fraud Attack Rate Fraud Detection Rate Fraud LossReimbursement not fully

compensated

Customer Churn

The destructive impact that fraud has on the SMB-financial institution

Relationship in 2010 in UK

%

Only 20 percent of banks were able to identify fraud before money was transferred.

CREDIT RISK

Risk due to an uncertainty in a counterparty’s ability to meet its obligations in accordance with agreed upon terms.

• Loans.

• Acceptances.

• Interbank transactions.

• Market risk

• Forex transactions

• Futures contracts

• Swaps

• Equities

SOUND PRACTICES

FOR MANAGING CREDIT RISK

Ex : Review periodically the risk strategy

Establish an appropriate credit risk environment

Ex : Criteria should include the specifies of the borrower/counterparties

Define an efficient credit process

Ex : Have in place different systems to analyze the risk, monitoring credits..

Maintain an appropriate credit administration,

measurement and monitoring process

Create systems to manage ongoing credits, problems linked to the credits.

Ensure adequate controls

3 MAINS LESSONS

Practice stringent credit standards for borrowers

and counterparties.

Have a strict portfolio risk management.

Define a constant focus on changes in economic or

other circumstances that can lead to a deterioration in the

credit

169

216

323

475

1048

0 200 400 600 800 1000 1200

Bank of America

Citibank

JPMorgan Chase

HSBC Bank USA

Goldman Sachs

Total Credit Exposure with Derivatives,

as a % of Risk-Based Capital (2009)

Major US Banks are overexposed to default risk especially due to the subprimes crisis Mortgage loans Credit risk

VISUAL

OTHER KEYS OF SUCESS

A positive corporate culture.

Actively observed policies and procedures.

Effective use of technology.

Respect the regulations from the Financial Services Community

CONCLUSION

• Losses due to operational and credit failures are huge

• The financial crisis isn’t reducing the risks

• A good ROI of investing in risks prevention

Risk Management

Human Resources

Management

IT Services

Relevant Processes