enterprise bank erm basel ii proposal

7/29/2019 Enterprise Bank ERM Basel II Proposal

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ENTERPRISE-WIDE RISK MANAGEMENT & BASEL II GAP

PROPOSAL

JANUARY, 2012


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BACKGROUND


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INTRODUCTION

The global economic crisis of the last two years has continued to challenge the way firms dobusiness, including how they anticipate and manage their risks and therefore the efficientdeployment and management of their capital. At the same time, global and local regulators havetaken a closer and tougher view on how they evaluate and oversee financial institutions in the wakeof high levels of operational and earnings volatilities.

There has therefore been an emergence of various regulatory reforms and the emergence of higher-level guidelines such as the recent Basel III.

It is in this regard that the bank is evaluating its current risk management framework with a view tofurther up-scaling it in line with Basel II requirements while embarking on bank-wide sensitization(Training) and automation of its risk management system. This will enable it achieve an enhancedmanagement of all the banks risk exposures and ensure increased financial stability and earningsgrowth, leading to a more effective actualization of the banks mandate.


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ENTERPRISE-WIDE RISKMANAGEMENT FRAMEWORK

(ERM) DESIGN & IMPLEMENTATION

PROJECT 1

BASEL II GAP ANALYSIS &

IMPLEMENTATION

PROJECT 2

PROJECTS


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ENTERPRISE-WIDE RISK MANAGEMENT FRAMEWORK (ERM)DESIGN & IMPLEMENTATION

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Enterprise-wide Risk Management is a process for identifying and prioritizing the critical risksfacing your organization, quantifying their impact on financial and strategic objectives, andimplementing financial and organizational solutions to address them.

1. Risk management is a systematic,critical risk-focusedactivity

2. Risk is quantified to makeinformed business decisions

3. Risk management is an integral part ofstrategic planning and budgeting

4. Pricing, capital allocation, performancemeasures consider potential risk as well as returns

5. Risk is not automatically avoided, butweighed against opportunity to optimize risk versus return

6. Risk mitigation/financing focuses on eventsand volatilities that could compromise financialand strategic objectives

OVERVIEW OF ERM

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Our ERM solution defines essential components, suggests a common language, and provides cleardirection and guidance for strong Enterprise-wide Risk Management. It reviews the existingoperations, enhances and installs the following framework components:

Strategic framework top-driven Risk Education and Culture Risk Philosophy and Appetite definition Risk Management Objectives

Organisational framework Board and Management Committees Risk Function structure, staffing, responsibilities Bank-wide linkages line, audit, Internal control, etc

Operational framework Risk Policies, Processes, Procedures

Analytical framework Risk Identification and listing Risk Metrics, Measurement and Management methodologies Linkage with Budgeting and Strategic Planning

Reporting framework

Reporting templates Responsibilities and frequency Technological framework Control and compliance framework

Internal supervisory framework Risk-based internal Audit self-assessment templates

OUR ERM FRAMEWORK

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It is expected that at the end of the project, the overall benefits should include the following:

Definition, formalization and communication bank-wide, of a top-driven, focused andconsistent risk philosophy and appetite, and the development of a sound risk culture.

Evolution of a robust ERM framework which helps identify, measure and manage allforms of risk facing the bank.

Ability to analyze business unit risks across the bank enabling better understanding andcomparison of risk across functions and business units. Improvement of capital efficiency

and cost savings through more effective management of internal resources and capital. Ability to align the banks corporate strategy with its risk tolerance level

Evolution of a risk performance measurement approach which provides the basis forsound business decision-making.

Compliance with the Central Bank of Nigerias risk framework and risk-based supervisionguidelines.

Implementing a framework which ensures effective overall capital management on aconsolidated basis. This includes appropriate structure covering credit, market.Operational and liquidity risks including policies, guidelines and procedures.

Develop appropriate risk measurement metrics and indicators recognizing the businessobjectives and competitive positioning

PROJECT BENEFITS

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PROJECT SCOPE

Business Risk ProfileAppreciation

Implementation RoadmapDevelopment

ERM FrameworkDesign

Situation Assessment

This involves an in-depth scanning of the internal business environment,regulatory requirements, business strategy/plans using our proprietaryintegrated Risk Assessment Tool IRATTM to determine the current andpotential risk universe

This is a thorough examination of the existing risk management frameworkand practices using our8-framework approach.It also involves best-practice benchmarking against global peer institutions.

Based on the outcome of the situation assessment, a best-fit enterprise-widerisk management framework is designed across our 8- frameworkapproach

In order to ensure ease of implementation, we work with the counterpartteams to evolve an implementation road map for the designed framework.

The scope of work under our ERM Framework design is as follows:

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The tasks to be performed under each broad activity are as follows:

Counterpart Team Formation

Work Plan Presentation and Amendment Work Stream Allocation and Briefing Project Inauguration Meeting and Steering Committee Formation

Strategic Plan Review - Current and Future Business Projection. Proof-of-Concept Session Identification of Core Activities - Business and Support Functions Risk Identification and Impact Analysis - IRATTM

Development of Risk Profile Report

Assessment of the existence and adequacy of current frameworks to support risk management.These are Strategic, Governance, Analytical, Operational (Process), Information Reporting andPerformance Management, Technological, Compliance and Control .This will be done through a thorough review of existing documentation and practices using desktop review and interviews with key stakeholders. -ERM Diagnostic

Current Policy Document Review This will be done to ascertain the relevance andcompleteness of existing polices in order to ensure risk identification, impact assessment,measurement and management . These must cover all identified risk areas - current and

projected. Use Policy Checklists - ERM/ Risk Policy PacksTM

Determination of benchmark parameters and institutions. Comparison of current risk frameworks with practices in benchmark institutions using

proprietary Risk Framework Evaluation Templates Scoring of current frameworks against benchmark institutions. Basis of scoring must be

agreed with the client and standardized.

Project Planning andOrganization

Business Case Analysis

- Risk Profiling

Current RiskManagement

Framework Assessment

Policy Framework

Evaluation

Best PracticeBenchmarking and

Gap Analysis

PROJECT METHODOLOGY AND ACTIVITIES

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The tasks to be performed under each broad activity are as follows:

Gap Report Writing And

Presentation

Framework Design

Development of

Implementation Roadmap

Production of Draft Gap Report Presentation of draft Gap Report to Counterpart Team, Steering Committee and Board Production of Final Draft Report recognizing comments from presentations

Design of frameworks to cover all identified core risks based on the Gap Report.This design cover Strategic, Governance, Analytical, Operational (Process), InformationReporting and Performance Management, Compliance and Control, and Technologicalframeworks.Provision of, as much as possible, the options to the design framework and an explanationof the rationale.

Presentation of draft design framework to Counterpart team, Steering Committee andBoard and collation of feedbacks/comments.

Submission of final design framework to the institution covering each of the identified riskareas

Development of implementation roadmap with counterparty team and itsfinalization

Provision of on & off site guidance to the counterpart team to generate a road map Project Closure

PROJECT METHODOLOGY AND ACTIVITIES

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PROJECT 2-BASEL II GAP & IMPLEMENTATION


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The Basel II Capital Accord is a reality for financial institutions in Nigeria and the global marketswith its strategic benefits for sound and safer business practices and controls, beyond thecompliance requirements.

The accord requires banks and related financial institutions to deploy detailed risk quantificationmethodologies and operating processes and make adequate capital provisioning for the risks theycarry. The Central Bank of Nigeria has also commenced plans to provide guidelines to the banks inNigeria in respect of their capital adequacy. This is to ensure that banks not only estimate their

earnings but also their risks and in turn set aside corresponding capital. The schema belowcaptures the framework of the accord:

OVERVIEW OF BASEL II

Recognizing the strategic benefits of the Basel II accord, the bank is willing to embark onimplementing its requirements. Some of the observed benefits of the Basel II Implementationproject are as captured in the next slide:


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PROJECT BENEFITS Basel II In keeping with the brand and corporate vision, the bank will meet international best practices andlocal regulatory expectations on Basel II.

The Basel II project will enhance the board and senior managements ability to understand howmuch capital flexibility exists to support the risk appetite of the bank.

An installed Basel II framework will enable the banks management understand capitalrequirements under different economic and stress scenarios and institutionalize the culture ofstress testing which is necessary for effective risk and earnings volatility management.

A Basel II framework builds and supports the linkage between the banks risk and capital and tiesperformance to both.

It strengthens the banks position to respond to the increasing focus on capital management and abetter appreciation of the firms risk profile and the capital implications of same.

While this will be an evolving perspective, it helps the banks ability to comprehensively evaluate

and document all risks and substantiate appropriate capital allocation to the supervisory authority.

Considering the amount of work done to date by the bank, the objective of this first leg of theproject is to get a clear evaluation of all additional work if any, that needs to be done to bring thebank into full compliance with Basel II requirements. Following this, there may then be a next leg tobridge observed gaps.


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SCOPE OF WORK

Basel II


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1.

DIAGNOSTICPHASE

a.

QuestionnaireAdministration

b.

Risk Management ITarchitecture

2

PROOF OFCONCEPT

a.

Basel II Workshop

b.

Basel II IT and DataArchitecture

Meetings

3

GAP ANALYSIS

a.

Basel II GapAnalysis

b.Recommendations,

Basel II Road Map

Design & ReportSubmission

POST

GAP ANALYSIS-

Mandate for FullBasel II Road Map

Implementation

SCOPE OF WORK


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METHODOLOGY


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# Task Description Timeline Deliverables

1 Risk

Management

Questionnaire

Distribution

i. A Request for Information paper will be

sent to the bank with dozens of relevant

questions for understanding:

Overall Credit Risk status in the bank

(rating models, IT systems and main data

entities, credit approval/denial processes,

etc )

Overall Market Risk status in the bank

(Risk factor data bases, VaR calculations,

limits policies, Market risk control

policies,)

3 week Duly filled

questionnaire

received from

respondents

METHODOLOGY1.Diagnostic Phase


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1 Contd

Overall Operational Risks status in the

bank (Loss events data base availability,

internal procedures for identifyingOperational risks, KRI calculations,

frequency/severity assessment of

potential loss events, )

ii Risk Management IT architecture (core

banking system, existing risk management

systems, infrastructure, main data entity, )

METHODOLOGY


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2 Workshop i. A joint 1 week workshop will be scheduled in

which we meet relevant business teams in the bank

(Retail division, Corporate division, Risk

Management division, Credit Cards division) and go

through answers given. In the meetings we will

discuss the Bank's vision for implementing Basel II

and Risk management best practice as well as

understand the current status at different areas of

activity.

1 week Information

about Basel

Framework,

Risks status

and risk

management

vision in THE

BANK

METHODOLOGY2.PROOF OF CONCEPT


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# Task Description Timeline Deliverables2 Workshop Contd.

ii. Conduct of meetings with IT staff for reviewing

IT and data architecture. In the meetings, we

will share our Basel II and Credit Scoring dataschemes which include the full data model

required for implementing Basel II on the

Standardized Approach and FIRB. During the

meetings we will seek to evaluate the

availability of main data entities, as described in

our data schemes, in THE BANK data

environment

METHODOLOGY


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3 a.

Analysis of

meetings

information

i. Writing down Credit, Operational and

Marketing Risk status chapter in gap analysis

report, based on meetings with THE BANK

teams

ii. If necessary, contact relevant persons in the

bank (by phone) in order to clarify and get

further explanations about vague points.

iii. Send paper to THE BANK for approval

3 weeks Approved

current Risk

status

chapter in

gap analysis

report

METHODOLOGY3.Gap Analysis &

Reporting


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b.

Recommenda

tion on

roadmap andactions

needed for

filling gaps

i. Writing down list of gaps between current

Risk status and the Bank's goals for

implementing Basel II

ii. Writing down recommended roadmap, work

plan and actions needed for filling gaps.

Send first draft to THE BANK for approval

3 weeks Draft of

whole gap

analysis

report

METHODOLOGY


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c.

Presenting gap

analysis report

to THE BANKs

management

i. Meetings in THE BANK site with

management to present the gap analysis

results and roadmap for Basel II

implementation

ii. Taking comments from THE BANK teams

after gap analysis presentation

1 week Basel II gap

analysis

report

presentation

d.

Submission of

final report

i. Fine tuning of the gap analysis

ii. Sending THE BANK final report

1. week Final Basel II

gap analysis

report

METHODOLOGY


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Current Credit Risk status: portfolio, credit approval/denial processes, rating models

Current Credit Risk IT status (operational systems, data bases, overall data tables,analytical systems)

Gaps founded between current status and Basel II regulation

Roadmap, work plan and action items for performing Basel II :

By the standardized approach

By the FIRB approach Optional Data schemes (data field level) for performing :

Basel II standardized approach

PD modeling for retail & micro-business customers (FIRB)

PD modeling for mortgage customers (FIRB)

PD modeling for SME & corporate (FIRB)

Each data scheme includes several data tables containing around 120 fields (andconnections between the fields) needed to be collected in order to perform Basel II(Standardized/FIRB approach).

CREDIT RISK DELIVERABLES


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The Basel II Gap Analysis Report will contain the following:

CREDIT RISK

Banks goals in the field of Credit Risk portfolio reporting, Credit Scoring and Rating,

Preparations for possible Basel II regulation,

Current Credit Risk status in THE BANK (portfolio, credit approval/denial processes, rating

models)

Current Credit Risk IT status in THE BANK (operational systems, data bases, overall data tables,

analytical systems)MARKET RISKS

Banks goals in the field of Market, VaR calculation , preparations for possible Basel II regulation

Current Market Risk status in THE BANK

Current Market Risk IT status in THE BANK (operational systems, data bases, overall data tables,

analytical systems)

OPERATIONAL RISKS

Banks goals in the field of Operational risks, Key Risks Indicators, Preparations for possible Basel

II regulation

Current Operational Risk status in THE BANK

BASEL II GAP REPORT SUMMARY


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GAP ANALYSIS Gaps founded between current status and Bank's goals

Roadmap, work plan and action items for filling the gaps :

By the standardized approach

By the FIRB approach

Annex 1 Basel II regulations Background

Annex 2 - Data schemes (data field level) for performing :

Basel II standardized approach

PD modeling for retail & micro-business customers (FIRB)

REPORT SUMMARY


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PROJECTS Roadmap


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WORKSTREAMS YEAR 1 YEAR 2

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

ENTERPRISE-WIDE RISKMANAGEMENT CONSULTING 6 MTHS

BASEL II GAP ANALYSIS(Credit, Market & Operational Risks) 6 MTHS

BASEL II DESIGN/IMPLEMENTATION:

12 months

(Pricing subject to the outcome of gap

analysis)

ROADMAP


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OUR FOOTPRINTS


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We thank you for the opportunity to forward this proposal, and will be pleased todiscuss with you any further customization which may be required on ourmethodology, time frame and pricing (after an assessment of the actual scope) thatyou may desire.

We eagerly look forward to working with you on this mandate and commend yourdesire to further strengthen firm-wide Risk Management

CONCLUSION

enterprise bank erm basel ii proposal

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