lia credit union seminar
TRANSCRIPT
LIA Credit Union Seminar
26th July 2018
Designed for you
@LIAIRL
Pat O’Sullivan
LIA Chief Executive
Adding Value through Risk Management
Justin McCarthy
Justin McCarthyJustin McCarthy has worked in roles in many firms, including Bank of America Merrill Lynch, PricewaterhouseCoopers and with the Irish Financial Regulator. This work has allowed him to see the changes in risk management since through and beyond the recent global financial crisis.
His work on the PRISM risk based supervision framework with the Irish Regulator included exposure to banking, funds and insurance risk practices as well as the quantitative work done on the related impact models and the challenge in feeding valid financial data to these models.
He is Chair of the Global Board of the Professional Risk Managers' International Association (PRMIA). This is a professional body and education organisation for risk managers globally and has a network of over 50,000 around the world.
He works as a Strategy, Governance, Risk and Compliance Consultant as well as lecturing and training. He works with a range of credit unions across the country as the risk and / or compliance functions and other work such as writing strategic plans. He also works with other financial services providers such as large banks. In 2017, he spent 6 months working with the Risk Leadership Team at Ulster Bank.
Justin has a BSc from University College Cork and an MBA from the Michael Smurfit Graduate School of Business at University College Dublin.
He is originally from Schull, west Cork.
Justin McCarthy
http://ie.linkedin.com/in/justincmccarthy/
http://grcjustin.blogspot.com
http://www.prmia.org
Risk Management
• What do you think?
• Is this a topic worth discussing anymore?
Asking another audience…
‘What risk is there with this?’
Actually it wasn’t that bad
So Let’s Try and Keep Risk Interesting…
Things we all know: Risk Assessment OverviewHow do we best go about Identifying, Assessing and Monitoring risk?
Top-down: E.g.
Scenarios
Top-down:Capture risks that may not be found in a walk-through of processes
Bott
om-U
p: E
.g.
Proc
ess m
appi
ng
Bottom-up:Capture risks as they are seen by the people that are working with the related processes
Cross reference between both approaches…
Things we all know: Risk Assessment OverviewQuestions that should be answered by a well designed risk assessment programme are:
• What are our top risks in rank order?• What is the state of the controls that we have in place to deal with those risks?• Are there control gaps?• What are we going to do about the gaps?• Who will own the action plans to address the gaps?• What have we learned that we can apply to the next risk assessment cycle?
How do we get people to “Buy-in” to this approach – this is admitting to issues in your business:• High level support / sponsorship?• Briefing / Education sessions?• Applying some kind of capital?
Things we all know: Connect the Data
Data in the Credit Union:• System
• Risk Management System• Ledgers
• Spreadsheets
Summary Reports
Management
Board
Things we all know: The Risk Register?Risk Category Risk Sub Category Risk .. Inherent Risk
Credit Risk Credit / Underwriting Risk
Inadequate verification of member's net disposable income
.. 1.2
Credit Risk Credit Concentration Risk
Inadequate risk concentration limits on overall lending
.. 2.4
Credit Risk Credit / Underwriting Risk
Loans are made to members who currently have arrears
.. 1.2
Credit Risk Credit / Underwriting Risk
Related party loans are not properly approved .. 1.2
Operational Risk IT Risk Risk that a server runs out of warranty .. 1.2
Operational Risk IT Risk Disruption to operations and financial loss when a computer virus infects the IT system
.. 2.4
Operational Risk IT Risk Risk that log-in usernames/ passwords are notsufficiently controlled
.. 1.2
Is this useful from a Top Down as well as a Bottom Up view of your risks?
Things we all know: The Risk Register?
These can get really detailed!
Collating our Risks
If we are told IT is one of our main risks, can we drill down into the detail?
IT Risk
Cyber Risk
Risk that the Website is Hacked
Risk that we are the victim of a
"Phishing Attack"
IT Resiliance
Risk that internal / external
network is down
Risk that the web server fails
PRISM already did this in 2011…
Just Collate it up… Get your Top 10 Risks
Risk Sub Category Inherent Impact Inherent Probability
Business Model 3.20 1.60Interest Rate Risk 2.64 1.20Board and Committee Quality 2.00 1.50Credit Control 1.80 1.48Anti-Money Laundering 2.40 1.20Succession Planning 2.00 1.50Strategic Plan Implementation 2.40 1.20Strategic Planning 2.60 1.10Data Protection 2.13 1.07Internal Fraud 2.21 0.92
Now talk about Risk…
Make it More
Visual if that
Helps…
A picture paints a thousand words…
Talking the Risk Language?Our Top 5 Risks? I don’t know… I
guess IT is a risk… maybe we should get new computers and a
website?
Have you seen that we have a risk register? It’s in there I guess?
Talking the Risk Language!Our Top Risk is the business model and thus
the viability of the credit union… our projections are for a good surplus for the next 3 years. We review the related KPIs at the monthly board
meeting.
Our top operational risk is cyber risk… but we are mitigating this with our IT security
programme and the residual risk is within our risk appetite for that area.
Talking the Risk Language
Example: Operational Risk TaxonomiesMuch more detail is available to us in the Basel table
Example: Operational Risk TaxonomiesLevel 3 detail can help drive discussion on operational risk
Now talk about Risk…
But wait…Have we
really been
Managing Risk?
Our Biggest Risk…
If we can’t show we have a strategy / business model to make a surplus, then the CBI may take action
Have That Conversation…
Questions?
Thank you
Credit / Underwriting Processes
Andrew Donovan
Strategus
Andrew Donovan
BackgroundSummary• Extensive financial experience spanning a 30 year career in financial
services, Business Development, Debt Recovery, Commercial & Retail Banking with particular experience in process improvement, productivity initiatives and lean processes for financial institutions.
Work Experience• Worked in AIB Bank, Anglo Irish Bank, Ulster Bank & ACC / Rabo-Bank
before commencing consultancy Work in June 2017Key Skills include:• Business Development, Credit Risk Management, Debt Collection,
Negotiating, Management, Team Management & Analysis and implementation of Lean Processes.
The areas I hope to cover this morning:
• Lending position as it currently exists
• PRISM reports and concern & Addressing Central Bank Concerns
• Lending and underwriting going forward.
• How to get more from existing resources.
Lending position as it currently exists.
Want to have a look at a number of charts from the Central Bank
Looking back over the last 5 years what can we say:
Credit Unions have held their share of the personal loan market.
The average size of loan has increased slightly & heading in the right direction.
The average length of loan is growing slowly but needs to lengthen.
Still over 94% of Credit Union loans are personal.
The volume and number of new loans has been growing since 2015.
The excellent work on arrears continues to be evident.
PRISM reports on Lending & Risk Management and
concern.
Addressing Central Bank Concerns.
“Given the importance of lending to the overall business model of credit unions of all sizes, we expect high standards of credit risk management from a prudential perspective. In order to satisfactorily manage and mitigate credit risk, credit unions must ensure that credit assessment processes are based on coherent and clearly defined criteria, the process of approving and amending loans is clearly defined and documented in credit policies and that the credit process is consistently implemented”
1. The member’s ability to repay shall be the primary consideration in the underwriting process and Credit Unions must satisfy themselves that they are fully appraised of the borrower’s financial position before granting a loan.
2. Comprehensive credit policies, reflecting the range of lending undertaken by the credit union.
3. Supporting rationale must be clearly documented with lending decisions. The decision to grant or deny a loan should be supported by a suitably detailed rationale.
CBI expectations of prudent lending include the following:
1. Weaknesses in underwriting practices, including lack of supporting rationale for loan approval. Failure to include such rationale makes it difficult to evidence and understand why certain loans were approved.
2. Failure to accurately assess member repayment capacity / debt-to-income ratios. We noted discrepancies and differences in approach as to how these ratios are calculated, or failure to consider the thresholds for such ratios, as per the approved policy of the credit union.
3. Incomplete or missing documentation on file in relation to the assessment of member’s income and outgoings, including examples of missing member account statements, no evidence of income verification or analysis of income and outgoings as part of the underwriting process.
4. Evidence of top-up loans being issued to members, without appropriate consideration of the potential risky nature of this lending and the potential effects on member's overall indebtedness.
A number of recurring risk issues were apparent in their engagements:
People
Policy Process Procedure
Loan Assessment Training
Supervision
Do this we need to understand the difference in the three:
• Policy vs. Process vs. Procedure
• A policy is a rule, regulation, or set of guidelines.
• A process is a high level set of things that must happen outlining what must happen in order to ensure compliance with a policy.
• A procedure is a specific, detailed series of actions that staff members must take in order to implement a process and comply with a policy.
Lending policy, process & procedure
People
Policy
Proc
edur
es
Proc
esse
s
Loan Assessment Training
SupervisionGood Quality
Lending and underwriting going forward
• To increase income
• Expand offering
• Better use of IT
• People
What are our needs going forward?
What this means for our Business
Opportunities
Risks
Opportunities
• Increase the amount of our average loan
• Increase the length of the average loan
• Increase offering of Loan types
• Spread risk
• Widen who we deal with
Risks• Cost
• Sectoral Knowledge
• Underwriting Issues
• Concentration levels
• Ongoing Management
• Staff
• IT
• Make sure we have a solid core to build on
• Plan meticulously for whatever expansion we choose
• Review our performance against the plan on a continuous basis
• Don’t be rigid.
How do we mitigate these risks?
“Increasingly, it is expected that credit unions will proceed with product opportunities that can demonstrably add to earnings, if not immediately, over a reasonable timeframe.”
“It is expected that credit unions boards and management will consider all the risks to which they will be exposed. It is their responsibility to ensure that they can demonstrate they understand the financial and other risks and to have the appropriate systems and processes in place to manage and control those risks, prior to undertaking such business.”
The Central Bank
Conclusion
How to get more from existing resources.
First identify then, EliminateWaste
The Lean Concept
Radical Transformation of Collections
Challenge• Transform the performance and
Management information of the credit arrears process while meeting the Banks KPI’s and Central Banks codes.
Solution• Reviews the efficiency and
effectiveness of the current process using lean methods and created a desired future state.
• Solutions presented where significant Improvements and Efficiencies could be achieved in Reviews Management and Collections.
Reduction in Task Time
Central Bank Requirements
Cases Managed on-time
Process Time
25% Ensured
100% Compliance
18% 60%
Highlights• Milestone Based Approach• Clear Timelines • Measurable KPI’s• Standard Work• Improved Collections
Thank you
Networking Break
@LIAIRL
Credit Union Investments -Regulations, Risks & Returns
Padraig O’Sullivan
Topics to be covered
Why are investments important for credit unions?
Regulations - what investments can credit unions make?
How to assess risk
Why are investment returns so low?
Outlook for investment returns
Total Credit Union Assets: €15bn
Total Credit Union Investments: €10bn
Why are Investments Important?
The excess of shares over loans
Since crash, people save more & borrow less
Common to all credit unions and banks
CU must try earn some return on these funds
Why so much in Investments?
Strict regulations covering investments
– Types of Investments (investment classes)
– Who to invest with (investment counterparties)
– How long to invest for
Investment Regulations
Key Factor
Permitted investment classes (since March 2018)
a) Government Bonds of a euro zone country
b) Supranational Bonds
c) Bank Deposits
d) Bank Bonds (senior bonds only)
e) Corporate Bonds
f) Approved Housing Bodies (via regulated entity)
g) UCITS (i.e. funds)
h) Shares/deposits in another credit union
i) Shares of a society
CU Investment Regulations
1. Bank Deposits (Approx. 75% of CU investments)
2. Bonds issued by governments, banks & large corporates (25%)
Must be capital guaranteed
Can’t invest for longer than 10 years
No more than 20% with any counterparty (less for corporates)
Euro investments only
In Summary
Regulations exclude any high-risk investments
But all investments carry some risk
Obligation on board/investment committee to assess risk
Key investment risk for CU’s – Counterparty Risk
A guarantee is only as good as the party providing it
Who are you giving our money to?
How secure are they?
What is their credit rating?
Risk
Credit RatingsCredit Rating Capacity to Repay Grade
AAA Extremely strong Investment
AA Very strong Investment
A Strong Investment
BBB Adequate Investment
BB Faces major future uncertainties Speculative
B Faces major uncertainties Speculative
CCC Currently vulnerable Speculative
CC Currently highly vulnerable Speculative
C Has filed bankruptcy petition Speculative
D In default Speculative
Year Rate of Return (sample CU)
2014 3.16%
2015 2.84%
2016 2.25%
2017 1.73%
2018 1.10% (approx.)
All CU’s have seen significant fall in investment income
Investment Returns
People saving more and borrowing less
Too much money in the financial system
ECB adding more via Quantitative Easing (QE)
i.e. pumping even more money into the system
ECB trying to keep rates at rock bottom
Encouraging people to save less and spend more
Why are interest rates so low?
3-Month Euribor 1999-2018
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%Historic & Projected 3 Month Euribor
July 2018-0.32%
Euro zone interest rates largely controlled by the ECB
Strong economic growth needed before it raises rates
In particular, it will want to see higher inflation
Target inflation rate 2%, currently only 1% (“core” rate)
Inflation needs to rise if interest rates are to recover
Are low interest rates here to stay?
3-Month Euribor 1999-2018
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%Historic & Projected 3 Month Euribor
July 2018-0.32%
3-Month Euribor 1999-2018
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%Historic & Projected 3 Month Euribor
July 2018-0.32%
Historic & Projected 3-Month Euribor
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%Historic & Projected 3 Month Euribor
July 2018-0.32%
Market Projections
Interest rates at historic lows
Probably not going lower, but recovery will be slow
Likely to be several years before any major pickup in CU investment
income
No quick fix, unfortunately!
Summary
Questions?
Thank you