discover risk culture with mohammad fheili
TRANSCRIPT
Mohammad Fheili – [email protected]
The Collective Will & Ability to Manage Risk.
The CollectiveWill & Abilityto ManageRisk.
How To Build A Healthy Yet Contagious
May 18th & 19th 2016Movenpick Hotel
Mohammad Fheili – [email protected]
Mohammad Fheili “Over 30 years of Experience in Banking. [email protected] (961) 3 337175
Risk & Capacity Building Specialist. Trainer in Risk & Compliance University Lecturer: Economics, Risk, and Banking
Operations Currently serves in the capacity of an Executive (AGM) at
JTB Bank in Lebanon. Served as:
• An Economist at ABL,• Senior Manager at BankMed• Senior Manager & Chief Risk Officer at Group
Fransabank Mohammad received his college education
(undergraduate & graduate) at Louisiana State University(LSU), and has been teaching Economics and Finance forover 25 continuous years at reputable universities in theUSA (LSU) and Lebanon (LAU).
Finally, Mohammad published over 25 articles, of thosemany are in refereed Journals (e.g., Journal of MoneyLaundering & Control; Journal of Operational Risk;Journal of Law & Economics; etc.) and Bulletins.”
Mohammad Fheili – [email protected]
All Organizations need to take Risks toachieve their Goals.
The Prevailing Risk Culture within anOrganization can make it significantlyBetter or Worse at Managing these Risks.
Risk Culture significantly affects theorganizational capability to take strategicrisk decisions and deliver onPerformance Promises.
It’s never been about the presence of a Risk Culture
nor the absence of!
Risk is there; like it or not!
How Do You Do Things (& Think) Around Here?
There are MANY Risks but ONE Risk Culture!
Mohammad Fheili – [email protected]
Where Should We Go To Look For Risk Culture?
Board of Directors? Staff: Every Day Fire Fighters?
Mohammad Fheili – [email protected]
Then We Should Go Look For Risk Culture In
Every individual comes to anorganization with his/er ownpersonal Perception of Risk.
Every individual comes withhis/er own Inventory of MoralValues and these have a greatinfluence over the decisionsthey make on day‐to‐day basis.
The Man In The Mirror . . . The Man In The Mirror . . .
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Risk Culture
It’s About the Way we do things (& Think) around here. . . !
Do we anticipate problems, and guard against them preemptively?
Cushion
Mohammad Fheili – [email protected]
Risk Culture
It’s About the Way we do things (& Think) around here. . . !
Do we make the efforts to identify Key Risk Areas and Introduce the necessary Internal Controls to prevent potential problems?
Mohammad Fheili – [email protected]
Risk Culture
It’s About the Way we do things (& Think) around here. . . !
Do we anticipate a Fall and lend a helping hand if need be?
Mohammad Fheili – [email protected]
So What Do We Mean By Risk Culture?
Risk Culture is a Termdescribing:• The Values,• Beliefs,• Knowledge and• UnderstandingAbout risk shared by Employeeswith a common purpose(Organizational Performance).Culture is more than astatement of Values – it relatesto how these translate intoconcrete actions.
How Culture works in Practice:• The Culture of an Organization arisesfrom the repeated Behavior of itsmembers.
• The Behavior of the Organization and itsConstituent Individuals is shaped bytheir underlying Attitudes.
• Both Behavior and Attitudes areInfluenced by the Prevailing Culture ofthe Organization.
Culture is subject to cycles which can self‐reinforce in either virtuous, or vicious,circles.
Mohammad Fheili – [email protected]
Risk Culture
Personal Predisposition
of Risk
Personal Ethics
Behavior
Organizational Culture
Every individual comes to an organization with their own personalperception of Risk.People vary in all sorts of ways and this includes their predisposition towardRisk. Two specific Traits:1. The extent to which people are either:
spontaneous and challenge convention or organized, systematic and compliant.
2. The extent to which people may be: cautious, pessimistic and anxious, or optimistic, resilient and fearless.
Organizations need to pay attention to the ethical profile ofthose working in their business.Every individual comes with their own inventory of moralvalues and these have a great influence over the decisionsthey make on day‐to‐day basis.Three ethical consciences, significantly influencing individuals’Decision Making:
1. Ethic of Obedience (Rule Compliance, Spirit ofthe Law, etc.)
2. Ethic of Care (Empathy, Concern, Respect, etc.)3. Ethic of Reason (Wisdom, Experience,
Prudence, etc.)
Mohammad Fheili – [email protected]
Risk Culture
Personal Predisposition
of Risk
Personal Ethics
Behavior
Organizational Culture
Individual values and beliefs andattitudes toward risk contribute toand are affected by the wider overallculture of the organization.It is useful to consider Organizationalculture in relation to two keydimensions:1. Sociability: People Focus (based on
how well staff get on socially)2. Solidarity: Task Focus (based on
goal oriented and teamperformance)
Mohammad Fheili – [email protected]
Risk Management Is Everybody’s Business
Staff Business Unit Senior Management
Assessment & Follow Up
Acceptance or Mitigation of Identified Risks
Follow Up on Decided Actions
Oversight & Control
Reports to Enable Senior Management Appraisal
IdentificationReporting
Registration of Incidents and Monitoring of the
Internal Control Environment
Problems with Risk Cultureare frequently found at theroot of organizationalscandals and collapses.
Every individual comes to an
organization with his/er own personal
perception of Risk
It Starts Here
Risks
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Risk Management & Associated Culture
The Chief Risk Officer
Your Risk Culture Can Be Characterized as: Participative Risk Management Autocratic Risk Management
Mohammad Fheili – [email protected]
Participative Risk
Management
Full and Consistent
Communication & Coordination with all Business
Units
Involve EveryoneCulture is subject to cycles whichcan self‐reinforce in eithervirtuous, or vicious, circles.
Mohammad Fheili – [email protected]
Autocratic Risk
Management
I Know what to do, and I will do it all alone. My way or
the highway!
Involve EveryoneCulture is subject to cycles whichcan self‐reinforce in eithervirtuous, or vicious, circles.
Mohammad Fheili – [email protected]
An effective Risk Culture is one that enables and rewardsindividuals and groups for taking the right risks in aninformed manner.
Risk Culture (It is there!)Effective (Result Oriented)
Enables (Risk is not Crippling; Wrong Culture is!)
Rewards (Individuals & Groups) For Taking (Mostly Intentional risk‐taking behavior)
The Right Risk (Calculated Risks)
Informed Manner (Data is required: Facts not Perception).
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Non‐Identifiable Risk
Non‐Identifiable Risk
Financial Institution’s Risk Population
What is Normally Used in Risk Identification: • CIP• KYC• DD• EDD• Complete Credit File,
EAD, LGD, PD, UL, EL, etc. and Proper Follow Up
• Comprehensive & Consistent Data about the Market
• Etc.
Identified & Identifiable
Risks
Many Tools For Data Collection
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Increasing Our Understanding of Potential Outcomes
Increa
sing
Evide
nce on
Proba
bility of
occurren
ce
Ambiguity
Unc
erta
inty
Ignorance
A Bank is expected tocollect ALL needed datato move closer to RiskManagement and Awayfrom: Ambiguity, Ignorance, and Uncertainty.
The Fallacy . . .
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Near misses, loss = 0
0 < Losses < Threshold
Losses > Threshold
After The Problem Has Been Generated
Before The Problem Has Been Generated
Look for Early Warning Flags
Identify Problems in Progress
Research Historical Events
FocusFocus
Data Must Be Made Useful . . .
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Fire FightingFire Fighting
ProactiveProactive
ServiceService
ReactiveReactive
ValueValue
Risk in DIFFERENTIATOR role
Risk in ENABLER role
Risk in SUPPORT roleWrong Risk Culture
Right Risk Culture
The Question is NOT:• Do Organizations Need Risk
Culture?But it is:• What Kind of Risk Culture do we
Need?
Relatively Mature Organization
Primitive Organization
The question is whether thatculture is effectively Supportingor Undermining the longer‐termsuccess of the Organization. . . .Culture Eats Strategy if … !
The question is whether thatculture is effectively Supportingor Undermining the longer‐termsuccess of the Organization. . . .Culture Eats Strategy if … !
If The Job Is Done Right, Risk Management Create Value . . .
Mohammad Fheili – [email protected]
Many Organization have been concentratingmost, if not all their energies on surviving in thechanged environment by stemming losses,cutting costs and stabilizing their revenue base.
Where attention is paid to risk, the focus is moreoften than not on improving existing riskmanagement systems and models rather thantackling the underlying culture.
Failures (e.g., Fraud, etc.) have their origin in flawsin unique organizational cultures that allowedparticular risks to take root and grow. Culture EatsStrategy!
Otherwise, Culture Eats Strategy . . .
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TheCollective
Will &Ability toManage
Risk
Risk Culture IllustratedHow We Do Things Around Here . . .
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R.I.S.K.
A Boat in the Harbor is Safe, But That is Not What Boats Were Made For
A Truthful Statement of Risk Culture
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Consequences: Losses
Risk Event: Loan
Default
Dried up Cash Flow Sources: Client’s businessreceived a bad hit.
Collaboration between the Bank Employee andthe Client in the provision of inflated figures(Sales, Revenues, Cash Flows, …) leading to afalse‐favorable credit decision.
Over‐worked, and Under‐Staffed Business Unitleading to overlooking some critical changes inbusiness circumstances of the Client.
Incompetent Credit Analysts Gave FalseRecommendation which led to a False‐favorableCredit Decision.
Poor/Inadequate Follow‐up and Reviews by theBranch/Relationship Manager rendering theprocess handicapped in capturing “WarningSignals”
Causes
• Kick off Loan Workout andRecovery ‐ Beware of shortcuts:Accepting Cash in settlement of anagging Bad Debt
• Recovery is a Function of theQuality of the Credit File and theLegality of AccompanyingDocuments
• Losses (Total or Partial)
• Etc.
?
Probe Carefully about the Root‐Causes of this . . .
Culture is subject to cycles whichcan self‐reinforce in eithervirtuous, or vicious, circles.
Mohammad Fheili – [email protected]
Acquisition/ Credit Specific Customer Service
Collect And Review Data
CreditReview
Assess Collateral And Risk
DocumentApproval
& Pricing
Sales: Bank-Client Interface Financial & Risk Analysis: Understanding Risks Processing
Establishing Contact
Evaluate first customer info
Customer Meetings
Debriefing
Request documents
Obtain data & information
Completeness/ plausibility review
Follow up
Review document
Follow up with Loan Officer / Account Manager
Standardized Credit Rating
Document on other credit related factors
Inspect Object
Determine Loan-to-value
Evaluate Exposure
Data is Sufficient
Complete Loan Application
Prepare Credit rate
Handover Credit File
Follow Up
Data is Complete
Approval by Decision Makers
Check Compliance with Authority Structure
Prepare Contracts
Get Signatures
Provide Security
Disbursement Review
Disbursement
Monitor & Report
ResolutionLoan/Asset Life Cycle
Credit Approval Process
Implement On the Credit
Decision
In the Process of Producing a Credit Decision; Do Analysts focus only on Credit Risks, or theylook into other risks (Market, Operational, Interest‐Rate, Liquidity, AML Risks?
Culture is subject to cycles which can self‐reinforce in either virtuous, or vicious, circles.
Mohammad Fheili – [email protected]
Flying From “Beirut” To “Paris” Is a ‘Service’; Just Like Opening a Saving/CheckingAccount. Descent Below Safe Altitude is an Incident (With Zero Losses this time);overlooking a step in Due Diligence …. BUT . . .
Minimum Safe Altitude (MSA)
IncidentAccident
Culture is subject to cycles whichcan self‐reinforce in eithervirtuous, or vicious, circles.
Mohammad Fheili – [email protected]
Brilliant Surgery!
Well Done!Shame the
patient died.
Outcomes
Fear of AML Violation Penalty (i.e., Outcome), the FIdecides not to serve the client (i.e., Decision) sparing itselfthe pain of Enhanced Due Diligence.
Mohammad Fheili – [email protected]
The Culture of Compliance
Mohammad Fheili – [email protected]
Client is Engaged
Compliance Cycle
Service Cycle
st1Client Interface
Interface
End
CIP, KYC, DD, EDD, …
AML Compliance (Regulator Decides)Client Engagement is Constrained by AML‐Compliance. The Bank is Responsible & Accountable
Customer Satisfaction (Customer Decides)Client Engagement is Driven by: The Potential for Revenue:Interest Income, Commissions & Charges; and a Word‐of‐Mouth Free Marketing
Both Cycles Are Ongoing Processes; None is a Destination
by itself
Branch
From Here on it’s Relationship Management
A Serious Risk Culture Failure: IF “Satisfaction” Ends Up Competing with
“Compliance” ….Which means “Service Cycle” can’t be
compatible with the “Compliance Cycle”!
Mohammad Fheili – [email protected]
…and this may include all types of Risks a Bank may
Face
De‐Risking is Yet Another Form of Risk Culture Failure
Mohammad Fheili – [email protected]
Level Of Maturity in AML Compliance
Nature & Extent o
f Efforts Dep
loyed
DD
EDD
RBA
Due Diligence
Enhanced Due Diligence
Risk‐Based Approach to AML Compliance
Enhancing Compliance Capabilities …
AML Cost
Skills Needs
Know‐How
AML Analytics
Those Enhanced AML Compliance Steps: Are clear indication of a desire, on the
part of the FI, to continue on servingthe Client.
Otherwise, the FI would engage inDerisking.
Enhance AML Compliance require: The Use of Technology:
Quantification/Data‐Rich vs.Judgment/Opinion‐Rich
Increase reliance on Technology: LessHuman Intervention;
Increase exposure to TechnologyFailures: Different Sets of Skills arerequired.
Reliance on Technology may ReduceFrequency But Increase Impact.
Being Pragmatic About Compliance?
Mohammad Fheili – [email protected]
RiskManagement is a Decision & a Choice.
ComplianceWith Regulatory Guidelines & Rules
Pillar 1 is More Attractive.
Standardized Approach in Credit & Market Risks
Basic Indicator Approach in
Operational Risk. Advanced Approaches
… No Way! ICAAP only if Required
by Regulator; and the bare minimum.
RCSA Marginalized. IFRS 9 ………a
nightmare!
Pillar 2 is at the top of Risk Management
Priorities. Advanced
Approaches are Effectively Explored. ICAAP required by
Management as a Desired Self‐
Assessment Tool. RCSA is Essential.
IFRS 9 is a welcomed wakeup call.
Etc.
Risk Culture Failure: Regulatory Compliance is Competing with Risk Management
Mohammad Fheili – [email protected]
Basel I
Basel II
Credit Risk
Credit RiskMarket Risk
Operational Risk
1986 proposed
1999 proposed
1988 effective
2007 effective
Basel III
Credit RiskMarket Risk
Operational RiskCapital Quality
Additional BuffersLiquidity: LCR, NSFR
2009 proposed
Kick Off in 2011
Amendm
ents
Amendm
ents
Basel 2 ½
Basel 1 ½Am
endments
Basel 3 ½
Basel IV
2017 Anticipated Or Not
Kick Off in 20??
• Capital Requirements
• Liquidity Requirements
• Disclosure Requirements
• National Divergences
• Risk Sensitivity
• Use of Internal Models inDecision Making
• Total Risks = Credit PlusMarket Risks
• Internal Models Emerged
• Later on, Tier 3 Capital
• Enhanced Pillar 2, 3
• Complex Securitizationobtained higher Risk Weights.
• Trading Books
Tequila Crisis
Asian Market Crisis
Shadow Banking Crisis
Regulator’s Risk Culture
The Basel Accord with a
history of Incomplete
Implementation
The Signal it Sendshas much to do withRegulatory RiskCulture.
Mohammad Fheili – [email protected]
The World of Finance Has Changed.
Nothing Is The Same . . . And The Culture Has Been Dramatically Altered.
Mohammad Fheili – [email protected]
People Come First
Data Come First
The Risk of Not taking account of that in the Transformation Process. Interfacing with
Clients Delivery Channels Product Features Customer Needs &
Wants Service Proliferation Staff Skill Level
Requirements Agility Etc…
Mohammad Fheili – [email protected]
Your Life Begins At the End OfYour Comfort Zone
Coping With a Rapidly Changing Banking Environment
Your Life Begins At the End OfYour Comfort Zone
Mohammad Fheili – [email protected]
Credit Risk
Market Risk
Operational RiskReputational Risk
Business RiskStrategic Risk
. . . Other Risks
Let’s Explore Risk
Stay and Risk
Extinction
Comfort Zon
e
Coping With
Changes
Mohammad Fheili – [email protected]
Foundation
Emerging
Established
Dynam
ic
Optim
ized
Fragmented Awareness
Building Consensus
General Awareness
Responsive
Intuitive
Individual/ Silo Focus
Process Focus
End-To-End Monitor and Measure
Responsive
Fully Integrated
‐Ad‐HocImplementation‐Limited Awareness ofRisks & Outcomes‐Relatively Risk Averse.
‐Risk Tools available butnot fully embedded‐Awareness ofOutcome‐FocusedObjectives‐Developing RiskAwareness‐Risk perceived as aProcess.
‐Functional RiskFrameworkImplemented.‐Shift in Focus – RiskViewed Positively.‐Key Risk Behaviorsembedded.‐General Awareness ofRisks & Outcomes
‐Focus on ContinuousImprovement.‐System facilitates riskversus outcomeanalysis & Response.‐Regulatory delivery isassured.‐Key Risk behaviorsevidenced withinIndustry.
‐Risk & Outcomesdrive all activity.‐All stakeholdersrecognize, understandand support approachincluding firms.‐Organization wideunderstanding of RiskTolerances andtreatment.
Timeline
Maturity
Mohammad Fheili – [email protected]
MAXIMIZE PROFIT subject to:RISK , REGULATORY, Compliance, Reporting, Etc. Constraints
RISK . . . Default Liquidity Maturity Others . . . REGULATORY . . . Basel I Basel II Basel III Basel IV (In the making)
Sanctions Rules USA_FATCA Requirements
AML, Etc. . . .
Uses of Funds Sources of Funds
Reserves Loans Securities Other
Investments . . .
All Types of Deposits
Borrowings Other
Sources Equity . . .
Off-Balance Sheet
With every Dollar in Service a Typical Bank
Solicits, it MUST satisfy all these Regulatory
Constraints first!VERY COSTLY!
Legal Issues . . .
Who can best help the Bank recover some of the cost of Compliance?Yes, YOU – Branches. You can Increase Traffic:
• More Clients• More Transactions
which can be achieved Through cross‐selling
Follow up Diligently on the settlements of Loans (and ‘Bien Trouvé’, Updated Financials, Site Visits, etc….)
Reduce Loss‐Events. Promote the Bank
through your Social Networks.
Formulating Effective Responses to Constraints
Risk Culture Matter
Mohammad Fheili – [email protected]
Health‐Check Your Risk Culture Yes You Can . . .
Mohammad Fheili – [email protected]
Evaluate The Current Risk Culture
• Look for hidden and sub‐cultures• Use several techniques to surface all cultures
What is the Impact of the current Risk Culture?
• What are its strengths and weaknesses?• Is this the right culture for our future?
What would Improve Your Risk Culture?
• Are there Regulatory or other external drivers to consider?• What changes do we have to make?
Mohammad Fheili – [email protected]
The High‐Risk End of the Continuum . . . • Poor Communication: A culture where warning signs of both internal or external risks are not shared.
• Unclear Tolerance: A Culture where the Leadership does not communicate a clear risk appetite or failsto present a coherent approach or strategy.
• Lack of Insight: A Culture where the Organization fails to understand the Risks it is running or believesthat such an understanding is the preserve of Risk Specialists.
• Over‐Confidence: A culture where people believe that their organization is insulated or even immunefrom risk because of its superior position or people.
• No Challenge: A Culture where individuals do not challenge each others’ attitudes, ideas and actions.
• Fear of Bad News: A Culture where Management and Employees feel inhibited about passing on badnews or learning from past mistakes..
• Indifference: A culture which discourages responding to situations or fosters apathy about theoutcomes, either due to bad faith or incompetence..
• Slow Response: A Culture where the Organization perceives external changes but reacts too slowly or isin denial about innovation or the likely impact of change.
• Beat The System: A culture where Risk Appetites are misaligned with the organization’s Risk Profile,leaving room for the conception and implementation of inappropriate activities.
• Gaming: A Culture where individual units take risks or embrace projects which could benefit the unit,but are out of line with the Organization’s Risk Appetite.
Transparency of Risk
Acknowledgement of Risk
Responsiveness To Risk
Respect For Risk
Mohammad Fheili – [email protected]
Poor
Unclear
Lack of Insight
Over Confidence
No Challenge
Fear of Bad News
Indifference
Slow
Gaming
Beat the System
Communication
Tolerance
Level Of Insight
Level Of Insight
Communication
Tolerance
Level of Care
Speed of Response
Cooperation
Adherence to Rules
High RiskBeware of the Weak End of the Continuum!
Mohammad Fheili – [email protected]
Evaluate The Current Risk Culture
• Look for hidden and sub‐cultures• Use several techniques to surface all cultures
What is the Impact of the current Risk Culture?
• What are its strengths and weaknesses?• Is this the right culture for our future?
What would Improve Your Risk Culture?
• Are there Regulatory or other external drivers to consider?• What changes do we have to make?
Plan & Implement Your cultural change
Monitor & Adapt to Changes
• Are we achieving the outcomes we expect?• What do we need to change now in light of our progress so far?
Cultural Change requires aSustained efforts as the cultureneeds time to adapt new norms.
How easily can we adapt thisculture change approach tointernational situation?
Continuous Review isEssential.
• What do we need in place to grow & sustain a new risk culture?• What changes do we have to make?
Mohammad Fheili – [email protected]
Poor
Unclear
Lack of Insight
Over Confidence
No Challenge
Fear of Bad News
Indifference
Slow
Gaming
Beat the System
Good
Clear
Good Insight
Confident But Careful
Constructive Challenge
Reward Honesty
Diligence
Fast
Coordinating
Play By The Rules
Communication
Tolerance
Level Of Insight
Level Of Insight
Communication
Tolerance
Level of Care
Speed of Response
Cooperation
Adherence to Rules
Transparency of Risk
Acknowledgement of Risk
Responsiveness To Risk
Respect For Risk
High Risk Low Risk
Risk Culture Framew
ork
Beware of the Weak End of the Continuum!
Mohammad Fheili – [email protected]
Regulating ComplexityIn The Universe Of Finance
Mohammad Fheili – [email protected]
Basel III
2009 proposed
2011 effective
Capital
Capital BuffersConservation 2.5% & Countercyclical 2.5%
Risk Managem
ent
Liquidity (LCR ≥ 100%) (NSFR > 100%)
Leverage ≥ 3%
Reporting
Less Reliance on External
Rating Agencies
• Increase in common equity requirements from 2% to 4.5%
• In crease in Tier 1 Capital (Going Concern) from 4% to 6%
• Tier 1 Capital can no longer include Hybrid Capitalinstruments with an incentive to redeem through featuressuch as step‐up clauses. These will be phased out
• Tier 3 Capital will be eliminated (Previously used forMarket Risk)
• Credit Valuation Adjustment (CVA) Capital Charge must becalculated to cover Mark‐to‐Market losses on counterpartyrisk to Over‐The‐Counter (OTC) Derivatives.
• Stressed Parameters must be used to calculate counterpartyCredit Risk
• Effective Expected Positive Exposure (EPE) with stressedparameters to be used to address general wrong‐way risk(WWR) and counterparty credit risk
• Banks must ensure complete trade capture and exposureaggregation across all forms of counterparty credit risk (notjust OTC derivatives) at the counterparty‐specific level in asufficient time frame to conduct regular stress testing.
• A multiplier of 1.25 is applied to the correlation parameterof all exposures to financial institutions (meeting certaincriteria) (Asset Value Correlation – AVC)
• Additional Margining required for illiquid derivativesexposures.
• 100% risk weight for Trade Finance.
• Contractual maturity mismatch
• Concentration of funding
• Available unencumbered assets
• Market‐related monitoring tools; asset prices and liquidity,Credit Default Swap (CDS) spreads and equity prices.
• LCR by currency
• Results of stress tests should be integrated into regularreporting to senior management
Basel II
2007 effective
+= +
++
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Basel III Tried But …
Sub‐Prime Lending
Excessive Risk Taking
Housing Prices declineresulting in sub‐primedefaults
Sub‐Prime Defaults,Securitized Assets &Derivatives Tradingresulted in huge losses
Excessive Leverage &Poor capital could notabsorb losses fully,demanding freshequity infusion
Huge losses resulted ina crisis of confidencecausing liquidity toevaporate
Short‐term borrowingdemanded freshborrowing which failedin liquidity crisis
Firms on the verge ofinsolvency; threateningsystem failure
Governments step in toinject capital toprevent systemicfailure
Capital Conservation & Counter‐Cyclical
Buffers
Capital Conservation & Counter‐Cyclical
Buffers
a) Less reliance on external ratingsagencies; b) Credit Valuation Adjustmentcapital charge; c) Stress Testing
a) Higher quality & quantity of capital; b)Leverage Ratio Introduced; c) 100%weight for Trade Finance
Enhanced Supervisory Review and Disclosure Two new Liquidity
Ratios
Correlation to financialinstitutions will carry morerisk weights to preventsystemic risk and an overallcollapse
In stressed market situations,credit rating downgrades offinancial institutions andsecuritized products furtherlowered valuations andincreased losses.
Securitization
BUT not Enough!
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LendersSurplus Spending
Units ‐SSUs• Individuals (Current
Income is GREATER than Current Expenditures)
• Firms (Earnings in excess of what the firm needs currently)
• Government (Current Revenues are in excess of planned Expenditures)
• Financial Intermediaries (Funding is currently GREATER than investment)
BorrowersDeficit Spending Units ‐DSUs
• Individuals (Current Income is LESS than Current Expenditures)
• Firms (Earnings falls short of what the firm needs currently)
• Government (Current Revenues fall short of planned Expenditures)
• Financial Intermediaries (Funding is currently LESS than investment)
Regulated but not like
Banks
Heavily
RegulatedNot RegulatedWith Financial intermediation in
Both BUT Complexity of an Unprecedented Nature and
Magnitude in Shadow Banking
With No Intermediation
BCBS has been paying attention to Financial Transactions (NotIntermediation) and Associated Risks But Little To Economic Engines
$
$
$
$
This Loop is what matters to Economics
Where to warehouse the Surplus?
Where to go to finance the Deficit?
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Risk Management of Today has been Contaminated by theComplexity of Regulations. … Where in Many Jurisdictions RiskManagement should be as Simplistic as the Environment itOperates in.
Mohammad Fheili – [email protected]
Mohammad Fheili – [email protected]
A Strong Culture Demonstrates Several Critical and Mutually Reinforcing Elements:
• A clear and well communicated Risk Strategy.• High standards of analytical rigor and information‐sharing across theorganization.
• Rapid escalation of threats or concerns.• Visible and consistent role‐modeling of desired behaviors andstandards by senior managers.
• Incentives which encourage people to “do the right thing” and thinkabout the overall health of the whole organization.
• Continuous and constructive challenging of actions andpreconceptions at all levels of the organization.
Mohammad Fheili – [email protected]
Sources of Risk Culture Failures: Whatever their degree of severity, such failures have important common causes & Implications.
• Whether triggered by an internal or external agent, risk culture failures oftenexpose a long‐standing cultural weakness or a linked series of weaknessesthat have been incubating over time and that can be clearly recognized afterthe event.
• Failures and near failures often offer managers and key stakeholders awindow of opportunity to demand changes that strengthen anorganization’s risk culture and make it more robust. Unfortunately, some ofhe most powerful stimuli to change come when bad things happen, or areonly narrowly averted.
Mohammad Fheili – [email protected]
A Successful Risk Culture would Include:
• A Distinct and Consistent tone from the top from the Board of Directors andSenior Management in respect of Risk Taking and Avoidance.
• A Commitment to Ethical Principles, reflected in a concern with the ethicalprofile of individuals and the application of ethics and the consideration ofwider stakeholder positions in decision making.
• A common acceptance through the organization of the importance continuousmanagement of risk, including clear accountability for and ownership of specificrisks and risk areas.
• Transparent and timely risk information flowing up and down the organizationwith bad news rapidly communicated without fear of blame.
• Encouragement of risk event reporting and whistle blowing, actively seeking tolearn from mistakes and near misses.
• No Process or activity too large or too complex or too obscure for the risks to bereadily understood.
Mohammad Fheili – [email protected]
A Successful Risk Culture Would Include:
• Appropriate Risk taking behaviors rewarded and encouraged and in appropriatebehaviors challenged and sanctioned.
• Risk Management Skills and Knowledge valued, encouraged and developed,with a properly resourced risk management function and widespreadmembership of and support for professional bodies. Professional qualificationssupported as well as technical training.
• Sufficient diversity of perspectives, values and benefits to ensure that thestatus quo is consistently and rigorously challenged.
• Alignment of culture management with employee engagement and peoplestrategy to ensure that people are supportive socially but also strongly focusedon the task in hand.
Mohammad Fheili – [email protected]
What Do We Mean By Risk Culture?
• Risk Attitudes is the chosen position adopted by an individual or grouptowards risk, influenced by risk perception and pre‐disposition.
• Risk Behavior comprises external observable risk‐related actions,including risk‐based decision‐making, risk processes, riskcommunications etc.
• Risk Culture is the values, beliefs, knowledge and understanding aboutrisk, shared by a group of people with a common intended purpose, inparticular the leadership and employees of an organization.
One of the many challenges in addressing culture is that people naturallygravitate to others like themselves so the culture of an organization canself‐propagate if recruitment processes and environment remainunchallenged.
Mohammad Fheili – [email protected]